<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
/ / 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MAIN STREET
KANSAS CITY, MISSOURI 64111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(816) 753-6900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 / /
The number of shares outstanding of the registrant's Common Stock, without par
value, at September 1, 1998 was 100,534,662 shares.
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TABLE OF CONTENTS
Page
----
PART I Financial Information
Consolidated Balance Sheets
July 31, 1998 and April 30, 1998 ........................... 1
Consolidated Statements of Operations
Three Months Ended July 31, 1998 and 1997 .................. 2
Consolidated Statements of Cash Flows
Three Months Ended July 31, 1998 and 1997 .................. 3
Notes to Consolidated Financial Statements .................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Quantitative and Qualitative Disclosures about Market Risk..... 11
PART II Other Information.............................................. 12
SIGNATURES ............................................................... 13
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1998 1998
---- ----
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 696,210 $ 900,856
Marketable securities 139,657 346,158
Receivables, less allowance for doubtful accounts of $45,870
and $45,314 813,697 793,237
Prepaid expenses and other current assets 123,363 103,026
------------- -------------
TOTAL CURRENT ASSETS 1,772,927 2,143,277
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 277,369 289,096
Excess of cost over fair value of net tangible assets acquired,
net of amortization 295,803 288,580
Other 108,346 105,809
------------- -------------
681,518 683,485
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 72,901 77,321
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$ 2,527,346 $ 2,904,083
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 765,503 $ 643,002
Accounts payable, accrued expenses and deposits 97,880 114,875
Accrued salaries, wages and payroll taxes 16,254 96,168
Accrued taxes on earnings 222,933 422,847
------------- -------------
TOTAL CURRENT LIABILITIES 1,102,570 1,276,892
LONG-TERM DEBT 249,688 249,675
OTHER NONCURRENT LIABILITIES 38,365 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 432,165 432,335
Retained earnings 961,530 1,010,545
Accumulated other comprehensive income (loss) (30,982) (24,515)
------------- -------------
1,363,802 1,419,454
Less cost of 5,436,964 and 1,992,043 shares of common stock
in treasury 227,079 77,822
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1,136,723 1,341,632
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$ 2,527,346 $ 2,904,083
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 4
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 31,
--------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 47,702 $ 30,360
Product revenues 28,642 6,011
Royalties 1,067 1,017
Other 1,476 1,822
------------- -------------
78,887 39,210
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 43,435 30,193
Occupancy and equipment 40,761 35,600
Interest 17,551 8,238
Marketing and advertising 3,798 3,299
Supplies, freight and postage 3,074 2,117
Other 28,899 20,462
------------- -------------
137,518 99,909
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Operating loss (58,631) (60,699)
OTHER INCOME
Investment income, net 13,890 5,190
------------- -------------
Loss from continuing operations before income tax benefit (44,741) (55,509)
Income tax benefit (17,002) (20,648)
------------- -------------
Net loss from continuing operations (27,739) (34,861)
Net loss from discontinued operations (less applicable
income tax benefit of ($1,489)) - (3,274)
------------- -------------
Net loss $ (27,739) $ (38,135)
============= =============
Weighted average number of common shares outstanding 104,976 104,102
============= =============
Basic and diluted net loss per share from continuing operations $ (.26) $ (.33)
============= =============
Basic and diluted net loss per share $ (.26) $ (.37)
============= =============
Dividends per share $ .20 $ .20
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,739) $ (38,135)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 13,388 8,796
Other noncurrent liabilities 2,481 1,146
Changes in:
Receivables (20,460) 342,147
Prepaid expenses and other current assets (20,337) (21,439)
Net assets of discontinued operations - 4,177
Accounts payable, accrued expenses and deposits (16,995) (19,605)
Accrued salaries, wages and payroll taxes (79,914) (96,471)
Accrued taxes on earnings (200,487) (39,936)
-------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (350,063) 140,680
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (117,868) (111,837)
Maturities of marketable securities 337,604 138,738
Purchases of property and equipment (4,018) (4,149)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (12,127) (223,209)
Other, net (9,986) (5,138)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 193,605 (205,595)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (1,762,864) (2,808,632)
Proceeds from issuance of notes payable 1,885,365 2,740,059
Proceeds from issuance of long-term debt 13 -
Dividends paid (21,275) (20,816)
Payments to acquire treasury shares (153,788) -
Proceeds from stock options exercised 4,361 1,145
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NET CASH USED IN FINANCING ACTIVITIES (48,188) (88,244)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (204,646) (153,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 696,210 $ 303,920
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 182,815 $ 19,950
Interest paid 13,952 5,668
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 6
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of July 31, 1998, the Consolidated
Statements of Operations for the three months ended July 31, 1998 and 1997,
and the Consolidated Statements of Cash Flows for the three months ended
July 31, 1998 and 1997 have been prepared by the Company, without audit. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at July 31, 1998 and for all periods
presented have been made.
Reclassifications have been made to prior year amounts to conform with the
current year presentation.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries and
companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1998 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the three-month results are not
indicative of results to be expected for the year.
2. On January 31, 1998, the Company completed the sale of all of its interest
in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc.
(WorldCom). The Consolidated Statement of Operations for the three months
ended July 31, 1997 and the Consolidated Statement of Cash Flows for the
three months ended July 31, 1997 have been reclassified to reflect
CompuServe as discontinued operations. CompuServe's revenues for the three
months ended July 31, 1997 were $205.7 million.
