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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
Missouri 44-0607856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4400 Main Street, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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, 1999, was $4,508,263,083.
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1999: 97,640,766.
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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, 1999, 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, 1999, 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 81% of the consolidated revenues of the
Company in fiscal year 1999 were generated by subsidiaries involved in tax
return preparation, electronic filing of income tax returns and other
tax-related services. The Company's subsidiaries also originate, purchase,
service, sell and securitize mortgages, offer personal productivity software,
purchase participation interests in refund anticipation loans made by a
third-party lender, offer accounting, tax and consulting services to business
clients and provide financial products and services.
Developments during fiscal year 1999 within U.S. Tax Operations,
International Tax Operations, Mortgage Operations and Business Services are
described in the section below entitled "Description of Business."
Effective September 1, 1998, Mark A. Ernst became Executive Vice President
and Chief Operating Officer of the Company, a newly created position. Mr.
Ernst was formerly a senior vice president for American Express Company. As
the Executive Vice President and Chief Operating Officer, Mr. Ernst's
responsibilities during fiscal year 1999 included oversight of the Company's
U.S. and international tax operations, its software operations, mortgage
operations and the development of new financial products and services.
During the 1999 fiscal year, subsidiaries of the Company acquired the
stock or non-attest assets of six regional accounting firms and several smaller
local accounting firms. Shortly after the 1999 fiscal year end, the Company
acquired the non-attest assets of another regional accounting firm, bringing
the total to seven, and thereafter announced that it had signed an agreement to
acquire substantially all of the non-attest assets of McGladrey & Pullen, LLP
("M&P"), the nation's seventh largest accounting and consulting firm. All of
these transactions are described below in the "Business Services" portion of
the section entitled "Description of Business." The Company also acquired a
conventional mortgage company based near Boston, Massachusetts, and a
subsidiary of the Company acquired a full-service investment firm located in
Kansas City, Missouri. The descriptions of these two acquisitions are
respectively set forth in the "Mortgage Operations" and "Other Business"
portions of the section below entitled "Description of Business."
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On July 21, 1999, the Company announced that it is evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner, and that it remains committed to the retail mortgage
business. There are no assurances that any transaction will take place, and
any transaction will be subject to the approval of the Company's Board of
Directors.
On January 29, 1999, Block Financial Corporation, an indirect subsidiary
of the Company, completed the sale of its WebCard Visa credit card portfolio to
Providian National Bank in San Francisco. The credit card business was listed
as a separate business segment in the Company's Form 10-K for the fiscal year
ended April 30, 1998. The Company recorded a $20.9 million loss, net of taxes,
on the transaction.
During the fiscal year ended April 30, 1999, 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.
The information contained in this Form 10-K and the exhibits hereto may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of the satisfaction of all closing conditions set forth in
the agreement to acquire substantially all of the non-attest assets of M&P and
the completion of the M&P transaction; the uncertainty of the entry by the
Company into any agreement regarding any sale, joint venture, or other
strategic action involving Option One; the uncertainty regarding the completion
of any transaction involving Option One; the uncertainty of laws, legislation,
regulations, supervision and licensing by Federal, state and local authorities
and their impact on any proposed or possible transactions and the lines of
business in which the Company's subsidiaries are involved; year 2000 readiness
of the Company and external parties; unforeseen compliance costs; changes in
economic, political or regulatory environments; changes in competition and the
effects of such changes; the inability of the Company's subsidiaries to
successfully expand the national accounting practice, the retail mortgage
business, the H&R Block Financial Center operations, other financial planning
and investment services operations, and the H&R Block Premium segment and other
aspects of the tax business; the inability to implement the Company's
strategies with respect to such expansion and other strategies; termination by
either party of the license agreement between H&R Block Tax Services, Inc. and
Sears, Roebuck & Co.; changes in management and management strategies; the
Company's inability to successfully design, create, modify and operate its
computer systems and networks; litigation involving the Company; and risks
described from time to time in reports and registration statements filed by the
Company and its subsidiaries with the Securities and Exchange Commission.
Readers should take these factors and risks into account in evaluating any such
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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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, 1999, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned subsidiaries,
has approximately 4,200 regular full-time employees. The highest number of
persons employed by the Company during the fiscal year ended April 30, 1999,
including seasonal employees, was approximately 86,500.
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 16,542,000 taxpayers in
the United States during fiscal year 1999, an increase from 15,835,000
taxpayers served in fiscal year 1998 and 15,625,000 taxpayers served in fiscal
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.
Tax Return Preparation. During the 1999 income tax filing season (January
2 through April 30), H&R Block offices in the United States prepared
approximately 15,761,000 individual income tax returns, compared to the
preparation of 14,838,000 such returns in fiscal year 1998 and 14,302,000 such
returns in fiscal year 1997. These returns constituted about 13.7% of an IRS
estimate of total individual income tax returns filed as of April 30, 1999. The
following table shows the approximate number of income tax returns prepared at
H&R Block offices during the last five tax filing seasons:
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<TABLE>
<CAPTION>
Tax Season Ended April 30
(in thousands)
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
Returns Prepared 12,918 13,360 14,302 14,838 15,761
</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, 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 in fiscal year 1999 to 617, as compared to 598 in
fiscal year 1998 and 581 in fiscal 1997. In fiscal 1999, the number of H&R
Block Premium clients increased to approximately 719,000, compared to
approximately 647,000 in fiscal year 1998 and approximately 666,000 in fiscal
year 1997.
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 1999 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Household 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.
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 Household Bank in
1999) 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 11,139,000 U.S. tax returns electronically
in fiscal 1999, compared to 9,423,000 in fiscal 1998 and 7,279,000 in fiscal
1997. Approximately 2,811,000 refund
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anticipation loans were processed in fiscal 1999 by H&R Block, compared to
2,420,000 in fiscal 1998 and 2,573,000 in fiscal 1997. Approximately 1,916,000
electronic refunds were processed in fiscal 1999 by H&R Block, compared to
1,855,000 in fiscal 1998 and 1,871,300 in fiscal 1997.
In 1999, H&R Block offered a service to transmit state income tax returns
electronically to state tax authorities in 38 states and the District of
Columbia (compared to 35 states and the District of Columbia in fiscal 1998 and
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 1999 fiscal year, 159,216 students enrolled in H&R
Block's basic and advanced income tax courses in the United States, compared to
130,884 students during fiscal year 1998 and 111,428 students during fiscal
year 1997.
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.
In fiscal year 1999, H&R Block also operated 729 offices in department
stores in the United States, including 723 offices in Sears, Roebuck & Co.
stores operated as "Sears Income Tax Service by H&R Block." During the 1999 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 relating to Tax Service's operation in Sears locations
throughout the United States. Such license agreement expires on December 31,
2004, subject to termination rights of both parties for a limited period of
time after each tax season. Tax Services views the operations under its
relationship with Sears to date as satisfactory and such relationship to be
amicable in general, although it is in negotiations with Sears regarding a
dispute over commissions owed to Sears under such agreement.
On April 15, 1999, there were 8,923 H&R Block offices in operation in the
United States compared to 8,780 offices in operation on April 15, 1998, and
8,554 offices in operation on April 15,
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1997. Of the 8,923 offices, 4,880 were owned and operated by Tax Services
(compared to 4,640 in fiscal year 1998 and 4,483 in fiscal year 1997) and 4,043
were owned and operated by independent franchisees (compared to 4,140 in fiscal
1998 and 4,071 in fiscal 1997). Of such franchised offices in fiscal 1999,
2,698 were operated by "satellite" franchisees of Tax Services (described
below), 796 were operated by "major" franchisees (described below) and 549 were
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 its 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 1999, Tax Services acquired 69 tax offices
in the United States, including 26 H&R Block franchise offices and 43 offices
of other tax businesses.
Participation Interests in RALs. Block Financial Corporation ("BFC") is
party to a July 1996 agreement with Household Bank ("Household") to purchase a
participation interest in refund anticipation loans provided by Household 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. In fiscal 1999, the participation
interest was increased to 49.9% in Company-owned RALs, and BFC began
participating in 25% of major franchise RALs (previously there was no such
participation). 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 1999 was
approximately $90.2 million (compared to revenue of $53.3 million in fiscal
1998 and $54.5 million in fiscal 1997), generating approximately $19.1 million
in pretax profits (compared to $6.4 million in pretax profits in fiscal year
1998 and $8.1 million in pretax profits in fiscal year 1997). The increase in
revenues and pretax profits resulted from a 40.4% increase in the number of RAL
participations over last year due to the increase in the participation
percentage.
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Software Products. BFC develops and markets the Kiplinger TaxCut(R)
tax preparation software package, as well as markets Kiplinger's Home Legal
Advisor (SM), Kiplinger's Small Business Attorney(R), Kiplinger's NetWealth
(SM), Kiplinger's WILLPower (SM) and Names & Dates(R) software products. As a
result of the increase in sales of TaxCut's final edition in fiscal year 1999,
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
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
Block Mortgage
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks: America's Largest Tax Service and
Nation's Largest Tax Service.
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax
Services.
BFC claims ownership of the following services marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
<TABLE>
<S> <C>
Audit Buster Financial Finder
B and Design Names & Dates
Block Financial Small Business Attorney
Block Financial and Design TaxCut
Conductor Web
Conductor and Baton Design WebBank
Conductor and Hand-Held Baton Design WebPay
Conductor Card Review
</TABLE>
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BFC also claims ownership of the following unregistered service marks and
trademarks:
<TABLE>
<S> <C>
CONDUCTOR.COM WebAccount
DittoCard WebBroker
Download Depot WebBuyer
Fast Lane WebCheck
Home Legal Advisor WebChecking
Your Complete Personal Legal Resource WebQuote
Solve Your Everyday Business Problems NetWealth
The Easy Way to Financial Success NetWealth and Design
The Fastest and Easiest Way To Do Your Taxes WILLPower
</TABLE>
BFC also 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.
At the time BFC sold the credit card portfolio in January 1999, it granted
to Providian National Bank a non-exclusive, non-transferable and royalty-free
licenses to use the mark "Conductor and Baton Design" for up to two years, the
patent "SYSTEM FOR ON-LINE FINANCIAL SERVICES USING DISTRIBUTED OBJECTS" for a
period of ten years, and the mark "CONDUCTOR.COM" perpetually.
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 1999, 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,
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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.
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.
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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 have fallen short
of adoption, such issues have received more serious attention in recent 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
tax returns, electronic filing and related services to the general public in
Canada, Australia and the United Kingdom. Tax preparation of U.S. tax returns
and related services are offered by franchisees in ten countries. The
electronic filing of U.S. income tax returns is offered at franchised offices
located in Europe, and the electronic filing of Australian, Canadian and United
Kingdom income tax returns is offered at H&R Block offices in Australia, Canada
and the United Kingdom, respectively.
The returns prepared at 1,466 H&R Block offices in countries outside of
the United States constituted 12.8% of the total returns prepared by H&R Block
in the last fiscal year (compared to 13.8% in fiscal year 1998 and 15.2% in
fiscal year 1997).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,858,000 Canadian regular and discounted
returns filed with Revenue Canada during the 1999 income tax filing season,
compared with 1,945,000 Canadian returns prepared during fiscal year 1998 and
2,156,000 Canadian returns prepared in fiscal 1997. The number of offices
operated by H&R Block in Canada increased in fiscal year 1999 to 1,032 from 928
in fiscal year 1998 and 1,021 in 1997. Of the 1,032 offices in Canada, 574
were owned and operated by Block Canada and 458 were owned and operated by
franchisees. H&R Block operated 164 offices in department stores in Canada in
fiscal year 1999, including 86 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 (i) 85% of that portion
of the anticipated refund which is less than or equal to $300 and (ii) 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 516,000 in fiscal year 1999 from 532,000 in fiscal year 1998 and
583,000 in fiscal year 1997. Block Canada also provides check-cashing and
other low-end financial services through its subsidiary Cashplan Systems Inc.
