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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED: APRIL 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 2000, was $2,927,823,165.
Number of shares of registrant's Common Stock, without par value, outstanding on
June 1, 2000: 94,620,816.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to
security holders for the fiscal year ended April 30, 2000, are incorporated
herein by reference in response to Part I, Item 1, and Part II, Items 5 through
7 and Item 8, and certain specified portions of the registrant's definitive
proxy statement filed within 120 days after April 30, 2000, are incorporated
herein by reference in response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a corporation that was organized in 1955 under the
laws of the State of Missouri (the "Company"). It is the parent corporation in a
two-tier holding company structure following a 1993 corporate restructuring. The
second-tier holding company is H&R Block Group, Inc., a Delaware corporation and
the direct or indirect owner of the operating subsidiaries that provide tax and
financial services to the general public principally in the United States, but
also in Canada, Australia, the United Kingdom and other foreign countries.
Approximately 62% of the consolidated revenues of the Company in fiscal year
2000 were generated by subsidiaries involved in tax return preparation,
electronic filing of income tax returns and other tax-related services. The
Company's subsidiaries also offer investment services through broker-dealers,
originate, purchase, service, sell and securitize mortgages, offer personal
productivity software, purchase participation interests in refund anticipation
loans made by a third-party lender, and offer accounting, tax and consulting
services to business clients.
Developments during fiscal year 2000 within U.S. tax operations,
International tax operations, Financial services and Business services are
described in the section below entitled "Description of Business."
On August 2, 1999, the Company, through its wholly-owned, indirect
subsidiary, RSM McGladrey, Inc. ("RSM"), purchased substantially all of the
non-attest assets of McGladrey & Pullen, LLP ("McGladrey"), at that time the
seventh largest accounting and consulting firm in the United States with more
than 70 offices located primarily in the Eastern, Midwestern, Northern and
Southwestern United States. The purchase price was $240 million in cash payments
over four years and the assumption of certain pension liabilities with a present
value at the date of acquisition of $52.7 million. The acquisition agreement
also provides for contingent consideration based on earnings in years two, three
and four after the acquisition. In addition, the Company made cash payments of
$65.5 million for outstanding accounts receivable and work-in-process balances
that have been repaid to the Company as RSM collected these amounts in the
ordinary course of business.
On December 1, 1999, the Company completed the acquisition of the
outstanding capital stock of OLDE Financial Corporation ("OLDE Financial") and
Financial Marketing Services, Inc. The purchase price was $850 million in cash
plus net tangible book value payments of $48.5 million. 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. The acquisition was initially funded with short-term
borrowings and a portion of these borrowings were repaid upon
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the issuance of $500 million in Senior Notes in the fourth quarter of fiscal
2000. OLDE Financial is the parent company of OLDE Discount Corporation ("OLDE
Discount"), the fourth largest discount brokerage firm in the United States at
the time of the acquisition. OLDE Discount offers brokerage services and other
financial services through its network of registered representatives in branch
offices in 35 states and the District of Columbia.
On March 27, 2000, the Company's Board of Directors authorized the
repurchase of 12 million shares of the Company's Common Stock. The number of
shares purchased will depend upon a number of factors including the price of the
stock, availability of excess cash, the ability to maintain financial
flexibility, securities law restrictions and other capital structure and
investment considerations.
After the conclusion of fiscal year 2000, the Company announced that
Henry W. Bloch would retire as Chairman of the Board of Directors of the Company
and as a director in September 2000. On June 21, 2000, the Board of Directors
approved a succession plan for senior management under which Frank L. Salizzoni
will succeed Henry Bloch as Chairman of the Board of Directors in September 2000
and retire as Chief Executive Officer on December 31, 2000. Mr. Salizzoni will
continue in the role of Chairman of the Board of Directors following his
retirement as Chief Executive Officer. The plan calls for Mark A. Ernst,
currently President and Chief Operating Officer, to assume the role of President
and Chief Executive Officer of the Company effective January 1, 2001.
During the fiscal year ended April 30, 2000, the Company was not
involved in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire or
dispose of any material amount of assets during such year otherwise than in the
ordinary course of business or in connection with the OLDE and the McGladrey
transactions.
The information contained in this Form 10-K and the exhibits hereto may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by Federal, state and local authorities and their impact on any proposed or
possible transactions and the lines of business in which the Company's
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability of the Company's subsidiaries to successfully expand
the financial planning and investment services business, the national accounting
practice, the retail mortgage business, and the core tax business; the inability
to implement the Company's strategies with respect to such expansion and other
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; the inability of the
Company to purchase shares of its Common Stock pursuant to the share repurchase
program and risks described
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from time to time in reports and registration statements filed by the Company
and its subsidiaries with the Securities and Exchange Commission ("SEC").
