<PAGE>
Filed pursuant to Rule 424(b)(5)
Registration Nos. 333-33655 and 333-33655-01
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 17, 1997)
$250,000,000
BLOCK FINANCIAL CORPORATION [LOGO]
6 3/4% SENIOR NOTES DUE 2004
FULLY AND UNCONDITIONALLY GUARANTEED BY
H&R BLOCK, INC.
The 6 3/4% Senior Notes due 2004 (the 'Notes') of Block Financial Corporation
(the 'Company' or 'BFC') being offered hereby will mature on November 1, 2004
and are not redeemable prior to maturity. Interest on the Notes will be payable
semiannually on May 1 and November 1 of each year, commencing May 1, 1998. The
Notes will constitute unsecured and unsubordinated senior indebtedness of the
Company and will rank equally in right of payment, on a pari passu basis, with
all its existing and future unsecured and unsubordinated senior indebtedness.
The Notes will be fully and unconditionally guaranteed (the 'Guarantees') on a
senior unsecured basis by H&R Block, Inc. (the 'Guarantor' or 'Block'), the
indirect parent of the Company. The Guarantees will rank equally in right of
payment, on a pari passu basis, with all the Guarantor's existing and future
unsecured and unsubordinated senior indebtedness and guarantees. See
'Description of the Notes.'
The Notes will be represented by one or more Global Notes registered in the name
of a nominee of The Depository Trust Company ('DTC'). Beneficial interests in
the Global Notes will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its participants. Except as described
herein, Notes in definitive form will not be issued. The Notes will trade in
DTC's Same-Day Funds Settlement System until maturity, and secondary market
trading activity for the Notes will, therefore, settle in immediately available
funds. All payments of principal and interest will be made by the Company in
immediately available funds. See 'Description of the Notes--Same-Day Settlement
and Payment.'
The Notes have been approved for listing on the New York Stock Exchange, subject
to official notice of issuance.
SEE 'RISK FACTORS' BEGINNING ON PAGE 7 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
<S> <C> <C> <C>
Per Note....... 99.860% .625% 99.235%
Total.......... $249,650,000 $1,562,500 $248,087,500
</TABLE>
(1) Plus accrued interest, if any, from October 23, 1997.
(2) Before deducting expenses estimated at $625,000 payable by the Company.
The Notes are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Notes will be made through the facilities of DTC on or
about October 23, 1997.
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
The date of this Prospectus Supplement is October 21, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING STABILIZING AND SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE 'UNDERWRITING.'
S-2
<PAGE>
THE COMPANY
BFC is an indirect wholly owned subsidiary of Block. The principal business
activities of BFC include (i) the origination, purchase, servicing, sale and
securitization of nonconforming residential mortgages, (ii) the purchase of
participation interests in refund anticipation loans ('RALs') made by Beneficial
National Bank ('Beneficial') to Block tax customers, (iii) the offering of
credit cards for CompuServe Corporation ('CompuServe') and WebBank Corporation,
a Utah Industrial Loan Company and wholly owned subsidiary of BFC, (iv) the
development, publishing, and marketing of software products designed to assist
individuals in managing their personal finances and preparing tax returns, and
(v) the offering of equity lines of credit to Block's tax preparation
franchisees.
NONCONFORMING MORTGAGES. BFC operates a nonconforming mortgage origination
and funding business 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.
In a strategic initiative to develop a retail nonconforming mortgage
business, BFC and Block formed H&R Block Mortgage Company, L.L.C. ('Block
Mortgage') in August 1995 to offer nonconforming mortgages at Block tax offices.
Block Mortgage is a limited liability company in which a subsidiary of Block
owns a 99% membership interest and BFC owns a 1% membership interest. During the
1997 tax season, Block Mortgage offered nonconforming mortgages through 31 tax
offices in Colorado, Indiana, North Carolina and Virginia. Block Mortgage plans
to continue the test of this business in additional Block tax offices during
fiscal 1998.
BFC further increased its commitment to the nonconforming mortgage business
with its purchase of Option One Mortgage Corporation ('Option One') from Fleet
Financial Group, Inc. ('Fleet') in June 1997. Option One engages in the
origination, purchase, securitization, sale and servicing of one-to-four family
residential mortgage loans made primarily to sub-prime borrowers who do not
qualify for loans which conform to FNMA and FHLMC guidelines. Option One is
headquartered in Santa Ana, California, and has a network of more than 5,000
mortgage brokers in 46 states. In calendar 1996, Option One originated more than
$1 billion in mortgage loans. BFC believes that Option One will provide BFC with
experienced associates in the nonconforming mortgage business and assist BFC and
Block in handling mortgage applications, processing loans and underwriting
mortgages originated through Block Mortgage.
BFC paid $218.1 million in cash for Option One, consisting of $28.1 million
in adjusted stockholder's equity and a premium of $190 million. In addition, BFC
made a cash payment of $456 million to Fleet to eliminate intercompany loans
made by Fleet to Option One to finance Option One's mortgage loan business. The
$456 million payment was recorded as an intercompany loan from BFC to Option One
and was repaid by Option One on June 30, 1997, when Option One sold mortgage
loans to a third party in the ordinary course of business.
BFC completed its first securitization of nonconforming mortgage loans on
January 30, 1997, through a $102 million asset-backed security issue.
Substantially all of the mortgages involved in this securitization were
mortgages offered through independent mortgage brokers. On July 30, 1997, BFC
completed its second securitization of nonconforming mortgages through a $215
million asset-backed security issue. This securitization included $134 million
of mortgages offered through independent mortgage brokers, $81 million of
mortgages offered by Option One and $10 million of mortgages offered by Block
Mortgage.
REFUND ANTICIPATION LOANS. In July 1996, BFC announced an agreement with
Beneficial to purchase a participation interest in RALs provided by Beneficial
to Block tax customers. In the 10-year agreement, BFC agreed to purchase an
initial 40% participation interest in such RALs, which interest would be
increased to nearly 50% in specific circumstances. As a result, BFC initially
has the right to receive 40% of the aggregate payments of principal, interest
and other sums due under the RALs, and
S-3
<PAGE>
bears 40% of the credit risk associated with the RALs. BFC's purchases of
participation interests are financed through short-term borrowings. BFC bears
all of the risks associated with its interests in the RALs. BFC's total RAL
revenue in fiscal 1997 was approximately $54.5 million, which generated
approximately $8.1 million in pretax profits.
CREDIT CARDS. BFC offers Gold and Classic versions of two types of
co-branded credit cards: CompuServe Visa and WebCard(Service Mark) Visa. The
credit cards are issued under a co-branding agreement between BFC and Columbus
Bank and Trust Company, Columbus, Georgia. Approximately 110,000 CompuServe Visa
credit cards were issued by the end of fiscal 1997, compared to 113,425 credit
cards at the end of fiscal 1996. The number of WebCard(Service Mark) Visa
accounts at April 30, 1997, was 57,223, compared to approximately 6,000 accounts
at the end of fiscal 1996. The aggregate portfolio for the credit cards issued
by BFC increased from approximately $165 million at the end of fiscal 1996 to
more than $246 million by the end of fiscal 1997.
While the aggregate number of BFC's credit cards increased during fiscal
1997, bad debt expense associated with such accounts also increased
substantially. The increase in bad debt expense resulted from the increase in
the credit card receivables portfolio and a deterioration in the credit quality
arising from the maturation of the credit card portfolio. Measured as a
percentage of the credit card receivables, the bad debt expense increased 40
basis points, from 5.5% to 5.9% during fiscal 1997. Based on the balance of the
portfolio at April 30, 1997, every 10 basis point increase in the ratio of bad
debt expense to credit card receivables would result in additional expenses of
$248,000.
BFC developed the CONDUCTOR(Registered) service, a technology that
facilitates the delivery of financial services online through existing
commercial online services, the Internet or directly through leased networks.
CONDUCTOR(Registered) features 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.
BFC is evaluating the possible sale of its credit card operations,
including its receivables portfolio and the CONDUCTOR(Registered) service.
SOFTWARE PRODUCTS. BFC's software business develops and markets the
Kiplinger TaxCut(Registered) tax preparation software package, and markets the
Kiplinger Home Legal Advisor(Service Mark) and Kiplinger Small Business
Attorney(Service Mark) software products. As a result of the increase in sales
of the final edition of TaxCut(Registered) in fiscal 1997, BFC's share in the
income tax return preparation software market is now approximately 30%.
EQUITY LINES OF CREDIT. BFC offers to Block's tax preparation franchisees
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.
S-4
<PAGE>
THE GUARANTOR
Block is a diversified services corporation which indirectly owns (i) all
of the shares of H&R Block Tax Services, Inc. ('Tax Services'), a subsidiary
involved in the business of income tax return preparation, electronic filing of
income tax returns and the performance of other tax related services in the
United States, (ii) approximately 80.1% of the shares of CompuServe, a
corporation that offers worldwide online and Internet access services to
consumers and worldwide network access, management and applications, and
Internet services to businesses, and (iii) all of the shares of BFC. Indirect
subsidiaries of Block operate income tax return preparation and related services
businesses in Canada, Australia, the United Kingdom and Guam, and offer H&R
Block franchises in other parts of the world as a part of the operations of H&R
Block International.
TAX SERVICES. The income tax return preparation and related services
business is the original core business of Block. These services are provided to
the public through a system of offices operated by Block or by others to whom
Block has granted franchises. Block 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, Block offers RALs through Beneficial in conjunction with Block's
electronic filing service. Block also markets its income tax preparation
knowledge through its income tax training schools.
Block's tax operations are divided structurally into three areas, each
targeting specific markets and focusing on new products and services and areas
for expansion. Tax Services focuses on tax business operations in the United
States. H&R Block Premium, a division of Tax Services, competes for those
clients who typically have more complex income tax returns and features meetings
by appointment any time of the year, private offices and more experienced tax
return preparers. H&R Block International focuses on strengthening operations in
current foreign markets, such as Canada and Australia, and identifying and
developing new markets. References in this subsection to Block include Block's
subsidiaries involved in the income tax preparation business and their
franchisees.
Block served approximately 18,190,000 taxpayers worldwide during fiscal
1997, an increase from 17,415,000 taxpayers served in fiscal 1996. The number of
taxpayers served by Block in fiscal 1997 in the United States alone was
approximately 15,600,000, compared to 14,800,000 in fiscal 1996. 'Taxpayers
served' includes taxpayers for whom Block prepared income tax returns as well as
taxpayers for whom Block provided only electronic filing services.
During the 1997 income tax filing season (January 2 through April 30),
Block offices prepared approximately 14,302,000 individual U.S. income tax
returns, compared to the preparation of 13,360,000 such returns in fiscal 1996.
These U.S. returns constituted approximately 13% of an Internal Revenue Service
('IRS') estimate of total U.S. individual income tax returns filed during fiscal
1997, and approximately 29% of all returns prepared by paid tax professionals in
fiscal 1997.
Block filed approximately 7,279,000 U.S. tax returns electronically in
fiscal 1997, compared to 6,298,000 in fiscal 1996. Approximately 2,573,000 RALs
were processed in fiscal 1997 by Block, compared to 2,361,000 in fiscal 1996.
Approximately 1,871,300 electronic refunds were processed in fiscal 1997 by
Block, compared to 1,283,000 in fiscal 1996. Block continued to dominate the
electronic filing market with a 51% market share.
On April 15, 1997, there were 9,937 Block offices in operation, principally
in all 50 states, the District of Columbia, Canada, Australia and Europe,
compared to 9,678 office in operation on April 15, 1996. Of the 9,937 offices,
5,215 were owned and operated by Tax Services (compared to 4,738 in fiscal 1996)
and 4,722 were owned and operated by independent franchisees (compared to 4,940
in fiscal 1996). In the United States alone, Block operated 8,554 offices in
fiscal 1997, compared to 8,308 offices in fiscal 1996. Of the 8,554 offices,
4,483 were owned and operated by Tax Services and 4,071 were owned and operated
by franchisees.
S-5
<PAGE>
COMPUSERVE. The business operated by CompuServe was started in 1969 as a
computer timesharing service. The first online service was introduced in 1979.
Until April 1996, CompuServe was an indirect wholly owned subsidiary of Block.
In April 1996, CompuServe completed an initial public offering of 18.4 million
shares of its common stock, which decreased Block's ownership of outstanding
CompuServe common stock to approximately 80.1%.
CompuServe is a worldwide leader in the market for computer-based
interactive services and data communications and a pioneer in the development of
consumer online and Internet access services. CompuServe was the first online
service provider to establish a major international presence, and continues to
be one of the largest global online and Internet service providers. CompuServe
operates what its management believes is the most extensive network in the world
dedicated solely to data transmission.
On September 7, 1997, Block entered into an Agreement and Plan of Merger
(the 'Merger Agreement') with H&R Block Group, Inc., CompuServe, WorldCom, Inc.,
a Georgia corporation ('WorldCom'), and Walnut Acquisition Company, L.L.C., a
Delaware limited liability company which is wholly owned by WorldCom ('WAC'),
pursuant to which WorldCom would acquire CompuServe through a merger of WAC with
and into CompuServe (the 'Merger'). At the Effective Time (as defined in the
Merger Agreement), each of the CompuServe Common Shares (as defined in the
Merger Agreement) outstanding as of the Effective Time will be converted into
the right to receive, and there will be paid and issued as provided in the
Merger Agreement in exchange for each of the CompuServe Common Shares, 0.40625
of a share of WorldCom Common Stock (as defined in the Merger Agreement),
subject to adjustment as provided in the Merger Agreement. Based on the closing
price of WorldCom Common Stock on September 5, 1997, the aggregate purchase
price for CompuServe is approximately $1.2 billion. Consummation of the Merger
is subject to the satisfaction of certain conditions, including, among others,
the expiration or termination of any applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
foreign competition law or similar law, the receipt of other required regulatory
approvals, and the absence of certain material adverse changes. Consummation of
the Merger is also subject to the approval and adoption of the Merger Agreement
by the holders of the requisite number of CompuServe Common Shares. Block has
agreed to vote all of the shares directly or indirectly owned by it in favor of
the Merger Agreement and the Merger, which number of shares is sufficient to
approve the Merger Agreement and the Merger. The closing of the Merger is
expected to occur as soon as practicable after the satisfaction of all the
conditions set forth in the Merger Agreement.
In fiscal 1997, CompuServe's revenues were $841.9 million, compared to
Block's consolidated revenues from continuing operations of $1.097 billion. As
of July 31, 1997, CompuServe's total assets were $787.2 million and Block's
total assets were $1.876 billion. In fiscal 1997, the net loss of CompuServe was
$96 million and the net earnings of Block excluding CompuServe were $143.8
million.
The Guarantor believes it is likely that the conditions to the consummation
of the Merger will be satisfied and that the Merger will be consummated.
However, there can be no assurance that all such conditions will be satisfied.
If the Merger is not consummated for any reason, the Guarantor will continue to
pursue alternatives to complete the separation of CompuServe.
