<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NUMBER 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -------------------------
Commission File Number: 1-6089
H&R BLOCK, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 44-0607856
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation Number)
4400 Main Street, Kansas City, Missouri 64111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 1997, was $3,265,139,295.
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1997: 104,078,315.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Certain specified portions of the registrant's annual report to security
holders for the fiscal year ended April 30, 1997, are incorporated herein by
reference in response to Part I, Item 1, Part II, Items 5 through 7, inclusive,
and certain specified portions of the registrant's definitive proxy statement
filed within 120 days after April 30, 1997, are incorporated herein by
reference in response to Part III, Items 10 through 13, inclusive. A certain
specified portion of the annual report on Form 10-K of CompuServe Corporation
for the fiscal year ended April 30, 1997, is incorporated herein by reference
in response to Part I, Item 1, and Part I, Item 2.
2
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenues $1,805,711 $1,543,104 $1,233,815
Royalties 110,519 99,717 92,436
Other income 13,433 13,363 7,568
---------- ---------- ----------
1,929,663 1,656,184 1,333,819
---------- ---------- ----------
EXPENSES:
Employee compensation and benefits 604,336 517,727 442,504
Occupancy and equipment 583,420 402,835 295,528
Marketing and advertising 239,255 113,204 84,905
Supplies, freight and postage 69,929 95,621 71,542
Other 414,897 262,942 162,335
Purchased research and development -- -- 83,508
---------- ---------- ----------
1,911,837 1,392,329 1,140,322
----------- ---------- ----------
Operating earnings 17,826 263,855 193,497
OTHER INCOME:
Investment income, net 20,730 8,994 23,703
Other, net -- 12,445 2,796
---------- ---------- ----------
20,730 21,439 26,499
---------- ---------- ----------
Earnings before income taxes and minority
interest 38,556 285,294 219,996
Taxes on earnings 14,613 108,126 112,737
---------- ---------- ----------
Net earnings before minority interest 23,943 177,168 107,259
Minority interest in consolidated subsidiary (23,812) -- --
---------- ---------- ----------
NET EARNINGS $ 47,755 $ 177,168 $ 107,259
========== ========== ==========
Net earnings per share $.45 $1.67 $1.01
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
<TABLE>
<CAPTION>
April 30
1997 1996
- -----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 595,851 $ 685,660
Marketable securities 84,362 42,952
Receivables, less allowance for doubtful accounts of
$35,018 and $7,848 525,777 333,734
Prepaid expenses and other current assets 64,008 59,912
---------- ----------
Total current assets 1,269,998 1,122,258
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 20,887 17,081
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $30,431 and $27,825 80,133 61,141
Deferred subscriber acquisition costs, net of amortization 43,959 96,636
Other 71,003 59,201
---------- ----------
215,982 234,059
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $432,195 and $315,195 420,278 399,574
---------- ----------
$1,906,258 $1,755,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 269,619 $ 72,651
Accounts payable, accrued expenses and deposits 193,628 201,320
Accrued salaries, wages and payroll taxes 120,709 109,870
Accrued taxes on earnings 129,186 94,406
---------- ----------
Total current liabilities 713,142 478,247
DEFERRED INCOME TAXES 25,750 46,700
OTHER NONCURRENT LIABILITIES 38,952 38,222
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 129,317 153,129
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share:
authorized 400,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share: authorized 500,000 shares 4 4
Additional paid-in capital 502,308 504,694
Retained earnings 684,071 747,212
---------- ----------
1,187,472 1,252,999
Less cost of common stock in treasury 188,375 213,406
---------- ----------
999,097 1,039,593
---------- ----------
$1,906,258 $1,755,891
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 47,755 $ 177,168 $ 107,259
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 166,811 111,240 67,684
Amortization of deferred subscriber acquisition costs 120,836 22,585 --
Deferred subscriber acquisition costs (68,159) (119,221) --
Provision for deferred taxes on earnings (13,968) 52,639) (734)
Gain on sale of subsidiaries -- (12,445) (2,796)
Purchased research and development -- -- 83,508
Noncash, nonrecurring charges 17,565 -- --
Net gain on sales of marketable securities (454) (1,134) (6,664)
Other noncurrent liabilities 730 4,760 2,845
Minority interest (23,812) -- --
Changes in assets and liabilities:
Receivables (93,802) (70,621) (87,995)
Mortgage loans held for sale:
Originations and purchases (211,700) (8,674) --
Sales and principal repayments 113,259 -- --
Prepaid expenses and other current assets (13,888) (25,373) (1,735)
Accounts payable, accrued expenses and deposits (8,736) 58,247 (24,994)
Accrued salaries, wages and payroll taxes 10,839 39,127 15,722
Accrued taxes on earnings 34,698 (17,554) (27,737)
----------- ----------- ----------
Net cash provided by operating activities 77,974 210,744 124,363
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (220,677) (162,544) (1,904,653)
Maturities of marketable securities 152,302 304,724 1,837,584
Sales of marketable securities 23,852 155,170 299,702
Purchases of property and equipment, net (164,500) (264,491) (123,337)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (27,068) (18,675) (47,773)
Proceeds from sale of subsidiaries -- 35,000 5,195
Other, net (24,111) (16,577) (5,856)
----------- ----------- ----------
Net cash provided by (used in) investing activities (260,202) 32,607 60,862
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (5,041,386) (2,252,761) (1,856,873)
Proceeds from issuance of notes payable 5,238,354 2,275,991 1,906,294
Net proceeds from sale of stock by subsidiary -- 518,819 --
Dividends paid (107,988) (131,263) (128,838)
Payments to acquire treasury shares -- (71,897) (114,900)
Proceeds from stock options exercised 3,439 13,172 57,997
----------- ----------- ----------
Net cash provided by (used in) financing activities 92,419 352,061 (136,320)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (89,809) 595,412 48,905
Cash and cash equivalents at beginning of the year 685,660 90,248 41,343
----------- ----------- ----------
Cash and cash equivalents at end of the year $ 595,851 $ 685,660 $ 90,248
=========== =========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ (8,047) $ 73,041 $ 141,062
Interest paid 10,889 5,898 4,064
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: H&R Block,Inc. (the "Company") provides a variety of
services to the general public, principally in the United States, but also in
Canada, Australia and other foreign countries. Approximately one-half of total
revenues are generated from tax return preparation, electronic filing of tax
returns and other tax-related services. The Company provides computer-based
information and communication services to businesses and individual owners of
personal computers through its CompuServe Corporation ("CompuServe")
subsidiary. The Company also offers credit card loans, nonconforming
mortgages, personal productivity software and purchases participation
interests in refund anticipation loans made by a third party lending
institution.