Readers should take these factors and risks into account in evaluating any such
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 2000, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company itself has no employees. Its direct and indirect wholly
owned subsidiaries, have approximately 10,000 regular full-time employees. The
highest number of persons employed by the subsidiaries during the fiscal year
ended April 30, 2000, including seasonal employees, was approximately 103,000.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This reportable operating segment provides to the general
public in the United States income tax return preparation services, electronic
filing services and other services related to income tax return preparation,
purchases participation interests in refund anticipation loans made to tax
clients by a third-party lending institution, offers online tax preparation,
electronic filing, mortgage products and brokerage services through the web site
at www.hrblock.com, and sells to the general public tax return preparation
software and other personal productivity computer software.
Tax Services. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices operated
by H&R Block Tax Services, Inc. and other tax operations subsidiaries, which are
collectively referred to as "Tax Services," or by others to whom Tax Services
has granted franchises. Tax Services and its franchisees (collectively referred
to herein as "H&R Block") provide to the general public H&R Block income tax
return preparation services, electronic filing services, the Peace of Mind
program (described below) and other services relating to income tax return
preparation. For U.S. returns, H&R Block offers a refund anticipation loan
service, the Refund Rewards program (described below) and an electronic refund
service in conjunction with its electronic filing service. H&R Block also
markets its knowledge of how to prepare income tax returns through its income
tax training schools.
Taxpayers Served. H&R Block served approximately 16,933,000 taxpayers
in the United States during fiscal year 2000, an increase from 16,542,000
taxpayers served in fiscal year 1999 and 15,835,000 taxpayers served in fiscal
1998. "Taxpayers served" includes taxpayers for whom H&R Block prepared income
tax returns as well as taxpayers for whom Block provided only electronic filing
services.
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Tax Return Preparation. During the 2000 income tax filing season
(January 2 through April 30), H&R Block offices in the United States prepared
approximately 16,276,000 individual income tax returns, compared to the
preparation of 15,761,000 returns in fiscal year 1999, and 14,838,000 returns in
fiscal year 1998. These returns constituted about 14% of an IRS estimate of
total individual income tax returns filed as of April 30, 2000 compared to 13.7%
in fiscal 1999. The following table shows the approximate number of income tax
returns prepared at H&R Block offices during the last five tax filing seasons:
Tax Season Ended April 30
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
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<S> <C> <C> <C> <C> <C>
Returns Prepared 13,360 14,302 14,838 15,761 16,276
</TABLE>
During the tax season, most H&R Block offices are open from 9:00 a.m.
to 9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have been
developed so that a tax return is prepared on a computer in the presence of the
customer, in most instances in less than one hour, on the basis of information
furnished by the customer. Pursuant to the one-stop service offered at
company-owned offices, the return is reviewed for accuracy and presented to the
customer for signature and filing during his or her initial visit to the office.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States. Appealing to taxpayers with more complicated returns, H&R Block Premium
stresses the convenience of appointments, year-round tax service from the same
preparer and private office interviews. The number of H&R Block Premium offices
decreased in fiscal year 2000 to 555, compared to 617 in fiscal year 1999, and
598 in fiscal 1998. In fiscal 2000, the number of H&R Block Premium clients
decreased to approximately 619,000, compared to approximately 719,000 in fiscal
year 1999 and approximately 647,000 in fiscal year 1998.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 2000 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Household Bank ("Household")
in amounts based upon the customers' anticipated Federal income tax refunds.
Income tax return information is simultaneously transmitted by H&R Block to the
IRS and the lending bank. Within a few days after the date of filing, a check in
the amount of the loan, less the bank's transaction fee and H&R Block's tax
return preparation fee (and, where applicable, electronic filing fee), is
received by the RAL customer. The IRS then directly deposits the participating
customer's actual Federal income tax refund into a designated account at the
bank in order for the loan to be repaid.
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Tax Services received a $9.00 fee per RAL from Household for sublicense of
patent rights, the license of trademarks and certain expenses incurred in
connection with the making of RALs.
H&R Block was named a partner in the IRS's "Debt Indicator" pilot
program for the 2000 tax season. The Debt Indicator program is designed to
increase the number of electronically filed returns and aid the IRS, H&R Block
and other IRS partners in screening for electronic filing fraud. Under the
program, the IRS advises its partners if a requested refund will be reduced by
an offset, such as back taxes, delinquent student loans or overpayment from
federal agencies. Household uses the Debt Indicator in determining whether to
make a refund anticipation loan. Participation in the program resulted in an
approximate 40% overall reduction in refund anticipation loan pricing for
clients in the 2000 tax season. In exchange for access to the Debt Indicator,
tax preparers agree to help in strengthening anti-fraud efforts and increasing
the number of electronically filed returns.
H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service customer's income tax refund is directly
deposited into an account at a bank (Tax Services used Household in 2000) within
approximately three weeks after the tax return is electronically filed. A check
is thereafter issued to the taxpayer in the amount of the refund, less the
bank's transaction fee and H&R Block's tax return preparation fee (and, where
applicable, electronic filing fee).