Operating under the name "CashPlan," this service complements the CashBack
service.
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<PAGE> 12
In some parts of Canada, CashBack offices have been separated from regular
tax return preparation offices. Operating under the "Financial Stop" name
(without H&R Block signage), 217 offices offered the CashBack refund
discounting services, as well as the preparation of simple tax returns and
check cashing services, as compared to 147 offices in 1998.
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 428,000 in fiscal year 1999 from 406,000
in fiscal 1998 and 403,000 in fiscal year 1997. The number of offices operated
by H&R Block in Australia in fiscal year 1999 was 347, compared to 334 offices
operated in fiscal 1998 and 302 offices operated in fiscal 1997. Of the 347
offices, 213 were owned and operated by H&R Block Limited and 134 were
franchised offices. The tax season in Australia begins in July and ends in
October.
United Kingdom Operations. The Tax Team Limited, a Horsham-based firm
acquired by an indirect subsidiary of the Company, provides tax return
preparation services in the United Kingdom. The number of offices operated by
the Tax Team in fiscal year 1999 decreased to 26 from 28 in 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. Conforming mortgages are those that may be offered through government
sponsored loan agencies.
MORTGAGE OPERATIONS
Generally. The mortgage operations reportable segment is primarily engaged
in the origination, purchase, servicing, securitization and sale of conforming
and nonconforming mortgage loans in the United States. Conforming mortgages are
those that may be offered through government sponsored loan agencies.
Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies, and typically involve borrowers with
impaired credit, who have substantial equity in the property which will be used
to secure the loan. Mortgage origination services were offered in fiscal year
1999 through a network of mortgage brokers in 49 states and through H&R Block
Financial Center offices in 4 states.
Option One Mortgage Corporation. Option One, based in Irvine, California,
has a network of more than 5,000 mortgage brokers in 49 states. Option One
originates and purchases loans through both wholesale and retail channels, and
originated approximately $1.9 billion in mortgage loans in fiscal year 1998
after its acquisition. The average Option One loan during fiscal year 1999 had
a $108,000 principal balance, compared to $99,800 in fiscal 1998, and was
secured by a first lien on a single family residence. During fiscal 1999,
Option One sold or securitized approximately $3.6 billion of mortgage loans, as
compared to $1.8 billion sold in fiscal 1998 after its acquisition. At the end
of fiscal year 1999, Option One's servicing portfolio was 65,300 loans totaling
more than $6.5 billion, compared to 42,800 loans totaling $4.3 billion in
fiscal 1998.
Wholesale originations and purchases represented the substantial majority
of Option One's total loan production. Wholesale loan originations involve a
broker who assists the borrower in completing the loan application, the
gathering of necessary information and identifying a lender that offers a loan
product which is best suited to the borrower's financial needs. Brokers are
free to submit an application to one or more nonconforming lenders, such as
Option One. Upon receipt of an application from a broker,
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<PAGE> 13
Option One's account executives facilitate the processing and underwriting of
the loan. Based upon this review, Option One advises the broker whether the
loan application meets with Option One's underwriting guidelines and product
description by issuing a loan approval or denial, and in some cases issues a
"conditional approval," which requires the submission of additional information
or clarification.
On November 1, 1998, H&R Block Mortgage Company, L.L.C. ("Block Mortgage"),
formerly Block Mortgage Company, L.L.C., merged with and into Option One.
Operating under the name H&R Block Mortgage, this division focuses on retail
origination, and offers mortgage products, including VA, FHA and conventional
mortgages. Retail originations are made pursuant to the direct solicitation of
the borrower and do not involve a broker.
Option One sells virtually all of its loan production through a combination
of securitization and bulk sales of whole loans to institutional purchasers.
Option One completed two securitizations of nonconforming mortgage loans during
fiscal 1999. A $1 billion asset backed security issue closed in January 1999
and a $801.1 million issue closed in April 1999.
On July 21, 1999, the Company announced that it is evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner, and that it remains committed to the retail mortgage
business. There are no assurances that any transaction will take place, and
any transaction will be subject to the approval of the Company's Board of
Directors.
Assurance Mortgage Corporation of America. Acquired on March 5, 1999 by a
subsidiary of the Company, Assurance Mortgage Corporation of America ("AMCA")
is New England's largest independent mortgage broker for conventional and
government loans and is licensed throughout the United States. AMCA closed
approximately $1.3 billion in conventional retail loans in 1998. AMCA sold the
majority of these loans through the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation as well as other major institutional
investors. AMCA operates under its current name. AMCA has 11 retail offices
in Massachusetts, Rhode Island and New Hampshire.
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 which as of March 31, 1999 is
majority-owned by BFC) or other mortgage loan originators.
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.
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<PAGE> 14
Companion and Block Mortgage Finance completed two securitizations of
nonconforming mortgage loans during fiscal year 1999. A $252.7 million
asset-backed security issue closed in July 1998 and a $403.1 million issue
closed in January 1999.
Seasonality of Business. Residential mortgage volume is subject to
seasonal trends, with real estate sales being generally lower in the first
calendar quarter of the calendar year, peaking in the spring and summer
seasons, and then declining again in November and December. Accordingly, the
revenues of the mortgage operations reporting segment are generally higher in
the peak months, but the seasonal trends do not have a material impact on
overall results of the Company.
Service Marks and Trademarks. 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. Both the conventional and sub-prime sectors of
the residential mortgage loan market are highly competitive. The principal
methods of competition are in service, quality and price. There are a
substantial number of companies competing in the residential loan market,
including mortgage banking companies, commercial banks, savings associations,
credit unions and other financial institutions. No one firm is a dominant
supplier of conforming and nonconforming mortgage loans.
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
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<PAGE> 15
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.
BUSINESS SERVICES
Generally. Designated as a new reportable operating segment for fiscal
year 1999, the business services segment provides accounting, tax and
consulting services to business clients, and tax, estate planning and financial
planning services to individuals in the Unites States through a network of
accounting firms located in six metropolitan areas as of April 30, 1999.
In addition to providing these services to the public, the subsidiaries
involved in the business services segment provide management and administrative
services to the public accounting firms from which non-attest assets have been
acquired. The subsidiaries receive fees from the public accounting firms,
which continue to provide to the public audit and other services that
constitute the practice of public accounting.
HRB Business Services, Inc. Early in the 1999 fiscal year, the Company
announced its intention to build a national accounting practice through the
acquisition of both regional and local accounting firms. HRB Business
Services, Inc. ("HRBBS"), a subsidiary of H&R Block Group, Inc., was
incorporated to acquire these firms. As of April 30, 1999, HRBBS and its
subsidiaries had acquired the assets or stock of six regional accounting firms,
all of which are among the country's 100 largest accounting firms, as well as
affiliates entities and local accounting firms.
Donnelly, Meiners, Jordan Kline, P.C. ("DMJK"), a regional accounting firm
in Kansas City, Missouri, was the first accounting firm acquired by HRBBS in
May 1998. During the 1999 fiscal year, DMJK changed its name to DMJK Business
Services, Inc. and acquired the non-attest assets of three local accounting
firms by means of a merger or stock purchase. In October 1998, FERS Business
Services, Inc. ("FBS"), a subsidiary of HRBBS, acquired the non-attest assets
of Friedman Eisenstein Raemer and Schwartz, LLP ("FERS"), a Chicago accounting
and consulting firm, and Practice Development Institute, Inc., another
subsidiary of HRBBS, acquired the assets of Practice Development Institute,
L.L.C., an affiliated business that publishes marketing newsletters and was
owned by the partners of FERS. FBS acquired the non-attest assets of two other
Chicago-area accounting firms during the 1999 fiscal year.
On November 2, 1998, KSM Business Services, Inc., a subsidiary of HRBBS,
acquired the non-attest assets of a third regional accounting and consulting
firm, Katz, Sapper & Miller, LLP ("KSM"), located in Indianapolis, Indiana, and
later in fiscal 1999 acquired the non-attest assets of two other local
accounting firms. On November 3, 1998, other subsidiaries of HRBBS (FM
Business Services, Inc. and Freed Maxick ABL Services, Inc., respectively)
acquired the non-attest assets of Freed Maxick Sachs & Murphy, PC ("FMSM"), an
accounting, tax and consulting firm in Buffalo, New York, and Freed Maxick ABL
Services, LLC, an asset-based lending services firm that provides nationwide
services to the commercial banking industry. FM Business Services, Inc.
acquired the non-attest assets of an accounting firm in Batavia, New York, in
February 1999.
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<PAGE> 16
In December 1998, WS Business Services, Inc., an HRBBS subsidiary,
acquired the non-attest assets of a fifth regional accounting firm, Wallace
Sanders & Company. Located in Dallas, Texas, this firm specializes in real
estate, health care, service, manufacturing and wholesale industries. On April
16, 1999, CWA Business Services, Inc., an HRBBS subsidiary, acquired the
non-attest assets of a sixth accounting firm, C.W. Amos & Company, LLC, serving
the Baltimore/Washington, D.C. metropolitan area. Included in this acquisition
were the assets of Turner Pension Consulting, LLC, a full service, actuarial,
consulting and administration firm designed to maximize the value of its
clients' retirement plans.
Shortly following the end of the 1999 fiscal year, RP Business Services,
Inc., a subsidiary of HRBBS, acquired the non-attest assets of Rudolph, Palitz
LLP, the seventh regional accounting firm, which is based in Blue Bell,
Pennsylvania. The Company also announced on June 29, 1999, that it was party
to an agreement to acquire substantially all of the non-attest assets of
McGladrey & Pullen, LLP, the nation's seventh largest accounting and consulting
firm, headquartered in Minneapolis, Minnesota. Following the acquisition, the
Company intends to integrate the previously acquired accounting firms within
HRBBS and McGladrey & Pullen into one firm to be known as RSM McGladrey Inc,
with more than 70 offices nationwide. The M&P transaction is expected to be
completed in August 1999.
Seasonality of Business. Revenues for this segment are seasonal in
nature, with peak revenues occurring during January through April.
Service Marks and Trademarks. FBS, a wholly owned subsidiary of HRBBS
claims ownership of the following service marks and trademarks registered on
the principal register of the United States Patent and Trademark Office:
Tonelink
Because Results Come First
FERS Profit Edge
Competitive Conditions. The accounting and consulting business is highly
competitive. There are a substantial number of accounting firms offering
similar services at the nationwide, regional and local levels.
Government Regulation. Many of the same Federal and state regulations
relating to tax preparers and the information concerning tax reform discussed
above in "Government Regulation" section of "U.S. Tax Services" apply to
Business Services as well, except that accountants are not subject to the same
prohibition on the use or disclosure of certain income tax return information
as the Tax Services income tax return preparers are. These accounting firms
are also subject to state and Federal regulations governing accountants,
auditors and financial planners. The Company believes that these state and
Federal regulations do not and will not have a material adverse effect on the
operations of H&R Block, but it cannot predict what the effect of future
regulations may be.
OTHER BUSINESS
Generally. The Company is developing other businesses compatible with its
current operations and strategy.
H&R Block Financial Advisors, Inc. H&R Block Financial Advisors, Inc., a
wholly owned subsidiary of BFC, is a federally registered investment advisor
whose licensed employees offered
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<PAGE> 17
financial planning and investment advice in fiscal year 1999 to the general
public in Arizona, Florida, Indianapolis and Ohio. During the 1999 fiscal
year, H&R Block Financial Advisors participated with Tax Services and Option
One in a four-city test of H&R Block Financial Centers, which offer tax
preparation, financial planning, investment advice and home mortgages under one
roof. The Company has announced plans to expand the Financial Center concept
to an additional 70 locations in fiscal year 2000. The financial services
offered by H&R Block Financial Advisors will be offered to clients throughout
the year.
