<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- -------------------
COMMISSION FILE NUMBER 1-6089
H&R BLOCK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 44-0607856
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MAIN STREET
KANSAS CITY, MISSOURI 64111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(816) 753-6900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
------- -------
The number of shares outstanding of the registrant's Common Stock, without par
value, at March 1, 2000 was 98,382,049 shares.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I Financial Information
Consolidated Balance Sheets
January 31, 2000 and April 30, 1999 .................................................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 2000 and 1999 ........................................... 2
Nine Months Ended January 31, 2000 and 1999 ............................................ 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2000 and 1999 ............................................ 4
Notes to Consolidated Financial Statements ................................................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 11
Quantitative and Qualitative Disclosures about Market Risk................................. 22
PART II Other Information.......................................................................... 23
SIGNATURES................................................................................................. 25
</TABLE>
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 248,490 $ 193,240
Marketable securities 33,074 56,881
Receivables from customers, brokers, dealers and clearing
organizations, less allowance for doubtful accounts of $744 2,385,785 -
Receivables, less allowance for doubtful accounts of $37,474
and $61,872 1,248,065 743,301
Prepaid expenses and other current assets 163,121 94,000
----------- -----------
TOTAL CURRENT ASSETS 4,078,535 1,087,422
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 294,792 170,528
Excess of cost over fair value of net tangible assets acquired,
net of accumulated amortization 1,149,546 405,534
Other 178,903 132,470
----------- -----------
1,623,241 708,532
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 219,594 114,222
----------- -----------
$ 5,921,370 $ 1,910,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,094,939 $ 71,939
Accounts payable to customers, brokers and dealers 2,106,142 -
Accounts payable, accrued expenses and deposits 182,842 168,641
Accrued salaries, wages and payroll taxes 80,558 161,590
Accrued taxes on earnings 6,784 151,659
Current portion of long-term debt 60,207 -
----------- -----------
TOTAL CURRENT LIABILITIES 4,531,472 553,829
LONG-TERM DEBT 356,283 249,725
OTHER NONCURRENT LIABILITIES 108,342 44,635
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 417,311 420,658
Retained earnings 963,212 1,130,909
Accumulated other comprehensive income (loss) (17,229) (23,400)
----------- -----------
1,364,383 1,529,256
Less cost of 10,600,900 and 11,343,608 shares of common stock
in treasury 439,110 467,269
----------- -----------
925,273 1,061,987
----------- -----------
$ 5,921,370 $ 1,910,176
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 31,
-----------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 406,564 $ 213,156
Product revenues 81,941 60,110
Royalties 16,124 12,961
Other 7,878 5,255
------------- -------------
512,507 291,482
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 230,943 124,718
Occupancy and equipment 63,842 42,950
Interest 48,826 23,689
Depreciation and amortization 36,539 18,105
Marketing and advertising 39,221 17,824
Supplies, freight and postage 26,755 22,616
Other 80,085 49,930
------------- -------------
526,211 299,832
------------- -------------
Operating loss (13,704) (8,350)
OTHER INCOME
Investment income, net 72 4,641
Other, net 109 (879)
------------- -------------
181 3,762
Loss from continuing operations before income tax benefit (13,523) (4,588)
Income tax benefit (6,448) (1,743)
------------- -------------
Net loss from continuing operations (7,075) (2,845)
Net loss from discontinued operations (less applicable
income tax benefit of ($175)) - (273)
Net loss on sale of discontinued operations (less
applicable income tax benefit of ($12,773)) - (19,978)
------------- -------------
Net loss $ (7,075) $ (23,096)
============= =============
Weighted average number of common shares outstanding 98,358 97,481
============= =============
Basic and diluted net loss per share from continuing operations $ (.07) $ (.03)
============= =============
Basic and diluted net loss per share $ (.07) $ (.24)
============= =============
Dividends per share $ .275 $ .25
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 5
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 632,766 $ 308,466
Product revenues 176,182 111,906
Royalties 20,264 17,023
Other 14,801 10,273
------------- -------------
844,013 447,668
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 424,601 216,711
Occupancy and equipment 152,036 108,229
Interest 83,644 53,889
Depreciation and amortization 79,270 44,800
Marketing and advertising 59,076 30,088
Supplies, freight and postage 39,646 31,230
Other 156,701 87,631
------------- -------------
994,974 572,578
------------- -------------
Operating loss (150,961) (124,910)
OTHER INCOME
Investment income, net 5,125 28,177
Other, net 359 (879)
------------- -------------
5,484 27,298
Loss from continuing operations before income tax benefit (145,477) (97,612)
Income tax benefit (56,591) (37,072)
------------- -------------
Net loss from continuing operations (88,886) (60,540)
Net loss from discontinued operations (less applicable
income tax benefit of ($953)) - (1,490)
Net loss on sale of discontinued operations (less
applicable income tax benefit of ($12,773)) - (19,978)
------------- -------------
Net loss $ (88,886) $ (82,008)
============= =============
Weighted average number of common shares outstanding 97,962 100,526
============= =============
Basic and diluted net loss per share from continuing operations $ (.91) $ (.60)
============= =============
Basic and diluted net loss per share $ (.91) $ (.82)
============= =============
Dividends per share $ .80 $ .70
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 6
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (88,886) $ (82,008)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 79,270 44,800
Accretion of acquisition liabilities 7,266 -
Net loss on sale of discontinued operations - 19,978
Other noncurrent liabilities 5,279 3,613
Changes in:
Receivables from customers, brokers, dealers and
clearing organizations (423,288) -
Receivables (493,884) (217,181)
Prepaid expenses and other current assets (54,171) (45,195)
Accounts payable to customers, brokers and dealers 403,954 -
Accounts payable, accrued expenses and deposits (56,815) 14,341
Accrued salaries, wages and payroll taxes (81,032) (42,816)
Accrued taxes on earnings (144,933) (386,235)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (847,240) (690,703)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (5,009) (227,381)
Maturities of marketable securities 33,003 709,106
Purchases of property and equipment (68,855) (49,301)
Payments made for business acquisitions, net of cash acquired (986,556) (90,618)
Other, net (18,094) (23,738)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,045,511) 318,068
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (31,187,422) (7,301,430)
Proceeds from issuance of notes payable 33,210,422 7,459,389
Dividends paid (78,811) (70,700)
Payments to acquire treasury shares (32,366) (490,868)
Proceeds from stock options exercised 36,178 63,728
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,948,001 (339,881)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,250 (712,516)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 248,490 $ 188,340
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 87,168 $ 360,959
Interest paid 79,672 59,392
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 7
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 2000, the Consolidated
Statements of Operations for the three and nine months ended January 31,
2000 and 1999, and the Consolidated Statements of Cash Flows for the nine
months ended January 31, 2000 and 1999 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 31,
2000 and for all periods presented have been made.
Reclassifications have been made to prior periods to conform with the
current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1999 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the nine-month results are not
indicative of results to be expected for the year.
2. On December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of all of the issued and outstanding
shares of capital stock of Olde Financial Corporation and Financial
Marketing Services, Inc. (collectively, Olde) for $850,000 in cash plus an
estimated tangible book value payment of $37,100. An additional cash
payment of $11,372 was made in the fourth quarter based on the aggregate
consolidated net book value at the acquisition date, after a final
independent audit of the balance sheet. The purchase agreement also
provides for possible future consideration payable for up to five years
after the acquisition based upon revenues generated from certain online
brokerage services. Olde Discount Corporation, a wholly owned subsidiary of
Olde Financial Corporation, based in Detroit, Michigan, offers brokerage
and other financial services through its network of approximately 1,200
registered representatives located in 181 branch offices in 35 states. The
transaction was accounted for as a purchase and, accordingly, Olde's
results are included since the date of acquisition. The excess of cost over
fair value of net tangible assets acquired at January 31, 2000 was
$491,179, and will be adjusted for the additional payment made in the
fourth quarter. Such is being amortized on a straight-line basis over 15
years, subject to completion of an asset valuation as of the purchase date.
The acquisition was financed with short-term borrowings, and it is the
intention of the Company that a portion of the acquisition will ultimately
be financed with the issuance of approximately $500,000 in term debt in the
fourth quarter of fiscal 2000.
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<PAGE> 8
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Olde as if the acquisition had occurred on
May 1, 1999 and 1998, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the
acquisition debt and the related income tax effects. The pro forma
information is presented for informational purposes only and is not
necessarily indicative of what would have occurred if the acquisition had
been made as of those dates. In addition, the pro forma information is not
intended to be a projection of future results.
<TABLE>
<CAPTION>
Nine months ended
-----------------
January 31,
-----------
2000 1999
---- ----
<S> <C> <C>
Revenues $ 1,158,919 $ 703,152
Net loss (102,969) (84,794)
Basic and diluted net loss per share $ (1.05) $ (.84)
</TABLE>
3. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc.
(RSM), completed the purchase of substantially all of the non-attest assets
of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh
largest accounting and consulting firm with more than 70 offices located
primarily in the Eastern, Midwestern, Northern and Southwestern United
States. The purchase price was $240,000 in cash payments over the next four
years and the assumption of certain pension liabilities with a present
value of $52,728. The purchase agreement also provides for possible future
contingent consideration based on a calculation of earnings in year two,
three and four after the acquisition and will be treated as purchase price
when paid. In addition, the Company made cash payments of $65,453 for
outstanding accounts receivable and work-in-process that have been repaid
to the Company as RSM collected these amounts in the ordinary course of
business. The acquisition was accounted for as a purchase, and accordingly,
RSM's results are included since the date of acquisition. The present value
of the additional cash payments due over the next four years of $148,803
was treated as a noncash investing activity in the Consolidated Statement
of Cash Flows for the nine months ended January 31, 2000. The excess of
cost over the fair value of net tangible assets acquired was $240,535 and
is being amortized on a straight-line basis over periods of up to 25 years.
4. Receivables consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
2000 1999
---- ----
<S> <C> <C>
(Unaudited) (Audited)
Mortgage loans held for sale $ 621,578 $ 636,687
Participation in refund anticipation loans 356,659 51,074
Business services accounts receivable and work-in-process 122,397 33,015
Other 184,905 84,397
-------------- ---------------
1,285,539 805,173
Allowance for doubtful accounts 37,474 61,872
-------------- ---------------
$ 1,248,065 $ 743,301
============== ===============
</TABLE>
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<PAGE> 9
5. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
6. Basic and diluted net loss per share is computed using the weighted average
number of shares outstanding during each period. Diluted net loss per share
excludes the impact of common stock options outstanding of 8,464,234 shares
and the conversion of 608 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the nine
months ended decreased to 97,962,000 from 100,526,000 last year, due to the
purchase of treasury shares by the Company during fiscal 1999 and 2000.
This decrease was partially offset by stock option exercises and the
issuance of stock for acquisitions.
7. During the nine months ended January 31, 2000 and 1999, the Company issued
953,865 and 1,996,012 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. In addition, the
Company issued 475,443 shares of its common stock for an acquisition in the
second quarter of fiscal 2000. The issuance of common stock for the
acquisition was treated as a noncash investing activity in the Consolidated
Statement of Cash Flows for the nine months ended January 31, 2000. During
the nine months ended January 31, 2000, the Company acquired 721,800 shares
of its common stock at an aggregate cost of $32,366. During the nine months
ended January 31, 1999, the Company acquired 11,792,500 shares of its
common stock at an aggregate cost of $490,868.
8. CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. 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 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, Inc. 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.
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<PAGE> 10
9. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
2000 1999
---- ----
<S> <C> <C>
(Unaudited) (Audited)
Condensed balance sheets:
Cash and cash equivalents $ 147,465 $ 16,026
Finance receivables, net 3,373,268 658,882
Other assets 1,233,689 448,010
-------------- ---------------
Total assets $ 4,754,422 $ 1,122,918
============== ===============
Notes payable $ 2,090,802 $ 71,939
Long-term debt 249,763 249,725
Other liabilities 2,211,510 636,330
Stockholder's equity 202,347 164,924
-------------- ---------------
Total liabilities and stockholder's equity $ 4,754,422 $ 1,122,918
============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed statements of operations:
Revenues $ 220,892 $ 110,472 $ 394,716 $ 217,699
Earnings from continuing
operations 26,336 19,904 51,626 35,357
Net earnings (loss) 19,710 (8,026) 34,846 233
</TABLE>
10. As part of its interest rate risk management strategy, the Company may
choose to hedge its interest rate risk related to its fixed rate mortgage
or debt portfolios. The effectiveness of a 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.
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 Public Securities Association (PSA)
settlement dates, when the Company enters into a forward commitment to sell
those mortgages or decides to securitize the mortgages. Deferred gains on
the FNMA securities hedging instrument amounted to $227 at January 31,
2000. There were no open FNMA hedging instruments at January 31, 2000. The
contract value and market value of the forward commitment at January 31,
2000 were $130,000 and $130,171, respectively. In addition, the Company has
hedged its interest rate risk related to the anticipated issuance of term
debt in the fourth quarter of fiscal 2000 by utilizing treasury rate
guarantees. The position on the treasury rate guarantees is closed on the
anticipated bond issuance date. The contract value and the market value of
these treasury rate guarantees as of January 31, 2000 were $300,000 and
$297,873. These treasury rate guarantees expire on March 31, 2000.
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<PAGE> 11
11. The Company's comprehensive income is comprised of net loss, foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements. The components of
comprehensive income (loss) during the three and nine months ended January
31, 2000 and 1999 were:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (7,075) $ (23,096) $ (88,886) $ (82,008)
Change in net unrealized
gain (loss) on mkt. securities (3,390) 2,113 1,867 3,945
Change in foreign currency
translation adjustments 2,474 2,458 4,304 (6,447)
------------- ------------- -------------- ---------------
Comprehensive income (loss) $ (7,991) $ (18,525) $ (82,715) $ (84,510)
============= ============= ============== ===============
</TABLE>
12. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
will now be effective for the Company's fiscal year ending April 30, 2002.