H&R Block filed approximately 12,592,000 U.S. tax returns
electronically in fiscal 2000 compared to 11,139,000 in fiscal 1999 and
9,423,000 in fiscal 1998. Approximately 4,814,000 refund anticipation loans were
processed in fiscal 2000 by H&R Block, compared to 2,811,000 in fiscal 1999 and
2,420,000 in fiscal 1998. Approximately 1,499,000 electronic refunds were
processed in fiscal 2000 by H&R Block, compared to 1,916,000 in fiscal 1999 and
1,855,000 in fiscal 1998.
In 2000, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 39 states and the District of
Columbia (compared to 38 states and the District of Columbia in fiscal 1999 and
35 states and the District of Columbia in fiscal 1998) and plans to continue to
expand this program as more states make this filing alternative available to
their taxpayers.
Refund Rewards Program. Under the Refund Rewards(TM) program, H&R Block
clients who electronically file their returns can choose to have the amount of
their refunds, less the tax preparation fee (and, where applicable, the
electronic filing fee) directly deposited into an account at Household Bank and
then loaded onto a prepaid buying card. The card can then be used when making
purchases with the program's participating retail merchants, including General
Motors and Sears Roebuck & Co. ("Sears"), to receive special discounts, to
obtain cash at an ATM or to make purchases anywhere MasterCard(TM) is accepted.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block
preparer makes an error in the preparation of a customer's tax return that
results in the assessment of any interest or penalties on additional taxes due,
while H&R Block does not assume the liability for the additional taxes (except
under its "Peace of Mind" Program described below), it guarantees payment of the
interest and penalties.
In addition to H&R Block's standard guarantee to pay penalty and
interest attributable to errors made by an H&R Block preparer, under the "Peace
of Mind" program, H&R Block agrees to pay additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from
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such errors. The Peace of Mind program has a per customer cumulative limit of
$4,000 ($5,000 at H&R Block Premium offices) in additional taxes paid with
respect to the Federal, state and local tax returns prepared by H&R Block for
the taxable year covered by the Program.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide H&R Block with a source of trained income tax return
preparers. During the 2000 fiscal year, 175,200 students enrolled in H&R Block's
basic and advanced income tax courses in the United States, compared to 159,216
students during fiscal year 1999 and 130,884 students during fiscal year 1998.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
In fiscal year 2000, H&R Block also operated 756 offices in department
stores in the United States, including offices in Sears stores operated as
"Sears Income Tax Service by H&R Block." During the 2000 tax season, the Sears'
facilities constituted approximately eight percent of the tax office locations
of H&R Block. Tax Services is a party to a license agreement with Sears relating
to Tax Service's operation in Sears' locations throughout the United States.
Such license agreement expires on December 31, 2004, subject to termination
rights of both parties for a limited period of time after each tax season. Tax
Services believes its relations with Sears to be excellent and that both parties
to the license arrangement view the operations thereunder to date as
satisfactory.
On April 17, 2000, there were 9,210 H&R Block offices in operation in
the United States compared to 8,923 offices in operation on April 15, 1999, and
8,780 offices in operation on April 15, 1998. Of the 9,210 offices, 5,162 were
owned and operated by Tax Services (compared to 4,880 in fiscal year 1999 and
4,640 in fiscal year 1998) and 4,048 were owned and operated by independent
franchisees (compared to 4,043 in fiscal 1999 and 4,140 in fiscal 1998). Of such
franchised offices in fiscal 2000, 2,749 were operated by "satellite"
franchisees of Tax Services (described below), 818 were operated by "major"
franchisees (described below) and 481 were operated by satellite franchisees of
major franchisees.
Two types of franchises have principally been granted by the Company
and its subsidiaries. "Major" franchisees entered into agreements with the
Company (primarily in the Company's early years) covering larger cities and
counties and providing for the payment of franchise royalties based upon a
percentage of gross revenues of their offices. Under the agreements, the Company
granted to each franchisee the right to the use of the name "H&R Block" and
provided a Policy and Procedure Manual and other supervisory services. Tax
Services offers to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major franchisee selects and
trains the employees for its office or offices. Since March 1993, HRB Royalty,
Inc., an indirect subsidiary of the Company, has been the franchisor under the
major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local
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advertising, initial training, and supervisory services and, consequently, pays
Tax Services a higher percentage of his or her gross tax return preparation and
related service revenues as a franchise royalty than do major franchisees. Many
of the satellite franchises of Tax Services are located in cities with
populations of 15,000 or less. Some major franchisees also grant satellite
franchises in their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue to
do so if future conditions warrant such acquisitions and satisfactory terms can
be negotiated. In October 1999, Tax Services acquired a major tax franchise
operation serving parts of North and South Carolina through 90 offices operated
by major franchisees and their subfranchisees. The Company issued 475,443 shares
of its Common Stock from treasury shares, with a value of approximately $21.0
million, for the purchase. In fiscal year 2000, Tax Services also acquired 11
satellite franchise offices and 13 offices of other tax businesses.
E-Commerce Initiatives. The Company's subsidiaries offer online tax
preparation, electronic filing of tax returns, mortgage products and brokerage
services through its web site at www.hrblock.com. In January 2000, these
subsidiaries launched an upgraded web site which is organized into three main
areas: Tax, Mortgage and Investment Centers.