3. Receivables consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
-------- ---------
1998 1998
---- ----
(Audited)
<S> <C> <C>
Mortgage loans held for sale $ 513,007 $ 448,102
Credit card loans 194,566 202,852
Other 151,994 187,597
-------------- ---------------
859,567 838,551
Allowance for doubtful accounts 45,870 45,314
-------------- ---------------
$ 813,697 $ 793,237
============== ===============
</TABLE>
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<PAGE> 7
4. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
5. Basic and diluted net loss per share is computed using the weighted average
number of shares outstanding during each period. Diluted net loss per share
excludes the impact of common stock options outstanding of 8,669,184 shares
and the conversion of 1,088 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the
first quarter of fiscal 1999 increased to 104,976,000 from 104,102,000 last
year, due to stock option exercises during fiscal 1998. The increase was
partially reduced by the repurchase of treasury shares by the Company
during the period from February 1998 to July 1998.
6. During the three months ended July 31, 1998 and 1997, the Company issued
111,379 and 50,145 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the three
months ended July 31, 1998, the Company acquired 3,556,300 shares of its
common stock at an aggregate cost of $153,788.
7. CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits allege
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 in April 1996. One state
lawsuit also alleges certain oral omissions and misstatements in connection
with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the
lead underwriters of CompuServe's initial public offering as additional
defendants and as representatives of a defendant class consisting of all
underwriters who participated in such offering. The Federal suits have been
consolidated, the defendants have filed a motion to dismiss the
consolidated suits, and the court has stayed all proceedings pending the
outcome of the state court suits. The four state court lawsuits also allege
violations of various state statutes and common law of negligent
misrepresentation in addition to the 1933 Act claims. The state lawsuits
have been consolidated for discovery purposes and defendants have filed a
motion for summary judgment covering all four state lawsuits. In the state
lawsuits, the court entered an order in July 1998 that the suits entitled
Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation,
et al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of
CompuServe Corporation between April 18, 1996 pursuant to the CompuServe's
initial public offering or on the open market and July 16, 1996, and who
were damaged thereby. All named defendants to these consolidated actions,
members of their immediate families, any entity in which they have a
controlling interest, and their legal representatives, heirs, successors or
assigns are excluded from the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in
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<PAGE> 8
state court was not included in the class certification order as the
plaintiff in such case did not seek class certification of its action. As a
part of the sale of its interest in CompuServe, the Company has agreed to
indemnify WorldCom and CompuServe against 80.1% of any losses and expenses
incurred by them with respect to these lawsuits. The defendants are
vigorously defending these lawsuits.
8. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
July 31, April 30,
1998 1998
---- ----
(Audited)
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 93,138 $ 30,895
Finance receivables, net 791,901 737,005
Other assets 315,438 311,759
---------- ----------
Total assets $1,200,477 $1,079,659
========== ==========
Commercial paper $ 765,503 $ 643,002
Long-term debt 249,688 249,675
Other liabilities 51,268 57,372
Stockholder's equity 134,018 129,610
---------- ----------
Total liabilities and stockholder's equity $1,200,477 $1,079,659
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
<S> <C> <C>
Condensed statements of operations:
Revenues $ 61,829 $ 28,609
Earnings (loss) from operations 7,148 (6,330)
Net earnings (loss) 4,427 (3,887)
</TABLE>
9. The Company sells short treasury securities under an open repurchase
agreement that can be adjusted at any time by either party. The position on
certain or all of the fixed rate mortgages is closed when the Company
enters into a forward commitment to sell those mortgages. Deferred losses
on the treasury securities hedging instrument amounted to $1,153 at July
31, 1998. The contract value and the market value of this hedging
instrument at July 31, 1998 was $54,578 and $54,821, respectively. The
contract value and market value of the forward commitment at July 31, 1998
was $335,000 and $330,913, respectively.
10. In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires that all changes in equity during the period,
except those resulting from investments by and distributions to owners, be
reported as "comprehensive income" in the financial statements. The
Company's comprehensive income is comprised of net earnings (loss), foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial
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<PAGE> 9
statements. The components of comprehensive income (loss) during the three
months ended July 30, 1998 and 1997 were:
<TABLE>
<CAPTION>
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
<S> <C> <C>
Net loss $(27,739) $(38,135)
Change in net unrealized gain (loss) on mkt. securities 935 463
Change in foreign currency translation adjustments (7,402) (106)
-------- --------
Comprehensive income (loss) $(34,206) $(37,778)
======== ========
</TABLE>
11. In the first quarter of fiscal year 1999, the Company acquired operations
that management determined to be a new reportable operating segment. The
new segment, Business services, is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. The Business
services segment offers its services through a regional accounting firm
based in Kansas City, Missouri. Revenues of this segment are seasonal in
nature.
Information concerning the Company's operations by reportable operating
segments for the three months ended July 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
<S> <C> <C>
Revenues:
U.S. tax operations $ 12,179 $ 11,432
International tax operations 3,437 3,380
Mortgage operations 52,705 14,208
Credit card operations 8,314 9,307
Business services 1,330 -
Unallocated corporate 922 1,010
Inter-segment sales - (127)
-------- --------
$ 78,887 $ 39,210
======== ========
Earnings (loss) from continuing operations:
U.S. tax operations $(57,493) $(49,338)
International tax operations (5,971) (5,124)
Mortgage operations 13,787 (491)
Credit card operations (1,966) (2,982)
Business services (114) -
Unallocated corporate (2,431) (1,183)
Acquisition interest expense (4,443) (1,581)
Investment income, net 13,890 5,190
-------- --------
Loss from continuing operations before
income tax benefit $(44,741) $(55,509)
======== ========
</TABLE>
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 3,
respectively.