Principles of consolidation: The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries. All
material intercompany transactions and balances have been eliminated.
Reclassifications: Reclassifications have been made to prior year amounts
to conform with the current year presentation.
Management estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Marketable securities: Marketable debt and equity securities are
classified as available-for-sale securities, and are carried at market value,
based on quoted prices, with unrealized gains and losses included in
stockholders' equity.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
Receivables: Receivables consist primarily of credit card loans and
mortgage loans held for sale. Mortgage loans held for sale are carried at the
lower of cost or market value. The allowance for doubtful accounts represents
an amount considered by management to be adequate to cover potential credit
losses.
Foreign currency translation: Assets and liabilities of the Company's
foreign branches and subsidiaries are translated into U.S. dollars at exchange
rates prevailing at the end of the year. Revenue and expense transactions are
translated at the average of exchange rates in effect during the period.
Translation gains and losses are recorded directly to stockholders' equity.
Deferred subscriber acquisition costs: Effective May 1, 1995, the Company
changed its method of accounting for direct response advertising costs to
conform with the American Institute of Certified Public Accountants Statement
of Position 93-7, "Reporting on Advertising Costs." Under this accounting
method, direct response advertising costs that meet certain criteria are
capitalized and amortized on a cost-pool-by-cost-pool basis over the period
during which the future benefits are expected to be received. Subscriber
acquisition costs consist principally of direct mail costs, including mailing
lists, postage, related payroll and outsourcing costs, payments to OEMs, and
disk and CD-ROM costs, all of which result in a direct revenue-generating
response. The net effect of the change in accounting increased assets by
$96,636 at April 30, 1996, and increased net earnings by $60,011 and net
earnings per share by $.57 for the year ended April 30, 1996. The Company
expenses advertising costs not classified as direct response the first time the
advertising takes place.
In October 1996, the Company changed its rate of amortization of subscriber
acquisition costs from a period of 24 months, with 60% amortized in the first
12 months, to a rate which more closely correlates with recent trends in
subscriber retention rates and member net revenues. The new rate of
amortization is 50% in the first three months, 30% in the next nine months, and
20% in the subsequent year. In conjunction with this change, the Company
accelerated amortization of previously deferred CompuServe Interactive Service
("CSi") subscriber acquisition costs of $34,500. Additionally, all previously
deferred subscriber acquisition costs for WOW! and SPRYNET, totaling $8,321 and
$2,560, respectively, were written off due to the costs to service these high
usage, flat priced services. The WOW! service was withdrawn from the
marketplace as of January 31, 1997. All future subscriber acquisition costs for
SPRYNET will be expensed as incurred. The total adjustment of $45,381 to
subscriber acquisition costs ($22,383 after taxes, or $.21 per share) is
included in marketing expenses in the consolidated statements of earnings for
the year ended April 30, 1997.
Excess of cost over fair value of net tangible assets acquired: The excess
of cost of purchased subsidiaries, operating offices and franchises over the
fair value of net tangible assets acquired is being amortized over an average
life of 20 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been
6
<PAGE> 7
impaired based on several criteria, including, but not limited to, revenue
trends, undiscounted operating cash flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389,
which is included in other expenses in the consolidated statements of earnings
for the year ended April 30, 1996. The impairment loss represents the amount by
which the carrying value of the tax preparation software business assets,
including goodwill, exceeded the estimated fair value of those assets. The
estimated fair value was determined as the present value of estimated expected
future cash flows using a discount rate appropriate for the risks associated
with the personal software industry.
Depreciation and amortization: Buildings and equipment are depreciated
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the period of the respective lease
using the straight-line method.
Notes payable: The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
The weighted average interest rates of notes payable at April 30, 1997 and 1996
were 5.7% and 5.4%, respectively.
Revenue recognition: Service revenues are recorded in the period in which
the service is performed. The Company records franchise royalties, based upon
the contractual percentages of franchise revenues, in the period in which the
franchise provides the service.
Taxes on earnings: The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes are provided for temporary differences
between financial and tax reporting, which consist principally of differences
between accrual and cash basis accounting, deferred compensation, depreciation,
and deferred subscriber acquisition costs.
The Company has entered into a Tax Sharing Agreement with CompuServe,
pursuant to which CompuServe is obligated to pay the Company (or the Company is
obligated to pay CompuServe) for CompuServe's liability (or tax benefits)
related to Federal, state, and local income taxes during any taxable period.
Net earnings per share: Net earnings per share are computed based on the
weighted average number of common and common equivalent shares outstanding
during the respective years (105,840,000 in 1997, 106,059,000 in 1996, and
105,871,000 in 1995). Net earnings per share assuming full dilution have not
been shown as there would be no material dilution.
Consolidated statements of cash flows: For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Disclosure regarding financial instruments: The carrying values reported
in the balance sheet for cash equivalents, receivables, notes payable, accounts
payable and accrued liabilities approximate fair market value due to the
relatively short-term nature of the respective instruments.
Stock plans: The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), in October 1995. SFAS 123 allows companies to
continue under the approach set forth in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the provisions of SFAS 123 based on the estimated fair value
of employee stock options. Companies electing to retain the approach under APB
25 are required to disclose pro forma net earnings and net earnings per share
in the notes to the financial statements, as if they had adopted the fair value
accounting method under SFAS 123. The Company has elected to retain its current
accounting approach under APB 25.
New accounting standard: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), effective for periods ending after December
15, 1997. SFAS 128 requires the disclosure of basic earnings per share and
diluted earnings per share on the face of the income statement, and a
reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation in the notes to the financial statements. The Company will
fully adopt the provisions of SFAS 128 beginning with the quarter ending January
31, 1998. The adoption of SFAS 128 will not have a material effect on reported
net earnings per share as presented herein.