The Tax Center offers a program that enables individuals to prepare
federal and state income tax returns online, file federal and many state tax
returns electronically, receive tax tips, subscribe to a tax newsletter and use
withholding and refund calculators for tax planning. The web site also offers a
program called Electronic Refund Advance ("ERA"), a unique loan product that
allows users to have a tax refund advance of up to $5,000 deposited directly
into their bank accounts usually within two days after the IRS accepts the
taxpayer's electronically filed return. ERA is a loan and the lending
institution, Household, charges a $19.95 fee for each transaction during the
2000 tax season. Household paid Block Financial Corporation ("BFC") a license
fee for each approved ERA of $7.21 for the sublicense of patent rights, the
license of trademarks and certain expenses incurred in connection with the
making of ERAs.
Pursuant to a three-year agreement announced in March 2000, BFC has
teamed with Microsoft Corporation ("Microsoft") to provide exclusive web-and
desktop-based tax preparation products for its customers who use the MSN(TM)
Money Central(TM) personal finance service and Microsoft(R) Money. Microsoft
and BFC plan to collaborate on integration capabilities between Microsoft
financial products and BFC's software and online-based tax preparation
products. As a result of this alliance, Microsoft has indicated its intention
to cease further development of its Microsoft(R) TaxSaver(TM) tax preparation
software, a product competitive with BFC's TaxCut(R) tax preparation software.
The Mortgage Center enables users to apply for mortgages online and
track the status of their applications through the web site. Block Financial
has teamed with E-Loan, Inc. ("E-Loan"), a leading online lender, to provide a
competitive mortgage marketplace where users can shop with more than 70 loan
providers for low rates on mortgages. The Mortgage Center also includes
interactive calculators to estimate the tax implications and benefits of home
ownership, e-mail notification when the desired loan
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rate becomes available, a tool that recommends the best loan types for a
borrower's situation, customized rate quotes and a mortgage comparison feature.
The Investment Center provides online brokerage services through H&R
Block Financial Corporation, a subsidiary of OLDE Financial. Users can monitor
investment portfolios, calculate unrealized profits and losses and open a
variety of investment accounts with access to stocks, bonds and mutual funds.
Trades at H&R Block Financial Corporation are executed and cleared by, and
accounts are carried by, OLDE Discount on a fully disclosed basis.
BFC has arranged with InsWeb, a leading Internet insurance marketplace,
to offer through the Company's web site free, multiple insurance quotes for
term-life, homeowners and automobile insurance products from leading insurers.
Software Products. BFC develops and markets the TaxCut tax preparation
software package (known as Kiplinger TaxCut during fiscal year 2000) and markets
Kiplinger's Home Legal Advisor(SM), Kiplinger's Small Business Attorney(R),
Kiplinger's NetWealth(SM) and Kiplinger's WILLPower(SM) and Names & Dates(R)
software products. H&R Block Investments, Inc. a wholly owned subsidiary of BFC
and a federally registered investment advisor markets Kiplinger's NetWealth(SM).
Refund Anticipation Loan Participations. BFC is a party to a July 1996
agreement with Household to purchase a participation interest in RALs provided
by Household to H&R Block tax customers. See "Electronic Filing" under "Tax
Services" above for a discussion of RALs. In the 10-year agreement, BFC agreed
to purchase an initial 40% participation interest in such RALs, which interest
would be increased to nearly 50% in specified circumstances. Beginning in fiscal
1999, the participation interest was increased to 49.9% in company-owned RALs,
and BFC participated in 25% of major franchise RALs. BFC's purchases of the
participation interests are financed through short-term borrowings. BFC bears
all of the risks associated with its interests in the RALs. BFC's total RAL
revenue in fiscal year 2000 was approximately $89.8 million (compared to revenue
of $90.2 million in fiscal 1999 and $53.3 million in fiscal 1998), generating
approximately $45.8 million in pretax profits (compared to $19.1 million in
pretax profits in fiscal year 1999 and $6.4 million in pretax profits in fiscal
year 1998).
Seasonality of Business. Since most of the customers of Tax Services
file their tax returns during the period from January through April of each
year, substantially all of Tax Services' revenues from income tax return
preparation, related services and franchise royalties are received during this
period. As a result, Tax Services operates at a loss through the first eight or
nine months of its fiscal year. Historically, such losses primarily reflect
payroll of year-round personnel, training of income tax preparers, rental and
furnishing of tax offices, and other costs and expenses relating to preparation
for the following tax season.
BFC's income tax return preparation software, online tax preparation
and RAL participation businesses are also seasonal, with the substantial portion
of the revenues from these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware
corporation, claims ownership of the following service marks and trademark
registered on the principal register of the United States Patent and Trademark
Office:
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Accufile
Alguien En Quien Confiar
Block Mortgage
Executive (when used in connection with the preparation of
income tax returns for others)
H&R Block in Two Distinct Designs
H&R Block Premium
Rapid Refund H&R Block and Design
Someone You Can Count On
The Income Tax People
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
BlockBonus
H&R Block in a Third Distinct Design
Nation's Largest Tax Service
Refund Rewards
We know. Do you?