S-6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are consolidated financial and other data of Block,
CompuServe and BFC for the periods indicated. Block's and BFC's selected
consolidated financial information for the five years in the period ended April
30, 1997 have been derived from Block's consolidated financial statements which
were audited by Deloitte & Touche, LLP, independent certified public
accountants, and are incorporated by reference herein and available as described
under 'Incorporation of Certain Documents by Reference' and 'Available
Information' in the Prospectus. Block's consolidated financial statements should
be read in conjunction with this table and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' contained in Block's Annual
Report on Form 10-K for the year ended April 30, 1997, as amended by Amendments
No. 1 and 2 on Form 10-K/A, and in Block's Quarterly Report on Form 10-Q for the
three months ended July 31, 1997, as amended by Amendment No. 1 on Form 10-Q/A.
CompuServe's balance sheet data as of each fiscal year end in the five year
period ended April 30, 1997 have been derived from CompuServe's consolidated
financial statements which were audited by Deloitte & Touche, LLP, independent
certified public accountants.
The selected financial data for Block and BFC and for CompuServe as of and
for the three months ended July 31, 1997 and 1996 are derived from Block's
unaudited consolidated financial statements and CompuServe's unaudited
consolidated financial statements, respectively. In the opinion of management,
the accompanying unaudited financial information contains all adjustments,
consisting only of normal, recurring items necessary to present fairly the
financial information for such periods. The results of the three months ended
July 31, 1997 and 1996 are not necessarily indicative of the results of
operations for a full fiscal year.
On April 19, 1996, CompuServe effected an initial public offering of 18.4
million shares of its common stock at $30.00 per share, which reduced Block's
ownership in CompuServe to just over 80%. Block did not recognize a gain on this
transaction. Block's additional paid-in capital was increased by the change in
Block's proportionate share of CompuServe's equity as a result of the initial
public offering, from which the net proceeds to CompuServe were $518.8 million.
On September 7, 1997, Block entered into an Agreement and Plan of Merger under
which a subsidiary of WorldCom would acquire CompuServe. See 'The
Guarantor--CompuServe.' As a result, Block's consolidated statements of
operations for each of the years in the five years ended April 30, 1997 and the
three months ended July 31, 1997 and 1996, and Block's consolidated balance
sheets as of April 30, 1997, and July 31, 1997, have been reclassified to
reflect CompuServe's operations as discontinued, in accordance with Accounting
Principles Board Opinion No. 30.
S-7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, YEAR ENDED APRIL 30,
------------------------- ----------------------------------------------------------------
1997 1996 1997 1996 1995(A) 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BLOCK
INCOME STATEMENT DATA(B)
Total revenues................ $ 43,967(c) $ 20,615 $1,097,456 $ 871,533 $ 766,323 $ 806,721 $ 759,630
Net earnings (loss) from
continuing operations....... (34,861) (28,495) 143,777 125,089 97,989 103,052(d) 126,556
Net earnings (loss) from
discontinued operations..... (3,274) (23,731) (96,022) 52,079 9,270 70,211(e) 54,149(e)
Net gain on sale of
discontinued operations..... -- -- -- -- -- 27,265(e) --
Net earnings (loss)........... (38,135) (52,226) 47,755 177,168 107,259 200,528 180,705
BALANCE SHEET DATA(F)
Total assets.................. $1,876,362 $1,561,830 $1,707,058 $1,755,891 $1,078,038 $1,074,704 $1,005,834
Cash, cash equivalents and
marketable securities....... 359,771 463,184 539,107 745,693 444,981 620,091 439,526
Total receivables, net........ 518,739 357,040 407,441 333,734 260,198 165,858 228,691
Net assets of discontinued
operations.................. 517,928 -- 522,144 -- -- -- --
Property and
equipment, net.............. 66,082 435,076 65,065 399,574 227,448 165,224 148,386
Total current liabilities..... 894,614 344,406 669,009 478,247 377,986 336,212 329,926
Total debt(g)................. 657,209 112,109 269,619 72,651 49,421 -- 37,167
Total liabilities............. 934,712 436,764 707,961 563,169 411,628 386,829 355,346
Minority interest............. -- 147,245 -- 153,129 -- -- --
Stockholders' equity.......... 941,650 977,821 999,097 1,039,593 685,865 707,875 650,488
PER SHARE DATA
Net earnings (loss) from
continuing operations....... $ (0.33) $ (0.27) $ 1.36 $ 1.18 $ 0.92 $ 0.97 $ 1.18
Net earnings (loss) from
discontinued operations..... (0.04) (0.23) (0.91) 0.49 0.09 0.65(e) 0.50(e)
Net gain on sale of
discontinued operations..... -- -- -- -- -- 0.26(e) --
Net earnings (loss)........... (0.37) (0.50) 0.45 1.67 1.01 1.88 1.68
Cash dividends declared....... 0.20 0.32 1.04 1.27 1.22 1.09 0.97
OTHER DATA
Shares outstanding............ 104,117 104,006 104,067 103,417 104,863 106,149 106,355
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, YEAR ENDED APRIL 30,
------------------------- -----------------------------------------------------------------
1997 1996 1997 1996 1995(A) 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMPUSERVE
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.................. $ 787,178 $ 923,969 $ 802,536 $ 965,828 $ 323,557 $ 330,867 $ 240,365
Cash, cash equivalents and
marketable securities....... 168,015 201,434 161,419 309,991 4,913 3,633 3,669
Total receivables, net........ 110,516 122,687 118,336 119,186 81,022 51,446 35,078
Property and equipment, net... 340,031 385,930 355,212 348,059 198,710 140,823 168,958
Total current liabilities..... 109,036 120,254 114,989 138,399 89,886 79,940 53,327
Total debt.................... -- -- -- -- -- -- --
Total liabilities............. 140,744 182,341 151,100 195,162 243,699 89,190 60,978
BFC
INCOME STATEMENT DATA
Total revenues................ $ 28,609(b) $ 8,224 $ 110,777 $ 36,854 $ 35,910 $ 42,097 $ 25,422
Earnings (loss) from
operations.................. (6,330) (1,022) 7,053 (7,368) (5,788) (15,634)(d) 10,122
Earnings (loss) before
income tax (benefit)........ (6,330) (1,022) 7,053 5,077 (5,788) (15,644) 10,122
Net earnings (loss)........... (3,887) (629) 4,337 (255) (4,326) (20,006) 6,250
BALANCE SHEET DATA(H)
Cash and cash equivalents..... $ 29,687 $ 5,428 $ 3,425 $ 3,871 $ 2,010 $ 13,500 $ 880
Finance receivables, net...... 503,084 226,255 380,206 191,210 138,027 59,494 18,623
Other assets.................. 270,806 10,455 34,657 10,490 25,147 44,360 16
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets.................. $ 803,577 $ 242,138 $ 418,288 $ 205,571 $ 165,184 $ 17,354 $ 19,519
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Commercial paper(i)........... $ 657,209 $ 112,109 $ 269,619 $ 72,651 $ 49,421 $ -- $ --
Other liabilities............. 37,809 22,549 36,226 24,810 21,895 19,161 13,269
Stockholder's equity.......... 108,559 107,480 112,443 108,110 93,868 98,193 6,250
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholder's equity........ $ 803,577 $ 242,138 $ 418,288 $ 205,571 $ 165,184 $ 117,354 $ 19,519
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
BLOCK--SEGMENT INFORMATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Tax Services.................. $ 14,389 $ 12,282 $ 993,924 $ 831,455 $ 729,718 $ 755,526 $ 733,449
Financial Services............ 29,209 8,224 110,830 36,442 35,910 42,097 25,442
Unallocated corporate......... 387 109 1,012 3,636 695 9,098 759
Intersegment sales............ (18) -- (8,310) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.............. $ 43,967 $ 20,615 $1,097,456 $ 871,533 $ 766,323 $ 806,721 $ 759,630
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, YEAR ENDED APRIL 30,
------------------------- -----------------------------------------------------------------
1997 1996 1997 1996 1995(A) 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING PROFIT (LOSS)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax Services.................. $ (52,059) $ (45,229) $ 217,124 $ 194,771 $ 147,740 $ 198,719 $ 191,288
Financial Services............ (6,349) (1,022) 7,053 (7,368) (5,788) (15,644)(d) 10,122
Unallocated corporate......... (2,291) (3,579) (9,989) (10,881) (12,260) (17,464) (14,593)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating earnings
(loss).................... (60,699) (49,830) 214,188 176,522 129,692 165,621 186,187
Investment income, net........ 5,190 3,944 10,870 8,490 23,703 15,256 15,038
Other, net.................... -- -- -- 12,445 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes....... $ (55,509) $ (45,886) $ 225,058 $ 197,457 $ 153,395 $ 180,877 $ 201,855
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
IDENTIFIABLE ASSETS
Tax Services.................. $ 170,259 $ 136,538 $ 217,720 $ 141,031 $ 117,560 $ 104,585 $ 176,727
Financial Services............ 803,862 244,771 415,900 208,489 186,859 134,671 19,682
Unallocated corporate......... 384,312 297,794 551,294 455,700 482,501 626,979 472,603
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total identifiable assets... $1,358,433 $ 679,103 $1,184,914 $ 805,220 $ 786,920 $ 866,235 $ 669,012
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
CAPITAL EXPENDITURES
Tax Services.................. $ 4,053 $ 3,025 $ 43,159 $ 36,724 $ 26,033 $ 11,411 $ 25,994
Financial Services............ 88 223 1,450 938 2,135 615 19
Unallocated corporate......... 8 14 144 354 45 126 289
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total capital
expenditures.............. $ 4,194 $ 3,262 $ 44,753 $ 38,016 $ 28,213 $ 12,152 $ 26,302
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------
(a) In October 1994, the IRS announced that 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
in the RAL program because it minimized loan losses and thus encouraged
participating financial institutions to make RALs under relatively favorable
terms to taxpayers. The IRS also instituted other changes during the 1995
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.
BFC, which participated in the RAL program in fiscal 1994 and 1993, decided
not to make investments in RALs in fiscal 1996 and 1995 due to the IRS
changes. Although the DDI was no longer available, BFC again participated in
RALs in 1997. See 'The Company--Refund Anticipation Loans.'
(b) Revenues and net earnings (loss) from continuing operations do not include
operations of CompuServe, which are classified as discontinued operations.
(c) On June 17, 1997, BFC completed the purchase of Option One. See 'The
Company--Nonconforming Mortgages.' Option One contributed revenues of $18.4
million for the three months ended July 31, 1997.
(d) Included in net earnings (loss) from operations in 1994 was a nonrecurring
pre-tax charge of $25,072 for purchased research and development related to
the acquisition of MECA Software, Inc., as disclosed in the 'Acquisitions'
note to Block's consolidated financial statements for the year ended April
30, 1996.
(e) Net earnings (loss) from discontinued operations in fiscal 1994 and 1993
include the net earnings of Interim Services Inc., a wholly owned subsidiary
of Block, which amounted to $9,268 and $9,688, respectively. Interim
Services Inc. was sold through an initial public offering of 100% of its
common stock in January 1994, which resulted in a net gain of $27,265.
(f) Balance sheet data as of April 30, 1997 and July 31, 1997 have been
reclassified to separately reflect CompuServe as discontinued operations.
CompuServe's balance sheet items at these two dates are reported as net
assets of discontinued operations.
(g) Total debt consists only of short-term debt.
(h) Balance sheet data for BFC has been reclassified to reflect the provision
for income taxes for the years ended April 30, 1995, 1994 and 1993.
(i) BFC has no debt other than outstanding commercial paper.
S-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The information appearing below has been extracted from 'Management's
Discussion and Analysis of Results of Operations and Financial Condition'
contained in Block's Annual Report on Form 10-K for the year ended April 30,
1997, as amended by Amendments No. 1 and 2 on Form 10-K/A, and in Block's
Quarterly Report on Form 10-Q for the three months ended July 31, 1997, as
amended by Amendment No. 1 on Form 10-Q/A, and should be read in conjunction
with the more complete information contained therein.
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997--CONSOLIDATED RESULTS
Consolidated revenues for the three months ended July 31, 1997 increased
113.3% to $44.0 million from $20.6 million reported last year. The increase is
primarily due to the revenues of Block's new retail mortgage operations this
year of $18.4 million, which include revenues of Option One, acquired on June
17, 1997.
The consolidated pretax loss from continuing operations for the first
quarter of fiscal 1998 increased to $55.5 million from $45.9 million in the
first quarter of last year. The increase is attributable to the Tax Services
segment, which incurred a pretax loss of $52.1 million compared to $45.2 million
in the first quarter of last year.
The net loss from continuing operations was $34.9 million, or $0.33 per
share, compared to $28.5 million, or $0.27 per share, for the same period last
year.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased 17.2% to $14.4 million from $12.3 million last year,
resulting primarily from higher tax preparation fees that are attributable to
increases in pricing and in the number of tax returns prepared.
The pretax loss increased 15.1% to $52.1 million from $45.2 million in the
first quarter of last year due to normal operational increases in compensation,
rent and utilities. Additionally, expenses associated with continued office
acquisitions and expansion, which include rent, salaries and benefits, have
contributed to the increased loss. Due to the seasonality of this segment's
business, first quarter operating results are not indicative of expected results
for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 255.2% to $29.2 million from $8.2 million in the same
period last year. The increase is primarily related to new mortgage operations
which contributed increased revenues of $18.4 million this year. New mortgage
operations include revenues related to the recently acquired Option One. Credit
card operations also contributed $2.4 million to the increase due to larger
revolving credit card balances over the first quarter of fiscal 1997.
The pretax loss increased to $6.3 million from $1.0 million in the first
quarter of fiscal 1997, primarily due to increased bad debt expenses resulting
from larger revolving credit card balances and operational costs related to the
new retail mortgage business. In addition, higher bad debt and compensation
expenses in software and online operations, respectively, contributed to the
loss.
S-11
<PAGE>
INVESTMENT INCOME, NET
Net investment income increased 31.6% to $5.2 million from $3.9 million
last year. The increase resulted from more funds available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first
quarter decreased 36.0% to $2.3 million from $3.6 million in the comparable
period last year. The decrease resulted mainly from expenses included in the
first quarter of fiscal 1997 of $517 thousand related to the planned spin-off of
Block's remaining investment in CompuServe. Also contributing to the decrease
were lower consultant fees, charitable contributions and insurance expenses.
FISCAL 1997 COMPARED TO FISCAL 1996--CONSOLIDATED RESULTS
Revenues increased 25.9% to $1.097 billion compared to $871.5 million in
1996. Net earnings from continuing operations increased 14.9% to $143.8 million
from $125.1 million in the prior year. Net earnings per share from continuing
operations increased to $1.36 from $1.18 in 1996.
Except for historical information contained herein, the matters addressed
in this discussion are forward-looking statements that are subject to risks and
uncertainties which could cause actual results to differ materially. Such risks
and uncertainties include, but are not limited to, economic, competitive and
governmental factors affecting Block's operations, markets, products, services,
prices and various other factors. Block cannot assume, for example, that
revenues of either of its operating segments will increase in fiscal 1998, or
that any increase in revenues will favorably impact operating earnings.
Additional information on each of Block's operating segments follows.