7
<PAGE> 8
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
April 30
1997 1996
-------------------------------
Cash and interest-bearing deposits $103,802 $272,951
Commercial paper 288,656 105,216
Certificates of deposit 99,747 22,093
U.S. Government obligations 62,586 285,400
Other interest-bearing securities 41,060 --
-------- --------
$595,851 $685,660
======== ========
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30, 1997
and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current:
Municipal bonds and
notes $ 6,167 $ 17 $ 12 $ 6,172 $ 13,182 $ 440 $ 79 $ 13,543
U.S. Government
obligations 15,047 8 9 15,046 3,492 3 -- 3,495
Other debt investments 63,048 131 35 63,144 25,852 82 20 25,914
-------- -------- -------- -------- -------- -------- -------- --------
84,262 156 56 84,362 42,526 525 99 42,952
-------- -------- -------- -------- -------- -------- -------- --------
Noncurrent:
Municipal bonds 15,039 325 135 15,229 11,013 310 37 11,286
Preferred stock 647 299 -- 946 1,511 316 32 1,795
Common stock 3,165 1,550 3 4,712 3,085 935 20 4,000
-------- -------- -------- -------- -------- -------- -------- --------
18,851 2,174 138 20,887 15,609 1,561 89 17,081
-------- -------- -------- -------- -------- -------- -------- --------
$103,113 $2,330 $194 $105,249 $ 58,135 $2,086 $188 $ 60,033
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
All marketable securities at April 30, 1997 are classified as
available-for-sale. Proceeds from the sales of available-for-sale securities
were $23,852, $155,170 and $299,702 during 1997, 1996 and 1995, respectively.
Gross realized gains on those sales during 1997, 1996 and 1995 were $600,
$1,520 and $7,014, respectively; gross realized losses were $146, $386 and
$350, respectively. At April 30, 1997 and 1996, the net unrealized holding gain
on available-for-sale securities included in stockholders' equity in the
consolidated balance sheet was $1,326 and $1,169, respectively.
Contractual maturities of available-for-sale debt securities at April
30, 1997 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
Amortized Market
Cost Value
----------------------------------
Within one year $84,262 $84,362
After one year through five years 6,846 7,034
After five years through 10 years 8,193 8,195
-------- -------
$99,301 $99,591
======== =======
8
<PAGE> 9
RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
April 30
1997 1996
-----------------------
<S> <C> <C>
Credit card loans $247,889 $166,008
Mortgage loans held for sale 107,115 8,674
Other 205,791 166,900
-------- --------
560,795 341,582
Allowance for doubtful accounts 35,018 7,848
-------- --------
$525,777 $333,734
======== ========
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30
1997 1996
-----------------------
<S> <C> <C>
Land $ 7,072 $ 7,084
Buildings 95,707 87,523
Computer and other equipment 700,136 582,815
Leasehold improvements 49,558 37,347
-------- --------
852,473 714,769
Less accumulated depreciation and amortization 432,195 315,195
-------- --------
$420,278 $399,574
======== ========
</TABLE>
Depreciation and amortization expense for 1997, 1996 and 1995 amounted to
$143,283, $90,829 and $62,809, respectively.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
management employees to defer portions of their compensation and accrue
earnings on the deferred amounts. The compensation, together with Company
matching of deferred amounts, has been accrued, and the only expenses related
to these plans are the Company match and the earnings on the deferred amounts,
which are not material to the financial statements. Included in other
noncurrent liabilities is $32,990 at the end of 1997 and $31,146 at the end of
1996 to reflect the liability under these plans. The Company purchased
whole-life insurance contracts on certain related directors and employees to
recover distributions made or to be made under the plans and has recorded the
cash surrender value of the policies in other assets. If all the assumptions
regarding mortality, earnings, policy dividends and other factors are realized,
the Company will ultimately realize its full investment plus a factor for the
use of its money.
9
<PAGE> 10
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years ended
April 30, 1997 are summarized below:
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Additional Treasury Stock
------------------ --------------- Paid-in Retained ------------------
Shares Amount Shares Amount Capital Earnings Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 1, 1994 108,972,699 $1,089 - - $ 90,552 $719,724 (2,823,605) $(103,490)
Net earnings for the year - - - - - 107,259 - -
Stock options exercised - - - - (4,164) - 1,624,843 62,161
Unrealized gain on translation - - - - - 2,043 - -
Acquisition of treasury shares - - - - - - (2,910,900) (114,900)
Stock issued for acquisition - - 401,768 $ 4 54,190 - - -
Cumulative effect of change in
accounting for marketable
securities, net of taxes - - - - - 5,526 - -
Change in net unrealized gain
on marketable securities - - - - - (5,291) - -
Cash dividends paid -
$1.21 1/4 per share - - - - - (128,838) - -
----------- ------ ------- --- -------- -------- ----------- ----------
Balances at April 30, 1995 108,972,699 1,089 401,768 4 140,578 700,423 (4,109,662) (156,229)
Net earnings for the year - - - - - 177,168 - -
Stock options exercised - - 3,031 - (1,501) - 340,395 12,957
Restricted stock granted - - - - (47) - 46,370 1,763
Unrealized loss on translation - - - - - (50) - -
Acquisition of treasury shares - - - - - - (1,833,200) (71,897)
Sale of stock by subsidiary - - - - 365,664 - - -
Change in net unrealized gain
on marketable securities - - - - - 934 - -
Cash dividends paid -
$1.27 1/4 per share - - - - - (131,263) - -
----------- ------ ------- --- -------- -------- ----------- ----------
Balances at April 30, 1996 108,972,699 1,089 404,799 4 504,694 747,212 (5,556,097) (213,406)
Net earnings for the year - - - - - 47,755 - -
Stock options exercised - - 2,280 - 24 - 88,945 3,415
Cancellation of restricted stock - - - - - - (28,217) (1,044)
Unrealized loss on translation - - - - - (3,065) - -
Repurchase of Convertible
Preferred Stock - - (391) - - - - -
Stock issued for acquisition - - - - (2,410) - 589,948 22,660
Change in net unrealized gain
on marketable securities - - - - - 157 - -
Cash dividend paid -
$1.04 per share - - - - - (107,988) - -
----------- ------ ------- --- -------- -------- ----------- ----------
Balances at April 30, 1997 108,972,699 $1,089 406,688 $ 4 $502,308 $684,071 (4,905,421) $(188,375)
=========== ====== ======= === ======== ======== =========== ==========
</TABLE>
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1997, the Company had 5,592,921 shares of
authorized but unissued Preferred Stock. Of the unissued shares, 600,000 shares
have been designated as Participating Preferred Stock in connection with the
Company's shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a
series of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. On April 4, 1995, 401,768 shares of
Convertible Preferred Stock were issued to certain shareholders of SPRY, Inc.