Birchtree Financial Services, Inc. Acquired by BFC in January 1999,
Birchtree Financial Services, Inc. ("Birchtree") is a full-service investment
firm offering stocks, bonds, mutual funds and other securities and insurance
products through a network of registered representatives across the county.
Included among Birchtree's registered representatives are employees of H&R
Block Financial Advisors, Inc. and Tax Services who are licensed to sell
securities, mutual funds and insurance products. The products offered by the
Birchtree representatives are available to their clients throughout the year.
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. Shortly after the end of the 1999 fiscal year, Tax
Services entered into a 20 year lease for a newly constructed building located
at 4400 East Blue Parkway, Kansas City, Missouri. 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, as well as at the 4400 Main Street location in Kansas
City.
Option One's executive offices are located in leased offices at 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. AMCA is headquartered in leased offices in Burlington,
Massachusetts. AMCA also leases offices throughout Massachusetts, Rhode Island
and New Hampshire.
The accounting firms acquired by HRBBS and its subsidiaries lease office
space in the following metropolitan areas: Kansas City, Missouri; Chicago,
Illinois; Indianapolis, Indiana; Buffalo, New York; Dallas, Texas; Baltimore,
Maryland; Washington, D.C.; and Philadelphia, Pennsylvania. Birchtree
Financial Services, Inc. is headquartered in leased offices in Kansas City,
Missouri.
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<PAGE> 18
ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation ("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 were
consolidated, the defendants filed a motion to dismiss the consolidated suits,
the district court stayed all proceedings pending the outcome of the state
court suits, and the United States Court of Appeals for the Sixth Circuit
affirmed such stay. 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 were consolidated for
discovery purposes and defendants 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 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 1999.
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, 1999.
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:
<TABLE>
<CAPTION>
Name and age Office(s)
- ------------------------- -----------------------------------------------------
<S> <C>
Henry W. Bloch (76) Chairman of the Board since August 1989; Chief
Executive Officer from August 1989 through July
1992; Member of the Board of Directors since 1955.
Frank L. Salizzoni (61) President and Chief Executive Officer since June
1996; Member of the Board of Directors since 1988.
See Note 1.
Mark A. Ernst (41) Executive Vice President and Chief Operating Officer
since September 1998. See Note 2.
</TABLE>
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<PAGE> 19
<TABLE>
<CAPTION>
Name and age Office(s)
- ------------------------- -----------------------------------------------------
<S> <C>
David F. Byers (37) Senior Vice President and Chief Marketing Officer
since June 1999. See Note 3.
James D. Rose (48) Senior Vice President and Chief Information Officer
since July 1999; Vice President and Chief
Information Officer from June 1997 through June
1999. See Note 4.
Ozzie Wenich (56) 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.
Robert E. Dubrish (47) 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 5.
Terrence E. Putney (45) President, HRB Business Services, Inc., since May
1998. See Note 6.
Thomas L. Zimmerman (49) 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.
Cheryl L. Givens (33) Vice President and Corporate Controller since July
1998; Assistant Vice President and Assistant
Controller from October 1996 until July 1998;
Assistant Vice President and Corporate Controller
from June 1996 until October 1996; Corporate
Accounting Manager from May 1994 until May 1996.
James H. Ingraham (45) Vice President, General Counsel since July 1999;
Secretary since June 1990; Vice President, Legal
from October 1996 through June 1999; Assistant Vice
President, Corporate Legal and Human Resources from
December 1995 until October 1996; Assistant Vice
President, Legal from May 1994 until December 1995.
Linda M. McDougall (46) Vice President, Communications since July 1999;
Assistant Vice President, Communications from
November 1995 through June 1999. See Note 7.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Name and age Office(s)
- ------------------------- -----------------------------------------------------
<S> <C>
Brian N. Schell (33) 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 8.
Douglas D. Waltman (38) 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 9.
Robert A. Weinberger (55) Vice President, Government Relations, since March
1996. See Note 10.
Bernard M. Wilson (37) Vice President and General Manager, Financial
Services Group since November 1998. See Note 11.
Bret G. Wilson (40) 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 12.
Robert D. Wilson (40) Vice President, Business Development since July
1999; Vice President, Tax Services Marketing, H&R
Block Tax Services, Inc., from September 1998
through June 1999; Assistant Vice President,
Marketing, H&R Block Tax Services, Inc., from
February 1996 until September 1998. See Note 13.
</TABLE>
<TABLE>
<S> <C>
Note 1: Mr. Salizzoni was President and Chief Operating Officer of USAir
Group, Inc. and USAir, Inc. from March 1994 until April 1996. He
served as Chairman of the Board of CompuServe Corporation from
October 1996 until January 1998.
Note 2: Mr. Ernst served as Senior Vice President, Third Party and
International Distribution for American Express Company, Minneapolis,
Minnesota, from July 1997 until June 1998; Senior Vice President,
WorkPlace Financial Services, American Express Company, from November
1995 until July 1997 and Vice President, Retail Services Group,
American Express Company, from December 1993 until November 1995.
Note 3: Mr. Byers was employed by Foote, Cone and Belding, an advertising
agency in San Francisco, California, from June 1987 until May 1999,
most recently serving as the Senior Vice President and Director of
Business Development.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
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: 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 6: The Company acquired Donnelly Meiners Jordan Kline, P.C. on May 15,
1998, at which time Mr. Putney became an employee of a subsidiary of
the Company. Prior to May 15, 1998, Mr. Putney had been a
shareholder of Donnelly Meiners Jordan Kline, P.C. since June 1987.
Note 7: Ms. McDougall was the District Manager, Creative Services for AT&T
Corp., Basking Ridge, New Jersey, from September 1993 until October
1995.
Note 8: Mr. Schell was Special Assistant to the Chief Operating Officer,
Federal Deposit Insurance Corporation, Washington, D.C., from May
1994 until December 1995.
Note 9: Mr. Waltman was Manager, Training and Development for Westlake Ace
Hardware, Inc., Kansas City, Missouri, from May 1993 until September
1996.
Note 10: Mr. Weinberger was Director, Washington Affairs, Unilever United
States, Inc., from February 1991 until April 1995.
Note 11: Mr. Bernard Wilson was Senior Vice President of Financial Services
for GMAC Mortgage Corporation, Philadelphia, Pennsylvania, from
September 1998 until October 1998 and Vice President of International
Operations, American Express Financial Advisors, Minneapolis,
Minnesota, from March 1987 until September 1998.
Note 12: Mr. Bret Wilson was an attorney with Smith, Gill, Fisher & Butts,
P.C., Kansas City, Missouri, from June 1989 until May 1994.
Note 13: Mr. Robert Wilson was Senior Product Manager for Thompson*Minwax from
September 1993 until February 1996.
</TABLE>
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 part in the
Company's annual report to security holders for the fiscal year ended April 30,
1999, 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, 1999, there were 34,179 stockholders of the Company. In
connection with the acquisition by the Company of Assurance Mortgage Corporation
of America ("Assurance") on March 5, 1999, the Company issued on that date an
aggregate of 268,325 shares of its Common Stock, without par value, to four
individual shareholders of Assurance. As a transaction relating to the sale of a
business and not involving any public offering, such issuance was exempt from
registration under section 4(2) of the Securities Act of 1933, as amended.
21
<PAGE> 22
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, 1999,
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, 1999,
under the heading "Management's Discussion and Analysis of Results of
Operations and Financial Condition," 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:
o interest rates on debt, cash equivalents, marketable
securities, mortgage loan origination commitments, and investments
in mortgage loans for resale or securitization
o 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,
1999, primarily consisted of cash equivalents and short-term marketable
securities. Consequently, the amortized cost approximates market value.
Almost 41% 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, compared to 19% in fiscal 1998. 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 50 basis point change in interest (an approximate
10% decline in interest rates) would negatively impact consolidated pretax
earnings by approximately $2 million, or about one-half percent. In fiscal
1998, a 60 basis point change in interest (an
22
<PAGE> 23
approximate 10% decline in interest rates) would have negatively impacted 1998
consolidated pretax earnings by less than $4 million, or about one percent.
Under its risk management strategy, the Company may hedge its interest
rate risk related to its fixed-rate mortgage portfolio by selling short FNMA
mortgage-backed securities and utilizing forward commitments. FNMA
mortgage-backed securities are sold short to certain broker-dealer
counterparties. The position on certain or all of the fixed rate mortgages is
closed, on standard PSA settlement dates, when the Company enters into a
forward commitment to sell those mortgages or decides to securitize the
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.
Because the Company funds these short-term assets with short-term, variable
rate debt, the Company is 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 1% of the
Company's fiscal year 1999 consolidated pretax earnings, compared to 4% in
fiscal 1998. 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 $200,000. Such impact represents approximately 8% of the pretax
earnings of International Tax Operations for fiscal year 1999 and approximately
.05% of the Company's consolidated pretax earnings for such year. In fiscal
1998, a 10% change in exchange rates would have impacted fiscal 1998 pretax
earnings by approximately one million dollars, or less than one-half percent.
23
<PAGE> 24
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, 1999, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 20, 1998, the Company dismissed the accounting firm of Deloitte &
Touche LLP and appointed PricewaterhouseCoopers LLP as its independent auditor
for the fiscal year ending April 30, 1999. Such appointment was ratified by
the shareholders at their 1998 annual meeting. The reports prepared by
Deloitte & Touche LLP on the Company's financial statements for fiscal year
1998 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 1998 fiscal
year, 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 fiscal years prior to fiscal year 1999 and during fiscal year
1999 prior to July 20, 1998.
During the 1998 fiscal year, and any subsequent interim period prior to
July 20, 1998, 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, 1999, 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, 1999, 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.
24
<PAGE> 25
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, 1999, 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, 1999, in the section titled "Election of Directors," and
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of H&R Block,
Inc., and subsidiaries are incorporated by reference from the
Company's annual report to security holders for the fiscal
year ended April 30, 1999:
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Stockholders' Equity 24
Notes to Consolidated Financial Statements 25
Quarterly Financial Data 35
Independent Auditors' Report 38
</TABLE>
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement
Schedule for PricewaterhouseCoopers LLP, Certified Public
Accountants
Independent Auditors' Consent and Report on Schedule for
Deloitte & Touche LLP, Certified Public Accountants
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.
25
<PAGE> 26
<TABLE>
<S> <C>
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) Amended and Restated Bylaws of H&R Block, Inc.,
as amended, filed as Exhibit 3.1 to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1999,
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) 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(d) 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(e) Form of Certificate of Amendment of Certificate
of Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc., filed as Exhibit 4(j) to
the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1998 is incorporated by reference.
4(f) Form of Certificate of Designation, Preferences
and Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company's annual
report on Form 10-K for the fiscal year ended April 30, 1995,
is incorporated by reference.
10(a) 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.
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.
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
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) 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(e) 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(f) 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(g) 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(h) 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(i) 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(j) The H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.1 to
H&R Block's quarterly report on Form 10-Q for the quarter
ended January 31, 1999, is incorporated herein by reference.
10(k) Amendment No. 1 to the H&R Block Deferred
Compensation Plan for Executives, as Amended and Restated,
filed as Exhibit 10.2.to the Company's quarterly report on
Form 10-Q for the quarter ended January 31, 1999, is
incorporated herein by reference.
10(l) 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(m) The Amendment and Termination of the H&R Block,
Inc. Retirement Plan for Non-Employee Directors, filed as
Exhibit 10.1 to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1998, is incorporated herein by
reference.
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
10(n) The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1998, is incorporated herein by
reference.
10(o) 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(p) Employment Agreement dated October 11, 1996,
between the Company and Frank L. Salizzoni, filed as
Exhibit 10(b) to the Company's quarterly report on
Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10(q) Employment Agreement dated July 16, 1998,
between the Company and Mark A. Ernst, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1998, is
incorporated herein by reference.
13 That portion of the annual report to security
holders for the fiscal year ended April 30, 1999 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(a) The consent of PricewaterhouseCoopers LLP, Certified
Public Accountants.