TAX SERVICES
Revenues increased 19.5% to $993.9 million from $831.5 million in the prior
year. Tax preparation fees increased $122.0 million, or 21.3%, as a result of a
7.1% increase in the number of returns prepared by company-owned offices, with
the remainder attributable to price increases and a change in the complexity of
returns prepared which results in higher fees. In the United States, fees from
electronic filing were up $26.9 million, or 23.7%, due primarily to an increase
in the number of U.S. Federal and state returns filed electronically by 15.7%
and 29.2%, respectively. Royalties increased by $11.2 million, or 11.6%,
reflecting improved results reported by franchises as a result of greater
revenues from electronic filing, a 5.4% increase in the number of returns
prepared by franchises and increases in pricing.
Operating earnings increased 11.5% to $217.1 million from $194.8 million in
1996. The pretax margin was 21.8% compared to 23.4% in the prior year. The
decline in margin resulted from increased bad debt associated with electronic
filing, marketing expenses targeted at gaining new customers and costs connected
with the implementation of a new, computerized bookkeeping and management
reporting system.
Management believes that Tax Services revenues will increase at a lower
rate in fiscal 1998 than that experienced in fiscal 1997, due to an anticipated
smaller increase in pricing and in the number of taxpayers served. Also, Block
acquired a major franchise in June 1996 which favorably impacted Tax Services
fiscal 1997 revenues.
FINANCIAL SERVICES
Revenues increased 204.1% to $110.8 million from $36.4 million in 1996. The
increase is largely due to Block's participation in the RAL program, which
contributed revenues of $54.5 million. Additionally, revenues from
mortgage-related operations, which are new this year, amounted to
S-12
<PAGE>
$8.7 million, including a gain recognized on Block's first securitization of
nonconforming mortgage loans, which approximated $3 million. Credit card
revenues increased 26.0% to $30.9 million due to the increased number of cards
outstanding and higher revolving balances.
Operating earnings were $7.1 million compared to a loss of $7.4 million in
the prior year. Exclusive of an impairment loss of $8.4 million recognized on
the tax preparation software business assets in 1996, operating earnings for
1996 were $1.0 million. This improvement in operating earnings is mainly due to
RAL program participation, which contributed pretax earnings of $8.1 million,
and the securitization gain of approximately $3 million. Operating earnings were
negatively impacted by a 60.7% increase in credit card bad debt expense to $14.6
million. This variance resulted from an increase in the credit card receivables
portfolio by 49%, and a deterioration in credit quality arising from the
maturation of the credit card portfolio.
Management believes that revenues from Financial Services will increase by
at least 50% in fiscal 1998 primarily as a result of the acquisition of Option
One.
INVESTMENT INCOME, NET
Net investment income increased 28.05% to $10.9 million from $8.5 million
in 1996. Block incurred $2.0 million of interest expense on corporate borrowings
in 1996, as compared to $0.2 million in 1997.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss decreased 8.2% to
$10.0 million compared to $10.9 million in 1996. The improvement was due to an
increase in the cash values of corporate-owned whole-life insurance contracts
used to informally fund deferred compensation plans. Block also favorably
adjusted its liability for certain insurance contingencies based upon actuarial
valuations.
INCOME TAX EXPENSE
The effective tax rate was 36.1% for fiscal 1997, compared to 36.7% for
1996, caused by a decrease in state and local income taxes.
S-13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are expected to be
approximately $247.8 million. All of the net proceeds of the offering will be
used to repay outstanding commercial paper with a weighted average interest rate
of 5.6% at September 30, 1997, which was issued by the Company in connection
with the acquisition of Option One.
CAPITALIZATION
The following table sets forth the consolidated capitalization of Block as
of July 31, 1997, and as adjusted to give effect to the sale by the Company of
the Notes offered hereby and the application of the estimated net proceeds
therefrom to reduce outstanding indebtedness. See 'Use of Proceeds.'
<TABLE>
<CAPTION>
JULY 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term notes payable.......................... $657,209 $ 409,395
6 3/4% Senior Notes due 2004.................... -- 250,000
-------- -----------
Total debt...................................... $657,209 $ 659,395
-------- -----------
-------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par, stated value $0.01 per
share: authorized 400,000,000 shares......... $ 1,089 $ 1,089
Convertible preferred stock, no par, stated
value $0.01 per share, authorized 500,000
shares....................................... 4 4
Additional paid-in capital...................... 501,528 501,528
Retained earnings............................... 625,479 625,479
Less cost of common stock in treasury........... (186,450) (186,450)
-------- -----------
Total shareholders' equity................... $941,650 $ 941,650
-------- -----------
-------- -----------
</TABLE>
S-14
<PAGE>
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture dated as of October 20, 1997
(the 'Indenture'), entered into by and between the Company and Bankers Trust
Company, as trustee (the 'Trustee'), as supplemented. The following summaries of
certain provisions of the Notes and the Indenture, a copy of which has been
incorporated by reference as an exhibit to the Registration Statement of which
the Prospectus and this Prospectus Supplement are a part, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Notes and the Indenture, including the
definitions therein of certain terms. Capitalized terms used in this
'Description of the Notes' have the meanings attributed to them in the Notes or
the Indenture unless otherwise defined herein.
The following description of the particular terms of the Notes offered
hereby supplements and, to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Debt Securities and the
Indenture set forth in the accompanying Prospectus, to which reference is hereby
made.
GENERAL
The Notes will be limited to $250 million aggregate principal amount and
will mature on November 1, 2004. The Notes will bear interest at the rate set
forth on the front cover of this Prospectus Supplement from October 23, 1997,
payable semiannually on May 1 and November 1 of each year, commencing May 1,
1998, to the registered holders at the close of business on the April 15 or
October 15 preceding such May 1 or November 1, whether or not such day is a
business day. Interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months.
RANKING
The Notes will be general unsecured obligations and will rank equal in
right of payment, on a pari passu basis, with all other existing and future
unsecured and unsubordinated senior indebtedness of the Company. The Notes will
be fully and unconditionally guaranteed on a senior unsecured basis by the
Guarantor. The Guarantees will rank equal in right of payment, on a pari passu
basis, with all existing and future unsecured and unsubordinated senior
indebtedness and guarantees of the Guarantor.
OPTIONAL REDEMPTION
The Notes will not be redeemable prior to maturity.
SINKING FUND
There will be no sinking fund payments for the Notes.
COVENANTS
The Notes contain the covenants set forth in the Prospectus.
EVENTS OF DEFAULT
The Notes are subject to the Events of Default set forth in the Prospectus.
DEFEASANCE
The Notes are subject to the Company's legal defeasance option and covenant
defeasance option as set forth under 'Description of Debt
Securities--Satisfaction and Discharge of the Indenture; Defeasance' in the
Prospectus.
S-15
<PAGE>
BOOK-ENTRY, DELIVERY AND FORM
The Notes initially will be represented by one or more Global Notes
deposited with DTC and registered in the name of a nominee of DTC. Except as
described in the Prospectus, the Notes will be available for purchase in
denominations of $1,000 principal amount, and integral multiples thereof, in
book-entry form only. Unless and until certificated Notes are issued under the
limited circumstances described in the Prospectus, no beneficial owner of a Note
shall be entitled to receive a definitive certificate representing a Note. So
long as the Notes are represented by the Global Notes, any payments in respect
of the Notes will be made to DTC or its nominee, as the registered owner of the
Global Notes. See 'Description of Debt Securities--Global Securities' in the
Prospectus.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in same-day funds. The Notes will trade in DTC's Same-Day
Funds Settlement System until maturity, and secondary market trading activity in
the Notes will therefore be required by DTC to settle in immediately available
funds.
CONCERNING THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with respect to the
Notes.
S-16
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated October 21, 1997 (the 'Underwriting Agreement'), among the Company, the
Guarantor and the Underwriters named below (the 'Underwriters'), the Company has
agreed to sell to each of the Underwriters, and each of the Underwriters has
severally, but not jointly, agreed to purchase, the principal amount of Notes
set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS NOTES
- -------------------------------------------------- ------------
<S> <C>
Salomon Brothers Inc.............................. $ 83,400,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................... 83,300,000
Morgan Stanley & Co. Incorporated................. 83,300,000
------------
Total........................................ $250,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to certain conditions
precedent, including approval of certain legal matters by their counsel, and
that the Underwriters will be obligated to purchase all the Notes if any are
purchased.
The Underwriters have advised the Company that they propose initially to
offer the Notes directly to the public at the public offering price set forth on
the cover page hereof and to certain dealers at such price less a concession not
in excess of .375% of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of .250% of the
principal amount of the Notes on sales to other dealers. After the initial
public offering, the public offering price and the concession and discount to
dealers may be changed by the Underwriters from time to time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments that the Underwriters may be required to make in
respect thereof.
The Company has applied for listing of the Notes on the New York Stock
Exchange. In addition, the Company has been advised by the Underwriters that
they presently intend to make a market in the Notes, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Notes and any such market making may be discontinued at any time
at the sole discretion of the Underwriters. Accordingly, no assurance can be
given as to the liquidity of or trading markets for the Notes.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific maximum.
Syndicate covering transactions involve purchases of the Notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Notes originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Notes to be higher than
it would otherwise be in the absence of such transactions.
The Underwriters and their affiliates may be customers of, engage in
transactions with, and/or perform services, including investment banking
services, in the ordinary course of their respective businesses for the
Guarantor and its affiliates, for which they have received or may receive
customary compensation.
S-17
<PAGE>
LEGAL MATTERS
The validity of the Notes and Guarantees offered hereby will be passed upon
for the Company and the Guarantor by Bryan Cave LLP, Kansas City, Missouri.
Certain matters will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
S-18
<PAGE>
PROSPECTUS
BLOCK FINANCIAL CORPORATION
DEBT SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED BY H&R BLOCK, INC.
Block Financial Corporation (the 'Company' or 'BFC') may offer from time to
time, in one or more series, debentures, notes, bonds or other obligations
('Debt Securities'), which may be senior ('Senior Debt Securities') or
subordinated ('Subordinated Debt Securities') to other indebtedness of the
Company, all having an aggregate initial public offering price not to exceed
$1,000,000,000 or the equivalent thereof in one or more foreign currencies,
foreign currency units or composite currencies, including European Currency
Units. The Debt Securities may be offered in separate series in amounts, at
prices and on terms to be determined at or prior to the time of sale. The Debt
Securities will be direct unsecured obligations of the Company. The payment of
principal, premium, if any, and interest with respect to the Debt Securities
will be fully and unconditionally guaranteed by H&R Block, Inc. (the 'Guarantor'
or 'Block'), the indirect parent company of BFC.
The specific terms of the Debt Securities with respect to which this Prospectus
is being delivered will be set forth in one or more supplements to this
Prospectus (each a 'Prospectus Supplement'), together with the terms of the
offering and sale of the Debt Securities, the initial offering price and the net
proceeds to the Company from the sale thereof. Each Prospectus Supplement will
include, among other things, the specific designation, aggregate principal
amount, ranking, authorized denomination, maturity, rate or method of
calculation of interest and dates for payment thereof, any index or formula for
determining the amount of any principal, premium, or interest payment, any
exchange, redemption, prepayment or sinking fund provisions, the currency or
currency unit in which principal, premium, or interest is payable, whether the
securities are issuable in registered form or in the form of global securities,
and the designation of the trustee acting under the indenture. Each Prospectus
Supplement will also contain information, where applicable, about material
United States federal income tax considerations relating to, and any listings on
a securities exchange of, the Debt Securities covered by such Prospectus
Supplement.
The Company may sell the Debt Securities directly to purchasers, through agents
designated from time to time or through underwriters or dealers on terms
determined by market conditions at the time of sale. If any agents,
underwriters, or dealers are involved in the sale of the Debt Securities, the
names of such agents, underwriters or dealers and any applicable commissions or
discounts and the net proceeds to the Company from such sale will be set forth
in the applicable Prospectus Supplement.
SEE 'RISK FACTORS' BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN ANY DEBT
SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF DEBT SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR, OR ANY
UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF OR THEREOF. THIS
PROSPECTUS AND ANY RELATED PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
The date of this Prospectus is October 17, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantor have filed with the Securities and Exchange
Commission (the 'Commission') a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the 'Registration Statement') under
the Securities Act of 1933, as amended (the 'Securities Act'), for the
registration of the Debt Securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to, or incorporated by reference in, the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company, the Guarantor
and the Debt Securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and financial statements and notes
filed as a part thereof or incorporated by reference therein. Statements made in
this Prospectus and in the accompanying Prospectus Supplement concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to, or
incorporated by reference in, the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Guarantor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in
accordance therewith the Guarantor files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Guarantor may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549. The Commission maintains an
Internet Web site at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. In addition, such material filed by the Guarantor may also be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005, and the Pacific Stock Exchange
Incorporated, 301 Pine Street, San Francisco, California 94104, on which
exchanges the Common Stock of the Guarantor is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Guarantor with the Commission pursuant
to the Exchange Act under File No. 1-6089 are incorporated herein by reference
and shall be deemed to be a part hereof:
1. the Guarantor's Annual Report on Form 10-K for the fiscal year
ended April 30, 1997 (as amended on Forms 10-K/A for such fiscal year);
2. the Guarantor's Current Reports on Form 8-K dated July 2, 1997 (as
amended on Form 8-K/A filed August 14, 1997), September 7, 1997 and
September 25, 1997;
3. the Guarantor's Quarterly Report on Form 10-Q for the three months
ended July 31, 1997 (as amended on Form 10-Q/A filed October 2, 1997).
All documents filed by the Company or the Guarantor pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Debt Securities made hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such documents. See 'Available Information.'
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein or in any Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
2
<PAGE>
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith, as indicated above. The Company will provide
without charge to each person, including any beneficial owner, to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which are incorporated herein by reference
(other than exhibits to such documents unless they are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to Block Financial Corporation, 4435 Main Street, Suite 500, Kansas City,
Missouri 64111, Attention: John R. Cox, telephone (816) 751-6019.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the 'Reform Act')
provides a 'safe harbor' for certain forward-looking statements contained in
this Prospectus, but such safe harbor does not protect any such statements made
by or regarding the Company. Certain statements contained in the sections
entitled 'The Company' and 'The Guarantor,' and certain statements incorporated
by reference from documents filed with the Commission by the Company, are or may
constitute forward-looking statements as defined in the Reform Act. However, the
safe harbor does not apply to forward-looking statements made in connection with
an initial public offering. Since the offering of Debt Securities is an initial
public offering by the Company, the safe harbor would not apply to any such
forward-looking statements concerning the Company. Because such statements are
subject to risks and uncertainties, actual results may differ from those
expressed or implied by such forward-looking statements.
THE COMPANY
BFC is an indirect wholly owned subsidiary of Block. It was organized in
May 1992 for the purpose of developing and providing tax-related and
technology-related financial services. The principal business activities of BFC
include (i) the origination, purchase, servicing, sale and securitization of
nonconforming residential mortgages, (ii) the purchase of participation
interests in refund anticipation loans ('RALs') made by Beneficial National Bank
('Beneficial') to Block tax customers, (iii) the offering of credit cards for
CompuServe Corporation ('CompuServe') and WebBank Corporation, a Utah Industrial
Loan Company and wholly owned subsidiary of BFC, (iv) the development,
publishing, and marketing of software products designed to assist individuals in
managing their personal finances and preparing tax returns, and (v) the offering
of equity lines of credit to Block's tax preparation franchisees. BFC's
principal executive office is located at 4435 Main Street, Suite 500, Kansas
City, Missouri 64111 and its telephone number is (816) 751-6000.
