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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 Identi-
incorporation or organization) fication 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. [ ]
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, 1998, was $4,422,545,501.23
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1998: 106,515,380.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to security holders
for the fiscal year ended April 30, 1998, are incorporated herein by reference
in response to Part I, Item 1, and Part II, Items 5 through 7 and Item 8, and
certain specified portions of the registrant's definitive proxy statement filed
within 120 days after April 30, 1998, are incorporated herein by reference in
response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a corporation that was organized in 1955 under the
laws of the State of Missouri (the "Company"). It is the parent corporation in a
two-tier holding company structure following a 1993 corporate restructuring. The
second-tier holding company is H&R Block Group, Inc., a Delaware corporation and
the direct or indirect owner of the operating subsidiaries that provide tax and
financial services to the general public principally in the United States, but
also in Canada, Australia, the United Kingdom and other foreign countries.
Approximately 86% of the consolidated revenues of the Company are generated by
subsidiaries involved in tax return preparation, electronic filing of income tax
returns and other tax-related services. The Company's subsidiaries also purchase
participation interests in refund anticipation loans made by a third-party
lender, originate, purchase, service, sell and securitize mortgages, and offer
personal productivity software and credit card loans.
Developments during fiscal year 1998 within U.S. Tax Operations,
International Tax Operations, Mortgage Operations and Credit Card Operations are
described in the section below entitled "Description of Business."
On January 31, 1998, H&R Block Group, Inc. ("Group") completed the sale
of its 80.1% interest in CompuServe Corporation ("CompuServe") to a subsidiary
of WorldCom, Inc. ("WorldCom"). The sale was structured as a stock-for-stock
transaction in which Group received 30,108,610 shares of WorldCom common stock
in exchange for its 74,200,000 shares of CompuServe common stock. Group
monetized 100% of its WorldCom stock through a block trade on February 2, 1998,
and generated $1,032,699,000 in net proceeds from such monetization. Group's
ownership of CompuServe stock had been reduced from 100% to approximately 80.1%
as a result of CompuServe's initial public offering of its common stock in April
1996. Pursuant to the April 1996 offering, CompuServe sold 18,400,000 shares of
its common stock to the public at $30.00 per share. The Company did not
recognize a gain on the initial public offering. 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.
On June 17, 1997, Block Financial Corporation ("BFC"), a direct
subsidiary of Group, purchased all of the stock of Option One Mortgage
Corporation ("Option One") from Fleet Financial Group, Inc. ("Fleet"). Option
One, with a network of more than 5,000 mortgage brokers in 46 states, engages in
the origination, purchase, servicing, securitization and sale of nonconforming
mortgage loans. The cash purchase price was $218.1 million in cash, consisting
of $28.1 million in adjusted stockholder's equity and a premium of $190 million.
In addition, BFC made a cash payment of $456.2 million to Fleet to eliminate
intercompany loans made to Option One to finance Option One's mortgage
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loan business. The $456.2 million payment was recorded as an intercompany loan
from BFC to Option One and was repaid by Option One by the end of June 1997
after Option One sold mortgage loans to a third-party in the ordinary course of
business. The acquisition was accounted for as a purchase and was ultimately
financed with the issuance of $250 million in Senior Notes during the second
quarter of fiscal year 1998.
During the fiscal year ended April 30, 1998, the Company was not
involved in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire or
dispose of any material amount of assets during such year otherwise than in the
ordinary course of business or in connection with the CompuServe and Option One
transactions.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 1998, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned
subsidiaries, has approximately 2,600 regular full-time employees. The highest
number of persons employed by the Company during the fiscal year ended April 30,
1998, including seasonal employees, was approximately 83,500.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This reportable operating segment provides to the general
public in the United States income tax return preparation services, electronic
filing services and other services related to income tax return preparation,
purchases participation interests in refund anticipation loans made to tax
clients by a third-party lending institution, and sells to the general public
tax return preparation software and other personal productivity computer
software.
Tax Operations. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices operated
by H&R Block Tax Services, Inc. and its subsidiaries (collectively, "Tax
Services") or by others to whom Tax Services has granted franchises. Tax
Services and its franchisees (collectively referred to herein as "H&R Block")
provide to the general public income tax return preparation services, electronic
filing services and other services relating to income tax return preparation.
For U.S. returns, H&R Block offers a refund anticipation loan service and an
electronic refund service in conjunction with its electronic filing service. H&R
Block also markets its knowledge of how to prepare income tax returns through
its income tax training schools.
Taxpayers Served. H&R Block served approximately 15,835,000 taxpayers
in the United States during fiscal year 1998, an increase from the 15,625,000
taxpayers served in fiscal year 1997. "Taxpayers served" includes taxpayers for
whom H&R Block prepared income tax returns as well as taxpayers for whom Block
provided only electronic filing services.
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Tax Return Preparation. During the 1998 income tax filing season
(January 2 through April 30), H&R Block offices in the United States prepared
approximately 14,838,000 individual income tax returns, compared to the
preparation of 14,302,000 such returns in fiscal year 1997 and 13,360,000 such
returns in fiscal year 1996. These returns constituted about 13.1% of an IRS
estimate of total individual income tax returns filed during fiscal year 1998.
The following table shows the approximate number of income tax returns prepared
at H&R Block offices during the last five tax filing seasons:
<TABLE>
<CAPTION>
Tax Season Ended April 30
(in thousands)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Returns Prepared 13,036 12,918 13,360 14,302 14,838
</TABLE>
During the tax season, most H&R Block offices are open from 9:00 a.m.
to 9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have been
developed so that a tax return is prepared on a computer in the presence of the
customer, in most instances in less than one hour, on the basis of information
furnished by the customer. Pursuant to the one-stop service offered at
Company-owned offices beginning in 1997, the return is reviewed for accuracy and
presented to the customer for signature and filing during his or her initial
visit to the office.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States. Appealing to taxpayers with more complicated returns, H&R Block Premium
stresses the convenience of appointments, year-round tax service from the same
preparer and private office interviews. The number of H&R Block Premium offices
increased from 581 in fiscal year 1997 to 598 in 1998. In fiscal 1998, the
number of H&R Block Premium clients decreased to approximately 647,000, compared
to approximately 666,000 in 1997. The Company plans to expand the H&R Block
Premium segment of its tax return preparation business.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 1998 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Beneficial National Bank in
amounts based upon the customers' anticipated Federal income tax refunds. Income
tax return information is simultaneously transmitted by H&R Block to the IRS and
the lending bank. Within a few days after the date of filing, a check in the
amount of the loan, less the bank's transaction fee and H&R Block's tax return
preparation fee (and, where applicable, electronic filing fee), is received by
the RAL customer. The IRS then directly deposits the participating customer's
actual Federal income tax refund into a designated account at the bank in order
for the loan to be repaid.
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H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service customer's income tax refund is directly
deposited into a bank account at a bank (Tax Services used Mellon Bank, N.A. in
1998) within approximately three weeks after the tax return is electronically
filed, and a check is thereafter issued to the taxpayer in the amount of the
refund, less the bank's transaction fee and H&R Block's tax return preparation
fee (and, where applicable, electronic filing fee).
H&R Block filed approximately 9,423,000 U.S. tax returns electronically
in fiscal 1998, compared to 7,279,000 in fiscal 1997 and 6,298,000 in fiscal
1996. Approximately 2,420,000 refund anticipation loans were processed in fiscal
1998 by H&R Block, compared to 2,573,000 in fiscal 1997 and 2,361,000 in fiscal
1996. Approximately 1,855,000 electronic refunds were processed in fiscal 1998
by H&R Block, compared to 1,871,300 in fiscal 1997 and 1,283,000 in fiscal 1996.
Tax Services eliminated the electronic filing charge associated with non-bank
services in approximately 70% of its offices in fiscal year 1998, thus
encouraging more customers to file their returns electronically.
In 1998, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 35 states and the District of
Columbia (compared to 34 states and the District of Columbia in fiscal 1997) and
plans to continue to expand this program as more states make this filing
alternative available to their taxpayers.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide H&R Block with a source of trained income tax return
preparers. During the 1998 fiscal year, 130,884 students enrolled in H&R Block's
basic and advanced income tax courses in the United States, compared to 111,428
students during fiscal year 1997 and 108,677 students during fiscal year 1996.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block
preparer makes an error in the preparation of a customer's tax return that
results in the assessment of any interest or penalties on additional taxes due,
while H&R Block does not assume the liability for the additional taxes (except
under its "Peace of Mind" Program described below), it guarantees payment of the
interest and penalties.
In addition to H&R Block's standard guarantee to pay penalty and
interest attributable to errors made by an H&R Block preparer, under the "Peace
of Mind" Program, H&R Block agrees to pay additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from such errors or
from revised interpretations of tax laws by the IRS. The Peace of Mind Program
has a per customer cumulative limit of $4,000 ($5,000 at H&R Block Premium
offices) in additional taxes paid with respect to the Federal, state and local
tax returns prepared by H&R Block for the taxable year covered by the Program.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
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In fiscal year 1998, H&R Block also operated 711 offices in department
stores in the United States, including 707 offices in Sears, Roebuck & Co.
stores operated as "Sears Income Tax Service by H&R Block." During the 1998 tax
season, the Sears' facilities constituted approximately eight percent of the tax
office locations of H&R Block. Tax Services is a party to a license agreement
with Sears under which Tax Services will continue to operate in Sears locations
throughout the United States. Such license agreement expires on December 31,
2004. Tax Services believes its relations with Sears to be excellent and that
both parties to the license arrangement view the operations thereunder to date
as satisfactory.
On April 15, 1998, there were 8,780 H&R Block offices in operation in
the United States compared to 8,554 offices in operation on April 15, 1997, and
8,308 offices in operation on April 15, 1996. Of the 8,780 offices, 4,640 were
owned and operated by Tax Services (compared to 4,483 in fiscal year 1997 and
4,031 in fiscal year 1996) and 4,140 were owned and operated by independent
franchisees (compared to 4,071 in fiscal 1997 and 4,277 in fiscal 1996). Of such
franchised offices in fiscal 1998, 2,630 were owned and operated by "satellite"
franchisees of Tax Services (described below), 901 were owned and operated by
"major" franchisees (described below) and 609 were owned and operated by
satellite franchisees of major franchisees.
Two types of franchises have principally been granted by the Company
and its subsidiaries. "Major" franchisees entered into agreements with the
Company (primarily in the Company's early years) covering larger cities and
counties and providing for the payment of franchise royalties based upon a
percentage of gross revenues of their offices. Under the agreements, the Company
granted to each franchisee the right to the use of the name "H&R Block" and
provided a Policy and Procedure Manual and other supervisory services. Tax
Services offers to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major franchisee selects and
trains the employees for his or her office or offices. Since March 1993, HRB
Royalty, Inc., a wholly owned subsidiary of Tax Services, has served as the
franchisor under the major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local advertising, initial training,
and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the satellite
franchises of Tax Services are located in cities with populations of 15,000 or
less. Some major franchisees also grant satellite franchises in their respective
areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue to
do so if future conditions warrant such acquisitions and satisfactory terms can
be negotiated. In fiscal year 1998, Tax Services acquired 117 tax offices in the
United States, including 69 H&R Block franchise offices and 48 offices of other
tax businesses. In a transaction that became effective immediately after the end
of fiscal year 1998, Tax Services acquired a major franchise operation serving a
majority of Alabama and Mississippi and the panhandle of Florida through 111
offices operated by the major franchisee and 68 satellite offices.
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Participation Interests in RALs. Block Financial Corporation is party
to a July 1996 agreement with Beneficial National Bank ("Beneficial") to
purchase a participation interest in refund anticipation loans provided by
Beneficial to H&R Block tax customers. See "Electronic Filing" under "Tax
Operations," above. In the 10-year agreement, BFC agreed to purchase an initial
40% participation interest in such RALs, which interest would be increased to
nearly 50% in specified circumstances. BFC's purchases of the participation
interests are financed through short-term borrowing. BFC bears all of the risks
associated with its interests in the RALs. BFC's total RAL revenue in fiscal
year 1998 was approximately $53.3 million (compared to revenue of $54.5 million
in fiscal 1997), generating approximately $6.4 million in pretax profits
(compared to $8.1 in pretax profits in fiscal year 1997). The decreases in
revenues and pretax profits resulted from decreases in the number of RALs
processed through Beneficial and an increase in the bad debt rate.
Software Products. BFC develops and markets the Kiplinger TaxCut(R) tax
preparation software package, as well as markets the Kiplinger Home Legal
AdvisorSM and Kiplinger Small Business AttorneySM software products. As a result
of the increase in sales of TaxCut's final edition in fiscal year 1998, BFC
believes that its share of retail sales in the income tax return preparation
software market is greater than 30%.
Seasonality of Business. Since most of the customers of Tax Services
file their tax returns during the period from January through April of each
year, substantially all of Tax Services' revenues from income tax return
preparation, related services and franchise royalties are received during this
period. As a result, Tax Services operates at a loss through the first eight or
nine months of its fiscal year. Historically, such losses primarily reflect
payroll of year-round personnel, training of income tax preparers, rental and
furnishing of tax offices, and other costs and expenses relating to preparation
for the following tax season.
BFC's income tax return preparation software and RAL participation
businesses are also seasonal, with the substantial portion of the revenues from
these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware corporation
and a wholly owned subsidiary of H&R Block Tax Services, Inc., claims ownership
of the following service marks and trademark registered on the principal
register of the United States Patent and Trademark Office:
H&R Block in Two Distinct Designs
The Income Tax People
Income Tax Saver
Executive (when used in connection with the
preparation of income tax returns for others)
Rapid Refund H&R Block and Design
Accufile
H&R Block Premium
Someone You Can Count On
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
Nation's Largest Tax Service
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Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax Services.
BFC claims ownership of the following trademarks registered on the
principal register of the United States Patent and Trademark Office:
B and Design
Block Financial
Block Financial and Design
Names & Dates
TaxCut
BFC also claims ownership of the following unregistered service marks
and trademarks used in connection with the software business:
Home Legal Advisor
NETWEALTH
Small Business Attorney
Competitive Conditions. The tax return preparation and electronic
filing businesses are highly competitive. There are a substantial number of tax
return preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms, and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that in terms of the number of
offices and tax returns electronically filed in fiscal year 1998, it is the
largest provider of electronic filing services in the United States.
The software business is highly competitive and consists of a large
number of companies. In the software industry, Intuit, Inc. is a dominant
supplier of personal financial software.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among other
things, set forth their signatures and identification numbers on all tax returns
prepared by them, and retain for three years all tax returns prepared. Federal
laws also subject income tax return preparers to accuracy-related penalties in
connection with the preparation of income tax returns. Preparers may be enjoined
from further acting as income tax return preparers if the preparers continuously
and repeatedly engage in specified misconduct. With certain exceptions, the
Internal Revenue Code also prohibits the use or disclosure by income tax return
preparers of certain income tax return information without the prior written
consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on the business of H&R Block. However,
the Company cannot predict what the effect may be of the enactment of new
statutes or adoption of new regulations.