13. In the second quarter of fiscal year 2000, management redefined its
Mortgage operations segment to reflect the change in how the business is
analyzed and evaluated. The redefined segment, Financial services, includes
all of the previous mortgage activity along with the startup of the
Company's new financial services operations and the acquisition of Olde.
Financial services is primarily engaged in the origination, purchase,
servicing, securitization and sale of nonconforming and conforming mortgage
loans, as well as offering full-service investment opportunities to the
general public. Mortgage origination services are offered through a network
of mortgage brokers, through H&R Block Financial Centers and through H&R
Block Mortgage Corporation retail offices. Financial planning and
investment advice are offered through H&R Block Financial Centers and tax
offices, and stock, bonds, mutual funds and other products and securities
are offered through a nationwide network of registered representatives,
including representatives located at H&R Block Financial Centers and tax
offices.
-9-
<PAGE> 12
Information concerning the Company's operations by reportable operating
segments for the three and nine months ended January 31, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
U.S. tax operations $ 237,851 $ 189,083 $ 270,649 $ 219,662
International tax operations 8,478 6,776 27,259 22,030
Financial services 182,419 79,350 353,376 185,005
Business services 82,806 15,341 190,165 18,205
Unallocated corporate 953 932 2,564 2,766
------------ -------------- -------------- --------------
$ 512,507 $ 291,482 $ 844,013 $ 447,668
============ ============== ============== ==============
Earnings (loss) from continuing operations:
U.S. tax operations $ (29,427) $ (18,845) $ (184,160) $ (137,977)
International tax operations (7,134) (7,508) (15,299) (15,742)
Financial services 43,976 24,189 83,733 48,043
Business services 2,156 (1) (169) (220)
Unallocated corporate (5,226) (3,231) (12,003) (8,989)
Interest exp - acquisition debt (18,472) (4,438) (29,952) (13,319)
------------ -------------- -------------- --------------
(14,127) (9,834) (157,850) (128,204)
Investment income, net 72 4,641 5,125 28,177
Intercompany interest 532 605 7,248 2,415
------------ -------------- -------------- --------------
Loss from continuing operations
before income tax benefit $ (13,523) $ (4,588) $ (145,477) $ (97,612)
============ ============== ============== ==============
January 31, April 30,
----------- ---------
2000 1999
---- ----
IDENTIFIABLE ASSETS:
U.S. tax operations $ 771,895 $ 268,650
International tax operations 56,937 55,684
Financial services 4,313,269 1,038,909
Business services 508,610 146,252
Unallocated corporate 270,659 400,681
-------------- --------------
$ 5,921,370 $ 1,910,176
============== ==============
</TABLE>
-10-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q 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 ENTRY BY THE COMPANY INTO ANY AGREEMENT REGARDING ANY
SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION INVOLVING OPTION ONE MORTGAGE
CORPORATION (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 TRANSACTION AND THE LINES OF
BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; THE UNCERTAINTY THAT
INCREASES IN THE NUMBER OF CLIENTS SERVED BY THE U.S. TAX OPERATIONS SEGMENT
WILL CONTINUE AT THE RATES STATED FOR A PORTION OF THE U.S. TAX-FILING SEASON;
UNFORESEEN COMPLIANCE COSTS; CHANGES IN ECONOMIC, POLITICAL OR REGULATORY
ENVIRONMENTS; CHANGES IN COMPETITION AND THE EFFECTS OF SUCH CHANGES; THE
INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES; 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 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.
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased to a negative $452.9 million at January 31, 2000 from
$533.6 million at April 30, 1999. The working capital ratio at January 31, 2000
is 0.90 to 1, compared to 1.96 to 1 at April 30, 1999. The decrease in working
capital and the working capital ratio is due to the following: (1) purchase of
Olde Financial Corporation (Olde) with short-term borrowings; (2) the increase
in short-term borrowings to fund mortgage loan receivables which were funded
with corporate cash at April 30, 1999 and; (3) the seasonal nature of the
Company's U.S. tax
-11-
<PAGE> 14
operations segment. Tax return preparation occurs almost entirely in the fourth
quarter and has the effect of increasing certain assets and liabilities during
this time.
The Company maintains a seasonal line of credit to support short-term borrowing
facilities in Canada. The credit limit of this line fluctuates 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. These
short-term borrowings in the U.S. are supported by a $1.89 billion back-up
credit facility through November 2000, subject to renewal. An additional credit
facility of $750 million was added in November 1999, which extends through April
2000, to support commercial paper that was issued to finance the acquisition of
Olde. It's the Company's intention to ultimately finance a portion of the
acquisition price with the issuance of approximately $500 million in term debt
in the fourth quarter of fiscal 2000.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first nine months were funded primarily through
internally-generated funds and, to a lesser extent, short-term borrowings.
At January 31, 2000, short-term borrowings used to fund mortgage loans and other
programs increased to $2.1 billion from $71.9 million at April 30, 1999 due
mainly to the funding of the acquisition of Olde and mortgage loan receivables
which were previously funded with corporate cash. For the nine months ended
January 31, 2000 and 1999, interest expense was $83.6 million and $53.9 million,
respectively. The increase in interest expense is primarily attributable to
interest expense related to the purchase of Olde and the non-attest assets of
McGladrey & Pullen, LLP.
In July 1996, the Company announced its intention to repurchase up to 10 million
shares in the open market over a two-year period following the separation of
CompuServe Corporation. At January 31, 2000, 7.7 million shares had been
repurchased. The two-year period expired January 31, 2000.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On July 21, 1999, the Company announced it was evaluating strategic alternatives
for Option One, including a possible sale or joint venture with a business
partner. There are no assurances that any transaction will take place. Option
One is reported in the Financial services segment.
On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM),
completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest
accounting and consulting firm with more than 70 offices located primarily in
the Eastern, Midwestern, Northern and Southwestern United States. The purchase
price was $240.0 million in cash payments over the next four years and the
assumption of certain pension liabilities with a present value of $52.7 million.
In addition, the Company made cash payments of $65.5 million for outstanding
accounts receivable
-12-
<PAGE> 15
and work-in-process balances that have been repaid to the Company as RSM
collected these amounts in the ordinary course of business. The acquisition was
accounted for as a purchase, and accordingly, RSM's results are included since
the date of acquisition.
On December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of all of the issued and outstanding shares
of capital stock of Olde for $850.0 million in cash plus an estimated tangible
book value payment of $37.1 million. An additional cash payment of $11.4 million
was made in the fourth quarter based on the aggregate consolidated net book
value at the acquisition date, after a final independent audit of the balance
sheet. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial
Corporation, based in Detroit, Michigan, offers brokerage and other financial
services through its network of approximately 1,200 registered representatives
located in 181 branch offices in 35 states. The transaction was accounted for as
a purchase and, accordingly, Olde's results are included since the date of
acquisition.
-13-
<PAGE> 16
FISCAL 2000 COMPARED TO FISCAL 1999
The analysis that follows should be read in conjunction with the table below and
the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 237,851 $ 189,083 $ (29,427) $ (18,845)
International tax operations 8,478 6,776 (7,134) (7,508)
Financial services 182,419 79,350 43,976 24,189
Business services 82,806 15,341 2,156 (1)
Unallocated corporate 953 932 (5,226) (3,231)
Interest expense on acquisition debt - - (18,472) (4,438)
--------------- -------------- -------------- -------------
$ 512,507 $ 291,482 (14,127) (9,834)
=============== ==============
Investment income, net 72 4,641
Intercompany interest 532 605
-------------- -------------
(13,523) (4,588)
Income tax benefit (6,448) (1,743)
-------------- -------------
Net loss from continuing operations (7,075) (2,845)
Net loss from discontinued operations - (273)
Net loss on sale of discontinued operations - (19,978)
-------------- -------------
Net loss $ (7,075) $ (23,096)
============== =============
</TABLE>
Consolidated revenues for the three months ended January 31, 2000 increased
75.8% to $512.5 million from $291.5 million reported last year. The increase is
primarily due to acquisitions. Revenues from Financial services increased 129.9%
over last year, due to the acquisition of Olde, and Business services increased
$67.5 million over the prior year, due mainly to the acquisition of RSM.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 2000 increased to $13.5 million from $4.6 million in the third quarter of
last year. The increase is attributable to increased losses from U.S. tax
operations. These increases were partially offset by improved results from
Financial services.
-14-
<PAGE> 17
The net loss from continuing operations was $7.1 million, or $.07 per share,
compared to $2.8 million, or $.03 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 25.8% to $237.9 million from $189.1 million last year,
resulting primarily from increased revenues from higher tax preparation fees
that are attributable to an increase in the number of clients served and price
increases. During the first month of the U.S. tax-filing season, the number of
clients served in company-owned offices increased 11.0%. Improved software sales
also contributed to the increase.
The pretax loss increased 56.2% to $29.4 million from $18.8 million in the third
quarter of last year due to higher expenses related to increased competitive
conditions for software sales and the startup of new e-commerce initiatives, as
well as normal operational increases in compensation and benefits, rent and
other facilities-related expenses and marketing and advertising related to tax
services. An increase in the number of tax offices over the prior year also
contributed to the increased expenses in tax services. These losses were
partially offset by improved performance of Refund Anticipation Loans (RALs) due
to lower bad debt expense, which is believed to primarily be a result of the IRS
Debt Indicator Program. Due to the nature of this segment's business, the
results for the first month of the tax-filing season are not necessarily
indicative of expected results for the entire tax season.
INTERNATIONAL TAX OPERATIONS
Revenues increased 25.1% to $8.5 million compared to $6.8 million in the prior
year's third quarter. The increase is principally attributable to higher check
cashing and tax preparation fees in Canada and higher tax preparation fees in
Australia.
The pretax loss decreased 5.0% to $7.1 million from $7.5 million last year. The
decrease is due to lower freight and postage and facilities-related expenses in
Canada. The lower facilities-related expense is attributable to a decrease in
the number of tax offices to 537 compared to 574 in the prior year. Improved
results from Australia and the United Kingdom also contributed to the decreased
loss. Due to the nature of this segment's business, third quarter operating
results are not indicative of expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 129.9% to $182.4 million from $79.4 million in the same
period last year. The increase is primarily attributable to the acquisition of
Olde on December 1, 1999. Olde contributed revenues for the two-month period of
$92.8 million. Option One, which includes H&R Block Mortgage Corporation
(formally Assurance Mortgage Corporation of America), also contributed $77.2
million to revenues, an 11.8% increase over the prior year. Option One
originated and sold or securitized $1.4 billion in loans during the third
quarter of fiscal 2000, compared to $930.2 million originated and $1.3 billion
sold or securitized in the third quarter last year.
-15-
<PAGE> 18
Financial services pretax earnings of $44.0 million increased 81.8% this year
compared to $24.2 million during the third quarter of fiscal 1999. The increase
is mainly due to the acquisition of Olde, which contributed earnings of $25.7
million for the two-month period. Pretax earnings were reduced by losses related
to the startup of financial services operations that offer financial planning
services in H&R Block Financial Centers and tax offices.
BUSINESS SERVICES
Business services revenues of $82.8 million increased 439.8% from $15.3 million
in the third quarter last year. The increase is primarily due to the acquisition
of two regional and one national accounting firm, RSM, as well as several
smaller market firms since the third quarter of fiscal 1999. Pretax earnings
were $2.2 million compared to a loss of $1 thousand in the prior year, which
includes goodwill amortization of $5.7 million and $1.1 million, respectively.
Due to the nature of this segment's business, revenues are seasonal, while
expenses are relatively fixed throughout the year. Results for the third quarter
are not indicative of the expected results for the entire year.
INVESTMENT INCOME, NET
Net investment income decreased 98.4% to $72 thousand from $4.6 million last
year. The decrease is due to less funds available for investment resulting from
using corporate cash to fund acquisitions and mortgage loans held for sale.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 61.7% to $5.2 million from $3.2 million in the comparable period last
year. The increase is due to higher employee costs and consulting fees and the
timing of charitable contributions. Also contributing to the increased loss from
last year are lower earnings from the Company's captive insurance company.
-16-
<PAGE> 19
THREE MONTHS ENDED JANUARY 31, 2000 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1999 (SECOND QUARTER)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- --------------------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. tax operations $ 237,851 $ 19,723 $ (29,427) $ (83,663)
International tax operations 8,478 14,713 (7,134) (1,644)
Financial services 182,419 91,503 43,976 20,931
Business services 82,806 83,167 2,156 (2,134)
Unallocated corporate 953 840 (5,226) (3,431)
Interest expense on acquisition debt - - (18,472) (7,042)
--------------- -------------- -------------- -------------
$ 512,507 $ 209,946 (14,127) (76,983)
=============== ==============
Investment income, net 72 2,402
Intercompany interest 532 2,424
-------------- -------------
(13,523) (72,157)
Income tax benefit (6,448) (27,420)
-------------- -------------
Net loss from continuing operations (7,075) (44,737)
Net loss from discontinued operations - -
Net loss on sale of discontinued operations - -
-------------- -------------
Net loss $ (7,075) $ (44,737)
============== =============
</TABLE>
Consolidated revenues for the three months ended January 31, 2000 increased
144.1% to $512.5 million from $209.9 million reported in the second quarter of
fiscal 2000. The increase is primarily due to revenues from U.S. tax operations
related to the beginning of the U.S. tax-filing season, as well as increased
revenues from Financial services related to the acquisition of Olde on December
1, 1999.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 2000 decreased to $13.5 million from $72.2 million in the second quarter
of this year. The decrease is attributable to U.S. tax operations, which
incurred a pretax loss of $29.4 million this quarter compared to a pretax loss
of $83.7 million in the second quarter, and improved results from Financial
services.
The net loss from continuing operations was $7.1 million, or $.07 per share,
compared to $44.7 million, or $.46 per share, for the second quarter.
An analysis of operations by reportable operating segments follows.