NONCONFORMING MORTGAGES. BFC operates a nonconforming mortgage origination
and funding business 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.
In a strategic initiative to develop a retail nonconforming mortgage
business, BFC and Block formed H&R Block Mortgage Company, L.L.C. ('Block
Mortgage') in August 1995 to offer nonconforming mortgages at H&R Block tax
offices. Block Mortgage is a limited liability company in which a subsidiary of
Block owns a 99% membership interest and BFC owns a 1% membership interest.
During the 1997 tax season, Block Mortgage offered nonconforming mortgages
through 31 tax offices in Colorado, Indiana, North Carolina and Virginia. Block
Mortgage plans to continue the test of this business in additional tax offices
during fiscal year 1998.
BFC further increased its commitment to the nonconforming mortgage business
with its purchase of Option One Mortgage Corporation ('Option One') from Fleet
Financial Group, Inc. ('Fleet') in June 1997. Option One engages in the
origination, purchase, securitization, sale and servicing of one-to-four family
residential mortgage loans made primarily to sub-prime borrowers who do not
qualify for loans which conform to FNMA and FHLMC guidelines. Option One is
headquartered in Santa Ana, California, and has a network of more than 5,000
mortgage brokers in 46 states. In calendar 1996, Option One originated more than
$1 billion in mortgage loans. BFC believes that Option One will provide BFC with
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experienced associates in the nonconforming mortgage business and assist BFC and
Block in handling mortgage applications, processing loans and underwriting
mortgages originated through Block Mortgage.
BFC paid $218.1 million in cash for Option One, consisting of $28.1 million
in adjusted stockholder's equity and a premium of $190 million. In addition, BFC
made a cash payment of $456 million to Fleet to eliminate intercompany loans
made by Fleet to Option One to finance Option One's mortgage loan business. The
$456 million payment was recorded as an intercompany loan from BFC to Option One
and was repaid by Option One on June 30, 1997, when Option One sold mortgage
loans to a third party in the ordinary course of business.
BFC completed its first securitization of nonconforming mortgage loans on
January 30, 1997, through a $102 million asset-backed security issue.
Substantially all of the mortgages involved in this securitization were
mortgages offered through independent mortgage brokers. On July 30, 1997, BFC
completed its second securitization of nonconforming mortgages through a $215
million asset-backed security issue. This securitization included $134 million
of mortgages offered through independent mortgage brokers, $81 million of
mortgages offered by Option One and $10 million of mortgages offered by Block
Mortgage.
REFUND ANTICIPATION LOANS. In July 1996, BFC announced an agreement with
Beneficial to purchase a participation interest in RALs provided by Beneficial
to Block tax customers. In the 10-year agreement, BFC agreed to purchase an
initial 40% participation interest in such RALs, which interest would be
increased to nearly 50% in specific circumstances. As a result, BFC initially
has the right to receive 40% of the aggregate payments of principal, interest
and other sums due under the RALs, and bears 40% of the credit risk associated
with the RALs. BFC's purchases of participation interests are financed through
short-term borrowings. BFC bears all of the risks associated with its interests
in the RALs. BFC's total RAL revenue in fiscal 1997 was approximately $54.5
million, which generated approximately $8.1 million in pretax profits.
CREDIT CARDS. BFC offers Gold and Classic versions of two types of
co-branded credit cards: CompuServe Visa and WebCard(Service Mark) Visa. The
credit cards are issued under a co-branding agreement between BFC and Columbus
Bank and Trust Company, Columbus, Georgia. Approximately 110,000 CompuServe Visa
credit cards were issued by the end of fiscal 1997, compared to 113,425 credit
cards at the end of fiscal 1996. The number of WebCard(Service Mark) Visa
accounts at April 30, 1997, was 57,223, compared to approximately 6,000 accounts
at the end of fiscal 1996. The aggregate portfolio for the credit cards issued
by BFC increased from approximately $165 million at the end of fiscal 1996 to
more than $246 million by the end of fiscal 1997.
While the aggregate number of BFC's credit cards increased during fiscal
1997, bad debt expense associated with such accounts also increased
substantially. The increase in bad debt expense resulted from the increase in
the credit card receivables portfolio and a deterioration in the credit quality
arising from the maturation of the credit card portfolio. Measured as a
percentage of the credit card receivables, the bad debt expense increased 40
basis points, from 5.5% to 5.9% during fiscal 1997. Based on the balance of the
portfolio at April 30, 1997, every 10 basis point increase in the ratio of bad
debt expense to credit card receivables would result in additional expenses of
$248,000.
BFC developed the CONDUCTOR(Registered) service, a technology that
facilitates the delivery of financial services online through existing
commercial online services, the Internet or directly through leased networks.
CONDUCTOR(Registered) features 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.
BFC is evaluating the possible sale of its credit card operations,
including its receivables portfolio and the CONDUCTOR(Registered) service.
SOFTWARE PRODUCTS. BFC's software business develops and markets the
Kiplinger TaxCut(Registered) tax preparation software package, and markets the
Kiplinger Home Legal Advisor(Service Mark) and Kiplinger Small
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Business Attorney(Service Mark) software products. As a result of the increase
in sales of the final edition of TaxCut in fiscal 1997, BFC's share in the
income tax return preparation software market is now approximately 30%.
EQUITY LINES OF CREDIT. BFC offers to Block's tax preparation franchisees
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.
THE GUARANTOR
Block is a diversified services corporation that was organized in 1955
under the laws of Missouri. 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., which is the direct owner of (i) all
of the shares of H&R Block Tax Services, Inc. ('Tax Services'), a subsidiary
involved in the business of income tax return preparation, electronic filing of
income tax returns and the performance of other tax related services in the
United States, (ii) approximately 80.1% of the shares of CompuServe, a
corporation that offers worldwide online and Internet access services to
consumers and worldwide network access, management and applications, and
Internet services to businesses, and (iii) all of the shares of BFC. Indirect
subsidiaries of H&R Block Group, Inc. operate income tax return preparation and
related services businesses in Canada, Australia, the United Kingdom and Guam,
and offer H&R Block franchises in other parts of the world as a part of the
operations of H&R Block International. Block's principal executive office is
located at 4400 Main Street, Kansas City, Missouri 64111 and its telephone
number is (816) 753-6900. Block's common stock is listed on the New York Stock
Exchange and Pacific Stock Exchange and is quoted under the symbol 'HRB.'
TAX SERVICES. The income tax return preparation and related services
business is the original core business of Block. These services are provided to
the public through a system of offices operated by Block or by others to whom
Block has granted franchises. Block 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, Block offers RALs through Beneficial in conjunction with Block's
electronic filing service. Block also markets its income tax preparation
knowledge through its income tax training schools.
Block's tax operations are divided structurally into three areas, each
targeting specific markets and focusing on new products and services and areas
for expansion. Tax Services focuses on tax business operations in the United
States. H&R Block Premium, a division of Tax Services, competes for those
clients who typically have more complex income tax returns and features meetings
by appointment any time of the year, private offices and more experienced tax
return preparers. H&R Block International focuses on strengthening operations in
current foreign markets, such as Canada and Australia, and identifying and
developing new markets.
COMPUSERVE. CompuServe was incorporated in Delaware on February 16, 1996.
CompuServe is the parent corporation in a holding company structure, and holds
all of the outstanding stock of CompuServe Incorporated. CompuServe Incorporated
was founded in 1969 as a computer timesharing service and introduced its first
online service in 1979. Until April 1996, CompuServe was an indirect wholly
owned subsidiary of Block. In April 1996, CompuServe completed an initial public
offering of 18,400,000 shares of its common stock. CompuServe's common stock is
quoted on the Nasdaq quotation system under the symbol 'CSRV.'
CompuServe is a worldwide leader in the market for computer-based
interactive services and data communications and a pioneer in the development of
consumer online and Internet access services. CompuServe was the first online
service provider to establish a major international presence, and continues to
be one of the largest global online and Internet service providers. CompuServe
operates what its management believes is the most extensive network in the world
dedicated solely to data transmission.
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CompuServe Interactive Service(Service Mark) ('CSi'), CompuServe's flagship
product, offers traditional online services and integrated Internet access.
Through SPRYNET(Service Mark), CompuServe also offers a stand-alone
Internet-access-only service. Management believes consumer online services are a
preferred access vehicle to the Internet for the average user due to the ability
of online services to focus and aggregate content and provide centralized
billing and support. Management also believes CompuServe's business networking
experience and infrastructure position it to be a leader in the
commercialization of the Internet.
On September 7, 1997, the Guarantor entered into an Agreement and Plan of
Merger (the 'Merger Agreement') with H&R Block Group, Inc., CompuServe,
WorldCom, Inc., a Georgia corporation ('WorldCom'), and Walnut Acquisition
Company, L.L.C., a Delaware limited liability company which is wholly owned by
WorldCom ('WAC'), pursuant to which WorldCom would acquire CompuServe through a
merger of WAC with and into CompuServe (the 'Merger'). At the Effective Time (as
defined in the Merger Agreement) each of the CompuServe Common Shares (as
defined in the Merger Agreement) outstanding as of the Effective Time will be
converted into the right to receive, and there will be paid and issued as
provided in the Merger Agreement in exchange for each of the CompuServe Common
Shares, 0.40625 of a share of WorldCom Common Stock (as defined in the Merger
Agreement), subject to adjustment as provided in the Merger Agreement. Based on
the closing price of WorldCom Common Stock on September 5, 1997, the aggregate
purchase price for CompuServe is approximately $1.2 billion. Consummation of the
Merger is subject to the satisfaction of certain conditions, including, among
others, the expiration or termination of any applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
foreign competition law or similar law, the receipt of other required regulatory
approvals, and the absence of certain material adverse changes. Consummation of
the Merger is also subject to the approval and adoption of the Merger Agreement
by the holders of the requisite number of CompuServe Common Shares. The
Guarantor has agreed to vote all of the shares directly or indirectly owned by
it in favor of the Merger Agreement and the Merger, which number of shares is
sufficient to approve the Merger Agreement and the Merger. The closing of the
Merger is expected to occur as soon as practicable after the satisfaction of all
the conditions set forth in the Merger Agreement.
In fiscal 1997, CompuServe's revenues were $841.9 million, compared to
Block's consolidated revenues from continuing operations of $1.097 billion. As
of July 31, 1997, CompuServe's total assets were $787.2 million and Block's
total assets were $1.876 billion. In fiscal 1997, the net loss of CompuServe was
$96 million and the net earnings of Block excluding CompuServe were $143.8
million.
The Guarantor believes it is likely that the conditions to the consummation
of the Merger will be satisfied and that the Merger will be consummated.
However, there can be no assurance that all conditions will be satisfied. If the
Merger is not consummated for any reason, the Guarantor will continue to pursue
alternatives to complete the separation of CompuServe.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Debt
Securities for general corporate purposes which may include acquisitions,
capital expenditures, working capital requirements, repayment of certain
indebtedness or for other business purposes. The specific use of proceeds of
each sale of Debt Securities will be set forth in each Prospectus Supplement.
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RISK FACTORS
Prospective investors should carefully consider the following risk factors
in connection with an investment in any Debt Securities.
COMPANY RISK FACTORS
GENERAL LENDING RISKS
BFC operates financial services businesses which are subject to various
business risks, including, but not limited to, the following: the risk that
borrowers will not satisfy their payment obligations; the risk, in the case of a
nonconforming mortgage loan or a franchisee line of credit loan, that the value
of the property securing such loan will not be sufficient to repay the
borrower's obligation to BFC upon foreclosure after default; the risk that
changes in interest rates after the origination of a loan and prior to its sale
may narrow the spread between the cost of BFC's funds and the interest paid by
the borrower; the risk, in the case of nonconforming mortgage loans, that a
decrease in interest rates could cause an increase in the rate at which
outstanding loans are prepaid; and the risk, in the case of credit card loans,
of increased bad debt expense as a result of growth and maturation of BFC's loan
portfolio, consistent with current trends in the credit card industry.
Many of the foregoing business risks become more acute in an economic
slowdown or recession, which may be accompanied by decreased demand for credit
and declining real estate and other asset values. Specifically, in the
nonconforming mortgage business, any material decline in real estate values
reduces the ability of borrowers to use home equity to support borrowings and
increases the loan-to-value ratios of loans previously made by BFC, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of a default. Delinquencies, foreclosures, repossessions and losses
generally increase during economic slowdowns or recessions. Certain of BFC's
borrowers may have had past credit problems and in the nonconforming mortgage
market the actual rates of delinquencies, foreclosures, repossessions and
losses, as applicable, could be higher under adverse economic conditions than
those experienced in the mortgage market generally. Any sustained period of
increased delinquencies, foreclosures, repossessions, losses or costs could
adversely affect BFC's ability to sell nonconforming mortgage loans through
securitization or whole loan sales and could increase the cost of selling such
loans, which could adversely affect BFC's financial condition or results of
operations.
ADVERSE IMPACT OF MORTGAGE LOAN PREPAYMENTS FOLLOWING SECURITIZATION
BFC sells nonconforming mortgages in both whole loan sales and
securitizations. Although significantly more mortgages are currently sold
through whole loan sales than through securitization, gains on sales of
mortgages through securitization could become a significant component of BFC's
reported revenues. The amount of such gains is based on estimates made by
management at the time loans are sold about prepayment rates and other matters.
The rate of prepayment of loans may be affected by a variety of economic and
other factors, including prevailing interest rates and the availability of
alternative financing. Decreases in interest rates could cause prepayment rates
to increase. The effects of these factors may vary depending on the particular
type of loan. Estimates of prepayment rates are made based on management's
expectations of future prepayment rates, which are based, in part, on the
historic performance of BFC's loans and other considerations. There can be no
assurance as to the accuracy of management's estimates. If actual prepayments
occur more quickly than was projected at the time loans were sold in a
securitization, the carrying value of the residual and servicing assets may have
to be written down through a charge to earnings in the period of adjustment.
NEED FOR ADDITIONAL FUNDS AND DEPENDENCE ON LOAN SALES TO FINANCE LENDING
ACTIVITIES
BFC has a continuing need for capital to finance its lending operations.
Currently, BFC's principal cash requirements are in connection with loan
originations and purchases, purchases of participations in RALs, repayments of
outstanding commercial paper, and payments of operating expenses and interest.
Loan production is funded principally through the issuance of commercial paper.
BFC's
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outstanding commercial paper is in turn repaid with the proceeds received by BFC
from selling nonconforming mortgage loans through securitization or whole loan
sales and from collections on credit card receivables and franchisee lines of
credit. While BFC believes that it will be able to refinance or otherwise repay
its outstanding commercial paper in the normal course of its business, there can
be no assurance that BFC will continue to be able to access the commercial paper
markets or that other lenders will be willing to extend lines of credit to BFC
or that funds otherwise generated from operations will be sufficient to satisfy
its obligations. Future financing may involve the issuance of additional Debt
Securities.
BFC relies significantly upon securitizations and whole loan sales to
generate cash proceeds for repayment of outstanding commercial paper.