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The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon application, be
accepted into the electronic filing program. Once accepted, electronic filers
must comply with all publications and notices of the IRS applicable to
electronic filing, provide certain information to the taxpayer, comply with
advertising standards for electronic filers, and be subjected to possible
monitoring by the IRS, penalties for disclosure or use of income tax return
preparation and other preparer penalties, and suspension from the electronic
filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is in fact a loan, and not a
substitute for or a quicker way of receiving an income tax refund. The Federal
laws place restrictions on the fees that an electronic filer may charge in
connection with refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect the operations
of H&R Block. However, the Company cannot predict what the effect may be of the
enactment of new statutes or the adoption of new regulations pertaining to
electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit
procedures. The IRS may from time to time change its direct deposit procedures
or may determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss to
BFC in connection with its purchases of interests in RALs. However, the Company
believes that Federal statutes and regulations regulating electronic filing and
RALs have not had and will not have a material adverse effect on the operations
of BFC. However, the Company cannot predict what the effect may be of the
enactment of new Federal or state statutes or the adoption of new regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict what
the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals
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have fallen short of adoption, such issues have received more serious attention
during the past few years than ever before. Historically, changes in tax laws
have increased H&R Block's business. The immediate result of tax law changes has
been an increase in complexity. The transition from the current system to a new,
untested system is likely to take a number of years and, under most serious tax
reform proposals, Americans will still need to file Federal and state tax
returns. The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the business of the
Company's subsidiaries over time is uncertain, and such legislation could have a
material adverse effect on the Company's business, financial position and
results of operations.
INTERNATIONAL TAX OPERATIONS
Generally. This reportable operating segment provides the preparation
of Canadian tax returns in Canada, Australian tax returns in Australia, and U.S.
income tax returns in other countries. With the commencement of tax season in
the United Kingdom in April 1997, a subsidiary of the Company also began
offering tax return preparation services in the United Kingdom. Tax preparation
services are offered by franchisees in eight countries. The electronic filing of
U.S. income tax returns is offered at franchised offices located in Europe, and
the electronic filing of Australian and Canadian income tax returns is offered
at H&R Block offices in Australia and Canada, respectively.
The returns prepared at 1,348 H&R Block offices in countries outside of
the United States constituted 13.8% of the total returns prepared by H&R Block
in the last fiscal year (compared to 15.2% in fiscal year 1997).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,945,000 Canadian regular and discounted
returns filed with Revenue Canada during the 1998 income tax filing season,
compared with 2,156,000 Canadian returns prepared during fiscal year 1997 and
2,223,000 Canadian returns prepared in fiscal 1996. The number of offices
operated by H&R Block in Canada decreased from 1,021 in fiscal year 1997 to 928
in fiscal year 1998. Of the 928 offices in Canada, 467 were owned and operated
by Block Canada and 461 were owned and operated by franchisees. H&R Block
operated 89 offices in department stores in Canada in fiscal year 1998,
including 83 offices in Sears' facilities.
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must follow
in conducting the program are specified by Canadian law. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by H&R Block to the
customer for an amount which is equal to the sum of (1) 85% of that portion of
the anticipated refund which is less than or equal to $300 and (2) 95% of that
portion of the refund in excess of $300. The customer assigns to H&R Block the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to H&R Block and deposited by H&R Block
in its bank account. In accordance with the law, the discount is deemed to
include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowing. The number of
returns discounted under the CashBack program decreased to approximately 532,000
in fiscal year 1998 from 583,000 in fiscal year 1997 and 681,000 in fiscal year
1996.
Block Canada acquired Cashplan Systems Inc., a company providing
check-cashing and other low-end financial services in January 1997. Operating
under the name "CashPlan," this service complements the CashBack service.
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In 1998, Block Canada continued to test the separation of CashBack
offices from regular tax return preparation offices in some parts of Canada.
Operating under the "Financial Stop" name (without H&R Block signage), 147
offices offered the CashBack refund discounting services, as well as the
preparation of simple tax returns and check cashing services.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 406,000 in fiscal year 1998 from 403,000
in fiscal 1997 and 389,000 in fiscal year 1996. The number of offices operated
by H&R Block in Australia in fiscal year 1998 was 334, compared to 302 offices
operated in fiscal year 1997 and 297 offices operated in fiscal 1996. Of the 334
offices, 199 were owned and operated by H&R Block Limited and 135 were
franchised offices. The tax season in Australia begins in July and ends in
October.
United Kingdom Operations. In April 1997, an indirect subsidiary of the
Company purchased The Tax Team Limited, a Horsham-based firm with 12 offices
throughout the United Kingdom. The Tax Team retained its name and opened 16
additional offices in major markets across the United Kingdom during fiscal year
1998.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company.
MORTGAGE OPERATIONS
Generally. The mortgage operations reportable segment is primarily
engaged in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans in the United States. Nonconforming mortgages are
those that may not be offered through government-sponsored loan agencies.
Mortgage origination services were offered in fiscal year 1998 through a network
of mortgage brokers in 46 states and through H&R Block tax offices in 15 states.
Option One Mortgage Corporation. The Company's commitment to the
nonconforming mortgage business was exemplified during fiscal year 1998 by the
June 1997 purchase from Fleet Financial Group, Inc. of Option One Mortgage
Corporation, a firm engaged in all of the aspects of the nonconforming mortgage
loan business noted above. See the discussion of such acquisition under "General
Development of Business," above. Option One, based in Santa Ana, California, has
a network of more than 5,000 mortgage brokers in 46 states and originated
approximately $1.9 billion in mortgage loans in fiscal year 1998 after its
acquisition. Between the date of its acquisition and April 30, 1998, Option One
sold approximately $1.8 billion of mortgage loans through whole-loan sales. At
the end of fiscal year 1998, Option One's servicing portfolio was 42,800 loans
totaling more than $4.3 billion.
Option One was organized in October 1992 as a wholly owned subsidiary
of Plaza Home Mortgage Corporation ("Plaza") and began operations in February
1993. It became a wholly owned subsidiary of Fleet National Bank ("FNB"), which
was a subsidiary of Fleet Financial Group, Inc., when Plaza was purchased by FNB
in March 1995.
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Option One predominantly originates first mortgage loans to borrowers
with sub-prime credit characteristics who have built up substantial equity in
their homes. These borrowers use the loans primarily for debt consolidation
purposes. The average Option One loan during fiscal year 1998 had a $99,800
principal balance and was secured by a first lien on a single family residence.
In the nonconforming loan business, a borrower will complete a loan
application with a loan broker and the broker will distribute the application to
one or more nonconforming lenders such as Option One. These lenders are
generally selected by the broker based upon level of fees received, response
time and approval experience with similar borrowers. Upon receipt of a deal
satisfactory to the broker, the borrower is required to pay a non-refundable fee
for an appraisal and for processing the application. This fee goes to the
lender. At closing, the borrower will receive the loan proceeds net of other
fees such as broker origination fees and document preparation fees. The broker
will close the loan using the broker's funds or funds loaned to the broker by
the nonconforming lender under a "warehouse line." When the statutory rescission
period expires, the broker sells the loan to the lender at a prearranged
premium.
Option One historically has packaged and sold substantially all of its
loans on a whole-loan basis into the secondary market with servicing retained by
Option One.
During fiscal year 1998, Option One opened retail branches in
Pleasanton, California, and Tampa, Florida. Such branches offered mortgages to
customers by means of direct mail solicitations and telemarketing.
Option One provides the Company with experienced associates in the
nonconforming mortgage lending business. Option One will assist H&R Block
Mortgage Company, L.L.C. in handling mortgage applications, loan processing and
underwriting of mortgages generated through H&R Block Mortgage Company's retail
operations, discussed below.
H&R Block Mortgage Company. H&R Block Mortgage Company, L.L.C. ("Block
Mortgage"), formerly Block Mortgage Company, L.L.C., is a limited liability
company in which H&R Block Tax Services, Inc. owns a 99% membership interest and
BFC owns a 1% membership interest. After testing the sale of sub-prime second
mortgage products in 31 H&R Block tax offices in four states during fiscal year
1997, Block Mortgage expanded the test during fiscal year 1998 by offering more
mortgage products, including VA, FHA and conventional mortgages, and by offering
mortgage products at H&R Block offices in 32 cities and 15 states. H&R Block
Premium offices were used for this expanded test. Block Mortgage funded 536
mortgage loans totaling $25.5 million during fiscal year 1998.
Following the end of fiscal year 1998, plans were made to combine the
retail operations of Option One and Block Mortgage to create greater teamwork,
efficiency, productivity and profitability.
Companion Mortgage Corporation. The sole business activity of Companion
Mortgage Corporation ("Companion"), a wholly owned subsidiary of BFC, consists
of purchasing, investing in, securitizing and selling nonconforming fixed and
adjustable-rate mortgage loans, primarily purchase money loans, refinancings and
home equity borrowings. The purchased loans are originated through retail,
wholesale and correspondent lending programs conducted through National Consumer
Services Corp., L.L.C. (a firm in which Block Mortgage purchased in fiscal year
1998 a 40% interest pursuant to a warrant), Block Mortgage or other mortgage
loan originators.
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In the securitization process, a subsidiary of Companion, Block
Mortgage Finance, Inc., acquires loans from Companion and assigns them to a
trust. The trust issues certificates that are secured by the home equity loans,
receives principal and interest payments on the loans and makes payments on the
asset-backed certificates. Block Mortgage Finance, Inc. applies the net proceeds
from the sale of the certificates primarily to the purchase of mortgage loans
from Companion, and Companion then uses the funds primarily to repay
indebtedness incurred to obtain funds for its acquisition of the loans. The
securities are issued under a $1 billion public registration that became
effective in January 1997.
Companion and Block Mortgage Finance completed their second and third
securitizations of nonconforming mortgage loans during fiscal year 1998. A $215
million asset-backed security issue closed on July 29, 1997 and a $184 million
issue closed on January 27, 1998.
Service Marks and Trademarks. Block Mortgage claims ownership of the
service mark "BLOCK MORTGAGE" registered on the principal register of the United
States Patent and Trademark Office.
Option One claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
AppOne
CorOne
Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
The Big 2
Option One claims ownership of the following unregistered service marks
and trademarks:
PartnerPlus
SumOne
Competitive Conditions. The residential mortgage loan market is the
largest consumer finance market in the United States. The sub-prime loan sector
of the mortgage industry has grown at a faster rate than the overall market and
is highly competitive. Despite the rapid growth and size of this market, it is a
relatively fragmented industry. No firm is a dominant supplier of nonconforming
mortgage loans.
In the sub-prime lending business, service is the most important
consideration to most customers. Price is a secondary consideration. The typical
sub-prime customer, whether the broker through a correspondent program or the
mortgagor through a retail branch, is motivated to select a particular lender
out of a belief that the lender can close the loan.
The market for sub-prime lending exists in part due to the inability
and unwillingness of some banks and thrifts to hold these loans. Without these
institutions, a significant opportunity existed for specialty companies.
However, many banks and thrifts have realized the value sub-prime lending can
hold and are now entering the market.
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Government Regulation.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure and, unless an exemption is available,
require licensing of the originators of certain mortgage loans. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, and
practices that may apply to the origination, servicing and collection of
mortgage loans. The mortgage loans purchased or originated by of the Company are
also subject to Federal laws, including, without limitation, the Federal Truth
in Lending Act and Regulation Z promulgated thereunder, the Equal Credit
Opportunity Act and Regulation B promulgated thereunder, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act, the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended, and certain other laws and
regulations. Certain mortgage loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, which incorporates the Home
Ownership and Equity Protection Act of 1994. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high up-front fees and charges,
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions, and may affect the enforceability of the related mortgage
loans. Under environmental legislation and case law applicable in certain
states, it is possible that liability for environmental hazards in respect of
real property may be imposed on a holder of a mortgage note secured by real
property.
The Company believes that Federal and state statutes and regulations
governing mortgage lending have not had and will not have a material adverse
effect on the operations of its mortgage subsidiaries. However, the Company
cannot predict what the effect may be of the enactment of new statutes or the
adoption of new regulations.
CREDIT CARD OPERATIONS
Generally. BFC's credit cards (which, at April 30, 1998, consisted of
the CompuServe Visa and WebCard(R) Visa cards) are currently issued under a
co-branding agreement between BFC and Columbus Bank and Trust Company, Columbus,
Georgia. Approximately 135,000 BFC credit cards were issued at the end of fiscal
year 1998, compared to 167,000 accounts at the end of fiscal year 1997 and
119,000 accounts at the end of fiscal 1996. The aggregate portfolio for the
credit cards issued by BFC was approximately $201.4 million at the end of fiscal
year 1998 compared to $246 million at the end of fiscal year 1997 and $165
million at the end of fiscal year 1996.
BFC commenced the conversion of the CompuServe Visa credit cards to
WebCard Visa cards following the end of fiscal year 1998 and plans to sell the
portfolio solely under the WebCard name.
Service Marks, Trademarks and Patent. BFC claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
CONDUCTOR Web
CONDUCTOR and Baton Design WebBank
CONDUCTOR and Hand-Held Baton Design WebCard
CONDUCTOR CARD REVIEW WebPay
FINANCIAL FINDER
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In addition, BFC claims ownership of the following unregistered service
marks and trademarks:
Audit Buster WebAccount
CONDUCTOR.COM WebBroker
DittoCard WebBuyer
Download Depot WebCheck
Fast Lane WebChecking
NetGuard WebQuote
BFC claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998 on the principal register of the United States Patent and
Trademark Office.
OTHER BUSINESS
Generally. The Company is developing other businesses compatible with
its current operations and strategy.
HRB Investments, Inc. During the 1998 fiscal year, HRB Investments,
Inc., a wholly owned subsidiary of BFC, test-marketed financial planning
services in four cities. Independent licensed securities brokers offered
retirement planning, financial planning and financial products, such as
annuities, mutual funds and insurance products, at select H&R Block Premium
offices. These financial services will be offered to clients throughout the
year.
HRB Business Services, Inc. HRB Business Services, Inc., a subsidiary
of H&R Block Group, Inc., plans to build a national accounting practice through
its acquisition of both regional and local accounting firms. Following the end
of the fiscal year 1998, HRB Business Services, Inc. acquired Donnelly, Meiners,
Jordan Kline, P.C., a regional accounting firm in Kansas City, Missouri,
offering accounting and auditing services, tax planning and reporting services,
profitability improvement and strategic planning, business valuation, litigation
support and fraud investigation, public finance verification services to its
business clients, and individual tax, estate planning and financial planning
services.
Franchise Partner, Inc. Franchise Partner, Inc., a subsidiary of BFC,
offers to franchisees of Tax Services lines of credit with reasonable interest
rates under a program designed to better enable the franchisees to refinance
existing business debt, expand or renovate offices or meet off-season cash flow
needs. A franchise equity loan is a revolving line of credit secured by the
franchise and the underlying business.
ITEM 2. PROPERTIES.