-17-
<PAGE> 20
U.S. TAX OPERATIONS
Revenues increased $218.2 million to $237.9 million from $19.7 million in the
second quarter. The pretax loss decreased 64.8% to $29.4 million from $83.7
million in the three months ended October 31, 1999. The improved results are due
to the start of the U.S. tax-filing season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 42.4% to $8.5 million compared to the second quarter revenues
of $14.7 million. The pretax loss increased 333.9% to $7.1 million from $1.6
million in the second quarter. The decreased results are due to the timing of
the tax-filing seasons in Australia and Canada. The Australian tax season ends
in October while the Canadian tax season begins in late January.
FINANCIAL SERVICES
Revenues increased 99.4% to $182.4 million from $91.5 million in the prior
quarter. Pretax earnings increased 110.1% to $44.0 million from $20.9 million in
the three months ended October 31, 1999. The improved results are primarily due
to the acquisition of Olde on December 1, 1999, which contributed $92.8 million
in revenues and $25.7 million in pretax earnings for the two months ended
January 31. The increase in pretax earnings was partially reduced by losses
related to the startup of financial services operations that offer financial
planning services in H&R Block Financial Centers and tax offices.
BUSINESS SERVICES
Revenues decreased .4% to $82.8 million from $83.2 million in the three months
ended October 31, 1999. Pretax earnings were $2.2 million, compared to a pretax
loss of $2.1 million in the prior quarter. The improved results are mainly due
to the improved results of RSM resulting from increased revenues, due to the
start of the tax and accounting season, as well as a decrease in personnel
training costs and lower bad debt expense. Additionally the onset of the
accounting firms' tax and accounting season improved the results of a majority
of the other firms.
INVESTMENT INCOME, NET
Net investment income decreased 97.0% to $72 thousand from $2.4 million in the
second quarter of fiscal 2000. The decrease resulted from less funds available
for investment due to the use of internal cash to fund operations.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 52.3% to $5.2 million from $3.4 million in the second quarter. The
increase is due to higher employee costs and consulting fees and the timing of
charitable contributions. Improved results at the Company's captive insurance
subsidiary partially offset the increased loss.
-18-
<PAGE> 21
NINE MONTHS ENDED JANUARY 31, 2000 COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 270,649 $ 219,662 $ (184,160) $ (137,977)
International tax operations 27,259 22,030 (15,299) (15,742)
Financial services 353,376 185,005 83,733 48,043
Business services 190,165 18,205 (169) (220)
Unallocated corporate 2,564 2,766 (12,003) (8,989)
Interest expense on acquisition debt - - (29,952) (13,319)
--------------- -------------- -------------- -------------
$ 844,013 $ 447,668 (157,850) (128,204)
=============== ==============
Investment income, net 5,125 28,177
Intercompany interest 7,248 2,415
-------------- -------------
(145,477) (97,612)
Income tax benefit (56,591) (37,072)
-------------- -------------
Net loss from continuing operations (88,886) (60,540)
Net loss from discontinued operations - (1,490)
Net loss on sale of discontinued operations - (19,978)
-------------- -------------
Net loss $ (88,886) $ (82,008)
============== =============
</TABLE>
Consolidated revenues for the nine months ended January 31, 2000 increased 88.5%
to $844.0 million from $447.7 million reported last year. The increase is
primarily due to acquisitions in the Business and Financial services segments.
Revenues from Business services increased $172.0 million over last year and
Financial services increased $168.4 million over the nine-month period last
year. U.S tax operations also contributed to the increase.
The consolidated pretax loss from continuing operations for the first nine
months of fiscal 2000 increased to $145.5 million from $97.6 million last year.
The increase is attributable to higher losses from U.S. tax operations and lower
investment income, which were reduced by increased earnings from Financial
services, resulting from the Olde acquisition.
The net loss from continuing operations was $88.9 million, or $.91 per share,
compared to $60.5 million, or $.60 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
-19-
<PAGE> 22
U.S. TAX OPERATIONS
Revenues increased 23.2% to $270.6 million from $219.7 million last year,
resulting primarily from higher tax preparation fees that are attributable to a
11.0% increase in clients served during the first month of the tax season and
price increases. Revenues from software sales also contributed to the increase.
The pretax loss increased 33.5% to $184.2 million from $138.0 million in the
comparable period last year due to normal operational increases in compensation,
rent and other facility-related expenses and consulting expenses related to tax
services, increased competitive conditions related to software sales and the
startup of e-commerce initiatives. In addition to the normal increases, the
higher compensation is related to a change in the field manager compensation
structure that shifts their compensation to salary incurred throughout the year
from incentive bonuses incurred during the fourth quarter. Contributing to the
increases in rent and other facility-related expenses is an increase in the
amount of tax office space maintained under lease during this year's off-season,
as well as an additional 282 tax offices this tax season compared to last year's
tax season. The increased loss was partially offset by earnings from RALs due to
lower bad debt expense, which is believed to primarily be a result of the IRS
Debt Indicator Program. Due to the nature of this segment's business, the
nine-month operating results are not indicative of expected results for the
entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 23.7% to $27.3 million compared to $22.0 million in the prior
year. The increase is due to Australia and Canada operations. The increase in
Australian revenues is due to higher tax preparation fees which is the result of
an 8.5% increase in the number of tax returns prepared over the same period last
year. The increase in Canadian revenues is due to higher check cashing, tax
preparation and discounted return fees.
The pretax loss decreased 2.8% to $15.3 million from $15.7 million last year.
The decrease is due to improved results in Australia and the United Kingdom.
These results were partially offset by increased losses from Canada operations.
Due to the nature of this segment's business, the nine-month operating results
are not indicative of expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 91.0% to $353.4 million from $185.0 million in the same
period last year. The increase is attributable to Olde, which was acquired on
December 1, 1999, and Option One. Olde contributed revenues of $92.8 million.
Option One, which includes H&R Block Mortgage Corporation (formally Assurance
Mortgage Corporation of America), contributed revenues of $222.6 million for the
nine months, a $64.8 million increase over the same period last year. Option One
originated and sold or securitized $4.2 billion in loans during the first nine
months of fiscal 2000, compared to $2.5 billion in the same period last year.
The Company's other mortgage operations and Birchtree Financial, a
broker-dealer, contributed to the improved revenues.
-20-
<PAGE> 23
Pretax earnings increased 74.3% to $83.7 million from $48.0 million in the
prior year. The increase is primarily due to Olde, acquired December 1, 1999,
which contributed earnings of $25.7 million and Option One, which contributed
earnings of $63.5 million compared to earnings of $46.7 million last year.
Earnings were reduced by losses related to the startup of financial services
operations that offer financial planning services in H&R Block Financial
Centers and tax offices.
BUSINESS SERVICES
Business services contributed revenues of $190.2 million compared to $18.2
million for the nine months ended January 31, 1999. The pretax loss decreased to
$169 thousand compared to $220 thousand for the same period last year, which
includes goodwill amortization of $12.7 million and $1.3 million, respectively.
Business services was a new reportable operating segment in fiscal 1999 with
only one regional accounting firm acquired during the first six months last year
and an additional four acquired in the third quarter last year. However, in the
nine-month period of fiscal 2000, there are seven regional accounting firms and
several smaller market firms that have been included for the full nine months
and a national accounting firm, RSM, that has been included for six months. Due
to the nature of this segment's business, revenues are seasonal, while expenses
are relatively fixed throughout the year. Results for the nine months are not
indicative of the expected results for the entire fiscal year.
INVESTMENT INCOME, NET
Net investment income decreased 81.8% to $5.1 million from $28.2 million last
year. The decrease is due to less funds available for investment resulting from
internal cash used to fund acquisitions and operations instead of short-term
borrowings.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the nine months
increased 33.5% to $12.0 million from $9.0 million in the comparable period last
year. The increase is a result of increased employee costs and consulting fees
and the timing of charitable contributions.
OTHER ISSUES
YEAR 2000
The Company has completed preparation for the Year 2000, and to date has
successfully managed the transition without any disruption of business. The
Company had estimated the cost of the Year 2000 issue to be $3.9 million and
actual results through January 31, 2000 were not materially different. While the
Company does not anticipate problems, the Company could still encounter
unanticipated issues related to the Year 2000. The Company will continue to
monitor its computer systems, services, vendor and suppliers as needed
throughout 2000 to address any such issues.
-21-
<PAGE> 24
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at April
30, 1999.
-22-
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. 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 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, Inc. 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 previously reported in the first and
second quarter 2000 Forms 10-Q filed by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 Amendment No. 4 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
10.2 Amendment No. 6 to the H&R Block Deferred Compensation Plan for
Directors.
10.3 Executive's Agreement dated January 20, 1998, between H&R Block Tax
Services, Inc. and Thomas L. Zimmerman.
10.4 Employment Agreement dated September 7, 1999, between HRB
Management, Inc. and Jeffery W. Yabuki.
10.5 Employment Agreement dated January 26, 2000, between HRB Management,
Inc. and Frank J. Cotroneo.
27 Financial Data Schedule
-23-
<PAGE> 26
b) Reports on Form 8-K
A Form 8-K, Current Report, dated December 1, 1999, was filed
on December 14, 1999, by the registrant reporting under "Item 2" the
acquisition of Olde Financial Corporation on December 1, 1999. The
registrant reported under "Item 7" that the financial statements of
Olde Financial Corporation and the registrant's pro forma financial
statements would be filed as soon as practicable, but no more than 60
days after that Current Report. The press release was included as
Exhibit 99.1 to the Form 8-K.
A Form 8-K/A, Current Report, dated December 1, 1999, was
filed on February 14, 2000 by the registrant reporting under "Item 7"
the audited financial statements of Olde Financial Corporation for the
years ended December 31, 1998 and 1997, the unaudited financial
statements of Olde Financial Corporation for the six months ended
September 24, 1999 and September 25, 1998, and the unaudited pro forma
balance sheet of the registrant as of October 31, 1999 and the
statements of operations of the registrant for the year ended April 30,
1999 and the six months ended October 31, 1999. The consent of
independent auditors was included as Exhibit 23.1 to the Form 8-K/A.
-24-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
------------------------
(Registrant)
DATE 03/16/00 BY /s/ Mark A. Ernst
---------------- ------------------------
Mark A. Ernst
President and
Chief Operating Officer
DATE 03/16/00 BY /s/ Cheryl L. Givens
---------------- ------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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EXHIBIT 10.1
AMENDMENT NO. 4
TO THE
H&R BLOCK DEFERRED COMPENSATION PLAN
FOR EXECUTIVES, AS AMENDED AND RESTATED
H&R Block, Inc. (the "Company") adopted the H&R Block Deferred
Compensation Plan for Executives, as Amended and Restated (the "Plan"),
effective as of January 1, 1999. The Company amended said Plan by Amendment No.
1 effective as of January 1, 1999, by Amendment No. 2 effective as of January 1,
2000, and by Amendment No. 3 effective as of September 8, 1999. The Company
continues to retain the right to amend the Plan pursuant to action by the
Company's Board of Directors. The Company hereby exercises that right. This
Amendment No. 4 is effective as of December 31, 1999.
AMENDMENT
1. Section 4.1.2 of the Plan, as previously amended, is further amended
by (a) adding the following words and punctuation after the words and
punctuation "provided, however, that" and before the words "the maximum
percentage" in the first paragraph of said Section:
"(i) each participating Affiliate may elect before an Enrollment Period
to have no Matching Contributions posted during the Plan Year (to which
the enrollment period relates) to the Accounts of Participants employed
by such Participating Affiliate, but such election is irrevocable and
will automatically apply to all future Plan Years., and (ii)";
and (b) deleting the final sentence of the first paragraph of said Section.
2. Except as modified in this Amendment No. 4, the Plan shall remain in
full force and effect, including the Company's right to amend or terminate the
Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
----------------------------
Its: Chief Executive Officer
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EXHIBIT 10.2
AMENDMENT NO. 6
TO THE
H&R BLOCK DEFERRED COMPENSATION PLAN FOR DIRECTORS
H&R BLOCK, INC. (the "Company") adopted the H&R Block Deferred Compensation
Plan for Directors (the "Plan") effective as of August 1, 1987. The Company
amended said Plan by Amendment No. 1 effective May 1, 1995; by Amendment No. 2
effective December 11, 1996; by Amendment No. 3 effective May 1, 1997; by
Amendment No. 4 effective January 1, 1998; and by Amendment No. 5 effective in
part on March 1, 1998 and in part on April 1, 1998. The Company continues to
retain the right to amend the Plan pursuant to action by the Company's Board of
Directors. The Company hereby exercises that right. This Amendment No. 6 is
effective as of December 8, 1999.
AMENDMENT
1. Section 6.2.3 of the Plan, as previously amended, is further
amended by replacing it with the following new Section 6.2.3:
"6.2.3 The amount of each level payment for the Initial
Payment Period, if any, shall be calculated using the balance
in the Account as of the beginning of the Initial Payment
Period and amortizing such balance over the remaining Overall
Payment Period (a) using an assumed interest rate equal to the
rate of one-year United States Treasury notes for each
Participant receiving payments of benefits prior to December
8, 1999, said rate to be determined once each Plan Year and to
be the rate in effect as of the September 30 immediately
preceding the payment period to which it applies, as published
by Solomon Smith Barney Inc., or any successor thereto, or as
determined by the Chief Financial Officer of the Company (the
"Assumed Interest Rate"), and (b) using an assumed interest
rate of zero percent (0%) for all other Participants. The
amount of each level payment for each Calendar Year Payment
Period shall be calculated by taking the balance in the
Account as of November 30 of the calendar year immediately
prior to such Calendar Year Payment Period, subtracting the
benefit payments made during the portion of such preceding
calendar year following November 30, and amortizing the
difference over the remaining Overall Payment Period (x) using
the Assumed Interest Rate for each participant receiving
payments of benefits prior to December 8, 1999, and (y) using
an assumed interest rate of zero percent (0%) for all other
Participants. The amount of each level payment for the
Remainder Payment Period, if any, shall be calculated by
taking the balance in the Account as of November 30 of the
calendar year immediately prior to the Remainder Payment
Period, subtracting the benefit payments made during the
portion of such preceding
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calendar year following November 30, and amortizing the
difference over the Remainder Payment Period using an assumed
interest rate of zero percent (0%) per annum. If the actual
crediting rate for the Remainder Payment Period is more
than zero percent, the additional gain resulting from the
difference shall be paid to the Participant in a single
payment within six months after the last day of the Remainder
Payment Period."