Working capital decreased to $670.4 million at July 31, 1998 from $866.4
million at April 30, 1998. The working capital ratio at July 31, 1998 is
1.6 to 1, compared to 1.7 to 1 at April 30, 1998. The decrease in working
capital and the working capital ratio is primarily due to the repurchase of
treasury shares and the seasonal nature of the Company's U.S. tax operations
segment. Tax return preparation occurs almost entirely in the fourth quarter
and has the effect of increasing certain assets and liabilities during this
time.
The Company maintains seasonal lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its nonconforming mortgage loan, credit card and other financial
services programs. These short-term borrowings in the U.S. are supported by a
$1.3 billion back-up credit facility through November 1998, subject to renewal.
The Company's capital expenditures and dividend payments during the first three
months were funded through internally-generated funds.
At July 31, 1998, short-term borrowings used to fund mortgage loans, credit
cards and other programs increased to $765.5 million from $643.0 million at
April 30, 1998 due mainly to the funding of mortgage operations. For the three
months ended July 31, 1998 and 1997, interest expense was $17.6 million and $8.2
million, respectively. The increase in interest expense is primarily
attributable to the funding of mortgage operations with short-term borrowings
and the long-term debt issued to fund the acquisition of Option One Mortgage
Corporation (Option One).
The Company announced in December 1993 its intention to repurchase from time to
time up to 10 million of its shares on the open market. In July 1996, the
Company announced its intention to repurchase up to 10 million additional shares
in the open market over a two-year period following the separation of
CompuServe. At July 31, 1998, 8.7 million shares had been repurchased. The
Company plans to continue to purchase its shares on the open market in
accordance with these authorizations, subject to various factors including the
price of the stock, availability of excess cash, the ability to maintain
financial flexibility, and other investment opportunities available.
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<PAGE> 11
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
The analysis that follows should be read in conjunction with the table below and
the Consolidated Statements of Operations found on page 2.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO
--------------------------------------------
THREE MONTHS ENDED JULY 31, 1997
--------------------------------
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 12,179 $ 11,432 $ (57,493) $ (49,338)
International tax operations 3,437 3,380 (5,971) (5,124)
Mortgage operations 52,705 14,208 13,787 (491)
Credit card operations 8,314 9,307 (1,966) (2,982)
Business services 1,330 - (114) -
Unallocated corporate 922 1,010 (2,431) (1,183)
Acquisition interest expense - - (4,443) (1,581)
Investment income, net - - 13,890 5,190
Inter-segment sales - (127) - -
--------------- -------------- -------------- -------------
$ 78,887 $ 39,210 (44,741) (55,509)
=============== ==============
Income tax benefit (17,002) (20,648)
-------------- -------------
Net loss from continuing operations (27,739) (34,861)
Net loss from discontinued operations - (3,274)
-------------- -------------
Net loss $ (27,739) $ (38,135)
============== =============
</TABLE>
Consolidated revenues for the three months ended July 31, 1998 increased 101.2%
to $78.9 million from $39.2 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $52.7 million, a 271.0%
increase over last year.
The consolidated pretax loss from continuing operations for the first quarter of
fiscal 1999 decreased to $44.7 million from $55.5 million in the first quarter
of last year. The decrease is attributable to Mortgage operations' pretax
earnings of $13.8 million compared to a pretax loss of $491 thousand in the
first quarter of last year and increased investment income.
The net loss from continuing operations was $27.7 million, or $.26 per share,
compared to $34.9 million, or $.33 per share, for the same period last year.
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<PAGE> 12
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 6.5% to $12.2 million from $11.4 million last year, resulting
primarily from higher tax preparation fees that are attributable to increases in
pricing.
The pretax loss increased 16.5% to $57.5 million from $49.3 million in the first
quarter of last year due to normal operational increases in compensation, rent
and other facility-related expenses. Also contributing to the increases in rent
and other facility-related expenses is an increase in the amount of tax office
space maintained under lease during this year's off-season. Due to the nature of
this segment's business, first quarter operating results are not indicative of
expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 1.7% to $3.4 million compared to the prior year's first
quarter. The increase is principally attributable to an increase in tax
preparation fees in Australia resulting from both increases in the number of
returns prepared over last year and higher prices, along with increased
royalities from overseas franchises. These increases were partially offset by
decreased tax preparation fees in Canada due to a decline in the number of
returns prepared.
The pretax loss increased 16.5% to $6.0 million from $5.1 million last year. The
increase is due to continued expansion in the United Kingdom, with an increase
of 16 offices over the same period last year, and normal operational increases
in compensation, rent and other facility-related expenses in Canada. The
increased losses were partially reduced by improved results over the prior
quarter in Australia. Due to the nature of this segment's business, first
quarter operating results are not indicative of expected results for the entire
fiscal year.
MORTGAGE OPERATIONS
Revenues increased 271.0% to $52.7 million from $14.2 million in the same period
last year. The increase is attributable to Option One, which was acquired on
June 17, 1997. Option One contributed revenues of $44.3 million for the quarter
compared to $9.1 million for the one-and-a-half-month period last year. Option
One originated and sold $779.9 million and $705.5 million in loans,
respectively, during the first quarter of fiscal 1999. Companion Mortgage also
contributed improved revenues due to interest income earned on higher balances
of mortgage loans held for sale.
Mortgage operations contributed pretax earnings of $13.8 million this year
compared to a $491 thousand pretax loss during the first quarter of fiscal 1998.
Option One contributed earnings of $14.0 million, including goodwill
amortization of $3.1 million.