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax Services.
BFC claims ownership of the following services marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
Audit Buster Names & Dates
B and Design (2) Small Business Attorney
Block Financial (2) Tax Cut
Block Financial and B Design (2) TaxCut and Design
Conductor Web
Conductor and Baton Design WebBank
Conductor and Hand-Held Baton Design WebCard
Conductor Card Review WebPay
Financial Finder
BFC also claims ownership of the following unregistered service marks
and trademarks:
CONDUCTOR.COM WebAccount
DittoCard WebBroker
Download Depot WebBuyer
Fast Lane WebCheck
Home Legal Advisor WebChecking
NetGuard WebQuote
NetWealth WILLPower
NetWealth and Design Your Complete Personal
Solve Your Everyday Business Problems Legal Resource
The Fastest and Easiest Way To Do Your Taxes
The Easy Way to Financial Success
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BFC also claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998, on the principal register of the United States Patent and
Trademark Office.
In connection with BFC's sale of its credit card portfolio in January
1999, it granted to Providian National Bank non-exclusive, non-transferable and
royalty-free licenses to use the mark "Conductor and Baton Design" for up to two
years, the patent "SYSTEM FOR ON-LINE FINANCIAL SERVICES USING DISTRIBUTED
OBJECTS" for a period of ten years, and the mark "CONDUCTOR.COM" perpetually.
Competitive Conditions. The tax return preparation and electronic
filing businesses are highly competitive. There are a substantial number of tax
return preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that in terms of the number of
offices and tax returns electronically filed in fiscal year 2000, it is the
largest provider of electronic filing services in the United States.
The software and e-commerce businesses are highly competitive and
consist of a large number of companies. In the software industry, Intuit, Inc.
is a dominant supplier of personal financial software. The online tax
preparation market is a relatively new market, and BFC expects increased
competition in this area as more competitors enter the market or existing
providers of online tax preparation services consolidate.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among other
things, set forth their signatures and identification numbers on all tax returns
prepared by them, and retain for three years all tax returns prepared. Federal
laws also subject income tax return preparers to accuracy-related penalties in
connection with the preparation of income tax returns. Preparers may be enjoined
from further acting as income tax return preparers if the preparers continuously
and repeatedly engage in specified misconduct. With certain exceptions, the
Internal Revenue Code also prohibits the use or disclosure by income tax return
preparers of certain income tax return information without the prior written
consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on the business of H&R Block. However,
the Company cannot predict what the effect may be of the enactment of new
statutes or adoption of new regulations.
The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon
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application, be accepted into the electronic filing program. Once accepted,
electronic filers must comply with all publications and notices of the IRS
applicable to electronic filing, provide certain information to the taxpayer,
comply with advertising standards for electronic filers, and be subjected to
possible monitoring by the IRS, penalties for disclosure or use of income tax
return preparation and other preparer penalties, and suspension from the
electronic filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is in fact a loan, and not a
substitute for or a quicker way of receiving an income tax refund. The Federal
laws place restrictions on the fees that an electronic filer may charge in
connection with refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect the operations
of H&R Block. However, the Company cannot predict what the effect may be of the
enactment of new statutes or the adoption of new regulations pertaining to
electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit
procedures. The IRS may from time to time change its direct deposit procedures
or may determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss to
BFC in connection with its purchases of interests in RALs and a loss to Tax
Services for tax preparation fees not collected. However, the Company believes
that Federal statutes and regulations regulating electronic filing and RALs have
not had and will not have a material adverse effect on the operations of BFC or
Tax Services. However, the Company cannot predict what the effect may be of the
enactment of new Federal or state statutes or the adoption of new regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict what
the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals have fallen short
of adoption, such issues have received serious attention in recent years.
Historically, changes in tax laws have increased H&R Block's business. The
immediate result of tax law changes
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has been an increase in complexity. The transition from the current system to a
new, untested system is likely to take a number of years and, under most serious
tax reform proposals, Americans will still need to file Federal and state tax
returns. The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the business of the
Company's subsidiaries over time is uncertain, and such legislation could have a
material adverse effect on the Company's business, financial position and
results of operations.
INTERNATIONAL TAX OPERATIONS
Generally. This reportable operating segment provides the preparation
of tax returns, electronic filing and related services to the general public in
Canada, Australia and the United Kingdom. Tax preparation of U.S. tax returns
and related services are offered by franchisees in ten countries. The electronic
filing of U.S. income tax returns is offered at franchised offices located in
Europe, and the electronic filing of Australian, Canadian and United Kingdom
income tax returns is offered at H&R Block offices in Australia, Canada and the
United Kingdom, respectively.