2. Except as modified in this Amendment No. 6, the Plan, as
previously amended, shall remain in full force and effect, including the
Company's right to amend or terminate the Plan as set forth in Article 9 of the
Plan.
H&R BLOCK, INC.
By: /s/Frank L. Salizzoni
-----------------------
Its: Chief Executive Officer
-----------------------
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EXHIBIT 10.3
EXECUTIVE'S AGREEMENT
THIS EXECUTIVE'S AGREEMENT ("AGREEMENT") is made and entered into as of
the 20th day of January, 1998 ("Employment Date") between H&R BLOCK TAX
SERVICES, INC., a Missouri corporation ("Company"), and Thomas L. Zimmerman
("Executive").
In consideration of the mutual covenants and consideration hereinafter
set forth, the Company and the Executive (collectively, the "Parties") agree as
follows:
1. Employment
Executive is hereby employed by the Company as President-H&R Block Tax
Services, Inc. The Company reserves the right, in its sole discretion, to change
the title and/or job description of Executive at any time.
2. Term
Unless terminated sooner as provided below, the term of this Agreement
will end May 31 next following the Employment Date ("Initial Term"), but will
extend automatically from year to year thereafter (each such year a "Renewal
Term"); provided, however, that either Party may terminate this Agreement and
every Renewal Term on any May 31, upon written notice given to the other Party
at least 15 days prior to that May 31.
3. Salary
Executive's salary for the Initial Term and each Renewal Term will be
at an annual rate of $275,000 ("Salary"), payable in approximately equal
semi-monthly installments commencing September 1, 1997. The Company may in its
sole discretion and without the need to amend this Agreement increase
Executive's Salary at any time.
4. Short Term Incentive Compensation.
In addition to Salary as provided for in Section 3 above, Executive may
be entitled to participate in a short term incentive compensation program, as
any such program exists, in the Initial Term or any Renewal Terms. The existence
of any such short term incentive compensation program, the factors upon which
any such short term incentive compensation is contingent, and the circumstances
under which it is paid may be determined by the Company from year to year.
5. Duties
The duties of Executive are generally described in the job description
provided to Executive on or before the Employment Date. The Company reserves the
right to modify, delete, add, or otherwise change Executive's job
responsibilities and job description, in its sole discretion, at any time.
Executive shall perform such other duties, which may be beyond the scope of the
job description, as are assigned to him or her by the Company from time to time.
Executive shall devote his or her full productive time
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and abilities to the efficient management of the Company and to carrying out his
or her duties as specified above, and shall not participate in any conflicting
activity. Executive must receive prior written consent of the Company before
accepting any other employment during the term of this Agreement.
Executive shall conduct all business in accordance with the law
(including, but not limited to, state and federal wage and hour laws) and the
H&R Block, Inc. Code of Business Ethics and Conduct, which Executive
acknowledges having read and understood. Executive also understands that the
Company's business is subject to governmental regulation, some of which may
require Executive to submit to background investigation as a condition of the
Company's participation in certain activities subject to such regulation. If
Executive, the Company, H&R Block, Inc., and/or the other direct or indirect
subsidiaries of H&R Block, Inc. (the Company, each such subsidiary and H&R
Block, Inc. an "H&R Block Affiliate") are unable to participate, in whole or in
part, in any such activity as the result of any action or inaction on the part
of Executive, then this Agreement and Executive's employment may be terminated
by the Company without notice.
6. Confidential Information
The Company has spent many years developing its business and believes
that its methods of operation are unique within its industry and constitute
trade secrets and confidential business information. In the course of
Executive's employment with the Company, Executive has and will be given access
to trade secrets and confidential business information of the Company and H&R
Block Affiliates, including, but not limited to: methods of operation and
distribution; its Operations Manual and other similar manuals; procedures and
processes related to electronic filing and refund anticipation loans; plans and
strategies relating to marketing, advertising, the development of products and
services, and other long and short term strategic plans; terms and conditions of
contracts with any person or entity; forecasts; potential business acquisitions
or dispositions; financial cost and price information; lists, names, addresses,
telephone numbers or other identifying information of customers and/or employees
of either the Company or any other H&R Block Affiliate; software; systems; and
marketing databases. Executive acknowledges that he or she possesses or has
access to such trade secrets and confidential business information, which could
be used to substantially injure the Company and other H&R Block Affiliates in
their present and future operations and expansions. Therefore, while this
Agreement is in effect and for a period of two years thereafter, Executive shall
not, without the Company's prior written authorization, directly or indirectly
make known, divulge or communicate to any person or entity any trade secrets or
confidential business information of the Company or any other H&R Block
Affiliate, including, but not limited to, the items listed in the first and
second sentences of this Section 6, or use such trade secrets and confidential
business information for any reason other than to enable Executive to properly
and completely perform his or her duties hereunder. The running of the two year
period shall be suspended during any period of violation and/or any period of
time required to enforce this covenant by litigation.
Executive shall not, at any time during or after the term of this
Agreement, without the Company's prior written authorization, make copies of,
reproduce or remove
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from offices of any H&R Block affiliate any lists, computer disks, files,
documents or other items containing names, addresses, or telephone numbers or
other identifying information of one or more customers and/or employees of
either the Company or any other H&R Block Affiliate or any other trade secrets
or confidential business information of the Company or any other H&R Block
Affiliate. Executive acknowledges that there are restrictions and limitations
established by section 7216 of the Internal Revenue Code of 1986, as amended,
and the regulations thereunder, pertaining to the use and/or disclosure of
confidential tax return information of the Company's customers. Executive will
not at any time disclose or use any such confidential tax return information in
violation of the law.
7. Covenant Against Competition
During the term of this Agreement, Executive shall not, anywhere in the
United States of America, directly or indirectly (whether as owner, employee,
agent, partner, stockholder, officer, director or in any other capacity),
solicit, accept or in any way establish or engage in any business for the
preparation or electronic filing of tax returns or provision of other services
or products that are offered in the offices operated by the Company and its
subsidiaries. For a period of two years after termination of this Agreement,
Executive shall not, directly or indirectly (whether as owner, employee, agent,
partner, stockholder, officer, director or in any other capacity), solicit,
accept or in any way establish or engage in any business for the preparation or
electronic filing of tax returns or provision of other services or products that
are offered in more than fifty percent of the offices operated by the Company
and its subsidiaries. The running of the two year period shall be suspended
during any period of violation and/or any period of time required to enforce
this covenant by litigation.
8. Covenant Against Solicitation
During the term of this Agreement and for a period of two years
thereafter, Executive shall not, directly or indirectly solicit, divert or take
away any of the employees, customers, third party contractors (or any contracts
or arrangements therewith) or patronage of the Company or any H&R Block
Affiliate anywhere within the United States of America. The running of the two
year period shall be suspended during any period of violation and/or any period
of time required to enforce this covenant by litigation.
9. Injunctive Relief
Executive recognizes that because of his or her access to trade secrets
and confidential business information and his or her substantial training and
experience with the Company, irreparable injury to the Company and/or one or
more H&R Block Affiliates would result from his or her violation of any
provision of Sections 6, 7, or 8 of this Agreement. Executive therefore agrees
that, in addition to and without limitation of any right the Company may have
under this Agreement or under common law, any such violation shall be the proper
subject matter for injunctive relief. The provisions of Sections 6, 7, 8, and 9
shall survive termination of this Agreement and shall be enforceable in
accordance with their terms.
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10. Litigation
In the event of litigation arising out of a breach of this Agreement by
Executive, the ultimately prevailing party shall be entitled to payment by the
ultimately nonprevailing party of its reasonable costs and attorneys' fees,
including, but not limited to, such fees incurred during any such litigation on
appeal.
11. Termination Upon Default
The Company may, at any time, at its option, terminate this Agreement
and the employment of Executive without notice in the event of:
(a) Executive's misconduct that interferes with or prejudices the
proper conduct of the Company's business or which may reasonably result
in harm to the reputation of the Company and/or any other H&R Block
Affiliate; or
(b) Executive's disobedience, insubordination or failure to discharge
his or her duties; or
(c) Executive's breach of any of the provisions of Sections 6, 7, or 8
of this Agreement; or
(d) Executive's suspension by the Internal Revenue Service from
participation in the Electronic Filing Program; or
(e) The inability of an H&R Block Affiliate to participate, in whole or
in part, in any activity subject to governmental regulation as the
result of any action or inaction on the part of Executive, as described
in the last paragraph of Section 5 of this Agreement.
In the event of a breach of a type not specifically enumerated in (a)
through (e) of this Section 11 by Executive of any of his or her obligations
under this Agreement or in the event of a failure by Executive to perform his or
her duties in a manner which the Company, in its sole judgment, considers to be
diligent and competent, and if such breach or failure continues for more than 10
days after notice from the Company or is not corrected to the satisfaction of
the Company within said 10 day period, then the Company may, at its option,
terminate this Agreement and the employment of Executive.
If Executive's services are terminated pursuant to paragraphs (a), (b),
(c), (d) or (e) of this Section 11, his or her compensation shall then
automatically cease, except as to any short term incentive compensation to which
he or she may be entitled on the date of termination. If Executive's services
are terminated for any reason other than pursuant to paragraphs (a), (b), (c),
(d) or (e) of this Section 11 or Section 12, upon Executive's execution of a
release of all claims arising out of his or her employment (except claims for
salary owed at the time of termination, any short term incentive compensation to
which Executive may be entitled at the time of termination or pursuant to this
Section 11, and any severance pay provided for in this Section 11), the Company
shall pay to
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Executive (i) severance pay in the amount of one month's salary for each year of
service with the Company or any other H&R Block Affiliate, up to a maximum of 12
months' salary, and (ii) if such termination occurs between November 1 and May
31 of any year, any short term incentive compensation to which Executive would
have been entitled, had he or she continued to be employed through May 31 of
such year. Any severance pay shall be based upon Executive's annual rate of
Salary in effect on the date of termination. Any severance pay to which
Executive is entitled pursuant to this paragraph shall be paid by the Company
within 30 days after termination in a lump sum, and any short term incentive
compensation to which Executive is entitled pursuant to this paragraph shall be
paid by the Company within 30 days after the amount is calculated by the
Company.
12. Death
In the event of Executive's death, this Agreement shall terminate as of
the last day of the month during which death occurs. Executive's compensation
hereunder shall automatically cease upon the date of the termination of this
Agreement, except as to any short term incentive compensation that he or she may
be entitled on the date of termination.
13. Severability
It is intended that each Section, paragraph, clause or provision
(collectively, "Provisions") of this Agreement be viewed as separate and
divisible, and that, in the event that any Provision is held to be void,
invalid, unenforceable or restricted by law or by applicable court decision in
any locality or state, such Provision shall be ineffective to the extent of such
voidness, invalidity, unenforceability or restriction without in any way
voiding, invalidating, rendering unenforceable, restricting or affecting the
remaining Provisions, and without voiding, invalidating, rendering
unenforceable, restricting or affecting such Provisions within states or
localities where not prohibited, invalidated or restricted by law or court
decree. Should any time or geographic restriction contained in Sections 6, 7, or
8 be deemed unreasonable and therefore unenforceable, such restrictions shall be
reduced to enforceable limitations and the remaining Provisions shall continue
to be in full force and effect.
14. Notices
All notices required or desired to be given hereunder shall be in
writing and shall be deemed served and delivered for all purposes if delivered
in person or mailed, postage prepaid, to Executive at his or her last known
address contained in Company records and to the Company at 4400 Main Street,
Kansas City, Missouri 64111, or at such other place as either Party may
designate to the other in writing from time to time. Any notice given by mail
shall be deemed given as of the date it is so mailed and postmarked or received
by nationally recognized overnight courier for delivery.
15. Binding Effect
This Agreement is the entire agreement between the Parties, superseding
and canceling any prior employment or Executive's agreement between them, oral
or
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written. No amendment or supplement hereto shall be valid unless in writing
and signed by the Parties. This Agreement shall be governed by the laws of the
State of Missouri and is effective only when executed by the President of the
Company and approved in writing by the President and Chief Executive Officer of
H&R Block, Inc.
The Parties have executed this Agreement in triplicate, as of the day
and year first above written.
H&R BLOCK TAX SERVICES, INC.
By:/s/ Thomas L. Zimmerman /s/Thomas L. Zimmerman
----------------------- ----------------------
President Executive
APPROVED:
/s/ Frank L. Salizzoni 11-1-99
- --------------------------------------
President and Chief Executive Officer
H&R Block, Inc.
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of
the 7th day of September, 1999, by and between HRB MANAGEMENT, INC., a Missouri
corporation ("HRB") and Jeffery W. Yabuki ("Executive").
ARTICLE ONE
EMPLOYMENT
1.01 - Agreement as to Employment. Effective September 7,
1999, or such other date as is mutually agreed upon by Executive and HRB in
writing (the "Employment Date"), HRB hereby employs Executive as President, H&R
Block International of H&R BLOCK, INC., a Missouri corporation ("Block") and the
indirect parent corporation of HRB, and Executive hereby accepts such employment
by HRB, subject to the terms of this Agreement. Subject to the terms of Section
1.06 of this Agreement, either party may terminate this Agreement for any
reason, or no reason, by providing not less than 45 days' prior written notice
of such termination to the other party, and, if such notice is properly given,
this Agreement and Executive's employment hereunder shall terminate as of the
close of business on the 45th day after such notice is deemed to have been given
or such later date as is specified in such notice. Any termination of this
Agreement shall not be effective as to those portions of this Agreement which,
by their express terms as set forth below, require performance by either party
following termination of this Agreement.