The executive offices of both the Company and Tax Services are located
at 4400 Main Street, Kansas City, Missouri, in a multi-level building owned by
Tax Services. The building was constructed in 1963 and expanded or redesigned in
1965, 1973, 1981, and 1996. Most other offices of Tax Services (except those in
department stores) are operated in premises held under short-term leases
providing fixed monthly rentals, usually with renewal options.
BFC's executive offices are located in leased offices at 4435 Main
Street, Kansas City, Missouri.
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Option One's executive offices are located in leased offices at 2020
East First Street, Santa Ana, California and 3 Ada, Irvine, California. Option
One also leases offices in Pleasanton, California, and Tampa, Florida, for its
retail operations and branch offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation, certain current and former officers and
directors of CompuServe and the Company 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 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
participating 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 negligent misrepresentation in addition to the 1993 Act claims. The
state court lawsuits have been consolidated for discovery purposes and
defendants have filed a motion for summary judgment covering all four state
lawsuits. 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. In the opinion of management, the ultimate
resolution of these suits will not have a material adverse impact on the
Company's consolidated financial position or future results of operations. The
lawsuits discussed herein were reported in the Company's Forms 10-Q for the
first, second and third quarters of fiscal year 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
Name and age Office(s)
------------ ---------
Henry W. Bloch (75) Chairman of the Board since
August 1992; Chairman of
the Board and Chief
Executive Officer from
August 1989 through July
1992; Member of the Board
of Directors since 1955.
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<PAGE> 17
Name and age Office(s)
------------ ---------
Frank L. Salizzoni (60) President and Chief
Executive Officer since
June 1996; Member of the
Board of Directors since
1988. See Note 1.
Ozzie Wenich (55) Senior Vice President and
Chief Financial Officer
since June 1997; Treasurer
from June 1997 until
December 1997; President,
H&R Block International,
from June 1996 until May
1998; Vice President,
Finance and Treasurer from
October 1994 through May
1996; Vice President,
Corporate Controller and
Treasurer from March 1994
until October 1994; Vice
President and Corporate
Controller from September
1985 until March 1994.
Thomas L. Zimmerman (48) President, H&R Block Tax
Services, Inc., since June
1996; Executive Vice
President, Field
Operations, H&R Block Tax
Services, Inc. from May
1994 through May 1996;
Senior Vice President,
Central Tax Services, H&R
Block Tax Services, Inc.,
from April 1993 through
April 1994.
Robert E. Dubrish (46) President and Chief
Executive Officer, Option
One Mortgage Corporation,
since March 1996; Executive
Vice President and Chief
Operating Officer, Option
One Mortgage Corporation,
from December 1992 until
March 1996. See Note 2.
James H. Ingraham (44) Vice President, Legal since
October 1996; Secretary
since June 1990; Assistant
Vice President, Corporate
Legal and Human Resources
from December 1995 until
October 1996; Assistant
Vice President, Legal from
May 1994 until December
1995; Assistant Vice
President, Corporate
Counsel and Secretary, H&R
Block Tax Services, Inc.,
from April 1993 until May
1994.
Patrick D. Petrie (39) Vice President and
Corporate Controller since
October 1996; Vice
President, Service
Operations and Treasurer,
H&R Block Tax Services,
Inc., from June 1996 until
October 1996; Assistant
Vice President, Treasurer
and Controller, H&R Block
Tax Services, Inc., from
July 1993 through May 1996;
Assistant Vice President
and Controller, H&R Block
Tax Services, Inc., from
April 1993 until July 1993.
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<PAGE> 18
Name and age Office(s)
------------ ---------
Kristine K. Rodgers (32) Vice President, Business
Development, since December
1997; Vice President,
Online Services, Block
Financial Corporation,
since September 1995; Vice
President, Marketing, Block
Financial Corporation, May
1995 until September 1995;
Assistant Vice President,
Block Financial
Corporation, from January
24, 1994 until May 1995.
See Note 3.
James D. Rose (47) Vice President and Chief
Information Officer since
June 1997. See Note 4.
Brian N. Schell (32) Vice President and
Treasurer since December
1997; Director of Investor
Relations since November
1996; Assistant Treasurer
from November 1996 until
December 1997; Director of
Corporate Development from
May 1995 until December
1997; Assistant Vice
President, Corporate
Development and Planning,
Block Financial
Corporation, from December
1994 until April 1995. See
Note 5.
Douglas D. Waltman (36) Vice President, Human
Resources, since April
1998; Assistant Vice
President, Director of
Education, H&R Block Tax
Services, Inc., from
September 1996 until April
1998. See Note 6.
Robert A. Weinberger (54) Vice President, Government
Relations, since March
1996. See Note 7.
Bret G. Wilson (39) Vice President, Corporate
Development, since December
1997; Vice President,
Mortgage Operations, Block
Financial Corporation,
since March 1997; Vice
President, Corporate
Counsel and Secretary,
Block Financial
Corporation, from June 1994
until March 1997. See Note
8.
Note 1: Mr. Salizzoni was President and Chief Operating Officer of
USAir Group, Inc. and USAir, Inc. from March 1994 until April
1996 and Executive Vice President - Finance, USAir, Inc. from
1990 until March 1994. He served as Chairman of the Board of
CompuServe Corporation from October 1996 until January 1998.
Note 2: Block Financial Corporation acquired Option One Mortgage
Corporation on June 17, 1997, at which time Mr. Dubrish
became an employee of a subsidiary of the Company.
Note 3: Ms. Rodgers served as Marketing Manager, Reynolds & Reynolds,
Dayton, Ohio, from August 1993 until January 14, 1994, and as
Research Supervisor, Proctor & Gamble, Cincinnati, Ohio, from
June 1991 until August 1993.
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Note 4: Mr. Rose served as Vice President, Chief Information Officer,
Integon Insurance Corporation, Winston-Salem, North Carolina,
from May 1996 until June 1997, and as Director of Information
Systems, National Association of Insurance Commissioners,
Kansas City, Missouri, from November 1987 until May 1996.
Note 5: Mr. Schell was Special Assistant to the Chief Operating
Officer, Federal Deposit Insurance Corporation, Washington,
D.C., from May 1994 until December 1995, and Special Assistant
to the Director, Division of Resolutions, Federal Deposit
Insurance Corporation, Washington, D.C., from May 1993 until
April 1994.
Note 6: Mr. Waltman was Manager, Training and Development for Westlake
Ace Hardware, Inc., Kansas City, Missouri, from May 1993 until
September 1996.
Note 7: Mr. Weinberger was Director, Washington Affairs, Unilever
United States, Inc., from February 1991 until April 1995.
Note 8: Mr. Wilson was an attorney with Smith, Gill, Fisher & Butts,
P.C., Kansas City, Missouri, from June 1989 until May 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Common Stock Data," and is hereby incorporated by reference.
The Company's Common Stock is traded principally on the New York Stock Exchange.
The Company's Common Stock is also traded on the Pacific Stock Exchange. On June
10, 1998, there were 35,216 stockholders of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
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<PAGE> 20
- interest rates on debt, cash equivalents, marketable securities,
mortgage loan origination commitments, investments in mortgage
loans for resale or securitization, and credit card loans
- foreign exchange rates, generating translation gains and losses
Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have no market risk sensitive
instruments entered into for "trading purposes," as such term is defined by
generally accepted accounting principles. Information contained herein relates
only to instruments entered into for purposes other than trading.
INTEREST RATES
The debt portfolio, rate-sensitive assets and related interest rate
risk are managed centrally by the office of the Chief Financial Officer of the
Company by taking into consideration investment opportunities and risks, tax
consequences and the financing strategies approved by the Finance Committee of
the Company's Board of Directors.
The investment portfolios of the Company and its subsidiaries at April
30, 1998, primarily consisted of cash equivalents and short-term marketable
securities. Consequently, the amortized cost approximates market value. Almost
19% of the Company's total cash and marketable securities portfolio is
classified as long-term, with nearly all maturities within a one-to-five year
range. Amortized cost of these securities also approximates market value. All
investments are generally held until maturity. Assuming all cash equivalents and
marketable securities held at year-end were variable rate investments, a 60
basis point change in interest (an approximate 10% decline in interest rates)
would negatively impact consolidated pretax earnings by less than $4 million, or
about one percent.
Under its risk management strategy, the Company hedges its interest
rate risk related to its fixed-rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. Treasury securities are sold short
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. It is the
Company's policy to utilize these financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. They are purchased from certain broker-dealer counterparties. If the
counterparties do not fulfill their obligations, the Company may be exposed to
risk. As the risk of default depends on the creditworthiness of the
counterparty, the Company's policy requires that such transactions may be
entered into only with counterparties that are rated A or better (or an
equivalent rating) by recognized rating agencies. As a matter of practice, the
Company has limited the counterparties to major banks and financial institutions
meeting such standards. All interest rate contracts conform to the standard
International Swaps and Derivatives Association, Inc. documentation.
The Company's variable rate mortgage portfolios are generally
short-term in nature, as it is the Company's policy to sell or securitize these
loans quarterly, and such portfolios are carried at the lower of cost or market.
Credit card loans are also short-term in nature and carry variable interest
rates. Because the Company funds these short-term assets with short-term,
variable rate debt, the Company is
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<PAGE> 21
not significantly exposed to interest rate risk in this area. As a result, any
change in interest rates would not materially impact the Company's consolidated
pretax earnings.
The Company's long-term debt consists of fixed-rate senior notes;
therefore, a change in interest rates would have no impact on consolidated
pretax earnings.
FOREIGN EXCHANGE RATES
The operation of the Company's subsidiaries in international markets
provides exposure to volatile movements in currency exchange rates. The
currencies involved are the Canadian dollar, the Australian dollar and the
British pound. International Tax Operations constituted approximately 4% of the
Company's fiscal year 1998 consolidated pretax earnings. As currency exchange
rates change, translation of the financial results of International Tax
Operations into U.S. dollars does not presently materially affect, and has not
historically materially affected, the consolidated financial results of the
Company, although such changes do affect the year-to-year comparability of the
operating results of the international businesses.
The Company does not hedge translation risks because (1) cash flows
from international operations are generally reinvested locally and (2) the
minimal exposure to material volatility to reported earnings does not justify
the cost.
The Company estimates that a 10% change in foreign exchange rates by
itself would impact reported pretax earnings from continuing operations by
approximately one million dollars. Such impact represents nearly 10% of the
pretax earnings of International Tax Operations for fiscal year 1998 and less
than one-half percent of the Company's consolidated pretax earnings for such
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a)1 is
contained in the Company's annual report to security holders for the fiscal year
ended April 30, 1998, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 20, 1998, H&R Block, Inc. (the "Company") dismissed the
accounting firm of Deloitte & Touche LLP as its independent auditors. Deloitte &
Touche LLP and its predecessors audited the accounts of the Company from 1965
through fiscal year 1998. The reports prepared by Deloitte & Touche LLP on the
Company's financial statements for either of the last two fiscal years did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change the Company's independent auditors was made by the Board of Directors
of the Company at the recommendation of its Audit Committee following a request
for proposals. During the Company's two most recent fiscal years, and any
subsequent interim period prior to July 20, 1998, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused it to make reference to the subject matter of the
disagreements in its reports. Also, there were no reportable events of the
nature described in Regulation S-K, Item 304(a)(1)(v) during either of the
Company's two most recent fiscal years and any subsequent interim period prior
to July 20, 1998.
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<PAGE> 22
On July 20, 1998, the Board of Directors of the Company appointed
PricewaterhouseCoopers LLP as the Company's independent auditors for the year
ending April 30, 1999, following a request for proposals made by the Company to
five accounting firms at the direction of the Audit Committee of the Board. The
Board of Directors directed the Company's management to submit the ratification
of such appointment to a vote of the shareholders of the Company at the annual
meeting of shareholders scheduled for September 9, 1998. During the two most
recent fiscal years, and any subsequent interim period prior to such
appointment, neither the Company, nor anyone acting on behalf of the Company,
consulted PricewaterhouseCoopers LLP regarding: (i) the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the registrant's
financial statements, or (ii) any matter that was either the subject of a
disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors" and in
Item 4a of Part I of this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors," and is
incorporated herein by reference.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of
H&R Block, Inc., and subsidiaries are incorporated by
reference from the Company's annual report to
security holders for the fiscal year ended April 30,
1998:
Page
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Quarterly Financial Data 35
Independent Auditors' Report 38
2. Financial Statement Schedules
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not
applicable, the information is not material or the
information is set forth in the financial statements
or notes thereto.
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block,
Inc., as amended, filed as Exhibit 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) Indenture dated as of October 20, 1997, among H&R
Block, Inc., Block Financial Corporation and Bankers
Trust Company, as Trustee, filed as Exhibit 4(a) to
the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
4(b) Form of 6 3/4% Senior Note due 2004 of Block
Financial Corporation, filed on October 23, 1997 as
Exhibit 2.2 to the Company's current report on Form
8-K, is incorporated herein by reference.
4(c) 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
23
<PAGE> 24
as Exhibit 4(c) to the Company's Registration
Statement on Form S-8 (File No. 33-67170), is
incorporated herein by reference.
4(d) 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(e) 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(f) 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(g) Copy of Fourth Amendment to Rights Agreement dated
March 25, 1998 between H&R Block, Inc. and
ChaseMellon Shareholder Services, L.L.C., filed on
May 1, 1998 as Exhibit 5 to Form 8-A/A, is
incorporated herein by reference.
4(h) Copy of Rights Agreement dated March 25, 1998 between
H&R Block, Inc. and ChaseMellon Shareholder Services,
L.L.C., filed on July 22, 1998 as Exhibit 1 to the
Company's Registration Statement on Form 8-A, is
incorporated herein by reference.
4(i) 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(j) Form of Certificate of Amendment of Certificate of
Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc.
4(k) 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) Agreement and Plan of Merger, dated as of September
7, 1997, by and among H&R Block, Inc., H&R Block
Group, Inc., CompuServe Corporation, WorldCom, Inc.,
and Walnut Acquisition Company, L.L.C., filed on
September 7, 1997 as Exhibit 2.1 to the Company's
current report on Form 8-K, is incorporated herein by
reference.
24
<PAGE> 25
10(b) Stockholders Agreement, dated as of September 7,
1997, by and among H&R Block, Inc., H&R Block Group,
Inc. and WorldCom, Inc., filed on September 7, 1997
as Exhibit 10.1 to the Company's current report on
Form 8-K, is incorporated herein by reference.
10(c) Standstill Agreement, dated as of September 7, 1997,
by and among H&R Block, Inc., H&R Block Group, Inc.
and WorldCom, Inc., filed on September 7, 1997 as
Exhibit 10.2 to the Company's current report on Form
8-K, is incorporated herein by reference.
10(d) 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(e) The Company's 1993 Long-Term Executive Compensation
Plan, as amended, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
10(f) 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(g) The H&R Block Deferred Compensation Plan for
Directors, as amended, filed as Exhibit 10 to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1994, is incorporated herein
by reference.