Accordingly, adverse changes in the securities markets generally, the asset
backed securities and whole loan sale markets, or the credit quality of BFC's
loan portfolio could impair BFC's ability to originate, purchase and sell loans
or other assets on a favorable or timely basis. Any such impairment could have a
material adverse effect upon BFC's business and results of operations. Any delay
in the sale of a loan or other asset pool would postpone the recognition of a
gain on such loans until their sale. Such delays could cause BFC's earnings to
fluctuate from quarter to quarter.
COMPETITION
The financial services and software businesses in which BFC engages are
highly competitive. BFC faces increasing competition as a purchaser and
originator of nonconforming mortgage loans and as an issuer of credit cards.
Certain large national finance companies, commercial banks, thrifts, credit card
originators and conforming mortgage originators, with greater capitalization and
financial resources than BFC, have adapted their origination programs and
allocated resources to the origination of nonconforming loans. The entrance of
these competitors into BFC's nonconforming mortgage or credit card markets could
have a material adverse effect on BFC's financial condition and results of
operations.
CERTAIN LEGAL RISKS
BFC's operations and origination activities are subject to extensive laws,
regulations, supervision and licensing by federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by BFC, disclosure in connection with loan originations,
credit reporting requirements, servicing requirements, federal and state
taxation, and multiple qualification and licensing requirements for doing
business in various jurisdictions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive.
GOVERNMENT REGULATION OF REFUND ANTICIPATION LOANS
Repayment of RALs generally depends on Internal Revenue Service ('IRS')
direct deposit procedures. A borrower of a RAL directs the IRS to deposit the
borrower's federal income tax refund directly into a special bank account
maintained at the banking institution that made the RAL. The lending institution
then collects the RAL by exercising a right of offset against the bank account.
The IRS may from time to time change its direct deposit procedures or may
determine not to make direct deposits of all or portions of a borrower's federal
income tax refund. Failure by the IRS to make direct deposits of federal income
tax refunds may impair the lender's ability to recover a RAL and result in a
loss.
Changes in government regulations applicable to RALs could adversely affect
the RAL business and thereby limit the ability of BFC to purchase participation
interests in RALs and adversely impact BFC's results of operations.
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SEASONALITY OF BUSINESS
A substantial portion of BFC's revenues are received during the period from
January through April of each year since revenues from participations in RALs
and sales of tax return preparation software occur during such period.
GUARANTOR RISK FACTORS
TAX LEGISLATION
From time to time, and especially in election years, the subjects of tax
simplification, restructuring and reform ('tax reform') are discussed in the
American political environment, sometimes leading to proposed legislation to
effectuate one or more tax reform ideas. In the past few years, tax reform ideas
such as a flat tax, a consumption tax and a national sales tax have been
proposed and have received more serious attention than in the past, although
none of these tax reform ideas has materialized into effective legislation.
Historically, changes in tax laws have increased Block's tax return preparation
business because of inherent uncertainties as to the interpretation and
application of new changes and, in many cases, the increased complexity in tax
law caused by such changes. If enacted, the effect of significant tax reform
legislation on Block's business over time is uncertain and such legislation
could have a material adverse effect on Block's business and results of
operations.
REGULATION OF TAX RETURN PREPARATION, ELECTRONIC FILING AND REFUND ANTICIPATION
LOANS
The federal government regulates the preparation and electronic filing of
income tax returns and an electronic filer's involvement in RALs. States that
have adopted electronic filing programs for state income tax returns have also
enacted laws that regulate electronic filers. In addition, some states and
localities have enacted laws and adopted regulations that regulate RAL
facilitators and/or the advertisement and offering of electronic filing and
RALs. Block cannot predict the affect of the enactment of new statutes or the
adoption of new regulations pertaining to its tax return preparation business.
COMPETITION
The income tax return preparation and electronic filing businesses are
highly competitive. Block considers the individual who prepares his own tax
return to be its primary competition. The enactment of legislative proposals to
reform or simplify the tax system, discussed under 'Tax Legislation' above, may
have the effect of increasing the number of self-preparers, which could have a
material adverse effect on Block's business and results of operations. In
addition to self-preparers, there are a substantial number of tax return
preparation firms. Many of these firms, and many firms not involved in the
income tax return preparation business, are involved in providing electronic
filing and RAL services to the public. Commercial tax return preparers and
electronic filers are highly competitive with regard to price, service and
reputation for quality.
SEASONALITY OF BUSINESS
Since most Block customers file their tax returns during the period from
January through April of each year, substantially all of Block's revenues from
income tax return preparation related services and franchise royalties are
received during this period. As a result, Block operates at a loss through the
first nine months of its fiscal year.
SALE OF COMPUSERVE
The sale of Block's interest in CompuServe through a merger with a
subsidiary of WorldCom is subject to conditions the satisfaction of which cannot
be assured. If such transaction is not consummated for any reason, there can be
no assurance that Block will be able to dispose of its interest in CompuServe on
terms as favorable as those offered by WorldCom. See 'The Guarantor--
CompuServe.'
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RATIO OF EARNINGS TO FIXED CHARGES
THE COMPANY
The following table sets forth the ratio of earnings to fixed charges for
the Company for the three months ended July 31, 1997 and for each of the five
years ended April 30.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31, 1997 1997 1996 1995 1994 1993
------------------- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to (a) 1.6:1 2.5:1 (b) (c) 6.9:1
Fixed Charges........ (d)
</TABLE>
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three months ended
July 31, 1997 by $6,330.
(b) Earnings were insufficient to cover fixed charges for the year ended April
30, 1995 by $5,788.
(c) Earnings were insufficient to cover fixed charges for the year ended April
30, 1994 by $15,644.
(d) Earnings for the year ended April 30, 1994 included a nonrecurring charge of
$25,072 for purchased research and development related to the acquisition of
MECA Software, Inc. as disclosed in the 'Acquisitions' note to the
Guarantor's consolidated financial statements for the year ended April 30,
1996. If such charges had not occurred, the ratio of earnings to fixed
charges would have been 4.2:1.
THE GUARANTOR
The following table sets forth the ratio of earnings to fixed charges for
the Guarantor on a consolidated basis for the three months ended July 31, 1997
and for each of the five years ended April 30, which ratios are based on the
historical consolidated financial statements of the Guarantor.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31, 1997 1997 1996 1995 1994 1993
------------------- ------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges........ (a) 4.8:1 5.9:1 5.0:1 5.5:1(b ) 6.2:1
</TABLE>
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three months ended
July 31, 1997 by $55,509.
(b) Earnings for the year ended April 30, 1994 included a nonrecurring charge of
$25,072 for purchased research and development related to the acquisition of
MECA Software, Inc. as disclosed in the 'Acquisitions' note to the
Guarantor's consolidated financial statements for the year ended April 30,
1996. If such charges had not occurred, the ratio of earnings to fixed
charges would have been 6.6:1.
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DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities and
Guarantees sets forth certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
of the Debt Securities offered by any Prospectus Supplement and the extent, if
any, to which such general provisions may apply to the Debt Securities so
offered will be described in the Prospectus Supplement relating to such Debt
Securities. Accordingly, for a description of the terms of a particular issue of
Debt Securities and Guarantees, reference must be made to both the Prospectus
Supplement relating thereto and to the following description.
The Debt Securities will be general obligations of the Company and may be
Senior Debt Securities or Subordinated Debt Securities. Senior Debt Securities
will rank equally with all other unsubordinated and unsecured indebtedness of
the Company. The Subordinated Debt Securities will be subordinate in right of
payment to 'Senior Indebtedness' (as defined below) of the Company to the extent
set forth in the Prospectus Supplement relating thereto. See 'Description of
Debt Securities--Subordination' below. The Guarantor will irrevocably and
unconditionally guarantee payments of principal, interest and premium, if any,
on the Debt Securities. Debt Securities and Guarantees will be issued under an
indenture (the 'Indenture') to be entered into between the Company, the
Guarantor and Bankers Trust Company (the 'Trustee'). A copy of the form of
Indenture has been filed as an exhibit to the Registration Statement filed with
the Commission. The following discussion of certain provisions of the Indenture
is a summary only and does not purport to be a complete description of the terms
and provisions of the Indenture. Accordingly, the following discussion is
qualified in its entirety by reference to the provisions of the Indenture,
including the definition therein of terms used below with their initial letters
capitalized.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder. The Debt Securities may be issued in
one or more series as may be authorized from time to time by the Company.
Reference is made to the applicable Prospectus Supplement for the following
terms of the Debt Securities of the series with respect to which such Prospectus
Supplement is being delivered:
(a) The title of Debt Securities of the series;
(b) Any limit on the aggregate principal amount of the Debt Securities
of the series that may be authenticated and delivered under the Indenture;
(c) The date or dates on which the principal and premium, if any, with
respect to the Debt Securities of the series are payable;
(d) The rate or rates (which may be fixed or variable) at which the
Debt Securities of the series shall bear interest (if any) or the method of
determining such rate or rates, the date or dates from which such interest
shall accrue, the interest payment dates on which such interest shall be
payable or the method by which such date will be determined, the record
dates for the determination of Holders thereof to whom such interest is
payable (in the case of Registered Securities), and the basis upon which
interest will be calculated if other than that of a 360-day year of twelve
30-day months;
(e) The Place or Places of Payment, if any, in addition to or instead
of the corporate trust office of the Trustee where the principal, premium,
if any, and interest with respect to Debt Securities of the series shall be
payable;
(f) The price or prices at which, the period or periods within which,
and the terms and conditions upon which Debt Securities of the series may
be redeemed, in whole or in part, at the option of the Company or
otherwise;
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(g) The obligation, if any, of the Company to redeem, purchase, or
repay Debt Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof and the price or
prices at which, the period or periods within which, and the terms and
conditions upon which Debt Securities of the series shall be redeemed,
purchased, or repaid, in whole or in part, pursuant to such obligations;
(h) The terms, if any, upon which the Debt Securities of the series
may be convertible into or exchanged for other Debt Securities of the
Company and the terms and conditions upon which such conversion or exchange
shall be effected, including the initial conversion or exchange price or
rate, the conversion or exchange period and any other provision in addition
to or in lieu of those described herein;
(i) If other than denominations of $1,000 or any integral multiple
thereof, the denominations in which Debt Securities of the series shall be
issuable;
(j) If the amount of principal, premium, if any, or interest with
respect to the Debt Securities of the series may be determined with
reference to an index or pursuant to a formula, the manner in which such
amounts will be determined;
(k) If the principal amount payable at the stated maturity of Debt
Securities of the series will not be determinable as of any one or more
dates prior to such stated maturity, the amount that will be deemed to be
such principal amount as of any such date for any purpose, including the
principal amount thereof that will be due and payable upon any maturity
other than the stated maturity or that will be deemed to be outstanding as
of any such date (or, in such case, the manner in which such deemed
principal amount is to be determined), and if necessary, the manner of
determining the equivalent thereof in United States currency;
(l) Any changes or additions to the provisions of the Indenture
dealing with defeasance, including the addition of additional covenants
that may be subject to the Company's covenant defeasance option;
(m) The coin or currency or currencies or units of two or more
currencies in which payment of the principal and premium, if any, and
interest with respect to Debt Securities of the series shall be payable;
(n) If other than the principal amount thereof, the portion of the
principal amount of Debt Securities of the series which shall be payable
upon declaration of acceleration or provable in bankruptcy;
(o) The terms, if any, of the transfer, mortgage, pledge or assignment
as security for the Debt Securities of the series of any properties,
assets, moneys, proceeds, securities or other collateral, including whether
certain provisions of the Trust Indenture Act are applicable and any
corresponding changes to provisions of the Indenture as currently in
effect;
(p) Any addition to or change in the Events of Default with respect to
the Debt Securities of the series and any change in the right of the
Trustee or the holders to declare the principal of and interest on, such
Debt Securities due and payable;
(q) If the Debt Securities of the series shall be issued in whole or
in part in the form of a Global Security, the terms and conditions, if any,
upon which such Global Security may be exchanged in whole or in part for
other individual Debt Securities in definitive registered form and the
Depositary for such Global Security;
(r) Any trustees, authenticating or paying agents, transfer agents or
registrars;
(s) The applicability of, and any addition to or change in the
covenants and definitions currently set forth in the Indenture or in the
terms relating to permitted consolidations, mergers, or sales of assets,
including conditioning any merger, conveyance, transfer or lease permitted
by the
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Indenture upon the satisfaction of an Indebtedness coverage standard by the
Company and Successor Company;
(t) The terms, if any, of any Guarantee (other than the Guarantee of
the Guarantor) of the payment of principal of, and premium, if any, and
interest on, Debt Securities of the series and any corresponding changes to
the provisions of the Indenture as currently in effect;
(u) The subordination, if any, of the Debt Securities of the series
pursuant to the Indenture and any changes or additions to the provisions of
the Indenture relating to subordination;
(v) With regard to Debt Securities of the series that do not bear
interest, the dates for certain required reports to the Trustee; and
(w) Any other terms of the Debt Securities of the series (which terms
shall not be prohibited by the Indenture).
The Prospectus Supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the series of Debt Securities to which such Prospectus Supplement relates,
including those applicable to (a) Debt Securities with respect to which payments
of principal, premium, or interest are determined with reference to an index or
formula (including changes in prices of particular securities, currencies, or
commodities), (b) Debt Securities with respect to which principal, premium, or
interest is payable in a foreign or composite currency, (c) Debt Securities that
are issued at a discount below their stated principal amount, bearing no
interest or interest at a rate that at the time of issuance is below market
rates ('Original Issue Discount Debt Securities'), and (d) variable rate Debt
Securities that are exchangeable for fixed rate Debt Securities.
Payments of interest on Debt Securities shall be made at the corporate
trust office of the Trustee or at the option of the Company by check mailed to
the registered holders thereof or, if so provided in the applicable Prospectus
Supplement, at the option of a Holder by wire transfer to an account designated
by such Holder.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities may be transferred or exchanged at the office of the Trustee at which
its corporate trust business is principally administered in the United States or
at the office of the Trustee or the Trustee's agent in the Borough of Manhattan,
the City and State of New York, at which its corporate agency business is
conducted, subject to the limitations provided in the Indenture, without the
payment of any service charge, other than any tax or governmental charge payable
in connection therewith.