23(b) The consent of Deloitte & Touche LLP, Certified Public
Accountants.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 8, 1999,
reporting as "Other Events" the asset purchase agreement entered
into by the registrant providing for the registrant's purchase of
substantially all of the non-attest assets of McGladrey & Pullen,
LLP, and the registrant's issuance of a press release announcing
the same. The asset purchase agreement was included as Exhibit
10.1 and the press release was included as Exhibit 99.1 to the Form
8-K. No financial statements were filed as a part of the Form 8-K.
Except for the Form 8-K filed on July 8, 1999, the Company did not
file any reports on Form 8-K during the fourth quarter of the year
ended April 30, 1999.
28
<PAGE> 29
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.
July 28, 1999 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.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Frank L. Salizzoni President, Chief Executive Officer and
----------------------
Frank L. Salizzoni Director (principal executive officer)
/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/ Louis W. Smith Director
---------------------
Louis W. Smith
/s/ Morton I. Sosland Director
---------------------
Morton I. Sosland
</TABLE>
(Signed as to each on July 28, 1999)
29
<PAGE> 30
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Ozzie Wenich Senior Vice President and Chief Financial
--------------------
Ozzie Wenich Officer (principal financial officer)
/s/ Cheryl L. Givens Vice President and Corporate Controller
--------------------
Cheryl L. Givens (principal accounting officer)
</TABLE>
(Signed as to each on July 28, 1999)
30
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
H&R Block, Inc.
Our audit of the consolidated financial statements referred to in our report
dated June 15, 1999 appearing in the Annual Report to Shareholders of H&R
Block, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the information as of and for the year ended April 30, 1999 presented
in the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information as of and for the year ended April 30, 1999
set forth therein when read in conjunction with the related consolidated
financial statements. The information included in the financial statement
schedule as of and for the years ended April 30, 1998 and 1997 was audited by
other independent accountants whose report dated June 16, 1998 and July 12,
1999 (as to the effects of the discontinued credit card operations described in
the note to the consolidated financial statements on the sale of subsidiaries)
expressed an unqualified opinion on that information.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
June 15, 1999
31
<PAGE> 32
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
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. 33-54989 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. 333-62515 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
report dated June 16, 1998 (July 12, 1999 as to the effects of the discontinued
credit card operations described in the note on the sale of subsidiaries),
appearing in this Annual Report on Form 10-K of H&R Block, Inc. and
subsidiaries for the year ended April 30, 1999.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the 1997 and 1998 financial statement
schedule of H&R Block, Inc. and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such 1997 and 1998 financial statement schedule when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Deloitte & Touche LLP
Kansas City, Missouri
July 28, 1999
32
<PAGE> 33
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Additions
--------------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
---------------------- ---------- ---------- ---------- ---------- ----------
Allowance for Doubtful
Accounts-deducted from
accounts receivable in
the balance sheet
<S> <C> <C> <C> <C> <C>
1999 $45,314,000 $71,662,000 $ - $55,104,000 $61,872,000
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS IN FISCAL 1999
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20.9 million loss, or $.21 per share, net of
taxes, on the transaction. The consolidated statements of earnings for all
periods presented reflect the Company's Credit card operations segment as
discontinued operations.
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms. This new Business services segment is
primarily engaged in providing accounting, tax and consulting services to
business clients and tax, estate planning and financial planning services to
individuals. The purchase prices plus additional contingent payments aggregated
$110.1 million. Each acquisition was accounted for as a purchase, and
accordingly, results for each acquisition are included since the date of
acquisition.
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) and $(.92) per basic
share, and $(.13) and $(.91) per diluted share, in 1998 and 1997, respectively.
On June 17, 1997, the Company completed the purchase of Option One Mortgage
Corporation ("Option One"). Option One primarily engages in the origination,
purchase, servicing, securitization and sale of nonconforming mortgage loans.
Based in Irvine, California, Option One has a network of more than 5,000
mortgage brokers in 49 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.
NEW ACCOUNTING STANDARDS
In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
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 changes in
equity during the period, except those resulting from investments by and
distributions to owners, be reported as "comprehensive income" in the financial
statements. The Company's comprehensive income is comprised of net earnings,
foreign currency translation adjustments and the change in the net unrealized
gain or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements.
In the third quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 requires that
mortgage-backed securities or other interests retained after a securitization be
classified based on the intent to sell or hold the investments. The Company has
classified its retained interests as available-for-sale securities, which are
included in investments in marketable securities on the consolidated balance
sheets.
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 does not anticipate that the
implementation of SFAS 133 will have a material impact on the consolidated
financial statements.
1999 COMPARED TO 1998
CONSOLIDATED RESULTS
Revenues increased 29.5% to $1.645 billion compared to $1.270 billion last
year. Net earnings from continuing operations increased 29.4% to $237.8 million
from $183.8 million in the prior year. Basic net earnings per share from
continuing operations increased to $2.38 from $1.75 last year. Diluted net
earnings per share from continuing operations increased to $2.36 compared to
$1.71 in 1998. The net effect of the share repurchase program in 1999 was to
increase earnings per share approximately $.05.
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 20.1% to $1.258 billion from $1.047 billion in the prior
year. Combined tax preparation and electronic filing fees increased $147.5
million, or 17.3%, due to a 4.5% increase in the number of clients served,
higher fees due to complexity and price increases. Fees associated with Refund
Anticipation Loans ("RALs") increased 69.1% over last year to $90.2 million
reflecting a 40.4% increase in the number of RAL participations over last year
due to the increase in the Company's participation percentage to 49.9%
17
<PAGE> 2
from 40% in 1998. Royalties increased by $12.0 million, or 11.7%, reflecting
improved results in the number of clients served by franchises as well as
increases in pricing. Software revenues increased $14.2 million, or 74.0%, as a
result of increased market penetration.
Operating earnings increased 24.5% to $314.1 million from $252.2 million in
1998. The pretax margin increased to 25.0% from 24.1% in the prior year. The
improved margin resulted from higher revenues spread over a significant portion
of fixed operating expenses, such as occupancy expenses, a lower bad debt rate
associated with the RAL program and improved results from software sales.
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 8.6% to $74.7 million from $81.8 million in 1998. Pretax
earnings declined 78.9% to $2.5 million from $11.9 million last year, and the
pretax margin decreased to 3.4% from 14.6% in the prior year. The downturn in
both revenues and pretax earnings is due to disappointing results from Canada.
As compared to last year, Canada's revenues declined 9.6% to $58.5 million
and pretax earnings declined 77.6% to $2.4 million. Results were affected by
several factors. The number of customers served in company-owned offices
declined 6.1%, resulting in the revenue decline. The Canadian government's
expanded efforts to provide free assistance to low-income Canadians contributed
to the decrease in clients served. In addition, operating expenses, such as
depreciation, advertising and rent, increased significantly due to continued
office expansion.
A weaker Australian dollar also affected international results when
translated into U.S. currency. In U.S. dollars, Australia's revenues declined
7.4% to $14.5 million and pretax earnings increased 1.7% to $2.3 million.
However, in Australian dollars, pretax earnings increased 33.2% to $4.0 million,
while revenues were up 11.6% to $24.2 million. The increase in Australian dollar
revenues and pretax earnings is due to a 5.2% increase in clients served.
In the United Kingdom, the cost of operating 20 company-owned offices for a
full year compared with a partial year in 1998 resulted in a pretax loss of $2.6
million, up 62.8% from the prior year. The Company is continuing its efforts to
build a customer base in the U.K.
MORTGAGE OPERATIONS
This segment is primarily engaged in the origination, purchase, servicing,
securitization and sale of nonconforming and conforming mortgage loans in the
United States. Mortgage origination services are offered through a network of
mortgage brokers in 49 states and through H&R Block offices in 4 states.
Revenues increased 88.5% over last year to $255.9 million. Pretax earnings
increased 103.7% to $62.7 million from $30.8 million in 1998. The increase in
both revenues and pretax earnings is largely due to Option One, which reported
revenues of $221.6 million and pretax earnings of $63.4 million. Option One
originated $3.6 billion of loans in fiscal 1999, up 74.8% from last year. At
April 30, 1999, Option One's servicing portfolio was 65,300 loans totaling $6.5
billion.
BUSINESS SERVICES
This segment is primarily engaged in providing accounting, tax and consulting
services to business clients and tax, estate planning and financial planning
services to individuals. This segment offers services through regional
accounting firms based in six cities in the United States. A new segment this
year, Business services reported revenues of $47.3 million and pretax earnings
of $7.1 million. During fiscal year 1999, six regional accounting firms and
several smaller market firms were acquired.
INVESTMENT INCOME, NET
Net investment income increased 25.9% to $32.2 million from $25.6 million in
1998, primarily as a result of an increase in the amount of cash available for
investment throughout fiscal 1999.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased to $17.4
million from $10.4 million in the prior year, largely due to increased
charitable contributions, increased wages and employee benefits, and lower
earnings from the Company's captive insurance subsidiary.
INCOME TAX EXPENSE
The effective tax rate in fiscal 1999 of 38.0% remained unchanged from last
year.
1998 COMPARED TO 1997
CONSOLIDATED RESULTS
Revenues increased 19.1% to $1.270 billion compared to $1.066 billion in 1997.
Net earnings from continuing operations increased 24.1% to $183.8 million from
$148.1 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.75 from $1.42 last year. Diluted net earnings per
share from continuing operations increased to $1.71 compared to $1.40 in 1997.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
Revenues increased 8.4% to $1.047 billion from $966.5 million in 1997. 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 were 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 19.9% to $252.2 million from $210.4 million in
1997. The pretax margin was 24.1% 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
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
18
<PAGE> 3
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 operations in the United Kingdom and the opening of 32 new
company-owned offices in Australia.
MORTGAGE OPERATIONS
Revenues of $135.8 million were $126.9 million better than 1997. 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.
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.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased $6.2 million
to $10.4 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. Interest expense
on long-term debt of $13.7 million in 1998 represented primarily the interest on
debt associated with the acquisition of Option One.
INCOME TAX EXPENSE
The effective tax rate was 38.0% for 1998, compared to 36.1% for 1997, caused by
an increase in state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in 1999, with cash and
marketable securities of $420.6 million at year-end, compared to $1.590 billion
at the end of 1998. This decrease resulted primarily from the acquisition of
11.8 million shares of the Company's common stock at an aggregate cost of $492.9
million and a $571.1 million reduction in short term borrowings. Working capital
declined to $533.6 million at April 30, 1999 from $866.4 million last year, but
the working capital ratio increased to 1.96 to 1 this year compared to 1.68 to 1
a year earlier. Stockholders' equity at April 30, 1999 and 1998 was $1.062
billion and $1.342 billion, 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
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund
receivables associated with its mortgage loan and other financial services
programs. During the past three years, the Company has also used short-term
borrowings in January through April to purchase a participation interest ranging
from 40% to 49.9% in certain RALs through its agreement with Household Bank.
These short-term borrowings in the U.S. are supported by a $1.85 billion back-up
credit facility through November 1999, subject to renewal. Outstanding
commercial paper related to loans held for sale and other receivables amounted
to $71.9 million and $643.0 million, respectively, at April 30, 1999 and 1998.
Loans held for sale totaled $636.7 million and $448.1 million at April 30, 1999
and 1998, 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, 1999 and 1998 include amounts due from Revenue Canada of $11.3 million and
$13.9 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 mortgage loans. As part of its risk management strategy
prior to securitization or sale, the Company may choose to hedge its interest
rate risk related to its fixed rate mortgage portfolio by selling short FNMA
mortgage-backed securities and utilizing forward loan sale 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
2000, exclusive of acquisitions, will increase significantly from 1999. The
Company will continue to use short-term financing in the United States to
finance various financial activities conducted by Block Financial Corporation,
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. At April 30, 1999, 17.0 million shares had been repurchased under
these authorizations. The Company intends to continue to purchase its shares on
the open market in accordance with these authorizations, subject to various
factors including the price of the stock, availability of excess cash, the
ability to maintain financial flexibility, securities laws restrictions and
other investment opportunities available.