10(h) 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(i) Amendment No. 3 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 July 31, 1997, is incorporated herein
by reference.
10(j) Amendment No. 4 to H&R Block Deferred Compensation
Plan for Directors, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1997, is incorporated herein
by reference.
10(k) Amendment No. 5 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, 1998, is incorporated
herein by reference.
10(l) 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.
25
<PAGE> 26
10(m) 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(n) 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(o) Amendment No. 8 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, 1997, is incorporated herein
by reference.
10(p) Amendment No. 9 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(f) to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
10(q) Amendment No. 10 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, 1998, is incorporated
herein by reference.
10(r) 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(s) 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(t) 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(u) 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(v) Amendment No. 4 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(e) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated
herein by reference.
10(w) Amendment No. 5 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(g) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1997, is
incorporated herein by reference.
26
<PAGE> 27
10(x) Amendment No. 6 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, 1998, is
incorporated herein by reference.
10(y) The H&R Block Short-Term Incentive Plan, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10(z) The Amendment and Termination of the H&R Block, Inc.
Retirement Plan for Non-Employee Directors, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1997, is
incorporated herein by reference.
10(aa) The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 10(o) to the
Company's annual report on Form 10-K for the fiscal
year ended April 30, 1997, is incorporated herein by
reference.
10(bb) The H&R Block Stock Plan for Non-Employee Directors,
filed as Exhibit 10(e) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31,
1997, is incorporated herein by reference.
10(cc) 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.
13 That portion of the annual report to security holders
for the fiscal year ended April 30, 1998 which is
expressly incorporated by reference in this filing.
Portions of such annual report to security holders
not expressly incorporated by this reference in this
filing are not deemed "filed" with the Commission.
16 Letter regarding change in Certifying Accountants
dated July 27, 1998 from Deloitte & Touche LLP
addressed to the Securities and Exchange Commission,
filed on July 27, 1998 as Exhibit 16.1 to the
Company's current report on Form 8-K, is
incorporated herein by reference. The Statements
contained in Item 4 of the Company's Form 8-K dated
July 27, 1998 to which Deloitte & Touche LLP
concurred in such letter are also contained in Item
9 of the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1998.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified
Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
fourth quarter of the year ended April 30, 1998.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
June 17, 1998 By /s/ Frank L. Salizzoni
----------------------
Frank L. Salizzoni, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title
/s/ Frank L. Salizzoni President, Chief Executive Officer and
- ------------------------------ Director (principal executive officer)
Frank L. Salizzoni
/s/ G. Kenneth Baum Director
- ------------------------------
G. Kenneth Baum
/s/ Henry W. Bloch Director
- ------------------------------
Henry W. Bloch
/s/ Robert E. Davis Director
- ------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
- ------------------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
- ------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- ------------------------------
Roger W. Hale
/s/ Marvin L. Rich Director
- ------------------------------
Marvin L. Rich
/s/ Morton I. Sosland Director
- ------------------------------
Morton I. Sosland
/s/ Ozzie Wenich Senior Vice President and Chief Financial
- ------------------------------ Officer (principal financial officer)
Ozzie Wenich
/s/ Patrick D. Petrie Vice President and
- ------------------------------ Corporate Controller
Patrick D. Petrie
(Signed as to each on June 17, 1998)
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the consolidated financial statements of H&R Block, Inc. and
subsidiaries as of April 30, 1998 and 1997, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1998. 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 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 16, 1998
29
<PAGE> 30
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additions
----------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
---------------------- --------- -------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts-deducted from
accounts receivable in
the balance sheet
1998 $30,144,000 $75,171,000 $ - $60,001,000 $45,314,000
=========== =========== ======== =========== ===========
1997 $ 4,419,000 $65,865,000 $ - $40,140,000 $30,144,000
=========== =========== ======== =========== ===========
1996 $ 7,274,000 $31,766,000 $ - $31,192,000 $ 7,848,000
=========== =========== ======== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 4 (J)
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF PARTICIPATING PREFERRED STOCK
OF
H&R BLOCK, INC.
I, Ozzie Wenich, the Senior Vice President and Chief
Financial Officer of H&R Block, Inc. (the "Company"), a corporation organized
and existing under The General and Business Corporation Law of the State of
Missouri, in accordance with the provisions of Section 351.180.7 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Company's Articles of Incorporation, as amended, the Board of
Directors on July 14, 1988 adopted a resolution creating a series of shares of
voting Preferred Stock designated as Participating Preferred Stock, pursuant to
a Certificate of Designation, Preferences and Rights of Participating Preferred
Stock filed with the Missouri Secretary of State, with such Participating
Preferred Stock having the powers, preferences and relative, participating,
optional and other special rights with the qualifications, limitations or
restrictions set forth below.
That pursuant to the authority conferred upon the Board of
Directors by the Company's Articles of Incorporation, as amended, the Board of
Directors on July 20, 1998, adopted the following resolution amending the
Company's Certificate of Designation, Preferences and Rights of Participating
Preferred Stock to increase the number of shares designated Participating
Preferred Stock:
RESOLVED, that it is desirable and in the best interests of
the Company that the number of shares designated Participating Preferred Stock
be increased from 600,000 to 1,200,000.
The powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as set forth below:
Section 1. Designation and Amount. There shall be a series of
the voting preferred stock of the Company which shall be designated as
"Participating Preferred Stock," without par value, and the number of shares
constituting such series shall be 1,200,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Participating Preferred Stock
to a number less than that of the shares then outstanding plus the number of
shares issuable upon
<PAGE> 2
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Company.
Section 2. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any
series of preferred stock of the Company ranking prior and superior to the
Participating Preferred Stock with respect to dividends, the holders of shares
of Participating Preferred Stock, in preference to the holders of shares of
Common Stock, without par value (the "Common Stock"), of the Company and of any
other junior stock, shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of January, April, July
and October in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Participating Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1.00 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount of
all cash dividends and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Participating Preferred Stock. In the
event the Company shall at any time after July 25, 1998 (the "Rights
Declaration Date") declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the amount to
which holders of shares of Participating Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) The Company shall declare a dividend or distribution on
the Participating Preferred Stock as provided in paragraph (a) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share
on the Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for
2
<PAGE> 3
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Participating
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Participating Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Participating Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be not more than sixty days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of
Participating Preferred Stock shall have the following voting rights:
(a) Each share of Participating Preferred Stock shall entitle
the holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Company.
(b) Except as otherwise provided herein, in the Company's
Articles of Incorporation or by law, the holders of shares of Participating
Preferred Stock, the holders of shares of Common Stock, and the holders of
shares of any other capital stock of the Company having general voting rights,
shall vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(c) Except as otherwise set forth herein or in the Company's
Articles of Incorporation, and except as otherwise provided by law, holders of
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Participating
Preferred Stock outstanding shall have been paid in full, the Company shall
not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution
3
<PAGE> 4
or winding up) with the Participating Preferred Stock, except
dividends paid ratably on the Participating Preferred Stock and all
such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) except as permitted in Section 4(a)(iv) below,
redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Participating
Preferred Stock, provided that the Company may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for share of any stock of the Company ranking junior (either
as to dividends or upon dissolution, liquidation or winding up) to the
Participating Preferred stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Participating Preferred Stock, or any shares of stock
ranking on a parity with the Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares
upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes.
(b) The Company shall not permit any subsidiary of the
Company to purchase or otherwise acquire for consideration any shares of stock
of the Company unless the Company could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Participating
Preferred Stock purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. The Company shall cause all such shares upon their cancellation to be
authorized but unissued shares of Preferred Stock which may be reissued as part
of a new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(a) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Company, no distribution shall be made to the
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Participating Preferred Stock
unless, prior thereto, the holders of shares of Participating Preferred Stock
shall have received per share, the greater of $100.00 or 100 times the payment
made per share of Common Stock, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Liquidation Preference"). Following the payment of the full
amount of the Liquidation Preference, no additional distributions shall be made
to the holders of shares of Participating Preferred Stock, unless, prior
thereto, the holders
4
<PAGE> 5
of shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Liquidation
Preference by (ii) 100 (as appropriately adjusted a set forth in subparagraph
(c) below to reflect such events as stock dividends, and subdivisions,
combinations and consolidations with respect to the Common Stock) (such number
in clause (ii) being referred to as the "Adjustment Number"). Following the
payment of the full amount of the Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Participating Preferred
Stock and Common Stock, respectively, holders of Participating Preferred Stock
and holders of shares of Common Stock shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio of
the Adjustment Number to 1 with respect to such Participating Preferred Stock
and Common Stock, on a per share basis, respectively.
(b) In the event there are not sufficient assets available to
permit payment in full of the Liquidation Preference and the liquidation
preferences of all other series of preferred stock, if any, which rank on a
parity with the Participating Preferred Stock, then such remaining assets shall
be distributed ratably to the holders of such parity shares in proportion to
their respective liquidation preferences. In the event there are not sufficient
assets available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(c) In the event the Company shall at any time after the
Rights Declaration Date declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise
then by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the Adjustment
Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, Etc. In case the Company
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the shares
of Participating Preferred Stock shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is exchanged or changed.
In the event the Company shall at any time after the Rights Declaration Date
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Participating
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
5
<PAGE> 6
immediately after such event and the denominator of which is the number of
shares of Common Stock that are outstanding immediately prior to such event.
Section 8. Redemption. The shares of Participating Preferred
Stock shall not be redeemable.
Section 9. Ranking. The Participating Preferred Stock shall
rank junior to all other series of the Company's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. Amendment. The Articles of Incorporation of the
Company shall not be further amended in any manner which would materially alter
or change the powers, preferences or special rights of the Participating
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Participating
Preferred Stock voting separately as a class.
Section 11. Fractional Shares. Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Participating Preferred Stock.
IN WITNESS WHEREOF, this Certificate of Amendment of the
Certificate of Designation has been executed by the Company by its Senior Vice
President and attested by its Secretary on this 17th day of July, 1998.
H&R BLOCK, INC.
By: /s/ Ozzie Wenich
-------------------------------------
Ozzie Wenich, Senior Vice President
and Chief Financial Officer
ATTEST:
/s/ James H. Ingraham
- ------------------------------------------
James H. Ingraham, Vice President, Legal
and Secretary
6
<PAGE> 7
STATE OF Missouri )
)SS.
COUNTY OF Jackson )
BE IT REMEMBERED, that on this 17th day of July, 1998, before
me, the undersigned, a Notary Public in and for said County and State,
personally appeared Ozzie Wenich and James H. Ingraham, who declared that they
are the Senior Vice President and Secretary, respectively, of the corporation
named in the foregoing certificate, and acknowledged that they executed the
foregoing certificate on behalf of the corporation.
/s/ Barbara Phillips
----------------------
Notary Public
My Commission Expires:
February 7, 2007
- ----------------
7
<PAGE> 1
EXHIBIT 13
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS IN FISCAL 1998
On January 31, 1998, the Company completed the sale of its interest in
CompuServe Corporation ("CompuServe") to a subsidiary of WorldCom, Inc.
("WorldCom"). The sale was structured as a stock-for-stock transaction in which
the Company received 30.1 million shares of WorldCom stock in exchange for its
80.1% ownership interest (74.2 million shares) in CompuServe stock. The
transaction was completed with the receipt of $1.033 billion in net proceeds
from the monetization of the WorldCom stock in a block trade on February 2,
1998. The Company recorded a $231.9 million gain, net of taxes, on the
transaction. CompuServe's results have been reflected as discontinued
operations. CompuServe's operations contributed $(.13), $(.92) and $.50 per
basic share, and $(.13), $(.91) and $.49 per diluted share, in 1998, 1997 and
1996, respectively.
On June 17, 1997, the Company completed the purchase of Option One Mortgage
Corporation ("Option One"). Option One engages in the origination, purchase,
servicing, securitization and sale of nonconforming mortgage loans. Based in
Santa Ana, California, Option One has a network of more than 5,000 mortgage
brokers in 46 states. The cash purchase price was $218.1 million. In addition,
the Company made a cash payment of $456.2 million to Option One's parent to
eliminate intercompany loans made to Option One to finance its mortgage
operations. The $456.2 million payment was recorded as an intercompany loan and
was repaid to the Company by the end of June 1997 after Option One sold the
mortgage loans to a third party in the ordinary course of business. The
acquisition was accounted for as a purchase and, accordingly, Option One's
results are included since the date of acquisition.
SIGNIFICANT EVENTS IN FISCAL 1997
The Company's wholly owned subsidiary, Block Financial Corporation ("BFC"), is a
party to a 10-year agreement with Beneficial National Bank which enables it to
purchase a participation interest in Refund Anticipation Loans ("RALs") made to
clients in H&R Block tax offices. RALs are loans expected to be retired by
income tax refunds. During 1998 and 1997, BFC held a participation interest of
40% in RALs made, which generated revenues of $53.3 million and $54.5 million,
respectively, and operating earnings of $6.4 million and $8.1 million,
respectively. Over the term of the agreement, BFC may increase its participation
in the RAL program to nearly 50%.
NEW ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), issued by the Financial Accounting Standards
Board ("FASB") in February 1997, which is effective for periods ending after
December 15, 1997. SFAS 128, which simplifies the standards for computing and
presenting earnings per share, replaces the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported primary earnings
per share. Accordingly, net earnings per share have been restated to conform to
the new standard.
In the third quarter of fiscal 1998, the Company elected the early adoption
of Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires that a company report financial and descriptive information about its
reportable operating segments, defined as those components of an enterprise
about which separate financial information is available and is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance. Management analyzes its business according to differences in types
of services and geographic locations, and the reportable operating segments have
been determined accordingly.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for the
Company's fiscal year ending April 30, 1999. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires that the Company (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company does not anticipate that the
implementation of SFAS 130 will have a material impact on the consolidated
financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), effective for the Company's fiscal year ending April 30, 2001. SFAS 133
requires companies to record derivative instruments as assets or liabilities,
measured at fair value. The recognition of gains or losses resulting from
changes in the values of those derivative instruments is based on the use of
each derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company has not yet determined the effect of SFAS 133 on the consolidated
financial statements.
17
<PAGE> 2
1998 COMPARED TO 1997
CONSOLIDATED RESULTS
Revenues increased 19.1% to $1.307 billion compared to $1.097 billion in 1997.
Net earnings from continuing operations increased 21.1% to $174.2 million from
$143.8 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.66 from $1.38 last year. Diluted net earnings per
share from continuing operations increased to $1.62 compared to $1.36 in 1997.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in the United States. Tax-related
service revenue includes fees from company-owned tax offices and royalties from
franchised offices. This segment also purchases participation interests in
refund anticipation loans made by a third party lending institution which are
offered to tax clients, and provides tax preparation and other personal
productivity software to the general public.
Revenues increased 8.4% to $1.047 billion from $966.5 million in the prior
year. Combined tax preparation and electronic filing fees increased $71.2
million, or 9.1%, entirely attributable to price increases. Clients served,
which includes taxpayers for whom the Company prepared income tax returns, as
well as taxpayers for whom only electronic filing services are provided, was
relatively consistent with the prior year. Royalties increased by $4.0 million,
or 4.0%, reflecting improved results in the number of clients served by
franchises as well as increases in pricing. Software revenues increased $5.2
million, or 36.6%, as a result of increased market penetration.