CREDIT CARD OPERATIONS
Revenues decreased 10.7% to $8.3 million from $9.3 million in the prior year due
to a decline in the average revolving credit card balance by 21.0% from the
first quarter of fiscal 1998.
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<PAGE> 13
The pretax loss declined 34.1% to $2.0 million from $3.0 million last year. The
decrease is attributable to lower marketing and advertising expenses and lower
service fees resulting from the decrease in the number of credit cards
outstanding.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
The Company acquired its first accounting firm in May 1998, which contributed
revenues of $1.3 million and a pretax loss of $114 thousand for the first
quarter of fiscal 1999, including goodwill amortization of $73 thousand. Due to
the nature of this segment's business, revenues are slightly seasonal, while
expenses are relatively fixed throughout the year. Results for the first quarter
are not indicative of the expected results for the entire year.
INVESTMENT INCOME, NET
Net investment income increased 167.6% to $13.9 million from $5.2 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first quarter
increased 105.5% to $2.4 million from $1.2 million in the comparable period last
year. The increase is a result of the start-up of a business which offers
financial planning services through the Company's tax offices, and increased
employee costs, technology and shareholder-related expenses.
Acquisition interest expense of $4.4 million represents the interest on the debt
associated with the acquisition of Option One.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at
April 30, 1998.
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<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits involve
claims based on allegations of omissions and misstatements of fact in
connection with CompuServe's initial public offering in April 1996. Relief
sought in the lawsuits is unspecified, but includes pleas for rescission and
damages. The Federal suits have been consolidated, the defendants have filed
a motion to dismiss the consolidated suits, and the court has stayed all
proceedings pending the outcome of the state court suits. The state lawsuits
have been consolidated for discovery purposes and defendants have filed a
motion for summary judgment covering all four state lawsuits. In the state
lawsuits, the court entered an order in July 1998 that the suits entitled
Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et
al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were damaged
thereby. All named defendants to these consolidated actions, members of their
immediate families, any entity in which they have a controlling interest, and
their legal representatives, heirs, successors or assigns are excluded from
the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the class
certification order as the plaintiff in such case did not seek class
certification of its action. The defendants continue to vigorously defend
these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10(a) Employment Agreement between HRB Management, Inc. and Mark A. Ernst
(27) Financial Data Schedule
b) Reports on Form 8-K
A Form 8-K, Current Report, dated July 20, 1998, was filed by the
registrant reporting as an "Item 4" the change in the Registrant's certifying
accountant. The registrant reported under "Item 7" the letter from the previous
auditors, Deloitte & Touche LLP, addressed to the Securities and Exchange
Commission. The registrant did not file any other reports on Form 8-K during the
first quarter of fiscal 1999.
-12-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
------------------------------------
(Registrant)
DATE 9/14/98 BY /s/ Ozzie Wenich
------- ------------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 9/14/98 BY /s/ Cheryl L. Givens
------- ------------------------------------
Cheryl L.Givens
Vice President and Corporate Controller
-13-
<PAGE> 1
Exhibit 10(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 16th day
of July, 1998, by and between HRB MANAGEMENT, INC., a Missouri corporation
("HRB") and MARK A. ERNST ("Executive").
ARTICLE ONE
EMPLOYMENT
1.01 - Agreement as to Employment. Effective September 1, 1998 (the
"Employment Date"), HRB hereby employs Executive as Executive Vice President and
Chief Operating Officer of H&R BLOCK, INC., a Missouri corporation ("Block") and
the indirect parent corporation of HRB, and Executive hereby accepts such
employment by HRB, subject to the terms of this Agreement. Subject to the terms
of Section 1.06 of this Agreement, either party may terminate this Agreement for
any reason, or no reason, by providing not less than 45 days' prior written
notice of such termination to the other party, and, if such notice is properly
given, this Agreement and Executive's employment hereunder shall terminate as of
the close of business on the 45th day after such notice is deemed to have been
given or such later date as is specified in such notice. Any termination of this
Agreement shall not be effective as to those portions of this Agreement which,
by their express terms as set forth below, require performance by either party
following termination of this Agreement.
1.02 - Duties. (a) Executive is employed by HRB to serve as the Executive
Vice President and Chief Operating Officer of Block subject to the authority and
direction of Block's Board of Directors (the "Board") and the President and
Chief Executive Officer of Block, and, subject to the foregoing, the Executive
shall have such authority and responsibility and duties as are normally
associated with the position of Chief Operating Officer.
(b) So long as he is employed under this Agreement, Executive agrees to
devote his full business time and efforts exclusively on behalf of HRB and Block
and to competently and diligently discharge his duties hereunder. Executive
shall not be prohibited from engaging in such personal, charitable, or other
nonemployment activities as do not interfere with his full-time employment
hereunder and which do not violate the other provisions of this Agreement.
Executive may, following approval by the Board, become a member of the board of
directors of a "for-profit" corporation or entity. Such approval will not be
unreasonably withheld by the Board but such approval may be withheld if the
Board reasonably determines that such activity conflicts with Executive's duties
hereunder, either in terms of Executive's time to be devoted thereto or in terms
of the relationship of such
<PAGE> 2
corporation's or entity's business to the present or future business then
conducted or proposed to be conducted by Block, whether or not such business is
directly competitive with the business of Block. Executive shall comply fully
with all reasonable policies of HRB and Block as are from time to time in effect
and applicable to his position.