GUARANTEES
The Guarantor will irrevocably and unconditionally guarantee to each holder
of a Debt Security the due and punctual payment of the principal of, and any
premium and interest on, such Debt Security, when and as the same shall become
due and payable, whether at maturity, upon acceleration, by call for redemption
or otherwise. The Guarantor has (a) agreed that its obligations under the
Guarantees in the event of an Event of Default will be as if it were principal
obligor and not merely surety, and will be enforceable irrespective of any
invalidity, irregularity or unenforceability of any series of the Debt
Securities or the Indenture or any supplement thereto and (b) waived its right
to require the Trustee or the Holders to pursue or exhaust its legal or
equitable remedies against the Company prior to exercising its rights under the
Guarantees.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more fully registered global securities (a 'Global Security')
that will be deposited with a depositary (the 'Depositary'), or with a nominee
for a Depositary identified in the Prospectus Supplement relating to such
series. In such case, one or more Global Securities will be issued in a
denomination or aggregate
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denomination equal to the portion of the aggregate principal amount of
outstanding registered Debt Securities of the series to be represented by such
Global Security or Securities. Unless and until it is exchanged in whole or in
part for Debt Securities in definitive registered form, a Global Security may
not be transferred except as a whole by the Depositary for such Global Security
to a nominee of such Depositary or by a nominee of such Depositary to such
Depositary or another nominee of such Depositary or by such Depositary or any
such nominee to a successor of such Depositary or a nominee of such successor.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement relating to such series. The
Company anticipates that the following provisions will apply to all depositary
arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by such Global
Security to the accounts of persons that have accounts with such Depositary
('participants'). The amounts to be credited shall be designated by any
underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interest through participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depositary for such Global Security (with respect to interests of
participants) or by participants or persons that hold through participants (with
respect to interests of persons other than participants). So long as the
Depositary for a Global Security, or its nominee, is the registered owner of
such Global Security, such Depositary or such nominee, as the case may be, will
be considered the sole owner or Holder of the Debt Securities represented by
such Global Security for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in a Global Security will not be entitled
to have the Debt Securities represented by such Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
such Debt Securities in definitive form and will not be considered the owners or
Holders thereof under the Indenture.
Principal, premium, if any, and interest payments on Debt Securities
represented by a Global Security registered in the name of a Depositary or its
nominee will be made to such Depositary or its nominee, as the case may be, as
the registered owner of such Global Security. None of the Company, the Trustee
or any paying agent for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in such Global Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, or
interest, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of the Depositary. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with the securities held for the accounts of customers registered in 'street
name', and will be the responsibility of such participants.
If the Depositary for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by the Company within ninety days, the Company will
issue such Debt Securities in definitive form in exchange for such Global
Security. In addition, the Company may at any time and in its sole discretion
determine not to have any of the Debt Securities of a series represented by one
or more Global Securities and, in such event, will
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issue Debt Securities of such series in definitive form in exchange for the
Global Security or Securities representing such Debt Securities.
SUBORDINATION
Debt Securities may be subordinated ('Subordinated Debt Securities') to
senior debt to the extent set forth in the Prospectus Supplement relating
thereto.
Subordinated Debt Securities will be subordinate in right of payment, to
the extent and in the manner set forth in the Indenture and the Prospectus
Supplement relating to such Subordinated Debt Securities, to the prior payment
of all Indebtedness of the Company that is designated as 'Senior Indebtedness'
(as defined in the Indenture) with respect to such Subordinated Debt Securities.
Senior Indebtedness, with respect to any series of Subordinated Debt Securities,
will consist of (a) any and all amounts payable under or with respect to the
Company's Indebtedness to banks and (b) any other Indebtedness of the Company
that is designated in a resolution of the Company's Board of Directors or the
supplemental Indenture establishing such series as Senior Indebtedness with
respect to such series.
Upon any payment or distribution of assets of the Company to creditors or
upon a total or partial liquidation or dissolution of the Company or in a
bankruptcy, receivership, or similar proceeding relating to the Company or its
property, holders of Senior Indebtedness shall be entitled to receive payment in
full in cash of the Senior Indebtedness before holders of Subordinated Debt
Securities shall be entitled to receive any payment of principal, premium, or
interest with respect to the Subordinated Debt Securities, and until the Senior
Indebtedness is paid in full, any distribution to which holders of Subordinated
Debt Securities would otherwise be entitled shall be made to the Holders of
Senior Indebtedness (except that such Holders may receive shares of stock and
any debt securities that are subordinated to Senior Indebtedness to at least the
same extent as the Subordinated Debt Securities).
The Company may not make any payments or principal, premium, or interest
with respect to Subordinated Debt Securities, make any deposit for the purpose
of defeasance of such Subordinated Debt Securities, or repurchase, redeem, or
otherwise retire (except, in the case of Subordinated Debt Securities that
provide for a mandatory sinking fund, by the delivery of Subordinated Debt
Securities by the Company to the Trustee in satisfaction of the Company's
sinking fund obligation) any Subordinated Debt Securities if (a) any principal,
premium, if any, or interest with respect to Senior Indebtedness is not paid
within any applicable grace period (including at maturity) or (b) any other
default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, the default has been cured or waived and such acceleration has been
rescinded, such Senior Indebtedness has been paid in full in cash, or the
Company and the Trustee receive written notice approving such payment from the
representatives of each issue of 'Designated Senior Indebtedness' (which will
include the Bank Indebtedness and any other specified issue of Senior
Indebtedness. During the continuance of any default (other than a default
described in clause (a) or (b) above) with respect to any Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Subordinated Debt Securities for a period (the 'Payment Blockage
Period') commencing on the receipt by the Company and the Trustee of written
notice of such default from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period (a
'Blockage Notice'). The Payment Blockage Period may be terminated before its
expiration by written notice to the Trustee and the Company from the person who
gave the Blockage Notice, by repayment in full in cash of the Senior
Indebtedness with respect to which the Blockage Notice was given, or because the
default giving rise to the Payment Blockage Period is no longer continuing.
Unless the holders of such Senior Indebtedness shall have accelerated the
maturity thereof, the Company may resume payments on the Subordinated Debt
Securities after the expiration of the Payment Blockage Period. Not more than
one Blockage Notice may be given in any period of 360 consecutive days unless
the first
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Blockage Notice within such 360-day period is given by or on behalf of holders
of Designated Senior Indebtedness other than the Bank Indebtedness, in which
case the representative of the Bank Indebtedness may give another Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any period of 360 consecutive days. After all Senior
Indebtedness is paid in full and until the Subordinated Debt Securities are paid
in full, Holders of the Subordinated Debt Securities shall be subrogated to the
rights of Holders of Senior Indebtedness to receive distributions applicable to
Senior Indebtedness.
All payments by the Guarantor pursuant to any Guarantees of Subordinated
Debt Securities will be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness of the Guarantor.
By reason of such subordination, in the event of insolvency, creditors of
the Company or the Guarantor who are Holders of Senior Indebtedness, as well as
certain general creditors of the Company or the Guarantor, may recover more,
ratably, than the Holders of the Subordinated Debt Securities.
EVENTS OF DEFAULT AND REMEDIES
The following events are defined in the Indenture as 'Events of Default'
with respect to a series of Debt Securities:
(a) Default in the payment of any installment of interest on any Debt
Securities of that series as and when the same shall become due and payable
(whether or not, in the case of Subordinated Debt Securities, such payment
shall be prohibited by reason of the subordination provision described
above) and continuance of such default for a period of 30 days;
(b) Default in the payment of principal or premium with respect to any
Debt Securities of that series as and when the same become due and payable,
whether at maturity, upon redemption, by declaration, upon required
repurchase, or otherwise (whether or not, in the case of Subordinated Debt
Securities, such payment shall be prohibited by reason of the subordination
provision described above);
(c) Default in the payment of any sinking fund payment with respect to
any Debt Securities of that series as and when the same shall become due
and payable;
(d) Failure on the part of the Company or the Guarantor to comply with
the provisions of the Indenture relating to consolidations, mergers and
sales of assets;
(e) Failure on the part of the Company or the Guarantor duly to
observe or perform any other of the covenants or agreements on the part of
the Company or the Guarantor in the Debt Securities of that series, in any
resolution of the Board of Directors of the Company authorizing the
issuance of that series of Debt Securities, in the Indenture with respect
to such series, or in any supplemental Indenture with respect to such
series (other than a covenant or agreement a default in the performance of
which is otherwise specifically dealt with) continuing for a period of 60
days after the date on which written notice specifying such failure and
requiring the Company or the Guarantor to remedy the same shall have been
given to the Company or the Guarantor by the Trustee or to the Company or
the Guarantor and the Trustee by the holders of at least 25% in aggregate
principal amount of the Debt Securities of that series at the time
outstanding;
(f) Indebtedness of the Guarantor or any Subsidiary of the Guarantor
is not paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default, the total amount
of such indebtedness unpaid or accelerated exceeds $100 million or the
United States dollar equivalent thereof at the time, and such default
remains uncured or such acceleration is not rescinded for 10 days after the
date on which written notice specifying such failure and requiring the
Guarantor to remedy the same shall have been given to the Guarantor by
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the Trustee or to the Guarantor and the Trustee by the Holders of at least
25% in aggregate principal amount of the Debt Securities of that series at
the time outstanding;
(g) The Company or the Guarantor or any of its Restricted Subsidiaries
shall (1) voluntarily commence any proceeding or file any petition seeking
relief under the United States Bankruptcy Code or other federal or state
bankruptcy, insolvency, or similar law, (2) consent to the institution of,
or fail to controvert within the time and in the manner prescribed by law,
any such proceeding or the filing of any such petition, (3) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator,
or similar official for the Company or the Guarantor or any such Restricted
Subsidiary or for a substantial part of its property, (4) file an answer
admitting the material allegations of a petition filed against it in any
such proceeding, (5) make a general assignment for the benefit of
creditors, (6) admit in writing its inability or fail generally to pay its
debts as they become due, (7) take corporate action for the purpose of
effecting any of the foregoing, or (8) take any comparable action under any
foreign laws relating to insolvency;
(h) The entry of an order or decree by a court having competent
jurisdiction for (1) relief with respect to the Company or the Guarantor or
any of its Restricted Subsidiaries or a substantial part of any of their
property under the United States Bankruptcy Code or any other federal or
state bankruptcy, insolvency, or similar law, (2) the appointment of a
receiver, trustee, custodian, sequestrator, or similar official for the
Company or the Guarantor or any such Restricted Subsidiary or for a
substantial part of any of their property (except any decree or order
appointing such official of any Restricted Subsidiary pursuant to a plan
under which the assets and operations of such Restricted Subsidiary are
transferred to or combined with another Restricted Subsidiary of the
Guarantor or to the Guarantor), or (3) the winding-up or liquidation of the
Company or the Guarantor or any such Restricted Subsidiary (except any
decree or order approving or ordering the winding-up or liquidation of the
affairs of a Restricted Subsidiary pursuant to a plan under which the
assets and operations of such Restricted Subsidiary are transferred to or
combined with another Restricted Subsidiary or Subsidiaries of the
Guarantor or to the Guarantor), and such order or decree shall continue
unstayed and in effect for 60 consecutive days, or any similar relief is
granted under any foreign laws and the order or decree stays in effect for
60 consecutive days; or
(i) Any other Event of Default provided under the terms of the Debt
Securities of that series.
An Event of Default with respect to one series of Debt Securities is not
necessarily an Event of Default for another series.
If an Event of Default occurs and is continuing with respect to any series
of Debt Securities, unless the principal and interest with respect to all the
Debt Securities of such series shall have already become due and payable, either
the Trustee or the holders of not less than 25% in aggregate principal amount of
the Debt Securities of such series then outstanding may declare the principal of
(or, if Original Issue Discount Debt Securities, such portion of the principal
amount as may be specified in such series) and interest on all the Debt
Securities of such series due and payable immediately.
If an Event of Default occurs and is continuing, the Trustee shall be
entitled and empowered to institute any action or proceeding for the collection
of the sums so due and unpaid or to enforce the performance of any provision of
the Debt Securities of the affected series or the Indenture, to prosecute any
such action or proceeding to judgment or final decree, and to enforce any such
judgment or final decree against the Company or any other obligor on the Debt
Securities of such series. In addition, if there shall be pending proceedings
for the bankruptcy or reorganization of the Company or any other obligor on the
Debt Securities, or if a receiver, trustee, or similar official shall have been
appointed for its property, the Trustee shall be entitled and empowered to file
and prove a claim for the whole amount of principal, premium and interest (or,
in the case of Original Issue Discount Debt Securities, such portion of the
principal amount as may be specified in the terms of such series) owing and
unpaid with respect to the Debt Securities. No Holder of any Debt Securities of
any series shall have any right to institute any action or proceeding upon or
under or with respect to the Indenture, for the appointment of a
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receiver or trustee, or for any other remedy, unless (a) such Holder previously
shall have given to the Trustee written notice of an Event of Default with
respect to Debt Securities of that series and of the continuance thereof, (b)
the Holders of not less than 25% in aggregate principal amount of the
outstanding Debt Securities of that series shall have made written request to
the Trustee to institute such action or proceeding with respect to such Event of
Default and shall have offered to the Trustee such reasonable indemnity as it
may require against the costs, expenses, and liabilities to be incurred therein
or thereby, and (c) the Trustee, for 60 days after its receipt of such notice,
request, and offer of indemnity shall have failed to institute such action or
proceeding and no direction inconsistent with such written request shall have
been given to the Trustee pursuant to the provisions of the Indenture.
Prior to the acceleration of the maturity of the Debt Securities of any
series, the Holders of a majority in aggregate principal amount of the Debt
Securities of that series at the time outstanding may, on behalf of the Holders
of all Debt Securities of that series, waive any past default or Event of
Default and its consequences for that series, except (a) a default in the
payment of the principal, premium, or interest with respect to such Debt
Securities or (b) a default with respect to a provision of the Indenture that
cannot be amended without the consent of each Holder affected thereby. In case
of any such waiver, such default shall cease to exist, any Event of Default
arising therefrom shall be deemed to have been cured for all purposes, and the
Company, the Trustee and the Holders of the Debt Securities of that series shall
be restored to their former positions and rights under the Indenture.
The Trustee shall, within 90 days after the occurrence of a default known
to it with respect to a series of Debt Securities, give to the Holders of the
Debt Securities of such series notice of all uncured defaults with respect to
such series known to it, unless such defaults shall have been cured or waived
before the giving of such notice; provided, however, that except in the case of
default in the payment of principal, premium, or interest with respect to the
Debt Securities of such series or in the making of any sinking fund payment with
respect to the Debt Securities of such series, the Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interest of the Holders of such Debt Securities.