Operating earnings increased 20.4% to $253.3 million from $210.4 million in
1997. The pretax margin was 24.2% compared to 21.8% in the prior year. The
improved margin resulted from cost-control measures implemented throughout the
tax operations business, primarily related to marketing and advertising expense
and employee compensation, in addition to lower bad debt expense in 1998
associated with electronic filing.
INTERNATIONAL TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in Canada, Australia and the United
Kingdom. Tax-related service revenue includes fees from company-owned tax
offices and royalties from franchised offices.
Revenues decreased 6.6% to $81.8 million from $87.5 million in 1997. The
deterioration of the Canadian and Australian dollars relative to the U.S. dollar
contributed significantly to the decline in both revenues and operating
earnings, accounting for 61% of the total revenue decrease. Tax preparation fees
declined $2.2 million, or 4.2%, as a result of a 12.4% decrease in returns
prepared by company-owned offices, partly offset by price increases. Discounted
return fees in Canada also declined 11.8% due to a continued decline in
available provincial tax credits.
Operating earnings decreased 15.9% to $11.9 million from $14.2 million in
1997, and the pretax margin decreased to 14.6% from 16.2% in the prior year. The
decrease is partly due to the revenue decline, as well as a loss of $1.6 million
from the start-up of operations in the United Kingdom and the opening of 32 new
company-owned offices in Australia.
MORTGAGE OPERATIONS
This segment is primarily engaged in the origination, purchase, servicing,
securitization and sale of nonconforming mortgage loans in the United States.
Mortgage origination services are offered through a network of mortgage brokers
in 46 states and through H&R Block tax offices in 15 states.
Revenues of $135.8 million were $126.9 million better than the prior year.
The increase is largely due to the acquisition of Option One in June 1997, which
contributed revenues of $117.4 million this year. Since its acquisition, Option
One has originated $1.853 billion of loans and sold $1.785 billion of mortgage
loans through whole-loan sales. At April 30, 1998, Option One's servicing
portfolio was 42,800 loans totaling $4.315 billion.
Operating earnings increased $29.9 million to $30.8 million. Option One
contributed operating earnings of $34.3 million, including goodwill amortization
of $10.8 million, which was reduced by the start-up costs associated with the
retail mortgage business offered through the Company's tax offices.
CREDIT CARD OPERATIONS
This segment operates in the United States and sponsors credit card loans under
a co-branded agreement and, through an Internet site and an online service
provider, allows cardholders access to account transactions and payment detail
through an online lookup feature.
Revenues increased 18.7% to $37.4 million from $31.5 million in 1997. This
increase is primarily attributable to an increase in the average credit card
receivables balance which totaled $227.8 million for 1998, compared to $200.6
million for 1997.
The pretax loss increased 121.2% to $15.5 million from $7.0 million in
1997. The increased loss is the result of several factors, including the
write-off of deferred subscriber acquisition costs ($2.2 million), and
capitalized software costs ($1.6 million) related to software which was being
developed to provide a variety of online services to cardholders and other
similar customers. Also, the quality of the credit card portfolio deteriorated,
resulting in an increase in bad debts as a percentage of purchase volume from
3.35% in 1997 to 4.70% in 1998.
INVESTMENT INCOME, NET
Net investment income increased 135.5% to $25.6 million from $10.9 million in
1997, primarily as a result of the proceeds from the monetization of WorldCom
stock of $1.033 billion received at the beginning of February 1998.
18
<PAGE> 3
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased $7.3 million
to $11.4 million, largely due to increased charitable contributions, increased
wages and employee benefits, and the start-up costs related to a pilot program
of additional financial services to be offered through the Company's tax
offices. Additionally, the Company favorably adjusted its liability for certain
insurance contingencies in 1997 based on actuarial valuations. Unallocated
interest expense of $13.7 million in 1998 represents the interest on debt
associated with the acquisition of Option One.
INCOME TAX EXPENSE
The effective tax rate was 38.0% for fiscal 1998, compared to 36.1% for 1997,
caused by an increase in state and local income taxes.
1997 COMPARED TO 1996
CONSOLIDATED RESULTS
Revenues increased 25.9% to $1.097 billion compared to $871.5 million in 1996.
Net earnings from continuing operations increased 14.9% to $143.8 million from
$125.1 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.38 from $1.20 last year. Diluted net earnings per
share from continuing operations increased to $1.36 from $1.18 last year.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
Revenues increased 27.3% to $966.5 million from $759.4 million in the prior
year. Tax preparation fees increased $114.4 million, or 21.6%, as a result of a
7.5% increase in the number of returns prepared by company-owned offices, with
the remainder attributable to price increases and a change in the complexity of
returns prepared which results in higher fees. RAL participation fees
contributed $54.5 million in revenues in 1997. Fees from electronic filing were
up $26.9 million, or 23.7%, due primarily to an increase in the number of U.S.
Federal and state returns filed electronically by 15.7% and 29.2%, respectively.
Royalties increased by $10.7 million, or 12.2%, reflecting improved results
reported by franchises as a result of greater revenues from electronic filing, a
6.3% increase in the number of returns prepared by franchises and increases in
pricing.
Operating earnings increased 21.5% to $210.4 million from $173.1 million in
1996. The pretax margin was 21.8% compared to 22.8% in the prior year. The
margin decline resulted from increased bad debt associated with electronic
filing, marketing expenses targeted at gaining new customers, and costs
connected with the implementation of a new, computerized bookkeeping and
management reporting system, partially offset by earnings of $8.1 million from
RAL participations in 1997.
INTERNATIONAL TAX OPERATIONS
Revenues increased 6.9% to $87.5 million from $81.8 million in 1996. Tax
preparation fees increased $7.5 million, or 16.8%, driven by a 4.3% increase in
the number of returns prepared as well as increases in pricing. Discounted
return fees in Canada decreased $2.6 million, or 10.1%, as a result of the
continued loss of certain provincial tax credits leading to fewer eligible
returns for discounting.
Operating earnings increased 20.8% to $14.2 million from $11.7 million in
1996. The pretax margin was 16.2% in 1997 compared to 14.3% a year earlier,
largely due to a restructuring of employee compensation.
MORTGAGE OPERATIONS
Revenues increased to $8.9 million from $.1 million in 1996. Fiscal 1997 was the
first full year for mortgage operations, and revenues included a gain on the
securitization of mortgage loans of approximately $3.0 million, as well as
interest income on mortgage loans held for sale.
Pretax earnings were $.9 million, compared to $.1 million in 1996.
CREDIT CARD OPERATIONS
Revenues increased 26.7% to $31.5 million from $24.9 million in 1996. The
increase in revenues is largely due to an increase in the average credit card
receivables balance which totaled $200.6 million for 1997, compared to $147.5
million for 1996.
The pretax loss increased 175.5% to $7.0 million from $2.6 million in 1996.
The increased loss is primarily attributable to increased bad debts. Bad debt
expense as a percentage of purchase volume was 3.35% in 1997 compared to 3.17%
in 1996.
INVESTMENT INCOME, NET
Net investment income increased 28.0% to $10.9 million from $8.5 million in
1996. The Company incurred $2.0 million of interest expense on corporate
borrowings in 1996, as compared to $.2 million in 1997.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss decreased 28.4% to $4.2
million compared to $5.8 million in 1996. The improvement was due to an increase
in the cash values of corporate-owned whole-life insurance contracts used to
informally fund deferred compensation plans. The Company also favorably adjusted
its liability for certain insurance contingencies based upon actuarial
valuations.
INCOME TAX EXPENSE
The effective tax rate was 36.1% for fiscal 1997, compared to 36.7% for 1996,
caused by a decrease in state and local income taxes.
19
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in 1998, with cash and
marketable securities of $1.536 billion at year end, compared to $539.1 million
at the end of 1997. This increase resulted from the sale of the Company's
remaining interest in CompuServe in January 1998, which generated $1.033 billion
in net proceeds. Working capital increased by $55.3 million, and the working
capital ratio decreased to 1.7 to 1 at April 30, 1998, compared to 2.2 to 1 a
year earlier. Stockholders' equity at April 30, 1998 and 1997 was $1.342 billion
and $999.1 million, respectively.
The Company maintains lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuates according to the amount of short-term borrowing 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. During the past two years, the Company has
also used short-term borrowings in January through April to purchase a
participation interest of 40% in certain RALs through its agreement with
Beneficial National Bank. These short-term borrowings in the U.S. are supported
by a $1.8 billion back-up credit facility through November 1998, subject to
renewal. This facility was reduced to $1.3 billion subsequent to year end
through the end of its term. Outstanding commercial paper related to loans held
for sale and credit card receivables amounted to $643.0 million and $269.6
million, respectively, at April 30, 1998 and 1997. Loans held for sale totaled
$448.1 million and $107.1 million at April 30, 1998 and 1997, respectively, and
credit card receivables amounted to $202.9 million and $247.9 million,
respectively.
In Canada, from January through April each year, the Company uses Canadian
borrowings to purchase refunds due its clients from Revenue Canada. Maturities
of these borrowings range from 30 to 90 days. Net accounts receivable at April
30, 1998 and 1997 include amounts due from Revenue Canada of $13.9 million and
$5.4 million, respectively.
In October 1997, the Company issued $250 million of 6 3/4% Senior Notes,
due 2004. The Senior Notes are not redeemable prior to maturity. The net
proceeds of this transaction were used to repay short-term borrowings which
initially funded the acquisition of Option One.
Utilizing the U.S. commercial paper program described above, the Company
originates and purchases nonconforming mortgage loans. As part of its risk
management strategy prior to securitization or sale, the Company hedges interest
rate risk related to its fixed rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. The Company purchases these
financial instruments from certain broker-dealer counterparties. The Company's
policy is to utilize such financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. As a matter of practice, the Company limits the counterparties to
major banks and financial institutions.
Management does not anticipate that the level of capital expenditures in
1999, exclusive of franchise and other tax businesses acquisitions, will
increase significantly from 1998.
The Company will continue to use short-term financing in the United States
to finance various financial activities conducted by BFC, including the funding
of loan originations by Option One, and in Canada to finance the Canadian refund
discount program.
The Company announced in December 1993 its intention to repurchase from
time to time up to 10 million of its shares on the open market. In July 1996,
the Company announced its intention to repurchase up to 10 million additional
shares on the open market over a two-year period following the separation of
CompuServe. Upon the completion of the CompuServe sale in January 1998, the
Company recommenced the purchase of its shares in accordance with these
authorizations, and 5.2 million shares have been repurchased as of April 30,
1998. The Company intends to continue this share repurchase program, 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.
The Company has a program to identify, evaluate and implement changes to
its computer systems as necessary to address the Year 2000 issue. As a part of
the program, the Company has initiated communications with state and Federal
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 concerns. The Year 2000 issue affects computer applications
that may not properly recognize and process data for the Year 2000 and beyond
because of the use of two digits rather than four to define an applicable year.
The Company presently is not aware of any material operational or financial Year
2000-related concerns and believes that, with modifications to existing software
and conversions to new software, any Year 2000 concerns can be mitigated. Based
on management's best estimates, the costs associated with the Year 2000
mitigation are not expected to be material to the Company and such costs are
being expensed as incurred. The Company plans to complete the Year 2000
mitigation in 1999. However, the Company cannot make any assurances that its
computer systems, or the computer systems of the state and Federal governments
and suppliers with which it interacts, will be Year 2000 ready on schedule, or
that management's cost estimates will be achieved. The inability of these
systems to be ready could result in significant difficulties in processing and
completing fundamental transactions. In such event, the Company's results of
operations and financial position could be adversely affected in a material
manner.
Except for historical information contained herein, the matters addressed
in this discussion are forward-looking statements that are subject to risks and
uncertainties which could cause actual results to differ materially. Such risks
and uncertainties include, but are not limited to, economic, competitive and
governmental factors affecting the Company's operations, markets, products,
services, prices and various other factors.