1.03 - Compensation. (a) Base Salary. HRB shall pay to Executive during
the period between the Employment Date and August 31, 1999, a minimum gross
salary at an annual rate of $400,000 ("Base Salary"), payable semimonthly or at
any other pay periods as HRB may use for its other executive employees. The Base
Salary shall be reviewed for adjustment by the Board or appropriate committee
thereof no less often than annually during the term of Executive's employment
hereunder and, if adjusted by the Board, such adjusted amount shall become the
"Base Salary" for purposes of this Agreement.
(b) Short-Term Incentive Compensation. As approved by the Compensation
Committee of the Board, Executive shall participate in the H&R Block Short-Term
Incentive Plan for the fiscal year ended April 30, 1999. Under such Plan, the
Executive shall have a target bonus for fiscal year 1999 of $240,000 and an
opportunity to earn 200% of such target bonus. The payment of the actual award
under the Plan shall be based upon such performance criteria as shall be
determined by the Compensation Committee at its meeting in June 1998. For
purposes of Executive's participation in such Plan for the fiscal year ending
April 30, 1999, Executive's actual incentive compensation shall be prorated
based upon the number of months during such year that he is actually employed by
HRB.
(c) Stock Options. As approved by the Compensation Committee of the
Board, Executive is granted on the Employment Date a stock option under Block's
1993 Long-Term Executive Compensation Plan to purchase 150,000 shares of Block's
common stock at a price per share equal to the closing price thereof on the New
York Stock Exchange on the date of grant. Such option shall expire on the tenth
anniversary of the date of grant and shall vest and become exercisable as to
one-third of the shares covered thereby on each of the first three anniversaries
of the date of grant. The stock option shall be an incentive stock option for
the maximum number of shares permitted by Internal Revenue Code Section 422 and
the regulations promulgated thereunder, and shall otherwise be a nonqualified
stock option.
(d) Restricted Stock. As approved by the Compensation Committee of the
Board, Executive shall be awarded promptly after the date of the commencement of
his employment, 36,000 Restricted Shares of Block's common stock under Block's
1993 Long-Term Executive Compensation Plan. One-third of the 36,000 shares shall
2
<PAGE> 3
vest, respectively, on each of the first three anniversaries following such
employment commencement date. Prior to the time such shares of Restricted Stock
are so vested, Executive shall be entitled to receive any cash dividends payable
with respect to unvested shares and vote such unvested shares at any meeting of
shareholders of Block.
(e) Relocation Benefits.
(i) HRB shall reimburse the Executive for all reasonable
packing, shipping and transportation costs incurred by Executive in
relocating himself, his family and personal property from Minneapolis,
Minnesota, to the Greater Kansas City Area, regardless of when such costs
are incurred. In addition, HRB shall reimburse Executive for the costs of
interim (up to 120 days after the date of this Agreement) housing in Kansas
City, prior to the time Executive's family relocates to Kansas City and for
the costs of air fare, parking, etc., for weekend trips to Minneapolis
during such period.
(ii) HRB shall reimburse Executive for the reasonable and
customary charges for real estate commissions and legal fees and expenses,
if any, in connection with the sale of Executive's residence in
Minneapolis, Minnesota, and the purchase of a residence in the Greater
Kansas City Area.
(iii) Executive shall exercise his reasonable best efforts
to cause the sale at the highest price of his Minnesota residence. In the
event that, despite such efforts, Executive is unable to sell such
residence within five months after the date of this Agreement, upon request
by Executive, HRB shall either: purchase such residence, free and clear of
all liens and encumbrances, at a price equal to the mean average of three
appraisals by three qualified, independent appraisers (one selected and
paid for by HRB; one selected by Executive and paid for by HRB; and one
selected by such appraisers and paid for by HRB); or, at HRB's election,
cause such purchase to be made by an independent relocation service in
accordance with economically similar arrangements.
(iv) To the extent that Executive incurs taxable income
related to any relocation benefits paid pursuant to this Agreement, HRB
shall pay to Executive such additional amount as is necessary to "gross up"
such benefits and cover the anticipated income tax liability resulting from
such taxable income.
3
<PAGE> 4
1.04 - Business Expenses. HRB shall promptly pay directly, or reimburse
Executive for, all business expenses, to the extent such expenses are paid or
incurred by Executive during the term hereof in accordance with Block policy
approved by the Board and in effect from time to time and to the extent such
expenses are reasonable and necessary to the conduct by Executive of Block's
business.
1.05 - Fringe Benefits. During the term of Executive's employment
hereunder, HRB shall make available to Executive such insurance, sick leave,
deferred compensation, stock options (also referred to in subsection 1.03(c)
above), retirement, vacation and other like benefits as are approved by the
Board or the Compensation Committee thereof and provided from time to time to
the other executive-level employees of HRB, Block or Block's other subsidiaries.