The returns prepared at 1,404 company-owned and franchised offices in
countries outside of the United States constituted 12.3% of the total returns
prepared by H&R Block in the last fiscal year (compared to 12.8% in fiscal year
1999 and 13.8% in fiscal year 1998).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,805,000 Canadian regular and discounted
returns filed with Revenue Canada during the 2000 income tax filing season,
compared to 1,858,000 Canadian returns prepared during fiscal year 1999, and
1,945,000 Canadian returns prepared in fiscal 1998. The number of offices
operated by H&R Block Canada decreased in fiscal year 2000 to 966 from 1,032 in
fiscal year 1999 (928 in 1998). Of the 966 offices in Canada, 537 were owned and
operated by Block Canada and 429 were owned and operated by franchisees. H&R
Block operated 142 offices in department stores in Canada in fiscal year 2000,
including 79 offices in Sears' facilities.
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must follow
in conducting the program are specified by Canadian law. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by H&R Block to the
customer for an amount which is equal to the sum of (i) 85% of that portion of
the anticipated refund which is less than or equal to $300 and (ii) 95% of that
portion of the refund in excess of $300. The customer assigns to H&R Block the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to H&R Block and deposited by H&R Block
in its bank account. In accordance with the law, the discount is deemed to
include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowings. In some parts of
Canada, CashBack services are offered at offices identified as "H&R Block
Express." The number of returns discounted under the CashBack program increased
to approximately 547,000 in fiscal year 2000 from 516,000 in fiscal year 1999
and 532,000 in fiscal year 1998.
Block Canada also provides check-cashing and other low-end financial
services through its subsidiary Cashplan Systems Inc. These services are
offered in offices operated under the name "Financial Stop," where no tax
return preparation services are offered, as well as in some H&R Block Express
offices.
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Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 455,000 in fiscal year 2000 from 428,000
in fiscal 1999 and 406,000 in fiscal year 1998. The number of offices operated
by H&R Block in Australia in fiscal year 2000 was 349, compared to 347 offices
operated in fiscal 1999 and 334 offices operated in fiscal 1998. Of the 349
offices, 219 were owned and operated by H&R Block Limited and 130 were
franchised offices.
United Kingdom Operations. The Tax Team Limited, a Horsham-based firm
acquired by an indirect subsidiary of the Company, provides tax return
preparation services in the United Kingdom. The Tax Team operated 26 offices in
fiscal year 2000, the same number it operated in fiscal year 1999 (compared to
28 offices in 1998).
Seasonality of Business. Revenues in this segment are seasonal in
nature with peak revenues occurring during the applicable tax seasons (January
through April in Canada; July through October in Australia; and August through
March in the United Kingdom).
Competitive Conditions. The tax return preparation business is highly
competitive, with a substantial number of firms offering tax preparation
services. Block Canada and H&R Block Limited believe that they operate the
largest tax return preparation business in their respective countries. The Tax
Team Limited believes that it is one of the largest providers of tax
preparation services in the United Kingdom.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company.
FINANCIAL SERVICES
Generally. The financial services reportable operating segment consists
of investment services and mortgage operations and such segment provides
financial planning, investment advice, brokerage services and the origination,
purchase, servicing, securitization and sale of conforming and nonconforming
mortgage loans in the United States. The investment services business is
conducted primarily through OLDE Discount and Birchtree Financial Services, Inc.
("Birchtree"). The mortgage business is conducted primarily through the
Company's indirect subsidiaries: Option One Mortgage Corporation ("Option One")
and H&R Block Mortgage Corporation ("H&R Block Mortgage") (formerly Assurance
Mortgage Corporation of America).
Investment Services
Generally. The Company's commitment to becoming a full service provider
of financial services was exemplified during fiscal year 2000 by the December 1,
1999 purchase of OLDE Financial, a Detroit-based financial services holding
company incorporated in the State of Michigan on August 5, 1986, and Financial
Marketing Services, Inc., a Michigan corporation incorporated in 1971. See the
discussion of the acquisition under "General Development of Business," above.
OLDE Discount. OLDE Discount, a Michigan corporation and the principal
subsidiary of OLDE Financial, is one of the largest discount brokers in the
United States. OLDE Discount is a
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registered broker-dealer with the SEC and is a member of the New York Stock
Exchange, other national securities exchanges and the National Association of
Securities Dealers, Inc. ("NASD"). OLDE Discount currently has no operations
outside of the United States. Effective August 1, 2000, OLDE Discount will
change its name to H&R Block Financial Advisors, Inc., but will be referred to
herein as OLDE Discount.
Revenues from OLDE Discount's discount brokerage activities are
generated through customer purchases and sales of stocks, bonds, options,
mutual funds, investment trusts, certificates of deposit and other financial
products. Commissions may be charged on both listed and over-the-counter
("OTC") transactions executed on an agency basis. Registered representatives
receive compensation in the form of commissions on OLDE Discount's revenues
from customer transactions and may receive additional compensation on customer
transactions in securities recommended by OLDE Discount or for which OLDE
Discount provides research as a result of the firm's market making activities.