20
<PAGE> 5
CONSOLIDATED STATEMENTS OF EARNINGS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Year Ended April 30
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenues $ 1,083,985 $ 953,000 $ 748,858
Product sales 103,717 31,781 20,022
Royalties 111,142 107,508 96,356
Other 7,941 5,167 6,297
----------- ----------- -----------
1,306,785 1,097,456 871,533
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 487,956 421,652 366,153
Occupancy and equipment 195,549 175,414 141,610
Marketing and advertising 75,567 78,139 57,105
Bad debt 75,171 65,865 20,261
Interest 52,252 11,641 3,969
Supplies, freight and postage 51,733 44,625 41,462
Other 112,582 85,932 64,451
----------- ----------- -----------
1,050,810 883,268 695,011
----------- ----------- -----------
OPERATING EARNINGS 255,975 214,188 176,522
OTHER INCOME:
Investment income, net 25,596 10,870 8,490
Other, net (680) -- 12,445
----------- ----------- -----------
24,916 10,870 20,935
----------- ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 280,891 225,058 197,457
TAXES ON EARNINGS 106,739 81,281 72,368
----------- ----------- -----------
NET EARNINGS FROM CONTINUING OPERATIONS 174,152 143,777 125,089
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS (LESS APPLICABLE
TAXES (BENEFIT) OF ($7,277), ($53,421) AND $35,757) (13,889) (96,022) 52,079
NET GAIN ON SALE OF DISCONTINUED OPERATIONS (LESS
APPLICABLE INCOME TAXES OF $251,701) 231,867 -- --
----------- ----------- -----------
NET EARNINGS $ 392,130 $ 47,755 $ 177,168
=========== =========== ===========
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 1.66 $ 1.38 $ 1.20
Net earnings (loss) from discontinued operations 2.08 (.92) .50
----------- ----------- -----------
Net earnings $ 3.74 $ .46 $ 1.70
=========== =========== ===========
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 1.62 $ 1.36 $ 1.18
Net earnings (loss) from discontinued operations 2.03 (.91) .49
----------- ----------- -----------
Net earnings $ 3.65 $ .45 $ 1.67
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
April 30
- ------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 900,856 $ 457,079
Marketable securities 346,158 61,755
Receivables, less allowance for doubtful accounts of $45,314 and $30,144 793,237 407,441
Prepaid expenses and other current assets 103,026 31,671
Net assets of discontinued operations -- 522,144
---------- ----------
Total current assets 2,143,277 1,480,090
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 289,096 20,273
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $40,261 and $23,089 288,580 74,794
Other 105,809 66,836
---------- ----------
683,485 161,903
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $167,065 and $142,894 77,321 65,065
---------- ----------
$2,904,083 $1,707,058
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 643,002 $ 269,619
Accounts payable, accrued expenses and deposits 114,875 164,872
Accrued salaries, wages and payroll taxes 96,168 105,326
Accrued taxes on earnings 422,847 129,192
---------- ----------
Total current liabilities 1,276,892 669,009
LONG-TERM DEBT 249,675 --
OTHER NONCURRENT LIABILITIES 35,884 38,952
COMMITMENTS AND CONTINGENCIES -- --
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
Additional paid-in capital 432,335 502,308
Retained earnings 986,030 684,071
---------- ----------
1,419,454 1,187,472
Less cost of common stock in treasury 77,822 188,375
---------- ----------
1,341,632 999,097
---------- ----------
$2,904,083 $1,707,058
========== ==========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 392,130 $ 47,755 $ 177,168
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 55,787 36,526 32,477
Provision for deferred taxes on earnings (15,639) 538 1,183
Gain on sales of subsidiaries (231,867) -- (12,445)
Net gain on sales of marketable securities (1,720) (454) (1,134)
Other noncurrent liabilities (3,068) 730 4,760
Changes in assets and liabilities:
Receivables (44,727) (94,452) (32,457)
Mortgage loans held for sale:
Originations and purchases (2,330,349) (211,700) (8,674)
Sales and principal repayments 2,443,725 113,259 --
Prepaid expenses and other current assets (27,618) (15,455) (259)
Net assets of discontinued operations 13,665 95,405 (55,771)
Accounts payable, accrued expenses and deposits (82,469) 68,514 14,003
Accrued salaries, wages and payroll taxes (10,965) 10,932 35,109
Accrued taxes on earnings 28,118 36,833 (16,156)
----------- ---------- ----------
Net cash provided by operating activities 185,003 88,431 137,804
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (882,378) (75,595) (134,233)
Maturities of marketable securities 38,961 517 304,724
Sales of marketable securities 1,321,716 23,852 155,170
Purchases of property and equipment, net (46,803) (44,277) (36,972)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (265,700) (17,249) (11,139)
Proceeds from sale of subsidiaries -- -- 35,000
Net advances from discontinued operations -- -- 35,004
Other, net (30,812) (16,038) (3,829)
----------- ---------- ----------
Net cash provided by (used in) investing activities 134,984 (128,790) 343,725
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (11,090,798) (5,041,386) (2,252,761)
Proceeds from issuance of notes payable 11,008,018 5,238,354 2,275,991
Proceeds from issuance of long-term debt 249,675 -- --
Dividends paid (83,635) (107,988) (131,263)
Payments to acquire treasury shares (18,351) -- (71,897)
Proceeds from stock options exercised 58,881 3,439 13,172
----------- ---------- ----------
Net cash provided by (used in) financing activities 123,790 92,419 (166,758)
----------- ---------- ----------
Net increase in cash and cash equivalents 443,777 52,060 314,771
Cash and cash equivalents at beginning of the year 457,079 405,019 90,248
----------- ---------- ----------
Cash and cash equivalents at end of the year $ 900,856 $ 457,079 $ 405,019
=========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ 102,396 $ (8,047) $ 73,041
Interest paid 50,302 10,889 5,898
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: The operating subsidiaries of H&R Block, Inc. provide a
variety of services to the general public, principally in the United States, but
also in Canada, Australia and other foreign countries. Approximately 86% of
total revenues are generated from tax return preparation, electronic filing of
tax returns and other tax-related services. Certain of these subsidiaries also
originate, purchase, service, sell and securitize nonconforming mortgages, offer
personal productivity software and credit card loans, and purchase participation
interests in refund anticipation loans made by a third party lending
institution.
Principles of consolidation: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company") and all majority-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated.
Reclassifications: Certain 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 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.
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 17 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been impaired based on several criteria,
including, but not limited to, revenue trends, undiscounted operating cash
flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389,
which is included in other expenses in the consolidated statement 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, 1998 and 1997
were 5.6% and 5.7%, respectively.
Revenue recognition: Service revenues are recorded in the period in which
the service is performed.
Product sales consist primarily of gains on sales of mortgage loans and
software sales. Gains on loan sales are recognized utilizing the specific
identification method at the time of sale. Software sales are recorded at the
time of shipment.
The Company records franchise royalties, based upon the contractual
percentages of franchise revenues, in the period in which the franchise provides
the service.
Advertising expense: The Company expenses advertising costs the first time
the advertising takes place.
Taxes on earnings: The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes, which are not material, are provided for
temporary differences between financial and tax reporting, which consist
principally of accrued expenses, deferred compensation, mark-to-market
adjustments and depreciation.
24
<PAGE> 9
The Company has a Tax Sharing Agreement with CompuServe Corporation
("CompuServe"), pursuant to which CompuServe generally 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
for any taxable period during which CompuServe was a subsidiary of the Company.
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.
Hedging and forward commitments: As a part of its interest rate risk
management strategy, the Company may choose to hedge its interest rate risk
related to its fixed rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. The Company classifies these
instruments as hedges of specific loan receivables. The gains and losses derived
from these instruments are deferred and included in the carrying amounts of the
related hedged items and ultimately recognized in earnings.
Stock plans: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("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.
Segments: In the third quarter of fiscal 1998, the Company elected the
early adoption of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires that a company report financial and descriptive
information about its reportable operating segments, defined as those components
of an enterprise about which separate financial information is available and is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance. Management analyzes its business according to differences
in types of services and geographic locations, and the reportable operating
segments have been determined accordingly.
New accounting standards: In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for the Company's fiscal year
ending April 30, 1999. SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that the Company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company does not anticipate that the implementation of SFAS 130 will have a
material impact on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), effective for the Company's fiscal year
ending April 30, 2001. SFAS 133 requires companies to record derivative
instruments as assets or liabilities, measured at fair value. The recognition of
gains or losses resulting from changes in the values of those derivative
instruments is based on the use of each derivative instrument and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company has not yet determined the
effect of SFAS 133 on the consolidated financial statements.
NET EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), issued by the Financial Accounting Standards
Board in February 1997, which is effective for periods ending after December 15,
1997. SFAS 128, which simplifies the standards for computing and presenting
earnings per share, replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported primary earnings per share. Accordingly, net
earnings per share for all periods presented have been restated to conform to
the new standard.
25
<PAGE> 10
Basic net earnings per share is computed using the weighted average number
of common shares outstanding. The dilutive effect of potential common shares
outstanding are included in diluted net earnings per share. The computations of
basic and diluted net earnings per share are as follows (shares in thousands):
<TABLE>
<CAPTION>
Year Ended April 30
------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Net earnings from continuing operations $174,152 $143,777 $ 125,089
======== ======== =========
Basic weighted average shares 104,829 103,985 103,926
Effect of dilutive securities:
Common and convertible preferred stock options 1,229 230 525
Convertible preferred stock 1,515 1,625 1,608
-------- -------- ---------
Dilutive potential common shares 107,573 105,840 106,059
======== ======== =========
Net earnings per share from continuing operations:
Basic $1.66 $1.38 $1.20
Diluted 1.62 1.36 1.18
</TABLE>
Diluted net earnings per share excludes the impact of common stock options
of 244,071, 5,651,642 and 4,024,027 shares for 1998, 1997 and 1996,
respectively, because the options' exercise prices were greater than the
average market price of the common shares and therefore, the effect would be
antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
<TABLE>
<CAPTION>
April 30
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Municipal bonds $ 464,667 $ 14,000
Certificates of deposit 239,582 99,747
Commercial paper 132,972 195,015
Cash and interest-bearing deposits 58,765 58,671
U.S. Government obligations -- 62,586
Other interest-bearing securities 4,870 27,060
---------- ----------
$ 900,856 $ 457,079
========== ==========
</TABLE>
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30, 1998
and 1997 are summarized below:
<TABLE>
<CAPTION>
------------------------------------------ ------------------------------------------
1998 1997
------------------------------------------ ------------------------------------------
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 $ 149,842 $ -- $ 18 $149,824 $ 6,167 $ 17 $ 12 $ 6,172
Asset-backed securities 151,383 18 208 151,193 -- -- -- --
U.S. Government obligations -- -- -- -- 15,047 8 9 15,046
Other debt investments 45,000 141 -- 45,141 40,406 131 -- 40,537
--------- ------ ------ -------- --------- ------ ------ -------
346,225 159 226 346,158 61,620 156 21 61,755
--------- ------ ------ -------- --------- ------ ------ -------
Noncurrent:
Municipal bonds 181,060 96 1,472 179,684 15,039 325 135 15,229
Corporate bonds 68,790 -- 242 68,548 -- -- -- --
U.S. Government obligations 36,509 -- 228 36,281 -- -- -- --
Preferred stock -- -- -- -- 647 299 -- 946
Common stock 2,467 2,118 2 4,583 2,625 1,476 3 4,098
--------- ------ ------ -------- --------- ------ ------ -------
288,826 2,214 1,944 289,096 18,311 2,100 138 20,273
--------- ------ ------ -------- --------- ------ ------ -------
$ 635,051 $2,373 $2,170 $635,254 $ 79,931 $2,256 $ 159 $82,028
========= ====== ====== ======== ========= ====== ====== =======
</TABLE>
All marketable securities at April 30, 1998 are classified as
available-for-sale. Proceeds from the sales of available-for-sale securities
were $1,321,716, $23,852 and $155,170 during 1998, 1997 and 1996, respectively.
Gross realized gains on those sales during 1998, 1997 and 1996 were $1,826, $600
and $1,520, respectively; gross realized losses were $106, $146 and $386,
respectively. At April 30, 1998 and 1997, the net unrealized holding gain on
available-for-sale securities included in stockholders' equity in the
consolidated balance sheet was $126 and $1,326, respectively.
26
<PAGE> 11
Contractual maturities of available-for-sale debt securities at April 30,
1998 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
-------------------------------
<S> <C> <C>
Within one year $ 346,225 $ 346,158
After one year through five years 278,104 276,162
After five years through 10 years 8,255 8,351
--------- ---------
$ 632,584 $ 630,671
========= =========
</TABLE>
RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
April 30
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Mortgage loans held for sale $ 448,102 $ 107,115
Credit card loans 202,852 247,889
Other 187,597 82,581
--------- ----------
838,551 437,585
Allowance for doubtful accounts 45,314 30,144
--------- ----------
$ 793,237 $ 407,441
========= ==========
</TABLE>
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
April 30
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Land $ 2,872 $ 2,568
Buildings 21,350 19,812
Computer and other equipment 180,273 154,268
Leasehold improvements 39,891 31,311
--------- ----------
244,386 207,959
Less accumulated depreciation and amortization 167,065 142,894
--------- ----------
$ 77,321 $ 65,065
========= ==========
</TABLE>
Depreciation and amortization expense for 1998, 1997 and 1996 amounted to
$37,674, $30,727 and $21,006, respectively.
LONG-TERM DEBT
On October 21, 1997, the Company issued $250,000 of 6 3/4% Senior Notes under a
shelf registration statement. The Senior Notes are due November 1, 2004, and are
not redeemable prior to maturity. The net proceeds of this transaction were used
to repay short-term borrowings which initially funded the acquisition of Option
One Mortgage Corporation ("Option One"). Based upon borrowing rates currently
available to the Company for indebtness with similar terms, the fair value of
the long-term debt was approximately $254,515 at April 30, 1998.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
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 $29,885
and $32,990 at April 30, 1998 and 1997, respectively, to reflect the liability
under these plans. The Company purchased whole-life insurance contracts on
certain related directors and employees to recover a majority of 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 investment plus a factor for the use of its money.
27
<PAGE> 12
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years ended
April 30, 1998 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, 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)
Net earnings for the year -- -- -- -- -- 392,130 -- --
Stock options exercised -- -- 32,088 -- (1,832) -- 1,578,340 60,882
Unrealized loss on translation -- -- -- -- -- (5,290) -- --
Conversion of Convertible
Preferred Stock -- -- (435,972) (4) (68,018) -- 1,743,888 68,022
Cancellation of Convertible
Preferred Stock -- -- (910) -- (123) (46) -- --
Acquisition of treasury shares -- -- -- -- -- -- (408,850) (18,351)
Change in net unrealized gain
on marketable securities -- -- -- -- -- (1,200) -- --
Cash dividends paid --
$.80 per share -- -- -- -- -- (83,635) -- --
----------- ------ ------- ------ -------- -------- --------- ---------
Balances at April 30, 1998 108,972,699 $1,089 1,894 $ -- $432,335 $986,030 (1,992,043) $ (77,822)
=========== ====== ======= ====== ======== ======== ========= =========
</TABLE>
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1998, the Company had 5,560,833 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. In April 1995, 401,768 shares of Convertible
Preferred Stock were issued in connection with an acquisition. Each share of
Convertible Preferred Stock became convertible on 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. In April 1998, the Company issued 1,743,888
shares of its common stock upon conversion of 435,972 shares of the Convertible
Preferred Stock.
28
<PAGE> 13
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.
The plan for eligible seasonal employees, as amended, provided for the
grant of options on June 30, 1998, 1997 and 1996 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, 1998, 1997 and 1996 under these
plans were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 6,217,699 $35.78 6,413,928 $37.93 4,865,814 $35.73
Options granted 3,784,925 32.28 3,124,588 32.34 3,545,692 40.35
Options exercised (1,608,233) 33.63 (90,045) 20.08 (362,849) 29.02
Options which expired (3,283,999) 37.58 (3,230,772) 37.16 (1,634,729) 38.63
Options outstanding, end of year 5,110,392 32.71 6,217,699 35.78 6,413,928 37.93
Shares exercisable, end of year 3,428,615 32.87 4,506,372 36.00 4,029,301 37.56
Shares reserved for future grants, end of year 13,159,852 13,660,778 13,554,594
</TABLE>
A summary of stock options outstanding and exercisable at April 30, 1998
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 10,280 2 years $14.71 10,280 $14.71
$17.4375 - 28.75 397,731 7 years 26.70 230,564 26.03
$30.6875 - 39.875 4,458,310 9 years 32.82 3,027,390 33.02
$40 - 44.375 244,071 8 years 41.12 160,381 41.10
----------- -----------
5,110,392 3,428,615
=========== ===========
</TABLE>
In connection with a previous acquisition, outstanding options to purchase the
acquired company's 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 1998, 1997 and 1996, options to
purchase Convertible Preferred Stock of 32,088, 2,280 and 3,031, respectively,
were exercised, and 899, 11,163 and 2,052, respectively, were terminated. At
April 30, 1998, the options for the remaining 315 shares expired.
29
<PAGE> 14
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
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $392,130 $47,755 $177,168
Pro forma 379,985 34,891 168,232
Basic net earnings per share:
As reported $3.74 $.46 $1.70
Pro forma 3.62 .34 1.62
Diluted net earnings per share:
As reported $3.65 $.45 $1.67
Pro forma 3.55 .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, and therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years.
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
1998, 1997 and 1996 was $5.91, $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
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.21% 6.28% 5.89%
Expected life 3 years 3 years 3 years
Expected volatility 31.99% 34.08% 35.32%
Dividend yield 2.48% 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
acquirer 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, May 10, 1995, and March 25, 1998.