1.02 - Duties. (a) Executive is employed by HRB to serve as
the President, H&R Block International of Block subject to the authority and
direction of Block's Board of Directors (the "Board"), the Chief Executive
Officer of Block, and the Chief Operating Officer of Block. Subject to the
foregoing, the Executive shall have such authority and responsibility and duties
as are normally associated with the principal officer of an operating segment of
Block.
(b) So long as he is employed under this Agreement, Executive
agrees to devote his full business time and efforts exclusively on behalf of HRB
and Block and to competently and diligently discharge his duties hereunder.
Executive shall not be prohibited from engaging in such personal, charitable, or
other nonemployment activities as do not interfere with his full-time employment
hereunder and which do not violate the other provisions of this Agreement.
Executive may, following approval by the Board of Directors of Block, become a
member of the board of directors of a "for-profit" corporation or entity. Such
approval will not be unreasonably withheld by the Board, but such approval may
be withheld if the Board reasonably determines that such activity conflicts with
Executive's duties hereunder, either in terms of
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Executive's time to be devoted thereto or in terms of the relationship of such
corporation's or entity's business to the present or future business then
conducted or proposed to be conducted by Block and its subsidiaries, whether or
not such business is directly competitive with the business of Block. Executive
shall comply fully with all reasonable policies of HRB and Block as are from
time to time in effect and applicable to his position.
1.03 - Compensation. (a) Base Salary. HRB shall pay to
Executive during the period between the Employment Date and June 30, 2000, a
minimum gross salary at an annual rate of $250,000 ("Base Salary"), payable
semimonthly or at any other pay periods as HRB may use for its other executive
employees. The Base Salary shall be reviewed for adjustment by the Board or
appropriate committee thereof no less often than annually during the term of
Executive's employment hereunder and, if adjusted by the Board, such adjusted
amount shall become the "Base Salary" for purposes of this Agreement.
(b) Short-Term Incentive Compensation.
(i) As approved by the Compensation Committee of
the Board, Executive shall participate in the H&R Block Short-Term
Incentive Plan for the fiscal year ended April 30, 2000 and the
discretionary short-term incentive program for such year. Under such
Plan and program, the Executive shall have an aggregate target bonus
for fiscal year 2000 of $137,500 and an opportunity to earn 200% of
such target bonus. The payment of the actual award under the Plan (80%
of target) shall be based upon the performance criteria determined by
the Compensation Committee to be applicable to HRB participants for
fiscal year 2000. The payment of the actual award under the
discretionary program shall be based upon the performance of H&R Block
International (10% of target) and Executive's individual performance
(10%), as determined by the Chief Operating Officer of Block and
approved by the Compensation Committee. For purposes of Executive's
participation in such Plan and program for the fiscal year ending
April 30, 2000, Executive's actual incentive compensation shall be
prorated based upon the number of months during such year that he is
actually employed by HRB.
(ii) Executive shall be paid a $70,000 bonus
upon completion of his employment by HRB from the Employment Date
through April 30, 2000.
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(c) Stock Options. As approved by the Compensation
Committee of the Board and the Board itself, Executive shall be
granted (i) on the Employment Date a stock option under Block's 1993
Long-Term Executive Compensation Plan (the "1993 Plan") to purchase
40,000 shares of Block's common stock at a price per share equal to
the closing price thereof on the New York Stock Exchange on the date
of grant, such option to expire on the tenth anniversary of the date
of grant; to vest and become exercisable as to 40% of the shares
covered thereby on the third anniversary of the date of grant, as to
an additional 30% of such shares on the fourth anniversary of the date
of grant, and as to the remaining 30% of the shares on the fifth
anniversary of the date of grant; to be an incentive stock option for
the maximum number of shares permitted by Internal Revenue Code
Section 422 and the regulations promulgated thereunder; and to
otherwise be a nonqualified stock option; and (ii) a stock option to
purchase a minimum of 22,000 shares under the 1993 Plan on the date of
grant in fiscal year 2001 on which options are granted under the 1993
Plan to all or substantially all other senior executive officers of
Block and its subsidiaries, such stock option to have terms and
conditions consistent with the terms and conditions of options granted
to such other senior executive officers except as provided in Section
1.06(a). Should HRB elect to change its fiscal year, such change shall
not have a detrimental impact on Executive's stock option described in
this Subsection 1.03(c)(2). In the event of a change in HRB's fiscal
year, Executive shall be entitled to a pro rata adjustment of the
minimum of 22,000 shares available for purchase by Executive under the
1993 Plan based on the number of months the fiscal year is extended.
(d) Restricted Stock. As approved by the Compensation
Committee of the Board and the Board itself, Executive shall be
awarded promptly after the date of the commencement of his employment,
28,300 Restricted Shares of Block's common stock under the 1993 Plan.
One-third of the 28,300 shares shall vest, respectively, on each of
the first three anniversaries following such employment commencement
date. Prior to the time such Restricted Shares are so vested,
Executive shall be entitled to receive any cash dividends payable with
respect to unvested Restricted Shares and vote such unvested
Restricted Shares at any meeting of shareholders of Block. If the
value of the Restricted Shares on the date of grant (determined by
taking the average of the high and low reported sale price for Block
Common Stock on such date and multiplying it by 28,300) does not equal
or exceed $1,570,000, such number of Restricted Shares shall be
increased to such number of Restricted Shares (rounded to the next
highest 100 share increment) as shall first cause such fair market
value equal to exceed $1,570,000.
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(e) Relocation Benefits.
(i) HRB shall reimburse the Executive for
reasonable packing, shipping, transportation costs and other expenses
incurred by Executive in relocating himself, his family and personal
property to the Greater Kansas City Area, in accordance with HRB's
standard relocation policy.
(ii) If, as a result of Executive's acceptance of
employment hereunder, Executive must reimburse any prior employer for
any relocation expenses paid by such prior employer, HRB will pay to
Executive the amount of any such reimbursement.
(iii) To the extent that Executive incurs taxable
income related to any relocation benefits paid pursuant to this
Agreement, HRB shall pay to Executive such additional amount as is
necessary to "gross up" such benefits and cover the anticipated income
tax liability resulting from such taxable income.
1.04 - Business Expenses. HRB shall promptly pay directly, or
reimburse Executive for, all business expenses, to the extent such expenses are
paid or incurred by Executive during the term hereof in accordance with Block
policy in effect from time to time and to the extent such expenses are
reasonable and necessary to the conduct by Executive of Block's business.
1.05 - Fringe Benefits. During the term of Executive's
employment hereunder, HRB shall make available to Executive such insurance, sick
leave, deferred compensation, short-term incentive compensation, bonuses, stock
options (also referred to in Subsection 1.03(c) above), retirement, vacation and
other like benefits as are approved by the Board or the Compensation Committee
thereof and provided from time to time to the other executive-level employees of
HRB, Block or Block's other subsidiaries. Executive shall be entitled to 20 days
of paid vacation per year, commencing as of the date of this Agreement.
1.06 - Termination of Employment. (a) If, prior to the date of
Executive's retirement from gainful employment, HRB terminates Executive's
employment pursuant to Section 1.01 of this Agreement without "cause" (as
defined in Subsection 1.06(b), below), or if Executive terminates his employment
pursuant to Sections 1.01 of this Agreement with "good reason" (as defined in
Subsection 1.06(c) below) then, upon any such termination of Executive's
employment, (i) subject to Subsection 3.04(c), HRB shall pay to Executive
compensation at an annual rate equal to the sum of (A) the annual rate of Base
Salary in effect upon such
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termination, and (B) the aggregate short-term incentive compensation (under the
H&R Block Short-Term Incentive Plan and any discretionary incentive program)
paid by HRB to Executive for the last fiscal year completed before the fiscal
year in which the termination of employment occurs (or, if such termination
occurs prior to end of the fiscal year in which the Employment Date occurs, the
amount of actual aggregate short-term incentive compensation to which Executive
would have been entitled (with any discretionary incentive compensation
calculated at target) had Executive remained employed through the last day of
such fiscal year), such compensation to be paid throughout the two-year period
following such termination at such periodic intervals as Base Salary would have
been made had Executive remained employed by HRB hereunder; (ii) any portion of
any option to purchase shares of Block common stock granted pursuant to
Subsections 1.03(c) or 1.05 of this Agreement and held by Executive at the time
of such termination of employment that is not yet vested in accordance with its
terms, but would vest within two years after the date of such termination of
employment, shall vest upon the date of such termination of employment to the
extent that it would be vested at the end of such two-year period, and shall be
exercisable to the extent so vested for a period of three months after such date
of termination of employment; (iii) any Restricted Shares granted pursuant to
Subsection 1.03(d) of this Agreement and held by Executive at the time of such
termination of employment that are not yet vested (meaning the Shares are still
subject to restrictions), but would vest within two years after the date of such
termination of employment, shall vest upon the date of such termination of
employment to the extent that they would be vested at the end of such two-year
period, and all restrictions on any Restricted Shares so vested shall terminate;
(iv) subject to Subsection 3.04(c), HRB shall, during the two-year period
following such termination, continue Executive's health, life and disability
insurance benefits, but only to the extent Executive does not obtain similar
benefits paid for by a third party after such termination;(v) HRB shall pay to
Executive, at such times as the same would have been paid Executive had he
remained employed hereunder, a pro rata portion of any actual short-term
incentive compensation to which he would have been entitled (with any
discretionary incentive compensation calculated at target) pursuant to
Subsection 1.03(b)(i) had he remained employed through the end of the fiscal
year in which such termination occurs (such portion to be the actual short-term
incentive compensation earned for the fiscal year during which such termination
occurs as is proportionate to the portion of such fiscal year in which he is
actively employed hereunder); and (vi) if not already paid, HRB shall pay to
Executive the compensation specified in Subsection 1.03(b)(ii).
(b) As used in this Agreement, the term "cause" shall refer
only to any one or more of the following grounds:
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(i) Executive's commission of an act or Executive's
omission to act, that, in either case, (A) is materially and
demonstrably detrimental to the good will of Block or any subsidiary
of Block, and (B) constitutes gross negligence (specifically defined
to mean acting, or omitting to act in a situation where there is a
duty to act, not inadvertently, but willfully and intentionally with a
conscious indifference to the consequences of such act or omission)or
willful misconduct by the Executive in the performance of his material
duties to HRB or Block; or
(ii) commission by Executive of any act of
dishonesty or breach of trust resulting or intending to result in
material personal gain or enrichment of Executive at the expense of
Block or any subsidiary of Block; or
(iii) Executive's conviction of a misdemeanor
(involving an act of moral turpitude) or a felony.
(c) As used in this Agreement, Executive's
termination of employment for "good reason" shall mean termination of
employment based on any one or more of the following:
(i) An adverse change in Executive's status or
position as an executive officer of Block, including, without
limitation, (A) any adverse change in Executive's status or position
as a result of a material diminution in Executive's duties,
responsibilities or authority as of the date of this Agreement (or any
status or position to which Executive may be promoted after the date
hereof), or (B) the assignment to Executive of any duties or
responsibilities which are inconsistent with Executive's status or
position (except as may be related to a promotion or are intended to
provide experience for a possible promotion to a position that is more
senior than such status or position), or (C) any removal of Executive
from or any failure to reappoint or reelect Executive to such
positions (except in connection with an agreed upon promotion or the
termination of Executive's employment for cause or by reason of
Executive's disability or death);
(ii) A reduction by HRB in Executive's Base Salary
to an annual rate below $250,000 that is not mutually agreed upon by
HRB and Executive.
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(iii) HRB's requiring (without Executive's
agreement) Executive to be based anywhere outside the continental
United States except for required travel on HRB or Block's business to
an extent substantially consistent with the business travel
obligations which Executive agreed to undertake on behalf of Block and
HRB in connection with the position of President, H&R Block
International prior to the date of this Agreement (or such obligations
as Executive shall agree to undertake in connection with any promotion
after the date of this Agreement);
(iv) The failure by HRB or Block to obtain from
any successor an assent to this Agreement contemplated by Section
4.04 of this Agreement;
(v) Any purported termination by HRB of this
Agreement or the employment of the Executive by HRB which is not
expressly authorized by this Agreement or any breach of this Agreement
by HRB (A)other than an isolated, insubstantial and inadvertent
failure not occurring in bad faith and (B) which is not remedied by
HRB within a reasonable period of time not to exceed forty-five (45)
days after HRB's receipt of written notice of the breach from the
Executive; or
(vi) Any refusal by HRB or Block to continue to
allow Executive to attend to matters or engage in activities not
directly related to the business of Block which, prior to the date of
this Agreement or any time thereafter but prior to such refusal,
Executive was permitted by the Board to attend to or engage in,
provided that this Subsection 1.06(c)(v) shall not apply to any
refusal resulting from a reasonable determination by the Board that
such matters or activities conflict with Executive's duties hereunder,
either in terms of Executive's time to be devoted thereto or in terms
of the relationship of such matters or activities to the present or
future business then conducted or proposed to be conducted by Block
and its subsidiaries, whether or not such business is directly
competitive with the business of Block.
(d) In the event of Executive's death, Executive's employment
under this Agreement shall terminate and Executive's estate shall be paid the
benefits described in Subsections 1.06(a)(ii, iii, v, & vi) of this Agreement.
In the event of Executive's total and permanent disability defined under any
long-term disability plan maintained by HRB or Block for HRB executives,
Executive shall be paid the benefits described in
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Subsections 1.06(a)(ii, iii, iv, v, & vi) of this Agreement, and shall also be
paid his Base Salary pursuant to Subsection 1.06(a)(i) to the date of the
determination of such disability.
(e) The parties may terminate Executive's employment under
this Agreement at any time by mutual written agreement.