1.06 - Termination of Employment. (a) If HRB terminates Executive's
employment pursuant to Section 1.01 of this Agreement without "cause" (as
defined in subsection 1.06(b), below), or if Executive terminates his employment
pursuant to Section 1.01 of this Agreement for "good reason" (as defined in
subsection 1.06(c), below), then, upon any such termination of Executive's
employment, (i) subject to subsection 3.04(d), HRB shall continue to pay to
Executive the Base Salary in effect upon such termination throughout the
two-year period following such termination as the same would have been made had
Executive remained employed by HRB hereunder; (ii) any portion of any option to
purchase shares of Block common stock granted pursuant to subsections 1.03(c) or
1.05 of this Agreement and held by Executive at the time of such termination of
employment that is not yet vested in accordance with its terms shall vest upon
the date of the termination of employment and shall be exercisable for a period
of three months after such date of termination of employment; (iii) all
restrictions on any Restricted Shares of Block common stock awarded pursuant to
subsection 1.03(d) of this Agreement and held by Executive at the time of such
termination of employment shall terminate and such common stock shall fully vest
upon the date of termination of Executive's employment; (iv) subject to
subsection 3.04(d), HRB shall, during the two-year period following such
termination, continue Executive's health, life and disability insurance
benefits, but only to the extent Executive does not obtain similar benefits paid
for by a third party after such termination; and (v) HRB shall pay to Executive,
at such times as the same would have been paid Executive had he remained
employed hereunder, a pro rata portion of any actual short-term incentive
compensation to which he would have been entitled had he remained employed
through the end of the fiscal year in which such termination occurs (such
portion to be the
4
<PAGE> 5
actual short-term incentive compensation earned for the fiscal year during
which such termination occurs as is proportionate to the portion of such fiscal
year in which he is actively employed hereunder.
(b) As used in this Agreement, the term "cause" shall refer only to any
one or more of the following grounds:
(i) Executive's commission of an act materially and
demonstrably detrimental to the good will of Block or any subsidiary of
Block, which act constitutes gross negligence or willful misconduct by the
Executive in the performance of his material duties to Block; or
(ii) commission by Executive of any act of dishonesty or
breach of trust resulting or intending to result in material personal gain
or enrichment of Executive at the expense of Block or any subsidiary of
Block; or
(iii) Executive's conviction of a misdemeanor (involving an
act of moral turpitude) or a felony; or
(iv) for any reason (or no reason) at any time after the last
day of Block's fiscal year during which Executive attains normal retirement
age under Block's benefit plans; or
(v) Executive's death or total and permanent disability. The
term "total and permanent disability" shall have the meaning ascribed
thereto under any long-term disability plan maintained by HRB or Block for
HRB executives.
(c) As used in this Agreement, the term "good reason" shall refer to
any one or more of the following grounds upon which Executive elects to
terminate his employment pursuant to Section 1.01 of this Agreement:
(i) substantial reduction by Block (over the objection of
Executive) in Executive's duties, authority or status; or
(ii) the failure, as of or before the date that is two years
after the Employment Date, by Block to elect Executive as President and
Chief Executive Officer of Block.
(d) The termination of Executive's employment under this Agreement for
any reason (or no reason) by HRB or by Executive during the 180-day period
following the date of the
5
<PAGE> 6
occurrence of a "Change of Control" of Block shall be considered a termination
of Executive's employment without cause for purposes of this Agreement. For the
purpose of this subsection, a "Change of Control" shall mean:
(i) the acquisition, other than from Block, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 35% or more of the then outstanding
voting securities of Block entitled to vote generally in the election of
directors, but excluding, for this purpose, any such acquisition by Block
or any of its subsidiaries, or any employee benefit plan (or related trust)
of Block or its subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners of the voting securities of Block immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the then outstanding voting
securities of Block entitled to vote generally in the election of
directors, as the case may be; or
(ii) individuals who, as of the date hereof, constitute the
Board (as of the date hereof, the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board, provided that any
individual or individuals becoming a director subsequent to the date
hereof, whose election, or nomination for election by Block's shareholders,
was approved by a vote of at least a majority of the Board (or nominating
committee of the Board) shall be considered as though such individual were
a member or members of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of Block (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act); or
(iii) approval by the shareholders of Block of a
reorganization, merger or consolidation of Block, in each case, with
respect to which all or
6
<PAGE> 7
substantially all of the individuals and entities who were the respective
beneficial owners of the voting securities of Block immediately prior to
such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 50% of the then outstanding voting securities
entitled to vote generally in the election of directors of the corporation
resulting from such reorganization, merger or consolidation, or a complete
liquidation or dissolution of Block or of the sale or other disposition of
all or substantially all of the assets of Block.
(e) Upon termination of Executive's employment under this Agreement,
HRB shall have no further obligations under this Agreement and no further
payments of Base Salary or other compensation or benefits shall be payable by
HRB to Executive, except (i) as set forth in this Section 1.06, (ii) as required
by the express terms of any written benefit plans or written arrangements
maintained by HRB and applicable to Executive at the time of such termination of
Executive's employment, or (iii) as may be required by law.
ARTICLE TWO
CONFIDENTIALITY
2.01 - Background and Relationship of Parties. The parties acknowledge
(for all purposes including, without limitation, Articles Two and Three of this
Agreement) that Block and its subsidiaries have been and will be engaged in a
continuous program of acquisition and development respecting their businesses,
present and future, and that, in connection with Executive's employment by HRB,
Executive will be expected to have access to all information of value to HRB and
Block and that Executive's employment creates a relationship of confidence and
trust between Executive and Block with respect to any information applicable to
the businesses of Block and its subsidiaries. Executive will possess or have
unfettered access to information that has been created, developed or acquired by
Block and its subsidiaries or otherwise become known to Block and its
subsidiaries and which has commercial value in the businesses in which Block and
its subsidiaries have been and will be engaged and has not been publicly
disclosed by Block. All information described above is hereinafter called
"Proprietary Information". By way of illustration, but not limitation,
Proprietary Information includes trade secrets, developments, systems, designs,
know-how, marketing plans, product information, business and financial
information and plans, strategies, forecasts, new products and services,
financial statements, budgets, projections,
7
<PAGE> 8
prices and acquisition plans. Proprietary Information shall not include any
portions of such information which are now or hereafter made public by third
parties in a lawful manner or made public by parties hereto without violation
of this Agreement.