("SPRY") in connection with the Company's acquisition of such corporation.
10
<PAGE> 11
Each share of Convertible Preferred Stock is convertible on or after April 5,
1998 into four shares of Common Stock of the Company, subject to adjustment
upon certain events. The holders of the Convertible Preferred Stock are not
entitled to receive dividends paid in cash, property or securities and, in the
event of any dissolution, liquidation or winding-up of the Company, will share
ratably with the holders of Common Stock then outstanding in the assets of the
Company after any distribution or payments are made to the holders of
Participating Preferred Stock or the holders of any other class or series of
stock of the Company with preference over the Common Stock.
STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors and a plan
for eligible seasonal employees. The 1993 plan was approved by the shareholders
in September 1993 to replace the 1984 Long-Term Executive Compensation Plan,
which terminated at that time except with respect to outstanding awards
thereunder. Under the 1993 and 1989 plans, options may be granted to selected
employees and outside directors to purchase the Company's Common Stock for
periods not exceeding 10 years at a price that is not less than 100% of fair
market value on the date of the grant. A majority of the options are
exercisable each year either starting one year after the date of the grant or
on a cumulative basis at the annual rate of 33 1/3% of the total number of
option shares. Other options are exercisable commencing three years after the
date of the grant on a cumulative basis in annual increments of 60%, 20% and
20% of the total number of option shares.
The plan for eligible seasonal employees, as amended, provided for the
grant of options on June 30, 1997, 1996 and 1995 at the market price on the
date of the grant. The options are exercisable during September in each of the
two years following the calendar year of the grant.
Changes during the years ended April 30, 1997, 1996 and 1995 under
these plans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 6,413,928 $37.93 4,865,814 $35.73 3,538,341 $32.05
Options granted 3,124,588 32.34 3,545,692 40.35 3,912,763 38.53
Options exercised (90,045) 20.08 (362,849) 29.02 (1,624,203) 33.21
Options which expired (3,230,772) 37.16 (1,634,729) 38.63 (961,087) 37.79
Options outstanding, end of year 6,217,699 35.78 6,413,928 37.93 4,865,814 35.73
Shares exercisable, end of year 4,506,372 36.00 4,029,301 37.56 2,727,540 34.42
Shares reserved for future grants, end of year 13,660,778 13,554,594 15,465,557
</TABLE>
A summary of stock options outstanding and exercisable at April 30, 1997
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at April 30 Contractual Life Exercise Price at April 30 Exercise Price
- ------------------------------------ ----------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$6.9525 - 16.25 36,337 2 years $14.50 36,337 $14.50
$17.4375 - 28.75 529,720 7 years 25.99 278,970 24.52
$30.6875 - 39.875 3,586,278 9 years 34.41 2,548,222 34.33
$40 - 44.375 2,065,364 9 years 41.04 1,642,843 41.02
--------- ---------
6,217,699 4,506,372
========= =========
</TABLE>
11
<PAGE> 12
In connection with the acquisition of SPRY, outstanding options to
purchase SPRY common stock under an employee stock option plan were converted
on April 4, 1995 into options to purchase 51,828 shares of the Company's
Convertible Preferred Stock. During 1997 and 1996, options to purchase
Convertible Preferred Stock of 2,280 and 3,031, respectively, were exercised,
and 11,163 and 2,052, respectively, were terminated. At April 30, 1997, 33,302
of such options were outstanding, with exercise prices ranging from $9.54 to
$19.08.
The Company applies APB 25 in accounting for its stock option plans,
under which no compensation cost has been recognized for stock option awards.
Had compensation cost for the stock option plans been determined in accordance
with the fair value accounting method prescribed under SFAS 123, the Company's
net earnings and net earnings per share on a pro forma basis would have been as
follows:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996
---------------------
<S> <C> <C>
Net earnings:
As reported $47,755 $177,168
Pro forma 34,891 168,232
Net earnings per share:
As reported $.45 $1.67
Pro forma .33 1.59
</TABLE>
The SFAS 123 fair value method of accounting is not required to be
applied to options granted prior to May 1, 1995, therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years. Compensation cost for 1997 includes options granted during a two-year
period, whereas 1996 includes compensation cost for options granted during that
year.
For the purposes of computing the pro forma effects of stock option
grants under the fair value accounting method, the fair value of each stock
option grant was estimated on the date of the grant using the Black-Scholes
option pricing model. The weighted-average fair value of stock options granted
during 1997 and 1996 was $6.14 and $8.46, respectively. The following
weighted-average assumptions were used for grants during the following periods:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996
---------------------
<S> <C> <C>
Risk-free interest rate 6.28% 5.89%
Expected life 3 years 3 years
Expected volatility 34.08% 35.32%
Dividend yield 2.42% 1.99%
</TABLE>
SHAREHOLDER RIGHTS PLAN
On July 14, 1988, the Company's Board of Directors adopted a shareholder rights
plan to deter coercive or unfair takeover tactics and to prevent a potential
acquiror from gaining control of the Company without offering a fair price to
all of the Company's stockholders. The plan was amended by the Board of
Directors on May 9, 1990, September 11, 1991, and May 10, 1995. Under the plan,
a dividend of one right (a "Right") per share was declared and paid on each
share of the Company's Common Stock outstanding on July 25, 1988. As to shares
issued after such date, Rights automatically attach to them after their
issuance.