(f) The termination of Executive's employment under this
Agreement for any reason (or no reason) by HRB or by Executive during the
180-day period following the date of the occurrence of a "Change of Control" of
Block shall be considered a termination of Executive's employment without cause
for purposes of this Agreement. For the purpose of this subsection, a "Change of
Control" shall mean:
(i) the acquisition, other than from Block, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 35% or more of the then
outstanding voting securities of Block entitled to vote generally in
the election of directors, but excluding, for this purpose, any such
acquisition by Block or any of its subsidiaries, or any employee
benefit plan (or related trust) of Block or its subsidiaries, or any
corporation with respect to which, following such acquisition, more
than 50% of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners of
the voting securities of Block immediately prior to such acquisition
in substantially the same proportion as their ownership, immediately
prior to such acquisition, of the then outstanding voting securities
of Block entitled to vote generally in the election of directors, as
the case may be; or
(ii) individuals who, as of the date hereof,
constitute the Board (as of the date hereof, the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board,
provided that any individual or individuals becoming a director
subsequent to the date hereof, whose election, or nomination for
election by Block's shareholders, was approved by a vote of at least a
majority of the Board (or nominating committee of the Board) shall be
considered as though such individual were a member or members of the
Incumbent Board, but excluding, for this
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purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to
the election of the directors of Block (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act); or
(iii) approval by the shareholders of Block of (A)
a reorganization, merger or consolidation of Block, in each case, with
respect to which all or substantially all of the individuals and
entities who were the respective beneficial owners of the voting
securities of Block immediately prior to such reorganization, merger
or consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than 50%
of the then outstanding voting securities entitled to vote generally
in the election of directors of the corporation resulting from such
reorganization, merger or consolidation, (B) a complete liquidation or
dissolution of Block, voluntary or involuntary, or (C) the sale or
other disposition of all or substantially all of the assets of Block.
(g) Upon termination of Executive's employment under this
Agreement, HRB shall have no further obligations under this Agreement and no
further payments of Base Salary or other compensation or benefits shall be
payable by HRB to Executive, except (i) as set forth in this Section 1.06, (ii)
as required by the express terms of any written benefit plans or written
arrangements maintained by HRB and applicable to Executive at the time of such
termination of Executive's employment, (iii) as may be required by law, or (iv)
as may be mutually agreed upon between the parties in a negotiated Employment
Agreement Termination package.
ARTICLE TWO
CONFIDENTIALITY
2.01 - Background and Relationship of Parties. The parties
acknowledge (for all purposes including, without limitation, Articles Two and
Three of this Agreement) that Block and its subsidiaries have been and will be
engaged in a continuous program of acquisition and development respecting their
businesses, present and future, and that, in connection with Executive's
employment by HRB, Executive will be expected to have access to all information
of value to HRB and Block and that Executive's employment creates a relationship
of confidence and trust between Executive and Block with respect to any
information applicable to the businesses of Block and its subsidiaries.
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Executive will possess or have unfettered access to information that has been
created, developed or acquired by Block and its subsidiaries or otherwise become
known to Block and its subsidiaries and which has commercial value in the
businesses in which Block and its subsidiaries have been and will be engaged and
has not been publicly disclosed by Block. All information described above is
hereinafter called "Proprietary Information". By way of illustration, but not
limitation, Proprietary Information includes trade secrets, customer lists and
information, employee lists and information, developments, systems, designs,
know-how, marketing plans, product information, business and financial
information and plans, strategies, forecasts, new products and services,
financial statements, budgets, projections, prices and acquisition and
disposition plans. Proprietary Information shall not include any portions of
such information which are now or hereafter made public by third parties in a
lawful manner or made public by parties hereto without violation of this
Agreement.
2.02 - Proprietary Information is Property of Block. (a) All
Proprietary Information shall be the sole property of Block (or the applicable
subsidiary of Block) and its assigns, and Block (or the applicable subsidiary of
Block) shall be the sole owner of all patents, copyrights, trademarks, names and
other rights in connection therewith and without regard to whether Block (or any
subsidiary of Block) is at any particular time developing or marketing the same.
Executive hereby assigns to Block any rights Executive may have or may acquire
in such Proprietary Information. At all times, Executive will keep in strictest
confidence and trust all Proprietary Information and Executive will not use or
disclose any Proprietary Information without the written consent of Block,
except as may be necessary in the ordinary course of performing duties as an
employee of HRB or an officer of Block or as may be required by law or the order
of any court or governmental authority.
(b) In the event of the termination of Executive's employment
by HRB for any reason (including no reason), Executive shall promptly deliver to
HRB all copies of all documents, notes, drawings, specifications, documentation,
data and other materials of any nature belonging to Block or any subsidiary of
Block and obtained during the course of Executive's employment with HRB. In
addition, upon such termination, Executive will not remove from the premises of
Block or any subsidiary of Block any of the foregoing or any reproduction of any
of the foregoing or any Proprietary Information that is embodied in a tangible
medium of expression.
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ARTICLE THREE
NON-HIRING; NO CONFLICTS; NONCOMPETITION
3.01 - General. The parties hereto acknowledge that, during
the course of Executive's employment by HRB, Executive shall have access to
information valuable to HRB and Block concerning the key employees of Block and
its subsidiaries ("Block Employees") and, in addition to Executive's access to
such information, Executive may, during (and in the course of) Executive's
employment by HRB, develop relationships with such Block Employees whereby
information valuable to Block and its subsidiaries concerning the Block
Employees was acquired by Executive. Such information includes, without
limitation: the identity, skills and performance levels of the Block Employees,
as well as compensation and benefits paid by Block to such Block Employees.
3.02 - Non-Hiring. During the period of Executive's employment
hereunder and during the time Executive is receiving payments hereunder and for
a period of one year after the later of: termination by HRB or Executive for any
reason (or no reason) of such employment or cessation of such payments, the
Executive will not knowingly recruit, solicit or hire any Block Employee or
otherwise induce any such Block Employee to leave the employment of Block (or
the applicable employer-subsidiary of Block) to become an employee of or
otherwise be associated with any other party or with Executive or any company or
business with which Executive is or may become associated.
3.03 - No Conflicts. Executive represents in good faith that,
to the best of his knowledge, the performance by Executive of all the terms of
this Agreement will not breach any agreement as to which Executive is or was a
party and which requires Executive to keep any information in confidence or in
trust. Executive has not brought and will not bring with him to HRB or Block nor
will Executive use in the performance of employment responsibilities at HRB any
proprietary materials or documents of a former employer that are not generally
available to the public, unless Executive has obtained express written
authorization from such former employer for their possession and use. Executive
has not and will not breach any obligation of confidentiality that Executive may
have to former employers and Executive shall fulfill all such obligations during
his employment with HRB.
3.04 - Non-Competition.
(a) During any period of Executive's employment with HRB,
Executive shall not engage in, or own or control any interest in (except as a
passive investor in publicly-held companies,
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holding less than one percent of its outstanding securities), or act as an
officer, director or employee of, or consultant, advisor or lender to, any firm,
corporation, institution or business which engages in any line of business which
is competitive with any line of business of Block or any of its subsidiaries (or
which Block or any subsidiary is engaged in evaluating or developing).
(b) During the two-year period immediately following the
termination of Executive's employment hereunder by HRB or Executive for any
reason (including no reason) other than a termination for "cause," as defined in
Subsection 1.06(b) of this Agreement, Executive will not, except as permitted by
Subsection (c), below (i) own or control any interest in (except as a passive
investor in publicly-held companies, holding less than one percent of its
outstanding equity securities) any firm, corporation, institution or business
that derives more than 40% of its revenues from tax and accounting services, or
(ii) act as an officer, director or employee of, or consultant, advisor or
lender to, any line of business of any firm, corporation, institution or
business which line of business (A) is competitive with any line of business of
Block or any of its subsidiaries, (B) is one in which Executive has or had
significant management responsibilities prior to or at the time Executive's
employment terminates, and (C) derives more than 40% of its revenues from tax
and accounting services (any such line of business to be referred to in this
Agreement as a "Competitive Line of Business" and the prohibited acts set forth
in Subsections 3.04(b)(i) and (ii) to be referred to in this Agreement as the
"Prohibited Acts"). The Prohibited Acts shall not preclude Executive from
serving as an officer, director or employee of, or consultant, advisor or lender
to, any firm, corporation, institution or business with respect to any line of
business of such firm, corporation, institution or business that is not a
Competitive Line of Business, provided that Executive shall not provide direct
or indirect services, oversight, management, advice or loans to any Competitive
Line of Business and the person or persons responsible for the day-to-day
business of any such Competitive Line of Business shall not directly or
indirectly report to Executive.
(c) Notwithstanding the provisions of Subsection 3.04(b),
above, (i) during the two-year period immediately following termination of
Executive's employment hereunder by HRB for cause, Executive may engage in the
Prohibited Acts, or any one of them, without HRB's prior written consent, and
(ii) during the two-year period immediately following termination of Executive's
employment hereunder by HRB without "cause," or Executive's termination of this
Agreement for good reason, Executive may engage in the Prohibited Acts, or any
one of them, only if HRB gives to Executive its prior written consent to such
Prohibited Act. As of the effective date of any Prohibited Act to which HRB has
consented, HRB shall have no further obligation to continue to
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pay compensation pursuant to Subsection 1.06(a)(i) of this Agreement and no
further obligation to continue Executive's health, life and disability insurance
benefits pursuant to Subsection 1.06(a)(iv) of this Agreement.
3.05 - Reasonableness of Restrictions. Executive and HRB
acknowledge that the restrictions contained in this Agreement are reasonable,
but should any provisions of any Article of this Agreement be determined to be
invalid, illegal or otherwise unenforceable or unreasonable in scope by any
court of competent jurisdiction, the validity, legality and enforceability of
the other provisions of this Agreement shall not be affected thereby and the
provision found invalid, illegal or otherwise unenforceable or unreasonable
shall be considered by HRB and Executive to be amended as to scope of
protection, time or geographic area (or any one of them, as the case may be) in
whatever manner is considered reasonable by that court and, as so amended, shall
be enforced.
ARTICLE FOUR
MISCELLANEOUS
4.01 - Third-Party Beneficiary. The parties hereto agree that
Block is a third-party beneficiary as to the obligations imposed upon Executive
under this Agreement and as to the rights and privileges to which HRB is
entitled pursuant to this Agreement, and that Block is entitled to all of the
rights and privileges associated with such third-party-beneficiary status.
4.02 - Entire Agreement. This Agreement constitutes the entire
agreement and understanding between HRB and Executive concerning the subject
matter hereof. No modification, amendment, termination or waiver of this
Agreement shall be binding unless in writing and signed by Executive and a duly
authorized officer of HRB. Failure of HRB, Block or Executive to insist upon
strict compliance with any of the terms, covenants or conditions hereof shall
not be deemed a waiver of such terms, covenants and conditions.
4.03 - Specific Performance by Executive. The parties
acknowledge that money damages alone will not adequately compensate HRB or Block
or Executive for breach of any of the covenants and agreements herein and,
therefore, in the event of the breach or threatened breach of any such covenant
or agreement by either party, in addition to all other remedies available at
law, in equity or otherwise, a wronged party shall be entitled to injunctive
relief compelling specific performance of (or other compliance with) the terms
hereof.
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4.04 - Successors and Assigns. This Agreement shall be binding
upon Executive and the heirs, executors, assigns and administrators of Executive
or his estate and property and shall inure to the benefit of HRB, Block and
their successors and assigns. Executive may not assign or transfer to others the
obligation to perform Executive's duties hereunder. Executive's estate, heirs,
successors, representatives, assigns, conservators and/or trustees may seek
enforcement, on behalf of Executive or his estate, of the obligations outlined
in Section 1.06 of this Agreement.
4.05 - Withholding Taxes. From any payments due hereunder to
Executive from HRB, there shall be withheld amounts reasonably believed by HRB
to be sufficient to satisfy liabilities for federal, state and local taxes and
other charges and customary withholdings. Executive remains primarily liable to
such authorities for such taxes and charges to the extent not actually paid by
HRB. This Section 4.05 shall not affect HRB's obligation to "gross up" any
relocation benefits paid to Executive pursuant to Subsection 1.03(e)(iii).
4.06 - Indemnification. (a) To the fullest extent permitted by
law and Block's Bylaws, HRB hereby indemnifies during and after the period of
Executive's employment hereunder the Executive from and against all loss, costs,
damages and expenses including, without limitation, legal expenses of counsel
selected by HRB to represent the interests of Executive (which expenses HRB
will, to the extent so permitted, advance to executive as the same are incurred)
arising out of or in connection with the fact that Executive is or was a
director, officer, employee or agent of HRB or Block or serving in such capacity
for another corporation at the request of HRB or Block. Notwithstanding the
foregoing, the indemnification provided in this Section 4.06 shall not apply to
any loss, costs, damages and expenses arising out of or relating in any way to
any employment of Executive by any former employer or the termination of any
such employment.
(b) In the event that Executive and HRB mutually agree that
Executive has a valid claim or cause of action against a former employer to
secure deferred compensation, awards or other benefits from such former
employer, HRB shall reimburse Executive for any attorneys' fees, expenses and
other costs incurred by Executive in his efforts to secure such benefits. Any
net recovery (i.e., judgment, award or settlement amount paid to Executive by
such former employer, less any attorneys' fees, expenses, federal, state and
local income taxes and other costs not reimbursed by HRB) by Executive arising
from such claim shall be remitted by Executive to HRB.
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(c) In the event that a former employer makes a claim against
Executive arising out of or relating to its employment of Executive or the
termination of such employment, Executive may, in his sole discretion, assert a
counterclaim against the former employer seeking deferred compensation, awards
or other benefits, with the understanding that any award to Executive, net of
adverse awards, attorneys' fees, federal, state and local income taxes, costs
and expenses, will be remitted by Executive to HRB.
4.07 - Notices. Notices hereunder shall be deemed delivered
five days following deposit thereof in the United States mails (postage prepaid)
addressed to Executive at: 240 Central Park South, Suite 23B, New York, New York
10019, with a copy to William J. Egan, Esq., 150 Edina Executive Plaza, 5200
Willson Road, Edina, Minnesota 55424; and to HRB at: 4400 Main Street, Kansas
City, Missouri 64111; Attn: Mark A. Ernst, with a copy to James H. Ingraham,
Esq., H&R Block, Inc., 4400 Main Street, Kansas City, Missouri 64111; or to such
other address and/or person designated by either party in writing to the other
party.