MODIFICATION OF THE INDENTURE
The Company, the Guarantor and the Trustee may enter into supplemental
indentures without the consent of the Holders of Debt Securities issued under
the Indenture for one or more of the following purposes:
(a) To evidence the succession of another person to the Company or the
Guarantor pursuant to the provisions of the Indenture relating to
consolidations, mergers, and sales of assets and the assumption by such
successor of the covenants, agreements, and obligations of the Company or
the Guarantor in the Indenture and in the Debt Securities;
(b) To surrender any right or power conferred upon the Company or the
Guarantor by the Indenture, to add to the covenants of the Company or the
Guarantor such further covenants, restrictions, conditions, or provisions
for the protection of the Holders of all or any series of Debt Securities
as the Board of Directors of the Company or the Guarantor shall consider to
be for the protection of the Holders of such Debt Securities, and to make
the occurrence, or the occurrence and continuance of a default in any of
such additional covenants, restrictions, conditions, or provisions, a
default or an Event of Default under the Indenture (provided, however, that
with respect to any such additional covenant, restriction, condition, or
provision, such supplemental indenture may provide for a period of grace
after default, which may be shorter or longer than that allowed in the case
of other defaults, may provide for an immediate enforcement upon such
default, may limit the remedies available to the Trustee upon such default,
or may limit the right of Holders of a majority in aggregate principal
amount of any or all series of Debt Securities to waive such default);
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(c) To cure any ambiguity or to correct or supplement any provision
contained in the Indenture, in any supplemental indenture, or in any Debt
Securities that may be defective or inconsistent with any other provision
contained therein, to convey, transfer, assign, mortgage, or pledge any
property to or with the Trustee, or to make such other provisions in regard
to matters or questions arising under the Indenture as shall not adversely
affect the interests of any Holders of Debt Securities of any series;
(d) To modify or amend the Indenture in such a manner as to permit the
qualification of the Indenture or any supplemental Indenture under the
Trust Indenture Act as then in effect;
(e) To add or change any of the provisions of the Indenture to change
or eliminate any restriction on the payment of principal or premium with
respect to Debt Securities so long as any such action does not adversely
affect the interest of the Holders of Debt Securities in any material
respect or permit or facilitate the issuance of Debt Securities of any
series in uncertificated form;
(f) To comply with the provisions of the Indenture relating to
consolidations, mergers, and sales of assets;
(g) In the case of Subordinated Debt Securities, to make any change in
the provisions of the Indenture relating to subordination that would limit
or terminate the benefits available to any Holder of Senior Indebtedness
under such provisions (but only if such Holder of Senior Indebtedness
consents to such change);
(h) To add additional Guarantees with respect to the Debt Securities
or to secure the Debt Securities;
(i) To make any change that does not adversely affect the rights of
any Holder;
(j) To add to, change, or eliminate any of the provisions of the
Indenture with respect to one or more series of Debt Securities, so long as
any such addition, change, or elimination not otherwise permitted under the
Indenture shall (1) neither apply to any Debt Securities of any series
created prior to the execution of such supplemental Indenture and entitled
to the benefit of such provision nor modify the rights of the Holders of
any such Debt Security with respect to such provision or (2) become
effective only when there is no such Debt Security outstanding;
(k) To evidence and provide for the acceptance of appointment by a
successor or separate Trustee with respect to the Debt Securities of one or
more series and add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the
Indenture by more than one Trustee; and
(l) To establish the form or terms of Debt Securities of any series,
as described under 'Description of Debt Securities--General' above.
With the consent of the Holders of a majority in aggregate principal amount
of the outstanding Debt Securities of each series affected thereby, the Company,
the Guarantor and the Trustee may from time to time and at any time enter into a
supplemental Indenture for the purpose of adding any provisions to, changing in
any manner, or eliminating any of the provisions of the Indenture or of any
supplemental Indenture or modifying in any manner the rights of the Holder of
the Debt Securities of such series; provided, however, that without the consent
of the Holders of each Debt Security so affected, no such supplemental Indenture
shall (a) reduce the percentage in principal amount of Debt Securities of any
series whose Holders must consent to an amendment, (b) reduce the rate of or
extend the time for payment of interest on any Debt Security, (c) reduce the
principal of or extend the stated maturity of any Debt Security, (d) reduce the
premium payable upon the redemption of any Debt Security or change the time at
which any Debt Security may or shall be redeemed, (e) make any Debt Security
payable in a currency other than that stated in the Debt Security, (f) in the
case of any Subordinated Debt Security, make any change in the provisions of the
Indenture relating to subordination that adversely affects the rights of any
Holder under such provisions, (g) release any security that may have been
granted with
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respect to the Debt Securities, or (h) make any change in the provisions of the
Indenture relating to waivers of defaults or amendments that require unanimous
consent.
CERTAIN COVENANTS
Limitation on Liens. The Guarantor may not, and may not permit any of its
Subsidiaries to, directly or indirectly, create or permit to exist any Lien on
any Principal Property, whether owned on the date of issuance of the Debt
Securities or thereafter acquired, securing any obligation unless the Guarantor
contemporaneously secures the Debt Securities equally and ratably with (or prior
to) such obligation. The preceding sentence will not require the Guarantor to
secure the Debt Securities if the Lien consists of the following: (i) Permitted
Liens; or (ii) Liens securing Indebtedness if, after giving pro forma effect to
the Incurrence of such Indebtedness (and the receipt and application of the
proceeds thereof) or the securing of outstanding Indebtedness, all Indebtedness
of the Guarantor and its Subsidiaries secured by Liens on Principal Property
(other than Permitted Liens), at the time of determination does not exceed 10%
of the total consolidated stockholders' equity of the Guarantor as shown on the
audited consolidated balance sheet contained in the latest annual report to
stockholders of the Guarantor.
Ownership of the Company. The Indenture contains a covenant that, so long
as any of the Debt Securities are outstanding and subject to certain rights
described below under 'Consolidation or Merger,' the Guarantor will continue to
own, directly or indirectly, all of the outstanding voting shares of the
Company.
Certain Definitions. The following definitions, among others, are used in
the Indenture. Many of the definitions of terms used in the Indenture have been
negotiated specifically for the purposes of inclusion in the Indenture and may
not be consistent with the manner in which such terms are defined in other
contexts. Prospective purchasers of Debt Securities are encouraged to read each
of the following definitions carefully and to consider such definitions in the
context in which they are used in the Indenture. Capitalized terms used herein
but not defined have the meanings assigned thereto in the Indenture.
'Capitalized Lease Obligation' means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP; and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
'Currency Exchange Protection Agreement' means, in respect of any Person,
any foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
'Disqualified Stock' of a Person means Redeemable Stock of such Person as
to which the maturity, mandatory redemption, conversion or exchange or
redemption at the option of the holder thereof occurs, or may occur, on or prior
to the first anniversary of the Stated Maturity of the Debt Securities.
'GAAP' means generally accepted accounting principles in the United States
as in effect as of the date on which the Debt Securities of the applicable
series are issued, including those set forth in the opinions and pronouncements
of the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
based on GAAP contained in this Indenture shall be computed in conformity with
GAAP consistently applied.
'Government Contract Lien' means any Lien required by any contract,
statute, regulation or order in order to permit the Company or any of its
Subsidiaries to perform any contract or subcontract made
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by it with or at the request of the United States or any State thereof or any
department, agency or instrumentality of either or to secure partial, progress,
advance or other payments by the Company or any of its Subsidiaries to the
United States or any State thereof or any department agency or instrumentality
of either pursuant to the provisions of any contract, statute, regulation or
order.
'Hedging Obligations' of any Person means the obligations of such Person
pursuant to any Interest Rate Protection Agreement, Currency Exchange Protection
Agreement or Commodity Price Protection Agreement or other similar agreement.
'Indebtedness' means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of Indebtedness of such Person for borrowed money;
(ii) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables);
(v) all obligations of such Person in respect of letters of credit,
banker's acceptances or other similar instruments or credit transactions
(including reimbursement obligations with respect thereto), other than
obligations with respect to letters of credit securing obligations (other
than obligations described in (i) through (iv) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing
is reimbursed no later than the third business day following receipt by
such Person of a demand for reimbursement following payment on the letter
of credit;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (but
excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Persons; and
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Disqualified Stock or Preferred Stock that does not have
a fixed redemption, repayment or repurchase price shall be calculated in
accordance with the terms of such Stock as if such Stock were redeemed, repaid
or repurchased on any date on which Indebtedness shall be required to be
determined pursuant to this Indenture; provided, however, that if such Stock is
not then permitted to be redeemed, repaid or repurchased, the redemption,
repayment or repurchase price shall be the book value of such Stock as reflected
in the most recent financial statements of such Person. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
'Interest Rate Protection Agreement' means, in respect of any Person, any
interest rate swap agreement, interest rate option agreement, interest rate cap
agreement, interest rate collar agreement, interest rate floor agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in interest rates.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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'Net Amount of Rent' as to any lease for any period means the aggregate
amount of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water rates and similar charges. In the case of any lease
that is terminable by the lessee upon the payment of a penalty, such net amount
shall also include the amount of such penalty, but no rent shall be considered
as payable under such lease subsequent to the first date upon which it may be so
terminated.
'Permitted Liens' means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws, social security laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or bonds to
secure performance, surety or appeal bonds to which such Person is a party or
which are otherwise required of such Person, or deposits as security for
contested taxes or import duties or for the payment of rent or other obligations
of like nature, in each case incurred in the ordinary course of business; (b)
Liens imposed by law, such as carriers', warehousemen's, laborers',
materialmen's, landlords', vendors', workmen's, operators', factors and
mechanics liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings; (c) Liens for taxes, assessments and other
governmental charges or levies not yet delinquent or which are being contested
in good faith by appropriate proceedings; (d) survey exceptions, encumbrances,
easements or reservations of or with respect to, or rights of others for or with
respect to, licenses, rights-of-way, sewers, electric and other utility lines
and usages, telegraph and telephone lines, pipelines, surface use, operation of
equipment, permits, servitudes and other similar matters, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (e) Liens existing on
or provided for under the terms of agreements existing on the Issue Date
(including, without limitation, under the Credit Agreement); (f) Liens on
property at the time the Company or any of its Subsidiaries acquired the
property or the entity owning such property, including any acquisition by means
of a merger or consolidation with or into the Guarantor; provided, however, that
any such Lien may not extend to any other property owned by the Guarantor or any
of its Subsidiaries; (g) Liens on any Principal Property, or any shares of stock
or Indebtedness of any Subsidiary, acquired (including by way of merger or
consolidation) after the date of the Indenture by the Company or any Subsidiary
which are created contemporaneously with such acquisition, or within 24 months
thereafter, to secure or provide for the payment or financing of any part of the
purchase price thereof; (h) Liens on any property of CompuServe Corporation or
any of its Subsidiaries, including any shares of stock or Indebtedness of any
such Subsidiaries; (i) Liens arising in connection with the securitization of
any mortgage loans owned by the Company or any of its Subsidiaries; (j) Liens
arising in connection with the sale of any credit card receivables owned by the
Company or any of its Subsidiaries; (k) Liens securing a Hedging Obligation so
long as such Hedging Obligation is of the type customarily entered into for the
purpose of limiting risk; (l) Purchase Money Liens; (m) Liens securing only
Indebtedness of a Subsidiary of the Guarantor to the Guarantor or one or more
wholly owned Subsidiaries of the Guarantor; (n) Liens on any property to secure
Indebtedness Incurred in connection with the construction, installation or
financing of pollution control or abatement facilities or other forms of
industrial revenue bond financing or Indebtedness issued or Guaranteed by the
United States, any state or any department, agency or instrumentality thereof;
(o) Government Contract Liens; (p) Liens securing Indebtedness of joint ventures
in which the Guarantor or a Subsidiary has an interest to the extent such Liens
are on property or assets of, such joint ventures; (q) Liens resulting from the
deposit of funds or evidences of Indebtedness in trust for the purpose of
defeasing Indebtedness of the Guarantor or any of its Subsidiaries; (r) legal or
equitable encumbrances deemed to exist by reason of negative pledges or the
existence of any litigation or other legal proceeding and any related lis
pendens filing (excluding any attachment prior to judgment lien or attachment
lien in aid of execution on a judgment); (s) any
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attachment Lien being contested in good faith and by proceedings promptly
initiated and diligently conducted, unless the attachment giving rise thereto
will not, within 60 days after the entry thereof, have been discharged or fully
bonded or will not have been discharged within 60 days after the termination of
any such bond; (t) any judgment Lien, unless the judgment it secures will not,
within 60 days after the entry thereof, have been discharged or execution
thereof stayed pending appeal, or will not have been discharged within 60 days
after the expiration of any such stay; (u) Liens to banks arising from the
issuance of letters of credit issued by such banks ('issuing banks') on the
following: (i) any and all shipping documents, warehouse receipts, policies or
certificates of insurance and other document accompanying or relative to drafts
drawn under any credit, and any draft drawn thereunder (whether or not such
documents, goods or other property be released to or upon the order of the
Guarantor or any Subsidiary under a security agreement or trust or bailee
receipt or otherwise), and the proceeds of each and all of the foregoing; (ii)
the balance of every deposit account, now or at the time hereafter existing, of
the Guarantor or any Subsidiary with the issuing banks, and any other claims of
the Guarantor or any Subsidiary against the issuing banks; and all property
claims and demands and all rights and interests therein of the Guarantor or any
Subsidiary and all evidences thereof and all proceeds thereof which have been or
at any time will be delivered to or otherwise come into any issuing bank's
possession, custody or control, or into the possession, custody or control of
any bailee for the issuing bank or of any of its agents or correspondents for
the account of the issuing bank, for any purpose, whether or not the express
purpose of being used by the issuing bank as collateral security or for the
safekeeping or for any other of different purpose, the issuing bank being deemed
to have possession or control of all of such property actually in transit to or
from or set apart for the issuing bank, any bailee for the issuing bank or any
of its correspondents acting in its behalf, it being understood that the receipt
at any time by the issuing bank, or any of its bailees, agents or
correspondents, of other security, of whatever nature, including cash, will not
be deemed a waiver of any of the issuing bank's rights or power hereunder; (iii)
all property shipped under or pursuant to or in connection with any credit or
drafts drawn thereunder or in any way related thereto, and all proceeds thereof;
(iv) all additions to and substitutions for any of the property enumerated above
in this subsection; (v) rights of a common owner of any interest in property
held by such Person; (w) any defects, irregularities or deficiencies in title to
easements, rights-of-way or other properties which do not in the aggregate
materially adversely affect the value of such properties or materially impair
their use in the operation of the business of such Person; and (x) Liens to
secure any refinancing, refunding, extension, renewal or replacement (or
successive refinancings, refundings, extensions, renewals or replacements), as a
whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (e) through (p); provided, however, that (i) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements on such property) and (ii) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (e) through (l) at the time the original
Lien became a Permitted Lien under this Indenture and (B) an amount necessary to
pay any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement.
'Person' means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
'Principal Property' means, as of any date of determination, any property
or assets owned by the Company or any Subsidiary other than any property which,
in the good faith opinion of the Board of Directors of the Company, is not of
material importance to the business conducted by the Company and its
Subsidiaries taken as a whole.
'Purchase Money Lien' means a Lien on property securing Indebtedness
Incurred by the Guarantor or any of its Subsidiaries to provide funds for all or
any portion of the cost of acquiring, constructing, altering, expanding,
improving or repairing such property or assets used in connection with such
property.
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'Redeemable Stock' means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
of for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness (other than Preferred
Stock) or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part.
'Subsidiary' of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Neither the Guarantor nor the Company may consolidate with or merge with or
into any person, or convey, transfer, or lease all or substantially all of its
assets, unless the following conditions have been satisfied:
(a) Either (1) the Guarantor shall be the continuing person in the
case of a merger or (2) the resulting, surviving, or transferee person, if
other than the Guarantor (the 'Successor Company'), shall be a corporation
organized and existing under the laws of the United States, any State, or
the District of Columbia and shall expressly assume all of the obligations
of the Company and the Guarantor under the Debt Securities and the
Indenture;
(b) Immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the Successor Company or any
subsidiary of the Guarantor as a result of such transaction as having been
incurred by the Successor Company or such subsidiary at the time of such
transaction), no Default or Event of Default would occur or be continuing;
and
(c) The Guarantor shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger, or transfer complies with the Indenture.