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, prioritize, evaluate and
mitigate potential Year 2000 related issues. As part of its program, the Company
has identified three key categories of software and systems, including
information technology (IT) systems, non-IT systems (systems with internal
clocks or imbedded microprocessors) and systems of third parties with which it
interacts, for which the
19
<PAGE> 4
Company has developed detailed plans to address the Year 2000 issue.
The Company has identified 9 mission critical business functions (e.g. U.S.
tax preparation services, wholesale loan services, etc.) and 28 non-mission
critical business functions (e.g. TaxCut(R) software, Australian tax operations,
etc.). Within each of the business functions, key IT and non-IT systems have
been inventoried and assessed for compliance and detailed plans are in place for
required system modifications or replacements. Currently, remediation projects
are at different phases of completion. One hundred and thirty-six remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 118 are complete and
successfully tested, 4 are in the testing phase and 14 are still in progress. Of
the projects currently in the testing phase, all are scheduled to be completed
by July 31, 1999. The remaining projects are scheduled to be completed by
September 1999.
The Company has initiated communications and surveyed state, Federal and
foreign governments and suppliers with which it interacts to determine their
plans for addressing Year 2000 issues. The Company is relying on their responses
to determine if key third parties will be Year 2000 compliant. One of the
Company's key third parties is the Internal Revenue Service (IRS). In a report
given to the House Committee on Ways and Means on the Year 2000 Conversion
Efforts on February 24, 1999, the Commissioner of the IRS reported the status of
the IRS's Year 2000 effort. He stated: "Nearly all of our (IRS) mission critical
systems were made Y2K compliant and were placed in production for the 1999
Filing Season. Approximately half of these systems have been successfully tested
'end-to-end' with the clocks rolled forward. We (IRS) will continue focusing our
repair efforts on mission critical systems from now until the end of March. From
April through the end of 1999, most of the efforts will be applied to wrapping
up some smaller systems and, most importantly, completing the full-scale
End-to-End Testing." The Company tested its systems with the IRS in May and June
and found no major problems. In addition, the Company continues to communicate
frequently with the IRS regarding its Year 2000 readiness. The Company is also
in the process of completing a survey and inventory of tax franchisees. Some
readiness issues have been identified and the Company is consulting with its
franchisees on their remediation programs to help mitigate their risk.
Assurances from franchisees of Year 2000 readiness are scheduled to be obtained
by September 1999. The Company will continue to monitor its third party
relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred.
Total costs are currently estimated at $3.8 million, with approximately $2.5
million incurred through April 30, 1999. The remaining costs to complete
represent the cost of on-going monitoring of the Company's continued readiness
through the end of the next fiscal year. The costs associated with the
replacement of computer systems, hardware and equipment (currently estimated to
be $13.9 million in total, with $13.6 million incurred through April 30, 1999),
substantially all of which would be capitalized, are not included in the above
estimates. All costs related to the Year 2000 issue are being funded through
internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will
not be Year 2000 compliant and the Company would not be able to process
electronic filings or refund anticipation loans. The Company believes that its
competitors will face the same risks.
The Company has identified and developed contingency plans for Year 2000
interruptions in the event that internal and/or external remediation projects
are not completed on a timely basis or that they fail to meet anticipated needs.
The Company has focused its contingency plans on accounting functions,
communications, distribution channels, facilities, insurance, suppliers,
treasury functions and tax operations (which includes franchises, Federal and
state governments, IRS and electronic filing). In addition, disaster recovery
plans and business resumption plans are being reviewed and modified for
information technology functions. While the Company does not anticipate problems
in any of these areas, the Company believes a comprehensive plan includes
preparation for continuity of its mission critical processes. The contingency
plans were substantially completed in June 1999 and are scheduled to be
completed by September 1999, with on going modifications being made as issues
requiring change, if any, are identified.
The Company's Year 2000 program is an ongoing process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its
business activities, it can not make assurances that its systems, the systems of
the state, Federal and foreign governments, tax franchisees and suppliers will
be Year 2000 compliant and will not interrupt business. While the impact can not
be fully determined, 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.
The Notes to consolidated financial statements, as well as other
information contained in this Annual Report to Shareholders may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industry and the markets in which the
Company operates and management's assumptions and beliefs relating thereto.
Words such as "will," "expect," "intend," "plan," "wish," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of the completion of the McGladrey transaction; year 2000
readiness of the Company and third parties; the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
authorities and their impact on the lines of business in which the Company's
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the Company's inability to successfully expand its financial
center operations, other financial planning and investment services operations,
retail mortgage operations, and accounting practice; the Company's inability to
successfully design, create, modify and operate its computer systems and
networks; litigation involving the Company; changes in management and management
strategies; and risks described from time to time in reports and registration
statements filed by the Company and its subsidiaries with the Securities and
Exchange Commission. Readers should take these factors into account in
evaluating any such forward-looking statements. The Company undertakes no
obligation to update publicly or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
20
<PAGE> 5
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenues $1,324,494 $1,047,181 $ 921,954
Product sales 174,124 103,717 31,781
Royalties 123,201 111,142 107,508
Other 22,846 7,941 5,167
--------------------------------------
1,644,665 1,269,981 1,066,410
--------------------------------------
EXPENSES:
Employee compensation and benefits 610,866 483,951 420,060
Occupancy and equipment 232,003 195,192 175,050
Marketing and advertising 90,056 71,594 76,087
Bad debt 71,662 53,736 51,303
Interest 69,338 38,899 608
Supplies, freight and postage 57,157 51,705 44,554
Other 158,509 103,387 77,535
--------------------------------------
1,289,591 998,464 845,197
--------------------------------------
Operating earnings 355,074 271,517 221,213
OTHER INCOME:
Investment income, net 32,234 25,596 10,870
Other, net (3,767) (680) --
--------------------------------------
28,467 24,916 10,870
--------------------------------------
Earnings from continuing operations before income
taxes 383,541 296,433 232,083
Taxes on earnings 145,746 112,645 83,951
--------------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS 237,795 183,788 148,132
Net loss from discontinued operations (less
applicable income tax benefit of ($953), ($13,183)
and ($56,091)) (1,490) (23,525) (100,377)
Net gain (loss) on sale of discontinued operations
(less applicable income taxes (benefit) of
($13,387) and $251,701) (20,939) 231,867 --
--------------------------------------
NET EARNINGS $ 215,366 $ 392,130 $ 47,755
======================================
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $2.38 $1.75 $1.42
Net earnings (loss) from discontinued operations (.22) 1.99 (.96)
--------------------------------------
Net earnings $2.16 $3.74 $ .46
======================================
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $2.36 $1.71 $1.40
Net earnings (loss) from discontinued operations (.22) 1.94 (.95)
--------------------------------------
Net earnings $2.14 $3.65 $ .45
======================================
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
April 30 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. $ 193,240 $ 900,856
Marketable securities 56,881 400,240
Receivables, less allowance for doubtful accounts of $61,872
and $45,314 743,301 793,237
Prepaid expenses and other current assets 94,000 48,944
------------------------
Total current assets 1,087,422 2,143,277
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 170,528 289,096
Excess of cost over fair value of net tangible assets
acquired, less accumulated amortization of $64,414 and
$40,261 405,534 288,580
Other 132,470 105,809
------------------------
708,532 683,485
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $193,549 and $167,065 114,222 77,321
------------------------
$1,910,176 $2,904,083
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 71,939 $ 643,002
Accounts payable, accrued expenses and deposits 168,641 114,875
Accrued salaries, wages and payroll taxes 161,590 96,168
Accrued taxes on earnings 151,659 422,847
------------------------
Total current liabilities 553,829 1,276,892
LONG-TERM DEBT 249,725 249,675
OTHER NONCURRENT LIABILITIES 44,635 35,884
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 -- --
Additional paid-in capital 420,658 432,335
Accumulated other comprehensive income (loss) (23,400) (24,517)
Retained earnings 1,130,909 1,010,547
------------------------
1,529,256 1,419,454
Less cost of common stock in treasury 467,269 77,822
------------------------
1,061,987 1,341,632
------------------------
$1,910,176 $2,904,083
========================
- ----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Amounts in Thousands
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 215,366 $ 392,130 $ 47,755
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 74,605 55,787 36,526
Provision for deferred taxes on earnings 1,739 (15,639) 538
Net (gain) loss on sales of subsidiaries 20,939 (231,867) --
Net gain on sales of marketable securities (4,124) (1,720) (454)
Other noncurrent liabilities 4,739 (3,068) 730
Changes in assets and liabilities, net of
acquisitions:
Receivables 183,735 (44,727) (94,452)
Mortgage loans held for sale:
Originations and purchases (4,290,207) (2,330,349) (211,700)
Sales and principal repayments 4,201,187 2,443,725 113,259
Prepaid expenses and other current assets (27,952) (27,618) (15,455)
Net assets of discontinued operations -- 13,665 95,405
Accounts payable, accrued expenses and
deposits 46,029 (82,469) 68,514
Accrued salaries, wages and payroll taxes 55,178 (10,965) 10,932
Accrued taxes on earnings (260,458) 28,118 36,833
-----------------------------------------
Net cash provided by operating activities 220,776 185,003 88,431
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (251,627) (882,378) (75,595)
Maturities of marketable securities 211,239 38,961 517
Sales of marketable securities 522,252 1,321,716 23,852
Purchases of property and equipment, net (78,823) (46,803) (44,277)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (123,657) (265,700) (17,249)
Other, net (17,171) (30,812) (16,038)
-----------------------------------------
Net cash provided by (used in) investing
activities 262,213 134,984 (128,790)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (17,276,595) (11,090,798) (5,041,386)
Proceeds from issuance of notes payable 16,593,978 11,008,018 5,238,354
Proceeds from issuance of long-term debt -- 249,675 --
Dividends paid (95,004) (83,635) (107,988)
Payments to acquire treasury shares (492,945) (18,351) --
Proceeds from stock options exercised 79,961 58,881 3,439
-----------------------------------------
Net cash provided by (used in) financing
activities (1,190,605) 123,790 92,419
-----------------------------------------
Net increase (decrease) in cash and cash
equivalents (707,616) 443,777 52,060
Cash and cash equivalents at beginning of the
year 900,856 457,079 405,019
-----------------------------------------
Cash and cash equivalents at end of the year $ 193,240 $ 900,856 $ 457,079
=========================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ 394,273 $ 102,396 $ (8,047)
Interest paid 71,431 50,302 10,889
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS
<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, 1996 108,973 $1,089 405 $ 4 $504,694 $ 762,331 (5,556) $(213,406)
Net earnings for the year -- -- -- -- -- 47,755 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- 2 -- 24 -- 89 3,415
Cancellation of restricted
stock -- -- -- -- -- -- (28) (1,044)
Stock issued for acquisition -- -- -- -- (2,410) -- 590 22,660
Cash dividends paid --
$1.04 per share -- -- -- -- -- (107,988) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1997 108,973 1,089 407 4 502,308 702,098 (4,905) (188,375)
Net earnings for the year -- -- -- -- -- 392,130 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- 32 -- (1,832) -- 1,578 60,882
Conversion of Convertible
Preferred Stock -- -- (436) (4) (68,018) -- 1,744 68,022
Cancellation of Convertible
Preferred Stock -- -- (1) -- (123) (46) -- --
Acquisition of treasury
shares -- -- -- -- -- -- (409) (18,351)
Cash dividends paid --
$.80 per share -- -- -- -- -- (83,635) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1998 108,973 1,089 2 -- 432,335 1,010,547 (1,992) (77,822)
Net earnings for the year -- -- -- -- -- 215,366 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- -- -- (12,042) -- 2,175 90,462
Restricted stock granted -- -- -- -- (81) -- 37 1,544
Stock issued for acquisition -- -- -- -- 807 -- 268 11,053
Conversion of Convertible
Preferred Stock -- -- (2) -- (361) -- 11 439
Acquisition of treasury
shares -- -- -- -- -- -- (11,843) (492,945)
Cash dividends paid --
$.95 per share -- -- -- -- -- (95,004) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1999 108,973 $1,089 -- $ -- $420,658 $1,130,909 (11,344) $(467,269)
==================================================================================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Total
Income (loss) Equity
- ------------------------------------------------------------
<S> <C> <C>
Balances at May 1, 1996 $(15,119) $1,039,593
Net earnings for the year -- --
Unrealized loss on
translation (3,065) --
Change in net unrealized gain on
marketable securities 157 --
Comprehensive income -- 44,847
Stock options exercised -- 3,439
Cancellation of restricted
stock -- (1,044)
Stock issued for acquisition -- 20,250
Cash dividends paid --
$1.04 per share -- (107,988)
------------------------
Balances at April 30, 1997 (18,027) 999,097
Net earnings for the year -- --
Unrealized loss on
translation (5,290) --
Change in net unrealized gain on
marketable securities (1,200) --
Comprehensive income -- 385,640
Stock options exercised -- 59,050
Conversion of Convertible
Preferred Stock -- --
Cancellation of Convertible
Preferred Stock -- (169)
Acquisition of treasury
shares -- (18,351)
Cash dividends paid --
$.80 per share -- (83,635)
------------------------
Balances at April 30, 1998 (24,517) 1,341,632
Net earnings for the year -- --
Unrealized loss on
translation (1,525) --
Change in net unrealized gain on
marketable securities 2,642 --
Comprehensive income -- 216,483
Stock options exercised -- 78,420
Restricted stock granted -- 1,463
Stock issued for acquisition -- 11,860
Conversion of Convertible
Preferred Stock -- 78
Acquisition of treasury
shares -- (492,945)
Cash dividends paid --
$.95 per share -- (95,004)
------------------------
Balances at April 30, 1999 $(23,400) $1,061,987
========================
- ------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 9
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
81% 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 and conforming mortgages, offer personal productivity software,
purchase participation interests in refund anticipation loans made by a
third-party lending institution, and offer accounting, tax and consulting
services to business clients.