Discount Brokerage Business and Securities Trading. OLDE Discount
engages in a discount brokerage business primarily for retail customers
throughout the United States. OLDE Discount is also a dealer and engages in
market making activities in common stocks regularly trading in securities on a
principal basis and for its own account in the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), OTC market and on
regional stock exchanges. OLDE Discount acts as a qualified dealer in certain
listed securities on the Cincinnati Stock Exchange. In addition, OLDE Discount
regularly trades in corporate and municipal bonds, various U.S. Government and
U.S. Government Agency securities and certificates of deposit.
OLDE Discount is a full service broker dealer which effects
transactions on an unsolicited or solicited basis for its customers at
commission rates lower than the rates full-commission brokerage firms charge.
Although OLDE Discount offers discount brokerage services to retail customers,
OLDE Discount also offers services and products typically offered by
full-commission firms such as investment research with regard to individual
securities. Other services and products offered include money market funds with
sweep provisions for settlement of customer transactions; fixed-income
products; mutual funds; margin accounts; checking privileges; option accounts;
stock research; account access/review via the Internet; dividend reinvestment
plans and individual retirement accounts with no annual fees ("IRAs").
When OLDE Discount executes transactions as a dealer on a principal
basis, it may charge mark-ups or mark-downs which are equivalent to its
discounted commission schedule. Under certain circumstances, customers may be
eligible to effect securities transactions in which commissions, mark-ups and/or
mark-downs are not charged. OLDE Discount selects the stocks in which it makes a
market based upon fundamental and market factors. For those stocks in which OLDE
Discount makes a market, it may derive revenue from the spread which is the
difference between the bid and offer prices. However, due to the nature of the
activity and the volatility of the securities markets, OLDE Discount may realize
losses as a result of adverse market fluctuations.
Online Brokerage Services and Other Business. H&R Block Financial
Corporation ("H&R Block Financial"), a subsidiary of OLDE Financial, provides
online brokerage services through the Company's web site located at
www.hrblock.com. H&R Block Financial introduces its accounts to OLDE Discount.
OLDE Discount carries H&R Block Financial's accounts and provides clearing and
execution services to H&R Block Financial on a fully disclosed basis. The
Investment Center on the Company's web site is powered by SmartVest, a
convenient, user-friendly and powerful online
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investment service. H&R Block Financial is licensed in 49 states and the
District of Columbia. Additional information regarding online operations is
provided under the "E-Commerce Initiatives" in the "U.S. Tax Operations"
section, above.
Other Services. OLDE Discount also acts as custodian, as well as
broker, for IRAs and charges no annual fee. The OLDE Custodian Fund (the
"Fund"), organized as a Massachusetts business trust, operates as a
diversified, open-end management investment company and consists of three
series of shares of beneficial interest: OLDE Money Market Series, OLDE Premium
Money Market Series and OLDE Premium Plus Money Market Series. All three series
are offered as "no load" funds. OLDE Money Market Series commenced operations
in October 1989; OLDE Premium Plus Money Market Series in July 1990; and OLDE
Premium Plus Money Market Series in January 1992. Each series of the Fund is
managed by OLDE Asset Management, Inc., a subsidiary of OLDE Financial and a
registered investment adviser. The shares of the Fund are underwritten by OLDE
Discount and distributed exclusively by OLDE Discount.
Advertising and Marketing. Advertising and marketing play a significant
role in expanding OLDE Discount's client base as well as in introducing new
products and services. OLDE Discount uses a combination of media including
newspapers, magazines, the yellow pages, direct mail, television and its
Internet home page at www.olde.com. When an investor contacts OLDE Discount, the
investor receives a package including an account application and a brochure
containing information on the services and products offered by OLDE Discount.
Additional detailed information is available upon request and can be tailored to
match the client's investment preferences.
Retail Branch Offices and H&R Block Financial Centers. OLDE Discount is
authorized to do business as a broker-dealer in all 50 states and the District
of Columbia. At fiscal year end, OLDE Discount operated in 198 offices located
in 35 states and the District of Columbia. Ninety-three of these offices were
H&R Block Financial Centers, and the remaining offices are planned to be
converted to Financial Centers over the next two years. These locations offer
services year-round to clients including financial products and services, tax
preparation and, in some offices, mortgage services. OLDE Discount believes that
the existence of branch offices contributes to its growth and client
satisfaction. The existence of a branch office generally results in an increase
in unsolicited customer transactions in the geographic area near the branch.
Many clients prefer to conduct business with personnel in local rather than
distant offices. Clients may use branch offices to receive and deliver checks
and deliver securities.
Birchtree Financial Services, Inc. Birchtree, a full service investment
firm headquartered in Kansas City, Missouri, offers stocks, bonds, mutual funds
and other securities and insurance products through a network of registered
representatives across the country. Included among Birchtree's registered
representatives are employees of H&R Block's tax subsidiaries. These employees
are tax preparers who are licensed to sell securities, mutual funds and
insurance products.
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Mortgage Operations
Generally. Mortgage operations originate, purchase, service, securitize
and sell conforming and nonconforming mortgage loans in the United States.