2.02 - Proprietary Information is Property of Block. (a) All
Proprietary Information shall be the sole property of Block (or the applicable
subsidiary of Block) and its assigns, and Block (or the applicable subsidiary of
Block) shall be the sole owner of all patents, copyrights, trademarks, names and
other rights in connection therewith and without regard to whether Block (or any
subsidiary of Block) is at any particular time developing or marketing the same.
Executive assigns to Block any rights Executive may have or may acquire in such
Proprietary Information. At all times, Executive will keep in strictest
confidence and trust all Proprietary Information and Executive will not use or
disclose any Proprietary Information without the written consent of Block,
except as may be necessary in the ordinary course of performing duties as an
employee of HRB or an officer of Block or as may be required by law or the order
of any court or governmental authority.
(b) In the event of the termination of Executive's employment by HRB
for any reason (including no reason), Executive shall promptly deliver to HRB
all copies of all documents, notes, drawings, specifications, documentation,
data and other materials of any nature belonging to Block or any subsidiary of
Block and obtained during the course of Executive's employment with HRB. In
addition, upon such termination, Executive will not remove from the premises of
Block or any subsidiary of Block any of the foregoing or any reproduction of any
of the foregoing or any Proprietary Information that is embodied in a tangible
medium of expression.
ARTICLE THREE
NON-HIRING; NO CONFLICTS; NONCOMPETITION
3.01 - General. The parties hereto acknowledge that, during the course
of Executive's employment by HRB, the Executive shall have access to information
valuable to HRB and Block concerning the key employees of Block and its
subsidiaries ("Block Employees") and, in addition to Executive's access to such
information, Executive may, during (and in the course of) Executive's employment
by HRB, develop relationships with such Block Employees whereby information
valuable to Block and its subsidiaries concerning the Block Employees was
acquired by Executive. Such information includes, without limitation: the
identity, skills and performance levels of the Block Employees, as well as
compensation and benefits paid by Block to such Block Employees.
8
<PAGE> 9
3.02 - Non-Hiring. During the period of Executive's employment
hereunder and during the time Executive is receiving payments hereunder and for
a period of one year after the later of: termination by HRB or Executive for any
reason (or no reason) of such employment; or cessation of such payments, the
Executive will not knowingly recruit, solicit or hire any Block Employee or
otherwise induce any such Block Employee to leave the employment of Block (or
the applicable employer-subsidiary of Block) to become an employee of or
otherwise be associated with any other party or with Executive or any company or
business with which Executive is or may become associated.
3.03 - No Conflicts. Executive represents that the performance by
Executive of all the terms of this Agreement will not breach any agreement as to
which Executive is or was a party and which requires Executive to keep any
information in confidence or in trust. Executive has not brought with him to HRB
or Block nor will Executive use in the performance of employment
responsibilities at HRB any proprietary materials or documents of a former
employer that are not generally available to the public, unless Executive has
obtained express written authorization from such former employer for their
possession and use. Executive has not and will not breach any obligation of
confidentiality that Executive may have to former employers and Executive shall
fulfill all such obligations during his employment with HRB.
The parties acknowledge that they are parties to a Settlement Agreement
among Executive, HRB and American Express Company relating to Executive's
employment with HRB and Executive and HRB agree that they will use their best
efforts to comply with the terms of such Settlement Agreement and avoid any
action or omission that would cause the other party to breach such Settlement
Agreement.
3.04 - Non-Competition.
(a) During any period of Executive's employment with HRB, Executive
shall not engage in, or own or control any interest in (except as a passive
investor in publicly-held companies, holding less than one percent of its
outstanding securities), or act as an officer, director or employee of, or
consultant, advisor or lender to, any firm, corporation, institution or business
which engages in any line of business which is competitive with any line of
business of Block or any of its subsidiaries (or which Block or any subsidiary
is engaged in evaluating or developing).
(b) During the two-year period immediately following the termination of
Executive's employment hereunder by HRB or Executive (for any reason including
no reason), Executive will not (except as permitted by subsection (c) or (d),
below) own or
9
<PAGE> 10
control any interest in (except as a passive investor in publicly-held
companies, holding less than one percent of its outstanding equity securities)
or act as an officer, director or employee of, or consultant, advisor or lender
to, any firm, corporation, institution or business which engages in any line of
business which is competitive with any line of business of Block or any of its
subsidiaries at the time Executive's employment terminates.
(c) For purposes of subsection 3.04(b), above, and subsection 3.04(d),
below, as to Block, the term "line of business" shall not include any line of
business the revenues of which constituted less than 20% of the consolidated
revenues of Block for the fiscal year of Block completed on, or most recently
completed prior to, the effective date of the termination of Executive's
employment hereunder; and, as to any corporation, firm, institution or business
with which Executive proposes to become associated, as set forth in said
subsection 3.04(b) or said subsection 3.04(d), any line of business which is
immaterial in size within the industry it operates or to such corporation, firm,
institution or business.
(d) Notwithstanding the provisions of subsection 3.04(b), above, during
the two-year period immediately following termination of Executive's employment
hereunder by HRB without "cause" or by Executive for "good reason," Executive
may own or control an interest in (including as a passive investor in a
publicly-held company, holding one percent or more of its outstanding equity
securities), or act as an officer, director or employee of, or consultant,
advisor or lender to, any firm, corporation, institution or business which
engages in any line of business which is competitive with any line of business
of Block or any of its subsidiaries at the time Executive's employment
terminates, only if HRB gives to Executive its prior written consent to such
ownership, control or act. As of the effective date of any such ownership,
control or act, HRB shall have no further obligation to continue to pay Base
Salary pursuant to subsection 1.06(a)(i) of this Agreement and no further
obligation to continue Executive's health, life and disability insurance
benefits pursuant to subsection 1.06(a)(iv) of this Agreement.