Principles of consolidation: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company"), all majority-owned subsidiaries
and companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise. 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.
Residual interests in fiscal 1999 are classified as available-for-sale
securities, and are carried at market value, based on a discounted cash flow
model, with unrealized gains and losses included in stockholders' equity. The
residual interests are amortized over the estimated lives of the loans to which
they relate.
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 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 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 16 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.
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, 1999 and 1998
were 4.9% and 5.6%, 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.
25
<PAGE> 10
Taxes on earnings: The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes are provided for temporary differences
between financial and tax reporting, which consist principally of accrued
expenses, deferred compensation, allowance for credit losses and deferred gain
on sale of residual interests.
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 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.
Comprehensive income: In the first quarter of fiscal 1999, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). 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 changes in equity during the period, except those
resulting from investments by and distributions to owners, be reported as
"comprehensive income" in the financial statements. The adoption of SFAS 130 had
no effect on the Company's consolidated financial statements.
Mortgage-backed securities: In the third quarter of fiscal 1999, the
Company adopted Statement of Financial Accounting Standards No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134
requires that mortgage-backed securities or other interests retained after a
securitization be classified based on the intent to sell or hold the
investments. The Company has classified its retained interests as
available-for-sale securities, which are included in investments in marketable
securities on the consolidated balance sheets.
New accounting standards: 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 does not
anticipate that the implementation of SFAS 133 will have a material impact on
the consolidated financial statements.
26
<PAGE> 11
NET EARNINGS PER SHARE
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 from continuing operations are as
follows (shares in thousands):
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings from continuing operations $237,795 $183,788 $148,132
================================
Basic weighted average shares 99,761 104,829 103,985
Effect of dilutive securities:
Common and convertible preferred stock options 1,058 1,229 230
Convertible preferred stock 2 1,515 1,625
--------------------------------
Dilutive potential common shares 100,821 107,573 105,840
================================
Net earnings per share from continuing operations:
Basic $2.38 $1.75 $1.42
Diluted 2.36 1.71 1.40
- ---------------------------------------------------------------------------------------------
</TABLE>
Diluted net earnings per share excludes the impact of common stock options
of 149,370, 244,071 and 5,651,642 shares for 1999, 1998 and 1997, 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 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash and interest-bearing deposits $110,831 $ 58,765
Municipal bonds 77,500 464,667
Other interest-bearing securities 2,525 4,870
Certificates of deposit 2,384 239,582
Commercial paper -- 132,972
--------------------
$193,240 $900,856
====================
- ------------------------------------------------------------------------------------
</TABLE>
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30,
1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
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:
Asset-backed securities $ 45,038 $ 1 $ 28 $ 45,011 $151,383 $ 18 $ 208 $151,193
Corporate bonds 9,300 -- -- 9,300 -- -- -- --
Municipal bonds and notes 2,564 6 -- 2,570 149,842 -- 18 149,824
Other debt investments -- -- -- -- 45,000 141 -- 45,141
Residual interests-trading -- -- -- -- 54,082 -- -- 54,082
-----------------------------------------------------------------------------------------------
56,902 7 28 56,881 400,307 159 226 400,240
-----------------------------------------------------------------------------------------------
Noncurrent:
Residual interests 90,566 2,326 219 92,673 -- -- -- --
Municipal bonds 72,902 274 88 73,088 181,060 96 1,472 179,684
Common stock 2,419 2,362 14 4,767 2,467 2,118 2 4,583
Corporate bonds -- -- -- -- 68,790 -- 242 68,548
U.S. Government obligations -- -- -- -- 36,509 -- 228 36,281
-----------------------------------------------------------------------------------------------
165,887 4,962 321 170,528 288,826 2,214 1,944 289,096
-----------------------------------------------------------------------------------------------
$222,789 $4,969 $349 $227,409 $689,133 $2,373 $2,170 $689,336
===============================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 12
All marketable securities at April 30, 1999 are classified as
available-for-sale. Residual interests at April 30, 1998 were classified as
trading securities. Proceeds from the sales of available-for-sale securities
were $522,252, $1,321,716 and $23,852 during 1999, 1998 and 1997, respectively.
Gross realized gains on those sales during 1999, 1998 and 1997 were $4,711,
$1,826 and $600, respectively; gross realized losses were $587, $106 and
$146, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
1999 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 $ 56,902 $ 56,881
After one year through five years 46,277 46,283
After five years through 10 years 9,297 9,431
After 10 years 17,328 17,374
---------------------
$129,804 $129,969
=====================
- -------------------------------------------------------------------------------------
</TABLE>
The Company securitized $2,456,910 in mortgage loans during the year ended
April 30, 1999, resulting in residual interests with an allocated carrying value
of $158,485. In April 1999, the Company securitized $91,355 of these residual
interests in a net interest margin transaction. The remaining residual interests
from the securitizations during 1999 of $39,782 were treated as noncash
investing activities in the consolidated statement of cash flows for the year
ended April 30, 1999.
RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
April 30 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans held for sale $636,687 $448,102
Participation in refund anticipation loans 51,074 39,165
Credit card loans -- 202,852
Other 117,412 148,432
---------------------
805,173 838,551
Allowance for doubtful accounts 61,872 45,314
---------------------
$743,301 $793,237
=====================
- -------------------------------------------------------------------------------------
</TABLE>
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
April 30 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,060 $ 2,872
Buildings 24,292 21,350
Computers and other equipment 226,388 180,273
Leasehold improvements 54,031 39,891
---------------------
307,771 244,386
Less accumulated depreciation and amortization 193,549 167,065
---------------------
$114,222 $ 77,321
=====================
- ------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense for 1999, 1998 and 1997 amounted to
$49,302, $37,197 and $30,341, 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 $256,750 and $254,515 at April 30,
1999 and 1998, respectively.
28
<PAGE> 13
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 $33,628 and $29,885 at April 30, 1999 and 1998, respectively, to reflect the
liability under these plans. The Company purchased whole-life insurance
contracts on certain related directors and employees to recover distributions
made or to be made under the plans and has recorded the cash surrender value of
the policies in other assets. If all the assumptions regarding mortality,
earnings, policy dividends and other factors are realized, the Company will
ultimately realize its investment plus a factor for the use of its money.
STOCKHOLDERS' EQUITY
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1999, 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. In
addition, options to purchase 51,828 shares of Convertible Preferred Stock were
issued as a part of the acquisition and 37,399 shares of Convertible Preferred
Stock were issued in connection with these options. 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 fiscal 1999, the Company issued 6,884 shares of its
Common Stock upon conversion of 1,721 shares of the Convertible Preferred
Stock.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net earnings, foreign
currency translation adjustments and the change in the net unrealized gain or
loss on marketable securities. Included in stockholders' equity at April 30,
1999 and 1998, the net unrealized holding gain on available-for-sale securities
was $2,768 and $126, respectively, and the foreign currency translation
adjustment was $(26,168) and $(24,643), respectively.
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $215,366 $392,130 $47,755
Unrealized gains on securities (less applicable taxes
(benefit) of $1,619, ($736) and $96):
Unrealized holding gains (losses) arising during period
(less applicable taxes (benefit) of $3,186, ($82) and
$268) 5,199 (134) 439
Less: Reclassification adjustment for gains included in
earnings (less applicable taxes of $1,567, $654 and
$172) (2,557) (1,066) (282)
Foreign currency translation adjustments (1,525) (5,290) (3,065)
-------------------------------
Comprehensive income $216,483 $385,640 $44,847
===============================
- ---------------------------------------------------------------------------------------------
</TABLE>
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 plan expired in December 1998, except for options outstanding
thereunder, and was replaced by the Board of Directors with the 1999 Stock
Option Plan for Seasonal Employees (subject to shareholder approval in September
1999). The options are exercisable during September through November in each of
the two years following the calendar year of the grant.