Under the plan, as amended, a Right becomes exercisable when a person
or group of persons acquires beneficial ownership of 10% or more of the
outstanding shares of the Company's Common Stock without the prior written
approval of the Company's Board of Directors (an "Unapproved Stock
Acquisition"), and after 10 business days following the commencement of a
tender offer that would result in an Unapproved Stock Acquisition. When
exercisable, the registered holder of each Right may purchase from the Company
one two-hundredths of a share of a new class of the Company's Participating
Preferred Stock, without par value, at a price of $60.00, subject to
adjustment. The registered holder of each Right then also has the right (the
12
<PAGE> 13
"Subscription Right") to purchase for the exercise price of the Right,
in lieu of shares of Participating Preferred Stock, a number of shares of the
Company's Common Stock having a market value equal to twice the exercise price
of the Right. Following an Unapproved Stock Acquisition, if the Company is
involved in a merger, or 50% or more of the Company's assets or earning power
are sold, the registered holder of each Right has the right (the "Merger Right")
to purchase for the exercise price of the Right a number of shares of the common
stock of the surviving or purchasing company having a market value equal to
twice the exercise price of the Right.
After an Unapproved Stock Acquisition, but before any person or group of
persons acquires 50% or more of the outstanding shares of the Company's Common
Stock, the Board of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of one share of
Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of
any holder to exercise a Right terminates. Upon the occurrence of any of the
events giving rise to the exercisability of the Subscription Right or the
Merger Right or the ability of the Board of Directors to effect the Exchange,
the Rights held by the acquiring person or group become void as they relate to
the Subscription Right, the Merger Right or the Exchange.
The Company may redeem the Rights at a price of $.005 per Right at any
time prior to an Unapproved Stock Acquisition (and after such time in certain
circumstances). The Rights expire on July 25, 1998, unless extended by the
Board of Directors. Until a Right is exercised, the holder thereof, as such,
has no rights as a stockholder of the Company, including the right to vote or
to receive dividends. The issuance of the Rights alone has no dilutive effect
and does not affect reported net earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Bad debts $90,134 $31,766 $13,983
Purchased services 71,901 44,646 18,211
Royalties 68,653 77,926 59,027
Legal and professional 30,626 23,877 8,969
Travel and entertainment 24,971 26,349 20,077
Taxes and licenses 21,141 11,151 11,943
Interest 11,661 3,969 4,060
Amortization of goodwill 8,878 14,595 4,875
</TABLE>
Also included in other expenses for the year ended April 30, 1997 are
charges totaling $34,754. Of the total, $17,713 related to the potential sale
or other disposition of certain assets and business operations of a corporate
computer software group; the consolidation of certain U.S.-based staff
functions and office facilities; the renegotiation of certain third-party
customer service agreements; and the write-off of certain obsolete software
costs for billing and customer service systems. An additional $9,191 related to
further consolidation of Columbus-area office facilities and the sale or
write-down of certain equity investments in providers of content and
technologies. The remaining $7,850 was due to the withdrawal of the WOW! online
service from the marketplace as of January 31, 1997.
13
<PAGE> 14
TAXES ON EARNINGS
The components of earnings before income taxes and minority interest upon which
Federal and foreign income taxes have been provided are as follows:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
United States $27,967 $276,586 $213,122
Foreign 10,589 8,708 6,874
------- -------- --------
$38,556 $285,294 $219,996
======= ======== ========
</TABLE>
Deferred income tax provisions (benefits) reflect the impact of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The current and deferred
components of taxes on earnings is comprised of the following:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $20,504 $ 47,357 $ 96,686
State 3,036 6,047 13,511
Foreign 5,041 2,083 3,274
------- -------- --------
28,581 55,487 113,471
------- -------- --------
Deferred:
Federal (12,110) 44,926 (625)
State (1,793) 5,736 (88)
Foreign (65) 1,977 (21)
------- -------- --------
(13,968) 52,639 (734)
------- -------- --------
$14,613 $108,126 $112,737
======= ======== ========
</TABLE>
Provision is not made for possible income taxes payable upon distribution of
unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $58,996 at December 31, 1996. Management believes the cost to
repatriate these earnings would not be material.
The following table reconciles the U.S. Federal income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended April 30
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in
income taxes resulting from:
State income taxes, net of
Federal income tax benefit 2.1% 2.7% 4.0%
Foreign taxes, net of Federal
income tax benefit 3.3% .4% .3%
Purchased research and development - - 13.3%
Nontaxable Federal income ( 3.2%) (.7%) ( 2.3%)
Other .7% .5% .9%
----- ----- -----
Effective rate 37.9% 37.9% 51.2%
===== ===== =====
</TABLE>
14
<PAGE> 15
A summary of deferred income taxes follows:
<TABLE>
<CAPTION>
April 30
1997 1996
----------------------------------
<S> <C> <C>
Gross deferred tax assets:
Accrued expenses $(8,090) $(13,336)
Other (142) -
---------- ----------
Current (8,232) (13,336)
---------- ----------
Deferred compensation (13,414) (12,155)
Impairment of assets (2,573) -
Depreciation (2,330) -
State net operating loss carryforwards (2,530) -
---------- ----------
Noncurrent (20,847) (12,155)
---------- ----------
Gross deferred tax liabilities:
Accrued income 1,878 -
---------- ----------
Depreciation 28,095 20,375
Deferred subscriber acquisition costs 16,173 36,403
Product development costs 1,286 1,361
Capitalized research and development 1,043 716
---------- ----------
Noncurrent 46,597 58,855
---------- ----------
Net deferred tax liabilities $19,396 $ 33,364
========== ==========
</TABLE>
State net operating loss carryforwards will expire on various dates through
2011.
ACQUISITIONS
On April 14, 1997, the Company signed a definitive agreement to acquire Option
One Mortgage Corporation ("Option One"), a California-based originator of
nonconforming mortgage loans, for a cash purchase price equal to $190,000 plus
adjusted stockholder's equity of Option One on the closing date. The
acquisition, which will be accounted for as a purchase, was completed on June
17, 1997, subject to post-closing adjustments.
On April 4, 1995, the Company acquired SPRY for $41,785 in cash and issued
Convertible Preferred Stock valued at $54,194. In addition, outstanding options
for SPRY common stock were converted into options for Convertible Preferred
Stock valued at $5,641. The transaction was accounted for as a purchase and,
accordingly, the consolidated statements of earnings includes SPRY's operations
from the date of acquisition. On January 30, 1996, the Company contributed its
investment in SPRY to CompuServe. In connection with the purchase, the Company
acquired certain intangible assets, including software technology, tradenames
and an assembled workforce totalling $11,656. These intangibles are being
amortized on a straight-line basis over five years. The Company also acquired
research and development projects related to SPRY's next product generation.