3.05 - Reasonableness of Restrictions. Executive acknowledges that the
restrictions contained in this Agreement are reasonable, but should any
provisions of any Article of this Agreement be determined to be invalid, illegal
or otherwise unenforceable or unreasonable in scope by any court of competent
jurisdiction, the validity, legality and enforceability of the other provisions
of this Agreement shall not be affected thereby and the provision found invalid,
illegal or otherwise unenforceable or unreasonable shall be considered by HRB
and Executive to be amended as to scope of protection, time or geographic area
(or any one of them, as the case may be) in
10
<PAGE> 11
whatever manner is considered reasonable by that court and, as so amended,
shall be enforced.
ARTICLE FOUR
MISCELLANEOUS
4.01 - Third-Party Beneficiary. The parties hereto agree that Block is
a third-party beneficiary as to the obligations imposed upon Executive under
this Agreement and as to the rights and privileges to which HRB is entitled
pursuant to this Agreement, and that Block is entitled to all of the rights and
privileges associated with such third-party-beneficiary status.
4.02 - Entire Agreement. This Agreement constitutes the entire
agreement and understanding between HRB and Executive concerning the subject
matter hereof. No modification, amendment, termination or waiver of this
Agreement shall be binding unless in writing and signed by Executive and a duly
authorized officer of HRB. Failure of HRB, Block or Executive to insist upon
strict compliance with any of the terms, covenants or conditions hereof shall
not be deemed a waiver of such terms, covenants and conditions.
4.03 - Specific Performance by Executive. Executive acknowledges that
money damages alone will not adequately compensate HRB or Block for breach of
any of Executive's covenants and agreements herein and, therefore, in the event
of the breach or threatened breach of any such covenant or agreement by
Executive, in addition to all other remedies available to HRB and Block at law,
in equity or otherwise, HRB and Block shall each be entitled to injunctive
relief compelling specific performance of (or other compliance with) the terms
hereof.
4.04 - Successors and Assigns. This Agreement shall be binding upon
Executive and the heirs, executors, assigns and administrators of Executive or
his estate and property and shall inure to the benefit of HRB, Block and their
successors and assigns. Executive may not assign or transfer to others the right
to receive payments hereunder nor the obligation to perform duties hereunder.
4.05 - Withholding Taxes. From any payments due hereunder to Executive
from HRB, there shall be withheld amounts reasonably believed by HRB to be
sufficient to satisfy liabilities for federal, state and local taxes and other
charges and customary withholdings. Executive remains primarily liable to such
authorities for such taxes and charges to the extent not actually paid by HRB.
This Section 4.05 shall not affect HRB's obligation to "gross up" any relocation
benefits paid to Executive pursuant
11
<PAGE> 12
to subsection 1.03(e)(iv).
4.06 - Indemnification. To the fullest extent permitted by law and
Block's Bylaws, HRB hereby indemnifies during and after the period of
Executive's employment hereunder the Executive from and against all loss, costs,
damages and expenses including, without limitation, legal expenses of counsel
selected by HRB to represent the interests of Executive (which expenses HRB
will, to the extent so permitted, advance to executive as the same are incurred)
arising out of or in connection with the fact that Executive is or was a
director, officer, employee or agent of HRB or Block or serving in such capacity
for another corporation at the request of HRB or Block. Notwithstanding the
foregoing, the indemnification provided in this Section 4.06 shall not apply to
any loss, costs, damages and expenses arising out of or relating in any way to
any employment of Executive by any former employer or the termination of any
such employment.
4.07 - Notices. Notices hereunder shall be deemed delivered five days
following deposit thereof in the United States mails (postage prepaid) addressed
to Executive at: 2100 Stratford Road, Mission Hills, Kansas 66208 and to HRB at:
4400 Main Street, Kansas City, Missouri 64111; Attn: Frank L. Salizzoni; or to
such other address and/or person designated by either party in writing to the
other party.
4.08 - Counterparts. This Agreement may be signed in counterparts and
delivered by facsimile transmission confirmed promptly thereafter by actual
delivery of executed counterparts.
Executed as a sealed instrument under, and to be governed by, construed
and enforced in accordance with, the laws of the State of Missouri.
EXECUTIVE:
Dated: 16 July 1998 /s/ Mark A. Ernst
----------------------- -----------------------------
Mark A. Ernst
Accepted and Agreed:
HRB MANAGEMENT, INC.,
a Missouri corporation
By: /s/Frank L. Salizzoni
-------------------------------
Frank L. Salizzoni
President
Dated: 7/16/98
---------------------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FIANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JUL-31-1999
<CASH> 696,210
<SECURITIES> 139,657
<RECEIVABLES> 859,567
<ALLOWANCES> 45,870
<INVENTORY> 0
<CURRENT-ASSETS> 1,772,927
<PP&E> 72,901<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,527,346
<CURRENT-LIABILITIES> 1,102,570
<BONDS> 0
0
0
<COMMON> 1,089
<OTHER-SE> 1,135,634
<TOTAL-LIABILITY-AND-EQUITY> 2,527,346
<SALES> 0
<TOTAL-REVENUES> 78,887
<CGS> 0
<TOTAL-COSTS> 137,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (44,741)
<INCOME-TAX> (17,002)
<INCOME-CONTINUING> (27,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,739)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
</FN>
</TABLE>