29
<PAGE> 14
Changes during the years ended April 30, 1999, 1998 and 1997 under these
plans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
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 5,110,392 $32.71 6,217,699 $35.78 6,413,928 $37.93
Options granted 4,127,742 42.20 3,784,925 32.28 3,124,588 32.34
Options exercised (2,196,673) 32.67 (1,608,233) 33.63 (90,045) 20.08
Options which expired (1,314,967) 39.40 (3,283,999) 37.58 (3,230,772) 37.16
Options outstanding, end
of year 5,726,494 38.03 5,110,392 32.71 6,217,699 35.78
Shares exercisable, end
of year 3,505,737 37.62 3,428,615 32.87 4,506,372 36.00
Shares reserved for
future grants, end of
year 2,966,135 13,159,852 13,660,778
- ----------------------------------------------------------------------------------------------------
</TABLE>
A summary of stock options outstanding and exercisable at April 30, 1999
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>
$13.2813 -- 16.25 4,720 1 year $14.96 4,720 $14.96
$17.4375 -- 28.75 348,160 6 years 26.86 264,827 26.61
$30.6875 -- 39.875 2,011,968 6 years 33.05 1,301,986 33.39
$40.125 -- 47.375 3,330,646 6 years 42.12 1,934,204 42.04
$50.375 -- 51.6875 31,000 10 years 50.63 -- --
---------------------------------------------------------------------------------
5,726,494 3,505,737
=================================================================================
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $215,366 $392,130 $47,755
Pro forma 202,421 379,985 34,891
Basic net earnings per share:
As reported $2.16 $3.74 $.46
Pro forma 2.03 3.62 .34
Diluted net earnings per share:
As reported $2.14 $3.65 $.45
Pro forma 2.01 3.55 .33
- ---------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997 was $5.84, $5.91 and $6.14, respectively. The
following weighted-average assumptions were used for grants during the following
periods:
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.41% 6.21% 6.28%
Expected life 3 years 3 years 3 years
Expected volatility 21.86% 31.99% 34.08%
Dividend yield 2.36% 2.48% 2.42%
- ---------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 15
SHAREHOLDER RIGHTS PLAN
On July 25, 1998, the rights under the July 1988 shareholder rights plan,
as amended, expired and the rights under a shareholder rights plan adopted by
the Company's Board of Directors on March 25, 1998 became effective. Like the
1988 plan, the 1998 plan was adopted 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. Under the
1998 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,
1998. Rights automatically attach to shares issued after such date.
Under the 1998 plan, 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. The Company may, prior to any
Unapproved Stock Acquisition, amend the plan to lower such 15% threshold to not
less than the greater of (1) any percentage greater than the largest percentage
of beneficial ownership by any person or group of persons then known by the
Company, and (2) 10% (in which case the acquisition of such lower percentage of
beneficial ownership then constitutes an Unapproved Stock Acquisition and the
Rights become exercisable). When exercisable, the registered holder of each
Right 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
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 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 1998 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 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of intangibles $24,378 $17,336 $5,514
Purchased services 19,110 10,460 7,484
Travel and entertainment 15,094 11,548 9,642
Refund anticipation loan servicing fees 15,028 7,889 9,838
Taxes and licenses 14,531 11,392 10,467
Legal and professional 13,164 5,890 5,700
Loan servicing 11,158 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 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $381,443 $285,100 $221,494
Foreign 2,098 11,333 10,589
-----------------------------
$383,541 $296,433 $232,083
=============================
- --------------------------------------------------------------------------------------------
</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 are comprised of the
following:
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $123,035 $107,595 $ 69,725
State 16,128 14,402 7,965
Foreign 1,553 5,483 5,041
--------------------------------
140,716 127,480 82,731
================================
Deferred:
Federal 5,114 (12,047) 1,153
State 670 (1,613) 132
Foreign (754) (1,175) (65)
--------------------------------
5,030 (14,835) 1,220
--------------------------------
$145,746 $112,645 $ 83,951
================================
- ---------------------------------------------------------------------------------------------
</TABLE>
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $60,647 at December 31, 1998. 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 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<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 2.9% 2.8% 2.2%
Foreign income taxes, net of Federal income tax benefit 0.2% 0.5% 0.6%
Nontaxable Federal income (0.7%) (0.1%) (0.5%)
Other 0.6% (0.2%) (1.2%)
--------------------------------
Effective rate 38.0% 38.0% 36.1%
================================
- ---------------------------------------------------------------------------------------------
</TABLE>
A summary of deferred taxes follows:
<TABLE>
<CAPTION>
April 30 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Accrued expenses $(17,999) $ (9,809)
Allowance for credit losses (12,144) (4,081)
Mark-to-market adjustments (2,909) (3,454)
--------------------
Current (33,052) (17,344)
--------------------
Deferred compensation (14,577) (12,047)
Depreciation (5,222) (2,633)
Residual interest income -- (2,167)
--------------------
Noncurrent (19,799) (16,847)
--------------------
Gross deferred tax liabilities:
Accrued income 630 695
Deferred loan fees -- 1,921
Other -- 70
--------------------
Current 630 2,686
--------------------
Deferred gain on sale of residual interests 12,103 --
Residual interest income 6,359 --
Mortgage servicing rights 4,910 944
Depreciation 597 570
--------------------
Noncurrent 23,969 1,514
--------------------
Net deferred tax assets $(28,252) $(29,991)
====================
- ------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 17
ACQUISITIONS
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms. The purchase prices plus additional contingent
payments aggregated $110,133. Each acquisition was accounted for as a purchase
and, accordingly, results for each acquisition are included since the date of
acquisition. The excess of cost over fair value of net tangible assets acquired
was $99,857 and is being amortized on a straight-line basis over 15 years.
On March 5, 1999, the Company acquired Assurance Mortgage Corporation of
America, a company engaged in the origination and sale of conventional mortgage
loans. The Company issued 268,325 shares of its Common Stock from treasury, with
a value of $11,860, for the purchase. The acquisition was accounted for as a
purchase and, accordingly, its results are included since the date of
acquisition. The issuance of Common Stock was treated as a noncash investing
activity in the consolidated statement of cash flows for the year ended April
30, 1999. The excess of cost over fair value of net tangible assets acquired was
$21,710 and is being amortized on a straight-line basis over 15 years.
On June 17, 1997, the Company acquired Option One, a company primarily
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.
During fiscal 1999, 1998 and 1997, 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 since the date of
acquisition.
SALE OF SUBSIDIARIES
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20,939 loss, net of taxes, on the
transaction. The consolidated statements of earnings reflect the Company's
Credit Card operations segment as discontinued operations.
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 discontinued operations for the years ended April 30, 1999,
1998, and 1997 were $24,143, $665,649 and $873,400, respectively.
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, 1999, for fiscal 2000, 2001, 2002, 2003
and 2004 aggregated $96,995, $77,209, $54,624, $25,655 and $14,136,
respectively, with no significant commitments extending beyond that period of
time. The Company's rent expense for the years 1999, 1998 and 1997 aggregated
$99,654, $84,743 and $77,994, respectively.
Prior to March 31, 1999, the Company was obligated to purchase 60% of the
mortgage loan volume which met certain criteria as established by the Company
from a 40%-owned affiliate. The Company obtained majority-ownership of this
affiliate on March 31, 1999. From May 1, 1998 to March 31, 1999 the Company had
purchased $312,173 of such loans and all loan purchases after March 31, 1999
will be eliminated in consolidation. The Company also extended warehouse
financing to this affiliate to facilitate the accumulation of mortgage loans, of
which $68,434 was drawn at April 30, 1998.
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 $416,323 and $199,487 at April 30, 1999
and 1998, respectively. 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, 1999, the Company maintained a $1,850,000 backup credit
facility to support various financial activities conducted by its subsidiaries
through a 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
$4,864,137, subservicing loans of $1,300,374, and the master servicing of
$873,673 previously securitized mortgage loans held in trust at April 30, 1999.
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 $126,385 at April 30, 1999. 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 were consolidated, the defendants filed a motion to dismiss the
consolidated suits, the district court stayed all proceedings pending the
outcome of the state court suits, and the United States Court of Appeals for the
Sixth Circuit affirmed such stay. 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 were
consolidated for discovery purposes and defendants filed a motion for summary
judgment covering all four state lawsuits. As a part of the sale of its interest
in CompuServe, the Company 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 results of
operations.
FINANCIAL INSTRUMENTS
The Company sells short FNMA mortgage-backed securities to certain
broker-dealer counterparties. The position on certain or all of the fixed rate
mortgages is closed, on standard PSA settlement dates, when the Company enters
into a forward commitment to sell those mortgages or decides to securitize the
mortgages. The effectiveness of the hedge is measured by a historical and
probable future high correlation of changes in the fair value of the hedging
instruments with changes in the value of the hedged item. If correlation ceases
to exist, hedge accounting is terminated and the gains or losses are recorded in
revenues. Deferred gains on the FNMA securities hedging instrument amounted to
$156 at April 30, 1999. The contract value and market value of this hedging
instrument as of April 30, 1999 were $82,692 and $82,469, respectively.
The contract value and market value of the forward commitment as
of April 30, 1999 were $60,883 and $61,135, 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 fund.
34
<PAGE> 19
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1999 1999 1998 1998 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,196,997 $291,482 $ 85,613 $ 70,573 $967,591 $198,776 $ 73,584 $ 30,030
Continuing operations:
Earnings (loss) before income
taxes (benefits) $ 481,153 $ (4,588) $(50,249) $(42,775) $417,962 $(23,931) $(45,071) $(52,527)
Taxes (benefits) on
earnings 182,818 (1,743) (19,094) (16,235) 158,826 (9,094) (17,572) (19,515)
----------------------------------------------------------------------------------------
Net earnings (loss) 298,335 (2,845) (31,155) (26,540) 259,136 (14,837) (27,499) (33,012)
Net loss from discontinued
operations -- (273) (18) (1,199) (2,218) (2,452) (13,732) (5,123)
Net gain (loss) on sale of
discontinued operations (961) (19,978) -- -- -- 231,867 -- --
----------------------------------------------------------------------------------------
Net earnings (loss) $ 297,374 $(23,096) $(31,173) $(27,739) $256,918 $214,578 $(41,231) $(38,135)
========================================================================================
Basic net earnings per share:
Net earnings (loss) from
continuing operations $3.06 $(.03) $(.31) $(.25) $2.45 $(.14) $(.26) $(.32)
========================================================================================
Net earnings (loss) $3.05 $(.24) $(.31) $(.26) $2.43 $2.04 $(.39) $(.37)
========================================================================================
Diluted net earnings per
share:
Net earnings (loss) from
continuing operations $3.03 $(.03) $(.31) $(.25) $2.39 $(.14) $(.26) $(.32)
========================================================================================
Net earnings (loss) $3.02 $(.24) $(.31) $(.26) $2.37 $2.04 $(.39) $(.37)
========================================================================================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accumulation of four quarters in fiscal 1999 and 1998 for net earnings
per share does not equal the related per share amounts for the years ended April
30, 1999 and 1998 due to the repurchase of treasury shares, the timing of the
exercise of stock options, the conversion of Convertible Preferred Stock, and
the antidilutive effect of stock options in the first three quarters.
Revenues, earnings (loss) before income taxes (benefits), taxes (benefits)
on earnings, net earnings and net earnings (loss) from discontinued operations
for the first and second quarters of fiscal 1999 and for all quarters of fiscal
1998 differs from the amount reported on Form 10-Qs for the respective periods
due to reclassification of the credit card segment as discontinued operations.
SUBSEQUENT EVENTS (UNAUDITED)
On June 29, 1999, the Company announced it had signed an Asset Purchase
Agreement ("Purchase Agreement") under which it would acquire substantially all
of the non-attest assets of McGladrey & Pullen LLP ("M&P"), the nation's seventh
largest accounting and consulting firm. Under the terms of the Purchase
Agreement, a newly formed subsidiary of the Company ("Subsidiary") will purchase
a majority of M&P's non-attest assets for $240,000 in cash payments over four
years, the payment of certain pension liabilities with a present value of
approximately $50,000, and additional contingent payments based on future
performance. The Purchase Agreement provides for the Subsidiary to enter into an
administrative services agreement with M&P (which will continue as a separate,
independent partnership to perform attest services for its clients) to provide
support services on a fee basis and to enter into separate employment agreements
with certain partners and principals of M&P to perform non-attest services for
the Subsidiary. The Purchase Agreement further provides for the Company to
guarantee the payment of the purchase price and the pension liabilities.
The Company intends to fund the acquisition from internally generated funds.
The acquisition, which is subject to applicable regulatory approvals and
compliance and other normal closing conditions, is expected to be
completed in August 1999 and will be accounted for as a purchase. Upon closing,
the Subsidiary will be included in the Company's Business services segment.
M&P reported revenues of $328,000 for the year ended April 30, 1999.
Assuming the acquisition had taken place on May 1, 1998, the Company would have
reported revenues from non-attest services of $201,100 and pretax earnings
before goodwill amortization of $32,000.
35
<PAGE> 20
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 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 16,026 $ 30,895
Finance receivables, net 658,882 737,005
Other assets 448,010 311,759
------------------------
Total assets $1,122,918 $1,079,659
========================
Notes payable $ 71,939 $ 643,002
Long-term debt 249,725 249,675
Other liabilities 636,330 57,372
Stockholder's equity 164,924 129,610
------------------------
Total liabilities and stockholder's equity $1,122,918 $1,079,659
========================
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Condensed statements of operations:
Revenues $ 386,938 $ 209,334 $ 79,317
Earnings from operations 69,419 28,447 7,571
Earnings before income taxes 65,642 28,401 7,571
Net earnings 19,280 13,719 500
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 10 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 and conforming
mortgage loans in the United States. Mortgage origination services are offered
through a network of mortgage brokers in 49 states and through H&R Block offices
in 4 states.