These projects represent SPRY's research and development efforts prior to the
merger, which had not yet reached the stage of technological feasibility and had
no alternative future use; thus, the ultimate revenue generating capability of
these projects was uncertain. The purchased research and development was valued
at $83,508 using a discounted, risk-adjusted future income approach. The
consolidated statements of earnings includes a charge for the purchased research
and development which is not deductible for income tax purposes. The fair value
of assets acquired, including intangibles, was $106,371; liabilities assumed
were $4,751. Liabilities assumed and the Convertible Preferred Stock and stock
options issued were non-cash items excluded from the consolidated statements of
cash flows.
During fiscal 1997, 1996 and 1995, the Company made other acquisitions
which were accounted for as purchases. Their operations, which are not material,
are included in the consolidated statements of earnings. Pro forma results
assuming SPRY had been acquired as of the beginning of the period presented
would not be materially different from reported results.
15
<PAGE> 16
SALE OF SUBSIDIARIES
On April 19, 1996, CompuServe effected an initial public offering of 18,400,000
shares of its common stock at $30.00 per share, which reduced the Company's
ownership in CompuServe to just over 80%. The Company did not recognize a gain
on this transaction. Additional paid-in capital was increased by the change in
the Company's proportionate share of CompuServe's equity as a result of the
initial public offering, from which the net proceeds to CompuServe were
$518,819.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc., exclusive of its rights to publish TaxCut, for $35,000 cash.
The sale resulted in a gain of $12,445, which is included in other income for
the year ended April 30, 1996.
On June 30, 1994, the Company sold the stock of Collier-Jackson, Inc.,
a wholly owned subsidiary of CompuServe, for $5,195 in cash. The operating
results of Collier-Jackson, Inc. are reflected in the consolidated statements
of earnings through the date of disposition, and the gain on the sale of $2,680
is included in other income.
COMMITMENTS AND CONTINGENCIES
Substantially all of the Company's operations are conducted in leased premises.
Most of the operating leases are for a one-year period with renewal options of
one to three years and provide for fixed monthly rentals. Lease commitments at
April 30, 1997, for fiscal 1998, 1999, 2000, 2001 and 2002 aggregated $94,770,
$73,394, $50,790, $24,699 and $13,393, respectively, with no significant
commitments extending beyond that period of time. The Company's rent expense
for the years 1997, 1996 and 1995 aggregated $96,795, $78,745 and $70,377,
respectively.
The Company has commitments to its credit card holders to the extent of
the unused credit limits on credit card loans. These commitments amounted to
$923,348 and $712,314 at April 30, 1997 and 1996, respectively. The Company
does not require collateral to secure credit card loan agreements. Commitments
on credit card loans are cancelable by the Company at any time and do not
necessarily represent future cash requirements.
The Company is obligated to purchase 80% of the mortgage loan volume of
a third party which meets certain criteria as established by the Company. The
Company purchased $122,535 of such loans during the year ended April 30, 1997,
which may not be indicative of future obligations. The Company also extends
warehouse financing of $50,000 to such third party to facilitate the
accumulation of mortgage loans, of which $8,199 was drawn at April 30, 1997.
At April 30, 1997, the Company maintained a $400,000 line of credit to
support various financial activities conducted by Block Financial Corporation
and its commercial paper program. This line of credit was increased to
$1,000,000 subsequent to April 30, 1997. The annual commitment fee required to
support the availability of this facility is seven basis points per annum on
the unused portion of the facility. The Company also maintained a $25,000 line
of credit to fulfill short-term cash requirements of CompuServe, which expired
in June 1997. There was no outstanding balance under these lines at April 30,
1997 and 1996.
During fiscal 1997, CompuServe, certain current and former officers and
directors of CompuServe, and the Company were named as defendants in four
purported class action lawsuits and one lawsuit based on the same allegations
in which the plaintiff does not seek class action status. One purported class
action lawsuit was voluntarily dismissed by the plaintiffs and such plaintiffs
have joined as plaintiffs in one of the remaining class action lawsuits. One
suit names the lead underwriters in the CompuServe initial public offering as
additional defendants and as representatives of a defendant class consisting of
all underwriters who participated in such offering. Each pending suit alleges
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServe's public
filings related to its initial public offering. One suit also alleges
violations of the Ohio Securities Code and common law of negligent
misrepresentation. Another suit also alleges violations of Colorado, Florida
and Ohio statutes and common law of negligent misrepresentation. Relief sought
is unspecified but includes pleas for rescission and damages. In addition to
the five previously mentioned lawsuits, an action for discovery was filed
during fiscal 1997 solely against CompuServe. In such action the plaintiff
seeks factual support for a possible additional claim relating to initial
public offering disclosures. The defendants are vigorously defending these
suits.
16
<PAGE> 17
FINANCIAL INSTRUMENTS
The Company securitizes and sells fixed and variable rate mortgage loan
receivables. As a part of its interest rate risk management strategy, the
Company may choose to hedge its interest rate risk related to its mortgage
portfolio by utilizing treasury rate guarantees. The Company classifies these
treasury rate guarantees as hedges of specific loan receivables. The gains and
losses derived from these treasury rate guarantees are deferred and included in
the carrying amounts of the related hedged items and ultimately recognized in
earnings. Deferred losses on the treasury rate guarantees used to hedge the
anticipated transactions amounted to $142 at April 30, 1997. The contract value
and market value of these financial instruments as of April 30, 1997 was
$40,000 and $39,925, respectively.
The Company purchases treasury rate guarantees from certain broker-dealer
counterparties. In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty. It is the Company's policy to review, as
necessary, the credit standing of each counterparty.