4.08 - Counterparts. This Agreement may be signed in
counterparts and delivered by facsimile transmission confirmed promptly
thereafter by actual delivery of executed counterparts.
Executed as a sealed instrument under, and to be governed by,
construed and enforced in accordance with, the laws of the State of Missouri.
EXECUTIVE:
Dated: 9-7-99 /s/ Jeffery W. Yabuki
------------ ---------------------
Jeffery W. Yabuki
Accepted and Agreed:
HRB MANAGEMENT, INC.,
a Missouri corporation
By:/s/Mark A. Ernst
-------------------
Mark A. Ernst
Executive Vice President
Dated: 7 Sept 99
---------------
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of
the 26th day of January 2000, by and between HRB MANAGEMENT, INC., a Missouri
corporation ("HRB") and Frank J. Cotroneo ("Executive").
ARTICLE ONE
EMPLOYMENT
1.01 - Agreement as to Employment. Effective February 21, 2000
or an earlier date as agreed upon by both parties (the "Employment Date"), HRB
hereby employs Executive as Chief Financial Officer of H&R BLOCK, INC., a
Missouri corporation ("Block") and the indirect parent corporation of HRB, and
Executive hereby accepts such employment by HRB, subject to the terms of this
Agreement. Subject to the terms of Section 1.06 of this Agreement, either party
may terminate this Agreement for any reason, or no reason, by providing not less
than 45 days' prior written notice of such termination to the other party, and,
if such notice is properly given, this Agreement and Executive's employment
hereunder shall terminate as of the close of business on the 45th day after such
notice is deemed to have been given or such later date as is specified in such
notice. Any termination of this Agreement shall not be effective as to those
portions of this Agreement which, by their express terms as set forth below,
require performance by either party following termination of this Agreement.
1.02 - Duties.
(a) Executive is employed by HRB to serve as the Chief
Financial Officer and Senior Vice President of Block subject to the authority
and direction of Block's Board of Directors (the "Board"), the Chief Executive
Officer of Block, and the Chief Operating Officer of Block. Subject to the
foregoing, the Executive shall have such authority and responsibility and duties
as are normally associated with the position of Chief Financial Officer.
(b) So long as he is employed under this Agreement, Executive
agrees to devote his full business time and efforts exclusively on behalf of HRB
and Block and to competently and diligently discharge his duties hereunder.
Executive shall not be prohibited from engaging in such personal, charitable, or
other nonemployment activities as do not interfere with his full-time employment
hereunder and which do not violate the other provisions of this Agreement.
Executive shall comply fully with all reasonable policies of HRB and Block as
are from time to time in effect and applicable to his position.
(c) Except for the normal travel requirements associated with
Executive's position, Executive shall perform his duties in Kansas City,
Missouri; Kansas City, Kansas; and the surrounding suburbs (collectively the
"Greater Kansas City Area").
<PAGE> 2
1.03 - Compensation.
(a) Signing Bonus. HRB shall pay to Executive a $250,000 bonus
on the Employment Date. If Executive voluntarily terminates his employment with
HRB prior to the expiration of six months after the Employment Date, other than
for "good reason" or following a "Change of Control" (each as defined below),
Executive shall reimburse HRB the $250,000 on or before the 30th day after the
effective date of such termination.
(b) Base Salary. HRB shall pay to Executive a gross salary at
an annual rate of $350,000 ("Base Salary"), payable semimonthly or at any other
pay periods as HRB may use for its other executive employees. The Base Salary
shall be reviewed for adjustment by the Board or appropriate committee thereof
no less often than annually during the term of Executive's employment hereunder
and, if adjusted by the Board, such adjusted amount shall become the "Base
Salary" for purposes of this Agreement.
(c) Short-Term Incentive Compensation. As approved by the
Compensation Committee of the Board, Executive shall participate in the H&R
Block Short-Term Incentive Plan and the discretionary short-term incentive
program for fiscal year 2000. At the discretion of the Compensation Committee of
the Board, for periods following fiscal year 2000, Executive may participate in
such plan and program or any similar short-term incentive compensation plans or
programs as may from time to time be approved by the Compensation Committee for
senior executives of HRB or Block. Under such Plan and program, the Executive
shall have an aggregate target bonus for fiscal year 2000 of $192,500 and an
opportunity to earn 200% of such target bonus. The payment of the actual award
under the Plan (80% of target) shall be based upon the performance criteria
determined by the Compensation Committee to be applicable to HRB participants
for fiscal year 2000. The payment of the actual award under the discretionary
program shall be based upon the performance of departments that report to
Executive (10% of target) and Executive's individual performance (10%), as
determined by the Chief Executive Officer of Block and approved by the
Compensation Committee. For purposes of Executive's participation in such Plan
for the fiscal year ending April 30, 2000, Executive's actual incentive
compensation shall be prorated based upon the number of months during such year
that he is actually employed by HRB. Executive must remain employed through
April 30, 2000 to receive payments under the Plan and program.
(d) Stock Options. As approved by the Compensation Committee
of the Board and the Board itself, Executive shall be granted (i) on the
Employment Date a stock option under Block's 1993 Long-Term Executive
Compensation Plan (the "1993 Plan") to purchase 20,000 shares of Block's common
stock at a price per share equal to its closing price on the New York Stock
Exchange on the date of grant, such option to expire on the tenth anniversary of
the date of grant; to vest and become exercisable as to 40% of the shares
covered thereby on the first anniversary of the date of grant, as to an
additional 30% of such shares on the second anniversary of the date of grant,
and as to the remaining 30% of the shares on the third anniversary of the date
of grant; to be an incentive stock option for the maximum number of shares
permitted by Internal
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Revenue Code Section 422 and the regulations promulgated thereunder; and to
otherwise be a nonqualified stock option; and (ii) a stock option to purchase a
minimum of 20,000 shares of Block's common stock at a price per share equal to
its closing price on the New York Stock Exchange on the date in fiscal year 2001
on which options are granted under the 1993 Plan to all or substantially all
other senior executive officers of Block and its subsidiaries, such stock option
to have terms and conditions consistent with the terms and conditions of options
granted to such other senioar executive officers except as provided in Section
1.06(a). A registration statement under the Securities Act of 1933 is in effect
on the date hereof with respect to (i) the shares that may be transferred to
Executive pursuant to the exercise of the stock options under the 1993 Plan and
(ii) the Restricted Shares referred to in Section 1.03(e). Block shall use its
best efforts to maintain such registration for so long as the stock options and
the restrictions on the Restricted Shares remain outstanding. Executive will be
allowed to use any "cashless exercise" procedure offered by HRB or Block to
other employees of HRB or Block with respect to the exercise of stock options.
(e) Restricted Stock. As approved by the Compensation
Committee of the Board and the Board itself, Executive shall be awarded promptly
after the Employment Date, 3,000 Restricted Shares of Block's common stock under
the 1993 Plan. One-third of the 3,000 shares shall vest, respectively, on each
of the first three anniversaries of the Employment Date. Prior to the time such
Restricted Shares are so vested, (i) such Restricted Shares shall be
nontransferable, and (ii) Executive shall be entitled to receive any cash
dividends payable with respect to unvested Restricted Shares and vote such
unvested Restricted Shares at any meeting of shareholders of Block.
(f) Relocation Benefits.
(i) HRB shall reimburse Executive for reasonable
packing, shipping, transportation costs and other expenses incurred by
Executive in relocating himself, his family and personal property to
the Greater Kansas City Area, in accordance with HRB's Executive
Relocation Program.
(ii) To the extent that Executive incurs taxable
income related to any relocation benefits paid pursuant to this
Agreement, HRB shall pay to Executive such additional amount as is
necessary to "gross up" such benefits and cover the anticipated income
tax liability resulting from such taxable income.
(iii) If Executive purchases a personal residence in
the Greater Kansas City Area, needs a home mortgage loan to purchase
such personal residence, and elects to borrow money through one of
Block's subsidiaries for such purchase, HRB will provide a 75 basis
points interest rate reduction from the normal rate of interest
associated with the type of home mortgage loan Executive selects.
1.04 - Business Expenses. HRB shall promptly pay directly,
or reimburse Executive for, all business expenses, to the extent such expenses
are paid or incurred by Executive
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<PAGE> 4
during the term hereof in accordance with Block policy in effect from time to
time and to the extent such expenses are reasonable and necessary to the conduct
by Executive of Block's business.
1.05 - Fringe Benefits. During the term of Executive's
employment hereunder, HRB shall make available to Executive such insurance, sick
leave, deferred compensation, short-term incentive compensation, bonuses, stock
options (also referred to in Subsection 1.03(d) above), retirement, vacation,
and other like benefits as are approved by the Board or the Compensation
Committee thereof and provided from time to time to other senior executives of
HRB, Block, or Block's other subsidiaries.
1.06 - Termination of Employment.
(a) Termination Due to a Change of Control or Without Cause.
(i) If Executive terminates Executive's employment
under this Agreement for "good reason" or during the 180-day period
following the date of the occurrence of a "Change of Control," or if
HRB terminates Executive's employment under this Agreement for any
reason other than for "cause" as defined below, then, upon any such
termination of Executive's employment, (A) HRB shall pay to Executive
compensation at an annual rate equal to the sum of (I) the annual rate
of Base Salary in effect upon such termination, and (II) the aggregate
short-term incentive compensation (under the H&R Block Short-Term
Incentive Plan and any discretionary incentive program) paid by HRB to
Executive for the last fiscal year completed before the fiscal year in
which the termination of employment occurs (or, if such termination
occurs prior to the end of the fiscal year in which the Employment Date
occurs, the amount of actual aggregate short-term incentive
compensation to which Executive would have been entitled (with any
discretionary incentive compensation calculated at target) had
Executive remained employed through the last day of such fiscal year),
as determined on an annualized basis (if the short-term incentive
compensation for the preceding fiscal year or the initial fiscal year
of employment hereunder is computed on a prorated basis), such
compensation to be paid throughout the one-year period following such
termination at such periodic intervals as Base Salary would have been
made had Executive remained employed by HRB hereunder; (B) any portion
of any option to purchase shares of Block common stock granted pursuant
to Subsections 1.03(d) or 1.05 of this Agreement and held by Executive
at the time of such termination of employment that is not yet vested in
accordance with its terms shall fully vest upon the date of such
termination of employment, and shall be exercisable for a period of
three months after such date of termination of employment; (C) any
Restricted Shares granted pursuant to Subsection 1.03(e) of this
Agreement and held by Executive at the time of such termination of
employment that are not yet vested (meaning the Shares are still
subject to restrictions) shall fully vest upon the date of such
termination of employment, and all restrictions on any Restricted
Shares so vested shall terminate; and (D) HRB shall, during the
one-year period following such termination, continue Executive's
health, basic life, and disability insurance benefits (such health
insurance benefits to be provided by the payment by HRB (whether
4
<PAGE> 5
directly or by reimbursement) of Executive's premiums/contributions due
as a result of Executive selecting continuation coverage (COBRA) under
the plans providing such benefits) but only to the extent Executive
does not obtain similar benefits paid for by a third party after such
termination.
(ii) For the purpose of this subsection, "good
reason" shall mean:
(A) Executive is made subject to the authority
and direction of any person other than the Chief Executive Officer of
Block, the Board, and Mark A. Ernst as Chief Operating Officer and/or
President (a "Subordination Event"). If a Subordination Event occurs,
Executive shall have 6 months from the date he has actual knowledge of
such Subordination Event to terminate his employment for good cause for
this reason. If Executive does not terminate his employment for this
reason within such 6 month period, Executive waives his right to
terminate his employment by reason of such Subordination Event;
(B) Any material diminution in Executive's
duties, responsibilities, or authority as set forth in this Agreement;
and
(C) Any other material breach of this Agreement
by HRB which is not remedied by HRB within a reasonable period of time
not to exceed 30 days after HRB's receipt of written notice of the
breach from Executive.
To the extent that this Agreement or any agreement
referred to herein imposes an obligation on Block or otherwise requires
that Block take (or refrain from taking) any action, any material
breach of such obligation or requirement by Block shall be treated as a
material breach of this Agreement by HRB.
(iii) For the purpose of this subsection, a "Change
of Control" shall mean:
(A) the acquisition, other than from Block, by
any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 35% or more of the then outstanding voting
securities of Block entitled to vote generally in the election
of directors, but excluding, for this purpose, any such
acquisition by Block or any of its subsidiaries, or any
employee benefit plan (or related trust) of Block or its
subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners of the voting securities of Block
immediately prior to such acquisition in substantially the
same proportion as their ownership,
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<PAGE> 6
immediately prior to such acquisition, of the then outstanding
voting securities of Block entitled to vote generally in the
election of directors, as the case may be; or
(B) individuals who, as of the date hereof,
constitute the Board (as of the date hereof, the "Incumbent
Board") cease for any reason to constitute at least a majority
of the Board, provided that any individual or individuals
becoming a director subsequent to the date hereof, whose
election, or nomination for election by Block's shareholders,
was approved by a vote of at least a majority of the Board (or
nominating committee of the Board) shall be considered as
though such individual were a member or members of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the
election of the directors of Block (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or
(C) approval by the shareholders of Block of (I)
a reorganization, merger or consolidation of Block, in each
case, with respect to which all or substantially all of the
individuals and entities who were the respective beneficial
owners of the voting securities of Block immediately prior to
such reorganization, merger or consolidation do not, following
such reorganization, merger or consolidation, beneficially
own, directly or indirectly, more than 50% of the then
outstanding voting securities entitled to vote generally in
the election of directors of the corporation resulting from
such reorganization, merger or consolidation, (II) a complete
liquidation or dissolution of Block, voluntary or involuntary,
or (III) the sale or other disposition of all or substantially
all of the assets of Block.