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 15% 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 at the
close of business on the tenth business day following the commencement of, or
the public announcement of an intent to commence, a tender offer that would
result in an Unapproved Stock Acquisition. When exercisable, the registered
holder of each Right may purchase from the Company one two-hundredths of a share
of a new class of the Company's Participating Preferred Stock, without par
value, at a price of $60.00, subject to adjustment. The registered holder of
each Right then also has the right (the "Subscription Right") to purchase for
the exercise price of the Right, in lieu of shares of Participating Preferred
Stock, a number of shares of the Company's Common Stock having a market value
equal to twice the exercise price of the Right. Following an Unapproved Stock
Acquisition, if the Company is involved in a merger, or 50% or more of the
Company's assets or earning power are sold, the registered holder of each right
has the right (the "Merger Right") to purchase for the exercise price of the
Right a number of shares of the common stock of the surviving or purchasing
company having a market value equal to twice the exercise price of the Right.
After an Unapproved Stock Acquisition, but before any person or group of
persons acquires 50% or more of the outstanding shares of the Company's Common
Stock, the Board of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of one share of
Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of
any holder to exercise a Right terminates. Upon the occurrence of any of the
events giving rise to the exercisability of the Subscription Right or the Merger
Right or the ability of the Board of Directors to effect the Exchange, the
Rights held by the acquiring person or group become void as they relate to the
Subscription Right, the Merger Right or the Exchange.
30
<PAGE> 15
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.
On March 25, 1998, the Company's Board of Directors adopted a new
shareholder rights plan which will become effective upon the earliest of the
termination or expiration of the existing plan or the date upon which the
existing plan is determined to have become ineffective, regardless of the reason
therefor. Under the new plan, a dividend of one Right per share was declared and
will be paid on each share of the Company's Common Stock outstanding on the
effective date of the new plan. Rights will automatically attach to shares
issued after such date.
Under the new plan, a Right will become exercisable in the event of an
Unapproved Stock Acquisition, and at the close of business on the tenth business
day following the commencement of, or the public announcement of an intent to
commence, a tender offer that would result in an Unapproved Stock Acquisition.
When exercisable, the registered holder of each Right under the new plan may
purchase from the Company one one-hundredth of a share of a class of the
Company's Participating Preferred Stock, without par value, at a price of
$215.00, subject to adjustment. The registered holder of each Right then also
will have a subscription right identical to the Subscription Right provided for
in the existing plan. 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 under the new plan will have a
merger right identical to the Merger Right provided for in the existing plan.
Under the new plan, the Board of Directors may effect an exchange in
circumstances and in a manner identical to the exchange provided for in the
existing plan. 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 under the new plan will become void as they relate to the
subscription right, the merger right or the exchange.
The Company may redeem the Rights under the new plan at a price of $.00125
per Right at any time prior to the earlier of (i) an Unapproved Stock
Acquisition, or (ii) the expiration of the rights. The Rights under the new plan
will expire on March 25, 2008, unless extended by the Board of Directors. Until
a Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including the right to vote or to receive dividends.
The issuance of the Rights alone will have no dilutive effect and will not
affect reported net earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Purchased services $ 17,971 $ 14,504 $ 10,866
Amortization of goodwill 17,352 5,531 11,471
Travel and entertainment 11,648 9,773 7,370
Taxes and licenses 11,396 10,475 8,788
Refund anticipation loan servicing fees 7,889 9,838 --
Legal and professional 6,382 6,105 6,360
Loan servicing 5,851 -- --
</TABLE>
TAXES ON EARNINGS
The components of earnings from continuing operations before income taxes upon
which Federal and foreign income taxes have been provided are as follows:
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
United States $269,558 $ 214,469 $188,749
Foreign 11,333 10,589 8,708
-------- --------- --------
$280,891 $ 225,058 $197,457
======== ========= ========
</TABLE>
31
<PAGE> 16
Deferred income tax provisions (benefits) reflect the impact of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The current and deferred
components of taxes on earnings from continuing operations is comprised of the
following:
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $103,099 $67,992 $59,234
State 13,796 7,710 7,891
Foreign 5,483 5,041 4,060
-------- ------- -------
122,378 80,743 71,185
-------- ------- -------
Deferred:
Accrued expenses (5,271) 1,215 --
Mark-to-market adjustments (3,312) (143) --
Allowance for credit losses (2,699) (1,382) --
Residual interest income (2,167) -- --
Deferred loan fees 1,921 -- --
Depreciation (1,501) 2,821 374
Accrued income (1,306) (112) 1,887
Deferred compensation (1,206) (1,877) (1,068)
Other (98) 16 (10)
-------- ------- -------
(15,639) 538 1,183
-------- ------- -------
$106,739 $81,281 $72,368
======== ======= =======
</TABLE>
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $64,208 at December 31, 1997. 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
----------------------------------
1998 1997 1996
----------------------------------
<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 2.8% 2.2% 2.6%
Foreign income taxes, net of Federal income tax benefit .5% .6% .5%
Nontaxable Federal income (.1%) (.5%) (.8%)
Other (.2%) (1.2%) (.6%)
----- ----- -----
Effective rate 38.0% 36.1% 36.7%
===== ===== =====
</TABLE>
ACQUISITIONS
On June 17, 1997, the Company acquired Option One, a company engaged in the
origination, purchase, servicing, securitization and sale of nonconforming
mortgage loans. The cash purchase price was $218,083, consisting of $28,083 in
adjusted stockholder's equity and a premium of $190,000. In addition, the
Company made cash payments of $456,163 to Option One's former parent to
eliminate intercompany loans made to Option One to finance its mortgage loan
operations. The $456,163 payment was recorded as an intercompany loan and was
repaid to the Company by the end of June 1997 after Option One sold the mortgage
loans to a third party in the ordinary course of business. The acquisition was
accounted for as a purchase and, accordingly, Option One's results are included
since the date of acquisition. The fair value of tangible assets acquired,
including cash, and liabilities assumed was $683,777 and $463,877, respectively.
Liabilities assumed were treated as a noncash investing activity in the
consolidated statement of cash flows for the year ended April 30, 1998. The
excess of cost over fair value of net tangible assets acquired was $183,077 and
is being amortized on a straight-line basis over 15 years. The acquisition was
ultimately financed with the issuance of $250,000 in Senior Notes during the
second quarter of fiscal 1998.
32
<PAGE> 17
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Option One as if the acquisition had occurred
on May 1, 1997 and 1996, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the acquisition
debt and the related income tax effects. The pro forma information is presented
for information purposes only and is not necessarily indicative of what would
have occurred if the acquisition had been made as of those dates. In addition,
the pro forma information is not intended to be a projection of future results.
<TABLE>
<CAPTION>
Year Ended April 30
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Revenues $1,314,071 $1,192,790
Net earnings from continuing operations 170,135 144,527
Net earnings 388,113 48,505
Basic net earnings per share $3.70 $ .47
Diluted net earnings per share 3.61 .46
</TABLE>
During fiscal 1998, 1997 and 1996, 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.
SALE OF SUBSIDIARIES
On January 31, 1998, the Company completed the sale of its 80.1% interest in
CompuServe to a subsidiary of WorldCom, Inc. ("WorldCom"). The Company recorded
a $231,867 gain, net of taxes, on the transaction. The sale was structured as a
stock-for-stock transaction in which the Company received 30,108,610 shares of
WorldCom stock in exchange for its 80.1% ownership interest (74,200,000 shares)
in CompuServe stock. The Company completed the transaction through its receipt
of $1,032,699 in net proceeds from the monetization of 100% of its WorldCom
stock in a block trade on February 2, 1998. As a part of the CompuServe
transaction, the Company has agreed to indemnify WorldCom and CompuServe against
80.1% of any losses and expenses incurred by them with respect to litigation and
claims brought against CompuServe, any of its current or former officers,
directors, employees, agents or underwriters relating to CompuServe's initial
public offering in April 1996. The shares of WorldCom stock received in the
stock-for-stock transaction were treated as a noncash investing activity in the
consolidated statement of cash flows for the year ended April 30, 1998. The
consolidated financial statements reflect CompuServe as discontinued operations.
Revenues from CompuServe for the years ended April 30, 1998, 1997 and 1996 were
$628,245, $841,887 and $793,165, respectively.
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 pretax gain of $12,445, which is included in other income for
the year ended April 30, 1996.
COMMITMENTS AND CONTINGENCIES
Substantially all of the operations of the Company's subsidiaries 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, 1998, for fiscal 1999, 2000, 2001, 2002 and 2003
aggregated $47,186, $37,857, $24,957, $13,138 and $6,617, respectively, with no
significant commitments extending beyond that period of time. The Company's rent
expense for the years 1998, 1997 and 1996 aggregated $84,912, $78,141 and
$65,521, 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
$779,195 and $923,348 at April 30, 1998 and 1997, 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, from a 40%-owned affiliate, 60% of
the mortgage loan volume which meets certain criteria as established by the
Company. The Company purchased $298,405 and $122,535 of such loans during the
years ended April 30, 1998 and 1997, respectively, which may not be indicative
of future obligations. The Company also extends warehouse financing of $100,000
to this affiliate to facilitate the accumulation of mortgage loans, of which
$68,434 and $8,199 was drawn at April 30, 1998 and 1997, respectively.
33
<PAGE> 18
The Company has commitments to fund mortgage loans to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The
commitments to fund loans amounted to $199,487 at April 30, 1998. External
market forces impact the probability of commitments being exercised, and
therefore, total commitments outstanding do not necessarily represent future
cash requirements.
At April 30, 1998, the Company maintained a $1,800,000 backup credit
facility to support various financial activities conducted by its subsidiaries
through the commercial paper program. The annual commitment fee required to
support the availability of this facility is eight basis points per annum on the
unused portion of the facility. Among other provisions, the credit agreement
limits the Company's indebtedness.
The Company is responsible for servicing mortgage loans for others of
$2,924,683, subservicing loans of $1,389,851, and the master servicing of
$418,161 previously securitized mortgage loans held in trust at April 30, 1998.
The mortgage loans held in trust are serviced by a related party. Fiduciary bank
accounts that are maintained on behalf of investors and for impounded
collections were $67,650 at April 30, 1998. These bank accounts are not assets
of the Company and are not reflected in the accompanying consolidated financial
statements.
CompuServe, certain current and former officers and directors of CompuServe
and the Company 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. 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. In the opinion
of management, the ultimate resolution of these suits will not have a material
adverse impact on the Company's consolidated financial position or future
results of operations.
FINANCIAL INSTRUMENTS
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 gains on the treasury securities
hedging instrument amounted to $127 at April 30, 1998. The contract value and
market value of this hedging instrument as of April 30, 1998 was $39,992 and
$40,111, respectively. The contract value and market value of the forward
commitment as of April 30, 1998 was $210,000 and $210,714, respectively.
The Company purchases these instruments 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. Mortgage loans made to subprime borrowers present a higher level of
risk of default than conforming loans. These loans also involve additional
liquidity risk due to a more limited secondary market than conforming loans.
While the Company believes that the underwriting procedures and appraisal
processes it employs enable it to mitigate these risks, no assurance can be
given that such procedures or processes will be adequate protection against
these risks. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has committed to buy or fund and
commitments made to credit card holders to meet their financing needs.
34
<PAGE> 19
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED FISCAL 1997 QUARTER ENDED
-----------------------------------------------------------------------------------------------
APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31,
1998 1998 1997 1997 1997 1997 1996 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 975,900 $ 208,683 $ 82,992 39,210 $ 880,597 $ 155,137 $ 41,107 $ 20,615
========== ========== ========== ========= ========= ========== ========== =========
Continuing operations:
Earnings (loss) before
income taxes (benefits) $ 414,384 $ (28,155) $ (49,829) $ (55,509) $ 337,847 $ (22,418) $ (44,484) $ (45,887)
Taxes (benefits) on earnings 157,466 (10,699) (19,380) (20,648) 124,028 (8,496) (16,860) (17,391)
---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
Net earnings (loss) 256,918 (17,456) (30,449) (34,861) 213,819 (13,922) (27,624) (28,496)
Net earnings (loss) from
discontinued operations -- 167 (10,782) (3,274) (14,384) (11,404) (46,504) (23,730)
Net gain on sale of
discontinued operations -- 231,867 -- -- -- -- -- --
---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
Net earnings (loss) $ 256,918 $ 214,578 $ (41,231) $ (38,135) $ 199,435 $ (25,326) $ (74,128) $ (52,226)
========== ========== ========== ========= ========== ========== ========== =========
Basic net earnings per share:
Net earnings (loss) from
continuing operations $ 2.43 $ (.17) $ (.29) $ (.33) $ 2.05 $ (.13) $ (.27) $ (.27)
========== ========== ========== ========= ========== ========== ========== =========
Net earnings (loss) $ 2.43 $ 2.04 $ (.39) $ (.37) $ 1.91 $ (.24) $ (.71) $ (.50)
========== ========== ========== ========= ========== ========== ========== =========
Diluted net earnings per share:
Net earnings (loss) from
continuing operations $ 2.37 $ (.17) $ (.29) $ (.33) $ 2.03 $ (.13) $ (.27) $ (.27)
========== ========== ========== ========= ========== ========== ========== =========
Net earnings (loss) $ 2.37 $ 2.04 $ (.39) $ (.37) $ 1.90 $ (.24) $ (.71) $ (.50)
========== ========== ========== ========= ========== ========== ========== =========
</TABLE>
The accumulation of four quarters in fiscal 1998 for basic net earnings
per share from continuing operations, basic net earnings per share and diluted
net earnings per share from continuing operations is less than the related per
share amounts for the year ended April 30, 1998 due to the timing of the
exercise of stock options and the conversion of the Convertible Preferred
Stock.
Revenues for the first quarter of fiscal 1998 of $39,210 differs from
the amount reported on Form 10-Q for the three months ended July 31, 1997 by
$4,757 due to certain reclassifications made to conform with the current year
presentation.
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Block Financial Corporation, an indirect,
wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
April 30
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 30,895 $ 3,425
Finance receivables, net 737,005 380,206
Other assets 311,759 34,657
---------- --------
Total assets $1,079,659 $418,288
========== ========
Commercial paper $ 643,002 $269,619
Long-term debt 249,675 --
Other liabilities 57,372 26,867
Stockholder's equity 129,610 121,802
---------- --------
Total liabilities and stockholder's equity $1,079,659 $418,288
========== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Condensed statements of operations:
Revenues $246,787 $ 110,777 $ 36,854
Earnings (loss) from operations 12,859 7,053 (7,368)
Earnings before income taxes 12,859 7,053 5,077
Net earnings (loss) 7,813 4,337 (255)
</TABLE>
35
<PAGE> 20
SEGMENT INFORMATION
The principal business activity of the Company's operating subsidiaries is
providing tax and financial services to the general public. Management has
determined the reportable segments identified below according to differences in
types of services, geographic locations, and how operational decisions are made.