The Company is exposed to on-balance sheet credit risk related to its
receivables. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has commited to buy and commitments
made to credit card holders to meet their financing needs.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended Fiscal 1996 Quarter Ended
----------------------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1997 1997 1996 1996 1996 1996 1995 1995
--------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,085,891 $363,064 $ 253,450 $227,258 $921,931 $311,845 $221,046 $201,362
========== ======== ========= ======== ======== ======== ======== ========
Earnings (loss) before
income taxes (benefits)
and minority interest $ 313,197 $(44,085) $(136,599) $(93,957) $299,163 $ (8,882) $(13,470) $ 8,483
Taxes (benefits) on earnings 117,329 (15,930) (50,940) (35,846) 113,452 (3,411) (5,172) 3,257
---------- -------- --------- -------- -------- -------- -------- --------
Net earnings (loss) before
minority interest 195,868 (28,155) (85,659) (58,111) 185,711 (5,471) (8,298) 5,226
Minority interest (3,567) (2,829) (11,531) (5,885) -- -- -- --
---------- -------- --------- -------- -------- -------- -------- --------
Net earnings (loss) $ 199,435 $(25,326) $(74,128) $(52,226) $185,711 $ (5,471) $ (8,298) $ 5,226
========== ======== ======== ======== ======== ======== ======== ========
Net earnings (loss) per share $ 1.90 $ (.24) $ (.71) $ (.50) $ 1.75 $ (.05) $ (.08) $ .05
========== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The Company recorded a charge to earnings of $17,713 in the first
quarter of 1997 due to the potential sale or other disposition of certain assets
and business operations of a corporate computer software group; the
consolidation of certain U.S.-based staff functions and office facilities; the
renegotiation of certain third-party customer service agreements; and the
write-off of certain obsolete software costs for billing and customer service
systems.
The Company also recorded charges to earnings in the second quarter of
1997 of $34,500 related to accelerated amortization of previously deferred CSi
subscriber acquisition costs; $10,881 due to the write-off of all previously
deferred subscriber acquisition costs for WOW! and SPRYNET; and $7,850 related
to the withdrawal of the WOW! online service from the marketplace.
Additionally, the Company recorded a charge to earnings of $9,191 in the
fourth quarter of 1997 related to further consolidation of Columbus-area office
facilities and the sale or write-down of certain equity investments in providers
of content and technologies.
SEGMENT INFORMATION
The principal business activity of the Company is providing services to the
general public and business community. It operates in the following industry
segments:
Tax Services: This segment is engaged in providing tax return preparation,
filing and related services to the general public on a fee basis. Revenues are
seasonal in nature and represent fees of company-owned offices and royalties
from franchised offices.
Computer Services: This segment is engaged in providing computer
information and networking services to corporations and individual computer
owners via a proprietary data network and host servers located in Columbus and
Dublin, Ohio.
17
<PAGE> 18
Financial Services: This segment provides and invests primarily in financial
services delivery technology and the related financial services delivered by
that technology as well as financial services associated with Tax Services and
its typical customer. It sponsors credit card loans, nonconforming mortgages
and other financial services to existing CompuServe and Tax Services customers.
This segment also provides personal productivity software to the general public
and purchases participation interests in refund anticipation loans made by a
third party lending institution.
Identifiable Assets: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated with
each segment of the Company's operations. The remaining assets are classified
as corporate assets and consist primarily of cash, marketable securities and
corporate equipment.
Information concerning the Company's operations by industry segment for the
years ended April 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
REVENUES:
Tax Services $ 993,924 $ 831,455 $ 729,718
Computer Services 841,887 792,661 579,997
Financial Services 110,830 36,442 35,909
Unallocated corporate 1,012 3,636 695
Intersegment sales (17,990) (8,010) (12,500)
---------- ---------- ----------
Total revenues $1,929,663 $1,656,184 $1,333,819
========== ========== ==========
OPERATING EARNINGS:
Tax Services $ 217,124 $ 194,771 $ 147,740
Computer Services (196,362) 87,332 147,313
Financial Services 7,053 (7,368) (5,788)
Unallocated corporate (9,989) (10,880) (12,260)
Purchased research and development - - (83,508)
---------- ---------- ----------
Total operating earnings 17,826 263,855 193,497
Investment income, net 20,730 8,994 23,703
Other, net - 12,445 2,796
---------- ---------- ----------
Earnings before income taxes and
minority interest $ 38,556 $ 285,294 $ 219,996
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Tax Services $ 35,300 $ 23,499 $ 21,991
Computer Services 130,285 78,683 42,639
Financial Services 1,093 8,929 2,992
Corporate 133 129 62
---------- ---------- ----------
Total depreciation and amortization $ 166,811 $ 111,240 $ 67,684
========== ========== ==========
IDENTIFIABLE ASSETS:
Tax Services $ 213,455 $ 141,031 $ 117,560
Computer Services 731,666 950,671 310,393
Financial Services 415,717 208,489 186,859
Corporate 545,420 455,700 482,501
---------- ---------- ----------
Total assets $1,906,258 $1,755,891 $1,097,313
========== ========== ==========
CAPITAL EXPENDITURES:
Tax Services $ 43,159 $ 36,724 $ 26,033
Computer Services 125,753 227,710 99,690
Financial Services 1,450 938 2,135
Corporate 144 354 45
---------- ---------- ----------
Total capital expenditures $ 170,506 $ 265,726 $ 127,903
========== ========== ==========
</TABLE>
18
<PAGE> 19
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Block Financial Corporation, a wholly
owned subsidiary of the Company,is presented below.
<TABLE>
<CAPTION>
April 30,
1997 1996
------- --------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 3,425 $ 3,871
Finance receivables, net 380,206 191,210
Other assets 34,657 10,490
--------- ---------
Total assets $ 418,288 $ 205,571
========= =========
Commercial paper $ 269,619 $ 72,651
Other liabilities 26,867 15,451
Stockholder's equity 121,802 117,469
--------- ---------
Total liabilities and stockholder's
equity $ 418,288 $ 205,571
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
1997 1996 1995
------ -------- --------
<S> <C> <C> <C>
Condensed statements of operarions:
Revenues $110,777 $ 36,854 $ 35,909
Earnings (loss) from operations 7,053 (7,368) (5,788)
Earnings (loss) before income taxes
(benefit) 7,053 5,077 (5,788)
Net earnings (loss) 4,337 (255) (4,284)
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of H&R Block, Inc.
and subsidiaries as of April 30, 1997 and 1996, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of H&R Block, Inc., and
subsidiaries as of April 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended April
30, 1997, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its method of accounting for advertising costs during the year
ended April 30, 1996.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Kansas City, Missouri
June 17, 1997
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
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(a) 1. Financial Statements
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The following financial statements, related notes and report,
appear in Part II, Item 8, Financial Statements and
Supplementary Data, included in this Form 10-K/A.