(iv) For the purpose of this subsection, "cause"
shall mean any one or more of the following grounds:
(A) Executive's commission of an act materially
and demonstrably detrimental to the good will of Block or any
subsidiary of Block, which act constitutes reckless conduct or
willful misconduct by the Executive in the performance of his
material duties to Block; or
(B) commission by Executive of any act of
dishonesty or breach of trust resulting or intending to result
in material personal gain or enrichment of Executive at the
expense of Block or any subsidiary of Block; or
(C) Executive's conviction of a misdemeanor
(involving an act of moral turpitude) or a felony; or
(D) for any reason (or no reason) at any time
after the last day of Block's fiscal year during which
Executive attains normal retirement age under
6
<PAGE> 7
Block's benefit plans; or
(E) Executive's death or total and permanent
disability. The term "total and permanent disability" shall
have the meaning ascribed thereto under any long-term
disability plan maintained by HRB or Block for HRB executives.
Provided, however, that Executive shall receive not
less than 25 days' advance notice of any termination for cause by
reason of a ground or grounds described in paragraphs (A) or (B), and
shall have the opportunity to meet with the Chief Executive Officer to
discuss whether there are grounds for termination for cause.
(b) Termination Due to Mutual Agreement. The parties may
terminate Executive's employment under this Agreement at any time by mutual
written agreement.
(c) No Further Obligations. Upon termination of Executive's
employment under this Agreement, HRB shall have no further obligations under
this Agreement and no further payments of Base Salary or other compensation or
benefits shall be payable by HRB to Executive, except (i) as set forth in this
Section 1.06, (ii) as required by the express terms of any written benefit plans
or written arrangements maintained by HRB and applicable to Executive at the
time of such termination of Executive's employment, (iii) as may be required by
law, or (iv) as may be mutually agreed upon between the parties in a negotiated
Employment Agreement Termination package.
ARTICLE TWO
CONFIDENTIALITY
2.01 - Background and Relationship of Parties. The parties
acknowledge (for all purposes including, without limitation, Articles Two and
Three of this Agreement) that Block and its subsidiaries have been and will be
engaged in a continuous program of acquisition and development respecting their
businesses, present and future, and that, in connection with Executive's
employment by HRB, Executive will be expected to have access to all information
of value to HRB and Block and that Executive's employment creates a relationship
of confidence and trust between Executive and Block with respect to any
information applicable to the businesses of Block and its subsidiaries.
Executive will possess or have unfettered access to information that has been
created, developed, or acquired by Block and its subsidiaries or otherwise
become known to Block and its subsidiaries and which has commercial value in the
businesses in which Block and its subsidiaries have been and will be engaged and
has not been publicly disclosed by Block. All information described above is
hereinafter called "Proprietary Information." By way of illustration, but not
limitation, Proprietary Information includes trade secrets, customer lists and
information, employee lists and information, developments, systems, designs,
know-how, marketing plans, product information, business and financial
information and plans, strategies, forecasts, new products and services,
financial statements, budgets, projections, prices, and acquisition and
7
<PAGE> 8
disposition plans. Proprietary Information shall not include any portions of
such information which are now or hereafter made public by third parties in a
lawful manner or made public by parties hereto without violation of this
Agreement.
2.02 - Proprietary Information is Property of Block.
(a) All Proprietary Information shall be the sole property of
Block (or the applicable subsidiary of Block) and its assigns, and Block (or the
applicable subsidiary of Block) shall be the sole owner of all patents,
copyrights, trademarks, names, and other rights in connection therewith and
without regard to whether Block (or any subsidiary of Block) is at any
particular time developing or marketing the same. Executive hereby assigns to
Block any rights Executive may have or may acquire in such Proprietary
Information. At all times, Executive will keep in strictest confidence and trust
all Proprietary Information and Executive will not use or disclose any
Proprietary Information without the written consent of Block, except as may be
necessary in the ordinary course of performing duties as an employee of HRB or
an officer of Block or as may be required by law or the order of any court or
governmental authority. Except as otherwise provided in Article Three of this
Agreement, the foregoing shall not preclude Executive, after the termination of
his employment under this Agreement, from contacting or doing business with any
supplier, consultant, or other person with whom he became acquainted during his
employment hereunder.
(b) In the event of the termination of Executive's employment
by HRB, Executive shall promptly deliver to HRB all copies of all documents,
notes, drawings, specifications, documentation, data, and other materials of any
nature belonging to Block or any subsidiary of Block and obtained during the
course of Executive's employment with HRB. In addition, upon such termination,
Executive will not remove from the premises of Block or any subsidiary of Block
any of the foregoing or any reproduction of any of the foregoing or any
Proprietary Information that is embodied in a tangible medium of expression.
ARTICLE THREE
NON-HIRING; NO CONFLICTS; NONCOMPETITION
3.01 - General. The parties hereto acknowledge that, during
the course of Executive's employment by HRB, Executive shall have access to
information valuable to HRB and Block concerning the key employees of Block and
its subsidiaries ("Block Employees") and, in addition to Executive's access to
such information, Executive may, during (and in the course of) Executive's
employment by HRB, develop relationships with such Block Employees whereby
information valuable to Block and its subsidiaries concerning the Block
Employees was acquired by Executive. Such information includes, without
limitation: the identity, skills, and performance levels of the Block Employees,
as well as compensation and benefits paid by Block to such Block Employees.
3.02 - Non-Hiring. During the period of Executive's employment
hereunder and
8
<PAGE> 9
during the time Executive is receiving payments hereunder and for a period of
one year after the later of: termination by HRB or Executive of such employment
or cessation of such payments, the Executive will not knowingly recruit,
solicit, or hire any individual who is employed by Block or any of its
subsidiaries at any time during the six-month period ending with the date of
termination of Executive's employment hereunder, or otherwise induce any such
employee to leave the employment of Block (or the applicable employer-subsidiary
of Block) to become an employee of or otherwise be associated with any other
party or with Executive or any company or business with which Executive is or
may become associated.
3.03 - No Conflicts. Executive represents in good faith that,
to the best of his knowledge, the performance by Executive of all the terms of
this Agreement will not breach any agreement to which Executive is or was a
party and which requires Executive to keep any information in confidence or in
trust. Executive has not brought and will not bring with him to HRB or Block nor
will Executive use in the performance of employment responsibilities at HRB any
proprietary materials or documents of a former employer that are not generally
available to the public, unless Executive has obtained express written
authorization from such former employer for their possession and use. Executive
has not and will not breach any obligation of confidentiality that Executive may
have to former employers and Executive shall fulfill all such obligations during
his employment with HRB.
3.04 - Non-Competition.
(a) During any period of Executive's employment with HRB,
Executive shall not engage in, or own or control any interest in (except as a
passive investor in publicly-held companies, holding less than one percent of
its outstanding securities), or act as an officer, director, or employee of, or
consultant, advisor or lender to, any firm, corporation, institution, or
business which engages in any line of business which is competitive with any
line of business of Block or any of its subsidiaries (or which Block or any
subsidiary is then engaged in evaluating or developing).
(b) During the one-year period immediately following the
termination of Executive's employment hereunder by HRB or Executive, Executive
will not own or control any interest in (except as a passive investor in
publicly-held companies, holding less than one percent of its outstanding equity
securities) or act as an officer, director, or employee of, or consultant,
advisor, or lender to, any firm, corporation, institution, or business which
engages in any line of business which is competitive with any line of business
of Block or any of its subsidiaries at the time Executive's employment
terminates.
(c) For purposes of subsection 3.04(b), as to Block, the term
"line of business" shall not include any line of business the revenues of which
constituted less than 25% of the consolidated revenues of Block for the fiscal
year of Block completed on, or most recently completed prior to, the effective
date of the termination of Executive's employment hereunder; and, as to any
corporation, firm, institution, or business with which Executive proposes to
become associated, as
9
<PAGE> 10
set forth in said subsection 3.04(b), any line of business which constituted
less than 25% of the consolidated revenues of such corporation, firm,
institution, or business. It is further agreed that, on the date hereof, the
lines of business of Block (as determined without regard to the 25% of revenue
requirement) consist of: tax return preparation and related services (to which
is attributable more than 75% of Block's consolidated gross revenues for its
fiscal year ended April 30, 1999); home mortgage origination and syndication;
discount securities brokerage and related financial advisory services for
individuals; tax return preparation and other personal productivity computer
software and electronic income tax return preparation; and accounting and
related consulting services.
(d) Section 3.04(b) shall not apply following any termination
of Executive's employment hereunder by HRB for cause,
3.05 - Reasonableness of Restrictions. Executive and HRB
acknowledge that the restrictions contained in this Agreement are reasonable,
but should any provisions of any Article of this Agreement be determined to be
invalid, illegal, or otherwise unenforceable or unreasonable in scope by any
court of competent jurisdiction, the validity, legality, and enforceability of
the other provisions of this Agreement shall not be affected thereby and the
provision found invalid, illegal, or otherwise unenforceable or unreasonable
shall be considered by HRB and Executive to be amended as to scope of
protection, time, or geographic area (or any one of them, as the case may be) in
whatever manner is considered reasonable by that court and, as so amended, shall
be enforced.
ARTICLE FOUR
MISCELLANEOUS
4.01 - Third-Party Beneficiary. The parties hereto agree that
Block is a third-party beneficiary as to the obligations imposed upon Executive
under this Agreement and as to the rights and privileges to which HRB is
entitled pursuant to this Agreement, and that Block is entitled to all of the
rights and privileges associated with such third-party-beneficiary status.
4.02 - Entire Agreement. This Agreement constitutes the entire
agreement and understanding between HRB and Executive concerning the subject
matter hereof. No modification, amendment, termination, or waiver of this
Agreement shall be binding unless in writing and signed by Executive and a duly
authorized officer of HRB. Failure of HRB, Block or Executive to insist upon
strict compliance with any of the terms, covenants, or conditions hereof shall
not be deemed a waiver of such terms, covenants, and conditions.
4.03 - Specific Performance by Executive. The parties
acknowledge that money damages alone will not adequately compensate HRB or Block
or Executive for breach of any of the covenants and agreements herein and,
therefore, in the event of the breach or threatened breach of any such covenant
or agreement by either party, in addition to all other remedies available at
law, in equity or otherwise, a wronged party shall be entitled to injunctive
relief compelling specific
10
<PAGE> 11
performance of (or other compliance with) the terms hereof.
4.04 - Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of Executive and the heirs, executors, assigns and
administrators of Executive or his estate and property and shall inure to the
benefit of HRB, Block and their successors and assigns. Executive may not assign
or transfer to others the obligation to perform Executive's duties hereunder.
4.05 - Withholding Taxes. From any payments due hereunder to
Executive from HRB, there shall be withheld amounts required to be withheld to
satisfy liabilities for federal, state, and local taxes and other charges and
customary withholdings to which Executive consents. Executive remains primarily
liable to such authorities for such taxes and charges to the extent not actually
paid by HRB. This Section 4.05 shall not affect HRB's obligation to "gross up"
any relocation benefits paid to Executive pursuant to Subsection 1.03(f)(ii).
4.06 - Indemnification. To the fullest extent permitted by law
and Block's Bylaws, HRB hereby indemnifies during and after the period of
Executive's employment hereunder the Executive from and against all loss, costs,
damages, and expenses including, without limitation, legal expenses of counsel
selected by HRB to represent the interests of Executive (which expenses HRB
will, to the extent so permitted, advance to Executive as the same are incurred)
arising out of or in connection with the fact that Executive is or was a
director, officer, employee, or agent of HRB or Block or serving in such
capacity for another corporation at the request of HRB or Block. Notwithstanding
the foregoing, the indemnification provided in this Section 4.06 shall not apply
to any loss, costs, damages, and expenses arising out of or relating in any way
to any employment of Executive by any former employer or the termination of any
such employment.
4.07 - Notices. Notices hereunder shall be deemed delivered
five days following deposit thereof in the United States mails (registered or
certified mail, return receipt requested and postage prepaid) addressed to
Executive at: 72 Washington Post Drive, Wilton, CT 06897, with a copy to David
E. Kahen, Esq., Roberts & Holland LLP, 825 Eighth Avenue, 37th Floor, New York,
New York, 10019-7416; and to HRB at: 4400 Main Street, Kansas City, Missouri
64111; Attn: Mark A. Ernst, with a copy to James H. Ingraham, Esq., H&R Block,
Inc., 4400 Main Street, Kansas City, Missouri 64111; or to such other address
and/or person designated by either party in writing and in the same manner to
the other party.
4.08 - Counterparts. This Agreement may be signed in
counterparts and delivered by facsimile transmission confirmed promptly
thereafter by actual delivery of executed counterparts.
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Executed as a sealed instrument under, and to be governed by,
construed and enforced in accordance with, the laws of the State of Missouri.
EXECUTIVE:
Dated: 1/27/00 /s/ Frank J. Cotroneo
------------- --------------------------------
Frank J. Cotroneo
Accepted and Agreed:
HRB MANAGEMENT, INC.,
a Missouri corporation
By: /s/ Mark A. Ernst
-------------------------------
Mark A. Ernst, President
Dated: 26 JAN 00
--------------
H&R BLOCK, INC.,
A Missouri Corporation
(as to section 1.03(c) with respect to Fiscal Year 2000 only, and sections
1.03(d), 1.03(e), and 1.05)
By: /s/ Mark A. Ernst
-------------------------------
Mark A. Ernst, President
Dated: 26 JAN 00
--------------
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JAN-31-2000
<CASH> 248,490
<SECURITIES> 33,074
<RECEIVABLES> 3,633,850
<ALLOWANCES> 38,218
<INVENTORY> 0
<CURRENT-ASSETS> 4,078,535
<PP&E> 219,594<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,921,370
<CURRENT-LIABILITIES> 4,531,472
<BONDS> 0
0
0
<COMMON> 1,089
<OTHER-SE> 924,184
<TOTAL-LIABILITY-AND-EQUITY> 5,921,370
<SALES> 0
<TOTAL-REVENUES> 844,013
<CGS> 0
<TOTAL-COSTS> 994,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (145,477)
<INCOME-TAX> (56,591)
<INCOME-CONTINUING> (88,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,886)
<EPS-BASIC> (.91)
<EPS-DILUTED> (.91)
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
</FN>
</TABLE>