Business services: This segment is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. This segment offers
services through regional accounting firms based in six cities in the United
States. Revenues of this segment are seasonal in nature.
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, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
U.S. tax operations $1,258,234 $1,047,324 $ 966,524
International tax operations 74,714 81,754 87,493
Mortgage operations 255,944 135,778 8,895
Business services 47,257 -- --
Unallocated corporate 8,516 5,125 3,498
--------------------------------------
Total revenues $1,644,665 $1,269,981 $1,066,410
======================================
EARNINGS FROM CONTINUING OPERATIONS:
U.S. tax operations $ 314,113 $ 252,247 $ 210,365
International tax operations 2,514 11,922 14,172
Mortgage operations 62,749 30,811 865
Business services 7,089 -- --
Unallocated corporate (17,401) (10,413) (4,189)
Investment income, net 32,234 25,597 10,870
Interest expense on long-term debt (17,757) (13,731) --
--------------------------------------
Earnings from continuing operations before income
taxes $ 383,541 $ 296,433 $ 232,083
======================================
DEPRECIATION AND AMORTIZATION:
U.S. tax operations $ 49,380 $ 37,313 $ 31,981
International tax operations 5,741 4,541 3,594
Mortgage operations 15,764 12,690 56
Business services 3,340 -- --
Unallocated corporate 380 428 390
--------------------------------------
Total depreciation and amortization $ 74,605 $ 54,972 $ 36,021
======================================
IDENTIFIABLE ASSETS:
U.S. tax operations $ 268,650 $ 200,243 $ 189,007
International tax operations 55,684 48,362 39,145
Mortgage operations 1,033,261 829,396 125,734
Business services 146,252 -- --
Unallocated corporate 406,329 1,623,670 577,976
Discontinued credit card operations -- 202,412 253,052
Net assets of discontinued operations -- -- 522,144
--------------------------------------
Total assets $1,910,176 $2,904,083 $1,707,058
======================================
CAPITAL EXPENDITURES:
U.S. tax operations $ 63,354 $ 36,495 $ 38,760
International tax operations 7,709 7,013 4,773
Mortgage operations 7,478 4,736 205
Business services 1,137 -- --
Unallocated corporate 691 1,513 279
--------------------------------------
Total capital expenditures $ 80,369 $ 49,757 $ 44,017
======================================
- -----------------------------------------------------------------------------------------------
</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.
PricewaterhouseCoopers LLP, independent accountants, audited H&R Block's
1999 consolidated financial statements and issued an opinion thereon. Their
audit was made in accordance with generally accepted auditing standards and
includes 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
Ozzie Wenich
Senior Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
H&R Block, Inc.
In our opinion, the accompanying consolidated balance sheet as of April 30,
1999 and the related consolidated statements of earnings, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of H&R Block, Inc. and its subsidiaries (the "Company") at April 30,
1999, and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of the Company as of April 30, 1998 and for each
of the two years in the period then ended were audited by other independent
accountants whose report dated June 16, 1998 and July 12, 1999 (as to the
effects of the discontinued credit card operations described in the note on the
sale of subsidiaries) expressed an unqualified opinion on those statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
June 15, 1999
38
<PAGE> 23
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 the related consolidated statements of
earnings and cash flows for each of the two 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 the results of their operations and their cash flows
for each of the two 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
(July 12, 1999 as to the effects of the discontinued credit card
operations described in the note on the sale of subsidiaries)
<PAGE> 24
COMMON STOCK DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock Price Cash Dividend
-------------- --------------
High Low Paid per Share
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
1999 FISCAL YEAR:
Quarter ended 7/31/98 45 5/8 41 5/16 .20
Quarter ended 10/31/98 47 1/8 35 5/16 .25
Quarter ended 1/31/99 48 1/4 40 3/8 .25
Quarter ended 4/30/99 51 3/4 40 1/4 .25
- ------------------------------------------------------------------------------------------------
</TABLE>
Traded on the New York Stock Exchange Ticker Symbol: HRB
<PAGE> 25
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
Amounts in thousands, except per share amounts and number of shareholders
<TABLE>
<CAPTION>
Year Ended April 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Total revenues $1,644,665 $1,269,981 $1,066,410 $ 846,987 $ 752,637
Net earnings from continuing
operations(1) $ 237,795 $ 183,788 $ 148,132 $ 126,669 $ 98,034
Net earnings(1) $ 215,366 $ 392,130 $ 47,755 $ 177,168 $ 107,259
AT YEAR END:
Total assets $1,910,176 $2,904,083 $1,707,058 $1,755,891 $1,097,313
Cash, cash equivalents and
marketable securities $ 420,649 $1,590,192 $ 539,107 $ 745,693 $ 444,981
Long-term debt $ 249,725 $ 249,675 -- -- --
Stockholders' equity $1,061,987 $1,341,632 $ 999,097 $1,039,593 $ 685,865
Shares outstanding 97,629 106,981 104,067 103,417 104,863
Number of shareholders 34,624 31,177 33,517 35,634 38,053
MEASUREMENTS:
Per basic share of common stock:
Net earnings from continuing
operations(1) $ 2.38 $ 1.75 $ 1.42 $ 1.22 $ .93
Net earnings(1) $ 2.16 $ 3.74 $ .46 $ 1.70 $ 1.02
Per diluted share of common
stock:
Net earnings from continuing
operations(1) $ 2.36 $ 1.71 $ 1.40 $ 1.19 $ .93
Net earnings(1) $ 2.14 $ 3.65 $ .45 $ 1.67 $ 1.01
Other per share data:
Cash dividends declared $ .95 $ .80 $ 1.04 $ 1.27 1/4 $ 1.21 3/4
Net tangible book value $ 6.72 $ 9.84 $ 8.88 $ 9.46 $ 5.79
Return on total revenues(2) 14.5% 14.5% 13.9% 15.0% 13.0%
Return on beginning
stockholders' equity 16.1% 39.2% 4.6% 25.8% 15.2%
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
1
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business under
their corporate names listed below or close derivatives thereof:
<TABLE>
<CAPTION>
JURISDICTION IN
NAME WHICH ORGANIZED
------------------------------------------------ --------------------
<S> <C>
H&R Block Group, Inc. .......................... Delaware (1)
Block Investment Corporation ................... Delaware (1)
HRB Management, Inc. ........................... Missouri (2)
Companion Insurance, Ltd. ...................... Bermuda (3)
H&R Block Tax and Financial Services Limited ... United Kingdom (3)
H&R Block Tax Services, Inc. ................... Missouri (2)
H&R Block Eastern Tax Services, Inc. ........... Missouri (4)
H&R Block of Dallas, Inc. ...................... Texas (4)
HRB Partners, Inc. ............................. Delaware (5)
H&R Block and Associates, L.P. ................. Delaware (6)
HRB Royalty, Inc. .............................. Delaware (4)
H&R Block Limited .............................. New South Wales (7)
BWA Advertising, Inc. .......................... Missouri (4)
H&R Block Canada, Inc. ......................... Canada (4)
H&R Block (Nova Scotia), Incorporated .......... Nova Scotia (8)
Cashplan Systems, Inc. ......................... British Columbia (8)
H&R Block (Guam), Inc. ......................... Guam (4)
Block Financial Corporation .................... Delaware (2)
Franchise Partner, Inc. ........................ Nevada (9)
H&R Block Financial Advisors, Inc .............. Delaware (9)
Birchtree Financial Services, Inc. ............. Oklahoma (9)
H&R Block Insurance Services, Inc. ............. Delaware (9)
HRB Financial Services, Inc. ................... Delaware (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)
Option One Mortgage Securities Corp. ........... Delaware (11)
Premier Trust Deed Services, Inc. .............. California (11)
Premier Mortgage Services of Washington, Inc. .. Washington (11)
H&R Block Home Loans, Inc. ..................... California (11)
H&R Block Mortgage Corporation ................. Ontario (11)
Option One Direct Insurance Agency, Inc. ....... California (11)
Assurance Mortgage Corporation of America ...... Massachusetts (11)
NCS Mortgage Services, L.L.C. .................. Georgia (12)
NCS Mortgage Services II, L.L.C. ............... Georgia (12)
HRB Business Services, Inc. .................... Delaware (2)
Block Holdings, Inc. ........................... Illinois (13)
C.W. Amos Business Services, Inc. .............. Delaware (13)
DMJK Business Services, Inc. ................... Missouri (13)
FERS Business Services, Inc. ................... Delaware (13)
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
FERS Personal Financial Services, Inc........... Delaware (13)
FM Business Services, Inc....................... Delaware (13)
Freed Maxick ABL Services, Inc.................. Delaware (13)
KSM Business Services, Inc...................... Delaware (13)
Practice Development Institute, Inc............. Delaware (13)
WS Business Services, Inc....................... Delaware (13)
RP Business Services, Inc....................... Delaware (13)
RSM McGladrey, Inc.............................. Delaware (13)
Rex Investments, Inc............................ Texas (14)
C.W. Amos Investment Advisors, LLC ............. Maryland (15)
</TABLE>
Notes to Subsidiaries of H&R Block, Inc.:
<TABLE>
<S> <C>
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of HRB Management, Inc.
(4) Wholly owned subsidiary of H&R Block 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 HRB Royalty, Inc.
(8) Wholly owned subsidiary of H&R Block Canada, 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) Limited liability company in which Block Financial Corporation has a
96.25% membership interest and non-affiliated individuals having a
combined 3.75% membership interest.
(13) Wholly owned subsidiary of HRB Business Services, Inc.
(14) Wholly owned subsidiary of WS Business Services, Inc.
(15) Limited liability company in which C.W. Amos Business Services, Inc. has
a 100% membership interest.
</TABLE>
2
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-185, 33-33889, 33-54989, 33-64147, 333-62515
and 333-42143) of H&R Block, Inc. of our reports dated June 15, 1999 relating to
the consolidated financial statements and financial statement schedule, which
are incorporated by reference in and appear in this Form 10-K, respectively.
/s/PricewaterhouseCoopers LLP
Kansas City, Missouri
July 28, 1999
<PAGE> 1
EXHIBIT 23(B)
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
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. 33-54989 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. 333-62515 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
report dated June 16, 1998 (July 12, 1999 as to the effects of the discontinued
credit card operations described in the note on the sale of subsidiaries),
appearing in this Annual Report on Form 10-K of H&R Block, Inc. and
subsidiaries for the year ended April 30, 1999.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the 1997 and 1998 financial statement
schedule of H&R Block, Inc. and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such 1997 and 1998 financial statement schedule when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Deloitte & Touche LLP
Kansas City, Missouri
July 28, 1999
<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> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 193,240
<SECURITIES> 56,881
<RECEIVABLES> 805,173
<ALLOWANCES> 61,872
<INVENTORY> 0
<CURRENT-ASSETS> 1,087,422
<PP&E> 307,771
<DEPRECIATION> 193,549
<TOTAL-ASSETS> 1,910,176
<CURRENT-LIABILITIES> 553,829
<BONDS> 0
0
0
<COMMON> 1,089
<OTHER-SE> 1,060,898
<TOTAL-LIABILITY-AND-EQUITY> 1,910,176
<SALES> 0
<TOTAL-REVENUES> 1,644,665
<CGS> 0
<TOTAL-COSTS> 1,289,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 383,541
<INCOME-TAX> 145,746
<INCOME-CONTINUING> 237,795
<DISCONTINUED> (22,429)<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215,366
<EPS-BASIC> 2.16
<EPS-DILUTED> 2.14
<FN>
<F1>NET OF TAX BENEFIT OF ($14,340).
</FN>
</TABLE>