A disposition by the Guarantor of its ownership interest in CompuServe
Corporation shall not be deemed a transfer or conveyance of substantially all of
the Company's assets.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Indenture shall generally cease to be of any further effect with
respect to a series of Debt Securities if (a) the Company has delivered to the
Trustee for cancellation all Debt Securities of such series (with certain
limited exceptions) or (b) all Debt Securities of such series not theretofore
delivered to the Trustee for cancellation shall have become due and payable, or
are by their terms to become due and payable within one year or are to be called
for redemption within one year, and the Company shall have deposited with the
Trustee as trust funds the entire amount in the currency in which the Debt
Securities are denominated sufficient to pay at maturity or upon redemption all
such Debt Securities (and if, in either case, the Company shall also pay or
cause to be paid all other sums payable under the Indenture by the Company).
In addition, the Company shall have a 'legal defeasance option' (pursuant
to which it may terminate, with respect to the Debt Securities of the particular
series, all of its obligations under such Debt Securities and the Indenture with
respect to such Debt Securities) and 'covenant defeasance option' (pursuant to
which it may terminate, with respect to the Debt Securities of a particular
series, its obligations with respect to such Debt Securities under certain
specified covenants contained in the Indenture). If the Company exercises its
legal defeasance option with respect to a series of Debt Securities, payment of
such Debt Securities may not be accelerated because of an Event of Default If
the Company exercises its covenant defeasance option with respect to a series of
Debt Securities,
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payment of such Debt Securities may not be accelerated because of an Event of
Default related to the specified covenants.
The Company may exercise its legal defeasance option or its covenant
defeasance option with respect to the Debt Securities of a series only if (a)
the Company irrevocably deposits in trust with the Trustee cash or U.S.
Government Obligations (as defined in the Indenture) for the payment of
principal, premium, and interest with respect to such Debt Securities to
maturity or redemption, as the case may be, (b) the Company delivers to the
Trustee a certificate from a nationally recognized firm of independent
accountants expressing their opinion that the payment of principal and interest
when due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times and
in such amounts as will be sufficient to pay the principal, premium, and
interest when due with respect to all the Debt Securities of such series to
maturity or redemption, as the case may be, (c) 91 days after the deposit is
made and during the 91-day period no default described in clause (g) or (h)
under 'Description of Debt Securities Events of Default and Remedies' above with
respect to the Company or the Guarantor occurs that is continuing at the end of
such period, (d) no Default has occurred and is continuing on the date of such
deposit and after giving effect thereto, (e) the deposit does not constitute a
default under any other agreement binding on the Company or the Guarantor, and,
in the case of Subordinated Debt Securities, is not prohibited by the provisions
of the Indenture relating to subordination, (f) the Company delivers to the
Trustee an opinion of counsel to the effect that the trust resulting from the
deposit does not constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940, (g) the Company shall have delivered
to the Trustee an opinion of counsel addressing certain federal income tax
matters relating to the defeasance, and (h) the Company delivers to the Trustee
an officer's certificate and an opinion of counsel, each stating that all
conditions precedent to the defeasance and discharge of the Debt Securities of
such series as contemplated by the Indenture have been complied with.
The Trustee shall hold in trust cash or U.S. Government Obligations
deposited with it as described above and shall apply the deposited cash and the
proceeds from deposited U.S. Government Obligations to the payment of principal,
premium, and interest with respect to the Debt Securities of the defeased
series. In the case of Subordinated Debt Securities, the money and U.S.
Government Obligations so held in trust will not be subject to the subordination
provisions of the Indenture.
THE TRUSTEE
The Company may maintain banking and other commercial relationships with
the Trustee and its affiliates in the ordinary course of business and the
Trustee may own Debt Securities.
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PLAN OF DISTRIBUTION
The Company may sell the Debt Securities in or outside the United States
through underwriters, through or to dealers, directly to one or more purchasers,
or through agents. Each Prospectus Supplement with respect to the Debt
Securities offered hereby will set forth the terms of the offering of applicable
Debt Securities, including the name or names of any underwriters, dealers or
agents, the purchase price of the Debt Securities and the proceeds to the
Company from such sale, any delayed delivery arrangements, any underwriting
discounts and other items constituting underwriters' compensation, the initial
public offering price, any discounts or concessions allowed or re-allowed or
paid to dealers and any securities exchanges on which the Debt Securities may be
listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Debt
Securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of Debt Securities will be named in the
Prospectus Supplement relating to such offering, and if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of such Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters or
agents to purchase the Debt Securities will be subject to conditions precedent
and the underwriters will be obligated to purchase all the Debt Securities if
any are purchased. The initial public offering price and any discounts or
concessions allowed or re-allowed or paid to dealers may be changed from time to
time.
If dealers are used in the sale of Debt Securities with respect to which
this Prospectus is delivered, the Company will sell such Debt Securities to the
dealers as principals. The dealers may then resell such Debt Securities to the
public at varying prices to be determined by such dealers at the time of resale.
The names of the dealers and the terms of the transaction will be set forth in
the Prospectus Supplement relating thereto.
Debt Securities may be sold directly by the Company or through agents
designated by the Company from time to time at fixed prices, which may be
changed, or at varying prices determined at the time of sale. Any agent involved
in the offer or sale of the Debt Securities with respect to which this
Prospectus is delivered will be named, and any commissions payable by the
Company to such agent will be set forth in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of the Debt Securities, underwriters or agents
may receive compensation from the Company or from purchasers of Debt Securities
for whom they may act as agents in the form of discounts, concessions, or
commissions. Underwriters, agents and dealers participating in the distribution
of the Debt Securities may be deemed to be underwriters, and any discounts or
commissions received by them from the Company and any profit on the resale of
the Debt Securities by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers from certain types of
institutions to purchase Debt Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
Such contracts will be subject only to those conditions set forth in such
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
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Agents, dealers, and underwriters may be entitled under agreements entered
into with the Company and Block to indemnification by the Company and Block
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments that such agents, dealers, or
underwriters may be required to make with respect thereto. Agents, dealers, and
underwriters may be customers of, engage in transactions with, or perform
services for the Company and Block in the ordinary course of business.
The Debt Securities may or may not be listed on a national securities
exchange. No assurances can be given that there will be a market for the Debt
Securities.
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURE
When so provided in the Prospectus Supplement, investors in the Global
Securities representing any of the Securities issued hereunder may hold a
beneficial interest in such Global Securities through DTC, CEDEL or Euroclear
(as defined below) or through participants. The Global Securities may be traded
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle as set forth in the
applicable Prospectus Supplement.
Cedel S.A. ('CEDEL') is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations and may
include the underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the 'Euroclear Operator' or
'Euroclear'), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the 'Cooperative'). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries and may include the underwriters. Indirect access to
the Euroclear System is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear Operator is the Belgian branch of Morgan Guaranty Trust
Company of New York ('Morgan') which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Federal Reserve Board and
the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Principal, premium, if any, and interest payments with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations as described below. The CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the relevant Indenture on behalf of a CEDEL
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to its depositary's ability to effect such actions on
its behalf through the depositary.
INITIAL SETTLEMENT
All Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in the depository. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
depositories, Citibank and Morgan, which in turn will hold such positions in
accounts as participants of DTC.
Global Securities held through DTC will follow the settlement practices
described above. Investor securities custody accounts will be credited with
their holdings against payment on the settlement date. Global Securities held
through CEDEL or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no 'lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures described above. See
'Description of Debt Securities--Book-Entry Debt Securities.'
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL participants and/or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When
beneficial interests in the Global Securities are to be transferred from the
account of a DTC participant to the account of a CEDEL participant or a
Euroclear participant, the purchaser will send instructions to CEDEL or
Euroclear through a participant at least one business day prior to settlement.
CEDEL or Euroclear will instruct Citibank or Morgan, respectively, as the case
may be, to receive a beneficial interest in the Global Securities against
payment. Unless otherwise set forth in the Prospectus Supplement, payment will
include interest accrued on the beneficial interest in the Global Securities so
transferred from and
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including the last coupon payment date to and excluding the settlement date, on
the basis on which interest is calculated on the Debt Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by Citibank or Morgan to the DTC participant's account against delivery
of the beneficial interest in the Global Securities. After settlement has been
completed, the beneficial interest in the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the CEDEL or Euroclear participant's account. The
securities credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the beneficial interest in Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (that is, the trade fails), the CEDEL or Euroclear cash
debit will be valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL, or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, participants can elect not to preposition funds and allow that credit line
to be drawn upon to finance settlement. Under this procedure, CEDEL participants
or Euroclear participants purchasing beneficial interest in Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the beneficial interests in the Global Securities were credited to their
accounts. However, interest on the beneficial interests in the Global Securities
would accrue from the value date. Therefore, in many cases the investment income
on the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending a beneficial interest
in Global Securities to Citibank or Morgan for the benefit of CEDEL participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL and Euroclear participants may employ
their customary procedures to transactions in which the beneficial interest in
the Global Securities is to be transferred by the respective clearing system,
through Citibank or Morgan, to a DTC participant. The seller will send
instructions to CEDEL or Euroclear through a participant at least one business
day prior to settlement. In these cases, CEDEL or Euroclear will instruct
Citibank or Morgan, as appropriate, to deliver the beneficial interest in the
Global Securities to the DTC participant's account against payment. Payment will
include interest accrued on the beneficial interests in the Global Securities
from and including the last coupon payment date to and excluding the settlement
date on the basis on which interest is calculated on the Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL or Euroclear participant the
following day, and receipt of the cash proceeds in the CEDEL or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(that is, the trade fails), receipt of the cash
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proceeds in the CEDEL or Euroclear participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
beneficial interests in Global Securities from DTC participants for credit to
CEDEL participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(2) borrowing beneficial interests in the Global Securities in the
U.S. from a DTC participant no later than one day prior to settlement,
which would give beneficial interests in the Global Securities sufficient
time to be reflected in the appropriate CEDEL or Euroclear account in order
to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the CEDEL participant
or Euroclear participant.
Although the DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of beneficial interests in Global
Securities among participants of the DTC, CEDEL and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities, directly or
indirectly, through CEDEL or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements, and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8). Non-U.S. persons that are
beneficial owners (other than a beneficial owner that owns actually or
constructively 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote or a controlled foreign
corporation that is related to the Company through stock ownership) can
obtain a complete exemption from the withholding tax by filing a properly
completed Form W-8 (Certificate of Foreign Status).
Exemption for non-U.S. persons with effectively connected income (Form
4224). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, that is a beneficial owner and for which the interest income
is effectively connected with its conduct of a trade or business in the
United States, can obtain an exemption from the withholding tax by filing a
properly completed Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. persons that are beneficial owners that are
entitled to the benefits of an income tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing a properly completed Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner or the beneficial
owner's agent.
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Exemption for U.S. Persons (Form W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing a properly completed
Form W-9 (Request for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING, PROCEDURE
The beneficial owner of the Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate form to the
entity through whom it directly holds the Global Security. For example, if the
beneficial owner is listed directly on the books of Euroclear or CEDEL as the
holder of the Debt Security, the IRS Form must be provided to Euroclear or
CEDEL, as the case may be. Each person through which a Debt Security is held
must submit, on behalf of the beneficial owner, the IRS Form (or in certain
cases a copy thereof) under applicable procedures to the person through which it
holds the Debt Security, until the IRS Form is received by the U.S. person who
would otherwise be required to withhold U.S. federal income tax from interest on
the Debt Security. For example, in the case of Debt Securities held through
Euroclear or CEDEL, the IRS Form (or a copy thereof) must be received by the
U.S. depositary of such clearing agency. Applicable procedures include, if a
beneficial owner of the Debt Security provides an IRS Form W-8 to a securities
clearing organization, bank or other financial institution (a 'financial
institution') that holds the Debt Security in the ordinary course of its trade
or business on the owner's behalf, that such financial institution certify to
the person otherwise required to withhold U.S. federal income tax from such
interest, under penalties of perjury, that such statement has been received from
the beneficial owner by it or by a financial institution between it and the
beneficial owner and that it furnish the payor with a copy thereof.
As used in this section on tax documentation requirements, the term 'U.S.
person' means (i) a citizen or resident of the United States, (ii) a corporation
or partnership organized in or under the laws of the United States or any State
thereof or (iii) an estate or trust the income of which is includable in gross
income for U.S. tax purposes, regardless of its source.
This summary does not deal with all aspects of U.S. income tax and
withholding that may be relevant to foreign beneficial owners of the Global
Securities, including special categories of foreign investors who may not be
eligible for exemptions from U.S. withholding tax. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of beneficial interests in the Global Securities. Any additional
requirements, if applicable, will be set forth in the Prospectus Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Debt Securities and the
Guarantee will be passed upon for the Company and for the Guarantor by Bryan
Cave LLP, Kansas City, Missouri. Certain matters will be passed upon for any
underwriters or agents by a firm named in the Prospectus Supplement relating to
a particular issue of Debt Securities.
EXPERTS
The consolidated financial statements and financial statement schedule
incorporated in this Prospectus by reference from the Guarantor's Annual Report
on Form 10-K/A for the year ended April 30, 1997, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, which are
incorporated by reference, and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Option One Mortgage Corporation as of December
31, 1996 and 1995 and for the year ended December 31, 1996 and for the period
March 3, 1995 to December 31, 1995 (Successor period) and from January 1, 1995
to March 2, 1995 (Predecessor period) have been incorporated by reference herein
from the Guarantor's Current Report on Form 8-K/A dated July 2, 1997 (filed on
August 14, 1997) in reliance upon the report of KPMG Peat Marwick LLP,
independent certified
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public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of
Option One Mortgage Corporation as of December 31, 1996 and 1995 and for the
year ended December 31, 1996 and for the period March 3, 1995 to December 31,
1995 (Successor period) and from January 1, 1995 to March 2, 1995 (Predecessor
period) contains an explanatory paragraph that states that effective March 3,
1995, Fleet National Bank, Rhode Island acquired all of the outstanding stock of
Option One Mortgage Corporation in a business combination accounted for as a
purchase. As a result of the acquisition, the financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
Effective September 27, 1995, Fleet National Bank, Rhode Island transferred its
investment in the Company to one of its wholly owned subsidiaries, Fleet Holding
Corporation.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE GUARANTOR OR ANY OF
THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DO THEY CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company..................................................... S-3
The Guarantor................................................... S-5
Selected Consolidated and Other Financial Data.................. S-7
Management's Discussion and Analysis of
Results of Operations......................................... S-11
Use of Proceeds................................................. S-14
Capitalization.................................................. S-14
Description of the Notes........................................ S-15
Underwriting.................................................... S-17
Legal Matters................................................... S-18
PROSPECTUS
Available Information........................................... 2
Incorporation of Certain Documents by Reference................. 2
Cautionary Statement Regarding Forward-Looking Statements....... 3
The Company..................................................... 3
The Guarantor................................................... 5
Use of Proceeds................................................. 6
Risk Factors.................................................... 7
Ratio of Earnings to Fixed Charges.............................. 10
Description of Debt Securities.................................. 11
Plan of Distribution............................................ 26
Global Clearance, Settlement and
Tax Documentation Procedure................................... 27
Legal Matters................................................... 31
Experts......................................................... 31
</TABLE>
$250,000,000
BLOCK FINANCIAL
CORPORATION
6 3/4% SENIOR NOTES
DUE 2004
FULLY AND UNCONDITIONALLY GUARANTEED BY
H&R BLOCK, INC.
[LOGO]
SALOMON BROTHERS INC
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PROSPECTUS SUPPLEMENT
DATED OCTOBER 21, 1997