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Quarterly Financial Data
Independent Auditors' Report
2. Financial Statement Schedules
-----------------------------
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the
information is not material or the information is set forth in
the financial statements or notes thereto.
3. Exhibits
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3(a) Restated Articles of Incorporation of H&R Block, Inc.,
as amended, filed as Exhibit 3(b) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1996, are
incorporated herein by reference.
3(b) Bylaws of H&R Block, Inc., as amended, filed as
Exhibit 3(b) to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 1995, are incorporated herein by
reference.
4(a) Conformed copy of Rights Agreement dated as of July 14,
1988 between H&R Block, Inc., and Centerre Trust Company of St.
Louis, filed on August 9, 1993 as Exhibit 4(c) to the Company's
Registration Statement on Form S-8 (File No. 33-67170), is
incorporated herein by reference.
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4(b) Copy of Amendment to Rights Agreement dated as of May 9, 1990
between H&R Block, Inc. and Boatmen's Trust Company, filed as
Exhibit 4(b) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1995, is incorporated by
reference.
4(c) Copy of Second Amendment to Rights Agreement dated
September 11, 1991 between H&R Block, Inc. and Boatmen's Trust
Company, filed as Exhibit 4(c) to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1995, is
incorporated by reference.
4(d) Copy of Third Amendment to Rights Agreement dated May 10, 1995
between H&R Block, Inc. and Boatmen's Trust Company, filed
as Exhibit 4(d) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1995, is incorporated by
reference.
4(e) Form of Certificate of Designation, Preferences and Rights of
Participating Preferred Stock of H&R Block, Inc., filed as
Exhibit 4(e) to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 1995, is incorporated by reference.
4(f) Form of Certificate of Designation, Preferences and Rights of
Delayed Convertible Preferred Stock of H&R Block, Inc., filed
as Exhibit 4(f) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1995, is incorporated by
reference.
10(a) Stock Purchase Agreement dated April 14, 1997, among Fleet
Financial Group, Inc., Fleet Holding Corp., H&R Block, Inc. and
Block Financial Corporation, filed on July 2, 1997 as Exhibit
2.1 to the Company's current report on Form 8-K, is incorporated
herein by reference.
10(b) The Company's 1993 Long-Term Executive Compensation Plan, as
amended, filed as Exhibit 10(a) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1996, is
incorporated herein by reference.
10(c) The H&R Block Long-Term Performance Program, as amended, filed
as Exhibit 10(c) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1994, is incorporated
herein by reference.
10(d) The H&R Block Deferred Compensation Plan for Directors, as
amended, filed as Exhibit 10 to the Company's
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quarterly report on Form 10-Q for the quarter ended July 31,
1994, is incorporated herein by reference.
10(e) Amendment No. 2 to H&R Block Deferred Compensation Plan for
Directors, filed as Exhibit 10(c) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1997, is
incorporated herein by reference.
10(f) The H&R Block Deferred Compensation Plan for Executives, as
amended (Amendments 1 through 5), filed as Exhibit 10(e) to the
Company's annual report on Form 10-K for the fiscal year ended
April 30, 1994, is incorporated herein by reference.
10(g) Amendment No. 6 to H&R Block Deferred Compensation Plan for
Executives, filed as Exhibit 10(b) to the Company's quarterly
report on Form 10-Q for the quarter ended July 31, 1995, is
incorporated herein by reference.
10(h) Amendment No. 7 to H&R Block Deferred Compensation Plan for
Executives, filed as Exhibit 10(a) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1997, is
incorporated herein by reference.
10(i) The H&R Block Supplemental Deferred Compensation Plan for
Executives, filed as Exhibit 10(f) to the Company's annual
report on Form 10-K for the fiscal year ended April 30, 1994,
is incorporated herein by reference.
10(j) Amendment No. 1 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the quarter ended
October 31, 1994, is incorporated herein by reference.
10(k) Amendment No. 2 to H&R Block Supplemental Deferred Compensation
Plan for Executives, filed as Exhibit 10(c) to the Company's
quarterly report on Form 10-Q for the quarter ended July 31,
1995, is incorporated herein by reference.
10(l) Amendment No. 3 to H&R Block Supplemental Deferred Compensation
Plan for Executives, filed as Exhibit 10(b) to the Company's
quarterly report on Form 10-Q for the quarter ended January 31,
1997, is incorporated herein by reference.
10(m) The H&R Block Short-Term Incentive Plan, filed as Exhibit 10(a)
to the Company's quarterly report on
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Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10(n) The Amended and Restated H&R Block, Inc. Retirement Plan for
Non-Employee Directors, filed as Exhibit 10(h) to the Company's
annual report on Form 10-K for the fiscal year ended April 30,
1995, is incorporated herein by reference.
10(o) The Company's 1989 Stock Option Plan for Outside Directors,
as amended.
10(p) Employment Agreement dated October 11, 1996, between the
Company and Frank L. Salizzoni, filed as Exhibit 10(b) to the
Company's quarterly report on Form 10-Q for the quarter ended
October 31, 1996, is incorporated herein by reference.
11 Statement re Computation of Per Share Earnings.
13 That portion of the annual report to security holders
for the fiscal year ended April 30, 1997 which is expressly
incorporated by reference in the Annual Report on Form 10-k for
such fiscal year. Portions of such annual report to security
holders not expressly incorporated by reference in this
Amendment Number 1 to the Annual Report on Form 10-K are not
deemed "filed" with the Commission.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified Public
Accountants, is located immediately after the signature pages
contained in this filing.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The registrant filed a Current Report on Form 8-K on April 22, 1997,
reporting as an "Other Event" the registrant's issuance of a press
release announcing the agreement of Block Financial Corporation to
purchase all of the stock of Option One Mortgage Corporation. The
press release was included as Exhibit 99.1 to the Form 8-K. No
financial statements were filed as a part of the Form 8-K. Except for
the Form 8-K filed on April 22, 1997, the registrant did not file any
reports on Form 8-K during the fourth quarter of the year ended April
30, 1997.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendmment Number 1 to Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
H&R BLOCK, INC.
August 14, 1997 By /s/ Ozzie Wenich
-------------------------
Ozzie Wenich, Senior Vice
President, Chief Financial
Officer and Treasurer
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