Geographical information is presented within the segment data below. All foreign
countries in which subsidiaries of the Company operate, which are individually
immaterial, are included in International Tax Operations. Included below is the
financial information on each segment that is used by management to evaluate the
segment's results. The Company operates in the following reportable segments:
U.S. Tax Operations: This segment is primarily engaged in providing tax
return preparation, filing, and related services to the general public in the
United States. Tax-related service revenue includes fees from company-owned tax
offices and royalties from franchised offices. This segment also purchases
participation interests in refund anticipation loans made by a third party
lending institution which are offered to tax clients, and provides tax
preparation and other personal productivity software to the general public.
Revenues of this segment are seasonal in nature.
International Tax Operations: This segment is primarily engaged in
providing tax return preparation, filing, and related services to the general
public in Canada, Australia and the United Kingdom. In addition, International
Tax Operations has franchise offices in eight countries. Tax-related service
revenue includes fees from company-owned tax offices and royalties from
franchised offices. Revenues of this segment are seasonal in nature.
Mortgage Operations: This segment is primarily engaged in the origination,
purchase, servicing, securitization and sale of nonconforming mortgage loans in
the United States. Mortgage origination services are offered through a network
of mortgage brokers in 46 states and through H&R Block tax offices in 15 states.
Credit Card Operations: This segment operates in the United States and
sponsors credit card loans under a co-branded agreement and, through an Internet
site and an online service provider, allows cardholders access to account
transactions and payment detail through an online lookup feature.
Identifiable Assets: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated with
each reportable segment. The remaining assets are classified as corporate assets
and consist primarily of cash, marketable securities and corporate equipment.
36
<PAGE> 21
Information concerning the Company's operations by reportable segment for the
years ended April 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
REVENUES:
U.S. tax operations $ 1,047,324 $ 966,524 $ 759,354
International tax operations 81,754 87,493 81,822
Mortgage operations 135,778 8,895 91
Credit card operations 37,404 31,513 24,876
Unallocated corporate 5,125 3,498 5,720
Intersegment sales (600) (467) (330)
----------- ----------- -----------
Total revenues $ 1,306,785 $ 1,097,456 $ 871,533
=========== =========== ===========
EARNINGS FROM CONTINUING OPERATIONS:
U.S. tax operations $ 253,278 $ 210,365 $ 173,098
International tax operations 11,922 14,172 11,731
Mortgage operations 30,811 865 91
Credit card operations (15,542) (7,025) (2,550)
Unallocated corporate (11,444) (4,189) (5,848)
Investment income, net 25,597 10,870 8,490
Acquisition interest expense (13,731) -- --
Other, net -- -- 12,445
----------- ----------- -----------
Earnings from continuing operations before income taxes $ 280,891 $ 225,058 $ 197,457
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
U.S. tax operations $ 37,313 $ 31,981 $ 28,804
International tax operations 4,541 3,594 3,168
Mortgage operations 12,690 56 --
Credit card operations 815 505 244
Unallocated corporate 428 390 261
----------- ----------- -----------
Total depreciation and amortization $ 55,787 $ 36,526 $ 32,477
=========== =========== ===========
IDENTIFIABLE ASSETS:
U.S. tax operations $ 200,243 $ 189,007 $ 119,653
International tax operations 48,362 39,145 27,529
Mortgage operations 829,396 125,734 11,173
Credit card operations 202,412 253,052 168,049
Unallocated corporate 1,623,670 577,976 473,647
Net assets of discontinued operations -- 522,144 617,510
----------- ----------- -----------
Total assets $ 2,904,083 $ 1,707,058 $ 1,417,561
=========== =========== ===========
CAPITAL EXPENDITURES:
U.S. tax operations $ 36,495 $ 38,760 $ 34,987
International tax operations 7,013 4,773 1,906
Mortgage operations 4,736 205 --
Credit card operations 224 736 463
Unallocated corporate 1,513 279 660
----------- ----------- -----------
Total capital expenditures $ 49,981 $ 44,753 $ 38,016
=========== =========== ===========
</TABLE>
37
<PAGE> 22
MANAGEMENT'S REPORT
The financial information in this Annual Report, including the consolidated
financial statements, has been prepared by the management of H&R Block, Inc.
Management believes the information presented in the Annual Report is consistent
with the financial statements, the financial statements are prepared in
accordance with generally accepted accounting principles, and the financial
statements do not contain material misstatements due to fraud or error. Where
appropriate, the financial statements reflect management's best estimates and
judgments.
Management also is responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance that
the Company's assets are safeguarded against material loss from unauthorized use
or disposition, and that authorized transactions are properly recorded to permit
the preparation of accurate financial data. However, limitations exist in any
system of internal controls based on a recognition that the cost of the system
should not exceed its benefits. The Company believes its system of accounting
controls, of which its internal auditing function is an integral part,
accomplishes the stated objectives.
Deloitte & Touche LLP, independent accountants, audit H&R Block's
consolidated financial statements and issue an opinion thereon. Their audits are
made in accordance with generally accepted auditing standards and include an
objective, independent review of the system of internal controls to the extent
necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed of outside
directors, meets periodically with management, the independent accountants and
the internal auditor to review matters relating to the Company's annual
financial statements, internal audit activities, internal accounting controls
and non-audit services provided by the independent accountants. The independent
accountants and the internal auditor have full access to the Audit Committee and
meet with it, both with and without management present, to discuss the scope and
results of their audits including internal controls, audit and financial
matters.
/s/ Frank L. Salizzoni
Frank L. Salizzoni
President and Chief Executive Officer
/s/ Ozzie Wenich
Senior Vice President and
Chief Financial Officer
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, 1998 and 1997, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998, in conformity with generally accepted accounting principles.
/S/ Deloitte & Touche LLP
Kansas City, Missouri
June 16, 1998
38
<PAGE> 23
COMMON STOCK DATA
<TABLE>
<CAPTION>
Stock Price Cash Dividend
-----------------------
High Low Paid per Share
-------- ------ --------------
<S> <C> <C> <C>
1997 Fiscal Year:
Quarter ended 7/31/96 36 3/8 23 5/8 .32
Quarter ended 10/31/96 30 1/8 23 5/8 .32
Quarter ended 1/31/97 32 3/4 24 3/4 .20
Quarter ended 4/30/97 33 28 5/8 .20
1998 Fiscal Year:
Quarter ended 7/31/97 38 1/2 30 5/8 .20
Quarter ended 10/31/97 42 1/4 33 3/4 .20
Quarter ended 1/31/98 45 3/4 37 3/8 .20
Quarter ended 4/30/98 49 1/16 42 7/8 .20
</TABLE>
Traded on the New York Stock Exchange; Ticker Symbol: HRB
40
<PAGE> 24
Selected Financial Data
In thousands, except per share amounts and number of shareholders
<TABLE>
<CAPTION>
Year Ended April 30
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Total revenues $1,306,785 $1,097,456 $ 871,533 $ 766,323 $ 806,721
Net earnings from continuing operations (1) $ 174,152 $ 143,777 $ 125,089 $ 97,989 $ 103,052
Net earnings (1) $ 392,130 $ 47,755 $ 177,168 $ 107,259 $ 200,528
AT YEAR END:
Total assets $2,904,083 $1,707,058 $1,755,891 $1,097,313 $1,093,245
Cash, cash equivalents and marketable securities $1,536,110 $ 539,107 $ 745,693 $ 444,981 $ 620,091
Long-term debt $ 249,675 -- -- -- --
Stockholders' equity $1,341,632 $ 999,097 $1,039,593 $ 685,865 $ 707,875
Shares outstanding 106,981 104,067 103,417 104,863 106,149
Number of shareholders 31,177 33,517 35,634 38,053 35,514
MEASUREMENTS:
Per basic share of common stock:
Net earnings from continuing operations (1) $ 1.66 $ 1.38 $ 1.20 $ .93 $ .97
Net earnings (1) $ 3.74 $ .46 $ 1.70 $ 1.02 $ 1.89
Per diluted share of common stock:
Net earnings from continuing operations (1) $ 1.62 $ 1.36 $ 1.18 $ .92 $ .97
Net earnings (1) $ 3.65 $ .45 $ 1.67 $ 1.01 $ 1.88
Other per share data:
Cash dividends declared $ .80 $ 1.04 $ 1.27 1/4 $ 1.21 3/4 $ 1.09
Net tangible book value $ 9.84 $ 8.88 $ 9.46 $ 5.79 $ 6.03
Return on total revenues (2) 13.3% 13.1% 14.4% 12.8% 15.9%
Return on beginning stockholders' equity 39.2% 4.6% 25.8% 15.2% 30.8%
</TABLE>
(1) Fiscal 1994 includes a charge to earnings from continuing operations of
$25,072 ($.24 per basic and diluted share) for purchased research and
development in connection with the acquisition of MECA Software, Inc. Fiscal
1995 includes a charge to earnings from discontinued operations of $83,508
($.79 per basic share and $.78 per diluted share) for purchased research and
development in connection with a previous acquisition.
(2) Before charge for purchased research and development.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business under
their corporate names listed below or close derivatives thereof:
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
H&R Block Group, Inc.................... Delaware (1)
Block Investment Corporation............ Delaware (1)
HRB Management, Inc..................... Missouri (2)
H&R Block Tax Services, Inc............. Missouri (2)
H&R Block Eastern Tax Services, Inc..... Missouri (3)
Bay Colony, Ltd......................... Virginia (4)
H&R Block of Dallas, Inc................ Texas (3)
HRB Partners, Inc....................... Delaware (5)
H&R Block and Associates, L.P........... Delaware (6)
HRB Royalty, Inc........................ Delaware (3)
BWA Advertising, Inc.................... Missouri (3)
H&R Block Canada, Inc................... Canada (3)
H&R Block (Nova Scotia), Incorporated... Nova Scotia (7)
Cashplan Systems, Inc................... British Columbia (7)
Two Dog Ranch Ltd....................... British Columbia (7)
H&R Block (Guam), Inc................... Guam (3)
H&R Block Limited....................... New South Wales (8)
H&R Block The Income Tax People Limited. New Zealand (3)
Block Financial Corporation............. Delaware (2)
Franchise Partner, Inc.................. Nevada (9)
HRB Investments, Inc.................... Delaware (9)
H&R Block Insurance Services, Inc....... Delaware (9)
HRB Financial Services, Inc............. Delaware (9)
WebBank Corporation..................... Utah (9)
MECA Sub - LFOD, Ltd.................... New Hampshire (9)
Companion Mortgage Corporation.......... Delaware (9)
Block Mortgage Finance, Inc............. Delaware (10)
Option One Mortgage Corporation......... California (9)
Option One Mortgage Acceptance
Corporation........................... Delaware (11)
Premier Trust Deed Services, Inc........ California (11)
Premier Mortgage Services of Washington,
Inc............................... Washington (12)
H&R Block Home Loans, Inc............... California (11)
H&R Block Home Loans, Inc............... Ontario (11)
H&R Block Mortgage Company, L.L.C....... Virginia (13)
H&R Block Mortgage Company, Inc......... Delaware (3)
HRB Business Services, Inc.............. Delaware (2)
DMJK Business Services, Inc............. Missouri (14)
Access Technology, Inc.................. Massachusetts (15)
Companion Insurance, Ltd................ Bermuda (15)
H&R Block Tax and Financial Services
Limited................................ United Kingdom (15)
PM Industries, Inc...................... Kansas (15)
NCS Mortgage Services, L.L.C............ Georgia (16)
National Consumer Services,
Corp.II, L.L.C........................ Georgia (16)
<PAGE> 2
Notes to Subsidiaries of H&R Block, Inc.:
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of H&R Block Tax Services, Inc.
(4) Wholly owned subsidiary of H&R Block Eastern Tax Services, Inc.
(5) Wholly owned subsidiary of H&R Block of Dallas, Inc.
(6) Limited partnership in which H&R Block Tax Services, Inc. is a 1% general
partner and HRB Partners, Inc. is a 99% limited partner
(7) Wholly owned subsidiary of H&R Block Canada, Inc.
(8) Wholly owned subsidiary of HRB Royalty, Inc.
(9) Wholly owned subsidiary of Block Financial Corporation
(10) Wholly owned subsidiary of Companion Mortgage Corporation
(11) Wholly owned subsidiary of Option One Mortgage Corporation
(12) Wholly owned subsidiary of Premier Trust Deed Services, Inc.
(13) Limited liability company in which H&R Block Tax Services, Inc. has a 99%
membership interest and Block Financial Corporation has a 1% membership
interest
(14) Wholly owned subsidiary of HRB Business Services, Inc.
(15) Wholly owned subsidiary of HRB Management, Inc.
(16) Limited liability company in which H&R Block Mortgage Company L.L.C. has a
40% membership interest and non-affiliated individuals having a combined
60% membership interest.
2
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8, Registration
Statement No. 33-54985 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8, Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock issuable
under the Spry, Inc. 1995 Stock Option Plan) on Form S-8, Registration Statement
No. 333-33039 of H&R Block, Inc. and subsidiaries (relating to shares of Common
Stock issuable under the Third Stock Option Plan for Seasonal Employees) on Form
S-8, and Registration Statement No. 333-42143 of H&R Block, Inc. and
subsidiaries (relating to shares of Common Stock issued under the H&R Block
Stock Plan for Non-Employee Directors) on Form S-8 of our reports dated June 16,
1998, appearing in and incorporated by reference in this Annual Report on Form
10-K of H&R Block, Inc. and subsidiaries for the year ended April 30, 1998.
/s/Deloitte & Touche LLP
Kansas City, Missouri
July 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> APR-30-1998 APR-30-1997 APR-30-1996
<PERIOD-END> APR-30-1998 APR-30-1997 APR-30-1996
<CASH> 900,856 457,079 58,414
<SECURITIES> 346,158 61,755 360,212
<RECEIVABLES> 838,551 437,585 218,967
<ALLOWANCES> 45,314 30,144 4,419
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,143,277 1,480,090 1,262,910
<PP&E> 244,386 207,959 174,429
<DEPRECIATION> 167,065 142,894 122,914
<TOTAL-ASSETS> 2,904,083 1,707,058 1,417,561
<CURRENT-LIABILITIES> 1,276,892 669,009 339,746
<BONDS> 0 0 0
0 0 0
0 4 4
<COMMON> 1,089 1,089 1,089
<OTHER-SE> 1,340,543 998,004 1,038,500
<TOTAL-LIABILITY-AND-EQUITY> 2,904,083 1,707,058 1,417,561
<SALES> 0 0 0
<TOTAL-REVENUES> 1,306,785 1,097,456 871,533
<CGS> 0 0 0
<TOTAL-COSTS> 1,050,810 883,268 695,011
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 280,891 225,058 197,457
<INCOME-TAX> 106,739 81,281 72,368
<INCOME-CONTINUING> 174,152 143,777 125,089
<DISCONTINUED> 217,978<F1> (96,022)<F2> 52,079<F3>
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 392,130 47,755 177,168
<EPS-PRIMARY> 3.74 .46 1.70
<EPS-DILUTED> 3.65 .45 1.67
<FN>
<F1>NET OF TAXES OF $244,424.
<F2>NET OF TAX BENEFIT OF ($53,421).
<F3>NET OF TAXES OF $35,757.
</FN>
</TABLE>