Conforming mortgages are those that may be offered through government sponsored
loan agencies. Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies, and typically involve borrowers with
impaired credit, who have substantial equity in the property which will be used
to secure the loan. Retail and wholesale mortgage origination services were
offered in fiscal year 2000 through a network of mortgage brokers in 48 states,
H&R Block Financial Center offices in 12 states, and branch offices in 15
states.
Option One Mortgage Corporation. Option One, based in Irvine,
California, has a network of more than 7,500 mortgage brokers in 48 states.
Option One originates and purchases loans through wholesale channels. Option One
originated $5.7 billion in mortgage loans in fiscal year 2000, compared to $3.6
billion in fiscal 1999 and approximately $1.9 billion in fiscal year 1998 after
its acquisition. The average Option One loan during fiscal year 2000 had a
$106,700 principal balance (compared to $108,000 in fiscal 1999), and was
secured by a first lien on a single-family residence. During fiscal 2000, Option
One sold or securitized approximately $6.1 billion of mortgage loans, as
compared to $3.6 billion sold in fiscal 1999 and $1.8 billion in fiscal 1998
after its acquisition. At the end of fiscal year 2000, Option One's servicing
portfolio was 114,300 loans totaling more than $11.3 billion, compared to 65,300
loans totaling $6.5 billion at the end of fiscal 1999 and 42,800 loans totaling
$4.3 billion at the end of fiscal 1998.
Wholesale originations and purchases represented the substantial
majority of Option One's total loan production. Wholesale loan originations
involve a broker who assists the borrower in completing the loan application,
the gathering of necessary information and identifying a lender that offers a
loan product which is best suited to the borrower's financial needs. Brokers are
free to submit an application to one or more nonconforming lenders, such as
Option One. Upon receipt of an application from a broker, Option One's branch
office processes and underwrites the loan. Based upon this review, Option One
advises the broker whether the loan application meets with Option One's
underwriting guidelines and product description by issuing a loan approval or
denial, and in some cases, issues a "conditional approval," which requires the
submission of additional information or clarification. Option One sells
virtually all of its loan production through a combination of securitization and
bulk sales of whole loans to institutional purchasers.
In July 1999, the Company announced that it was evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner. On March 27, 2000, the Company announced that no expression of
interest regarding the acquisition of Option One resulted in an offer considered
to be in the best interests of the Company's shareholders. The Company also
announced plans for off-balance sheet financing arrangements and whole-loan sale
arrangements relating to Option One. Option One received commitments from three
banks totaling $2 billion for external warehouse financing for its subprime
mortgage production over a 12-month period. Option One has also received
commitments from two investment banks to purchase subprime mortgage loans
ranging from a minimum of $2.5 billion to a maximum of $6 billion over a
12-month period.
H&R Block Mortgage Corporation. On February 1, 2000, Assurance Mortgage
Corporation, which BFC acquired on March 5, 1999, changed its name to H&R Block
Mortgage Corporation ("H&R Block Mortgage"). H&R Block Mortgage is a retail
mortgage lender for conventional,
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nonconventional and government loans and is licensed to conduct business in 48
states. H&R Block Mortgage is an approved seller/servicer for Fannie Mae and
Freddie Mac, and is HUD authorized to originate and underwrite FHA and VA
mortgage loans. In fiscal year 2000, H&R Block Mortgage originated retail
mortgage loans from various sales channels, including 35 branch offices in 15
states, and two regional call centers located in Tampa, Florida and Pleasanton,
California, and by teaming with E-Loan over the Internet at www.hrblock.com. See
"E-Commerce Initiatives" under "U.S. Tax Operations," above.
In April 2000, H&R Block Mortgage entered into a strategic alliance
with Countrywide Home Loans, Inc. ("Countrywide") to sell 95% of its qualifying
conforming mortgage loans to Countrywide. The majority of mortgage loans sold to
Countywide are underwritten through an automated system under which H&R Block
Mortgage's representations and warranties relating to compliance with
Countrywide's underwriting guidelines are assumed by Countrywide. This alliance
allows H&R Block Mortgage, on average, an increase of 50 basis points in
execution due to price, efficiencies in delivery, and elimination of
redundancies in operations.
H&R Block Mortgage maintains a committed warehouse financing facility
with GE Capital Mortgage Services, Inc. and an off-balance sheet financing
arrangement with Prudential Securities Credit Corp. H&R Block Mortgage sells
substantially all of its mortgage loans servicing-released into the secondary
market.
NCS Mortgage Services, LLC. The mortgage loan origination operations
and certain assets of NCS Mortgage Services, a wholesale originator of subprime
mortgage loans, were sold by BFC to Centura Banks, Inc. of Rocky Mount, North
Carolina in March 2000.
Service Marks and Trademarks. OLDE Discount claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Chevron Design SmartTrading
IRA United SmartVest
The OLDE Investors Account SmartVestor
SmartBroker SmartViews
SmartRetirement SmartWire
SmartTrade
In addition, Smart Travel, Inc., a wholly-owned subsidiary of OLDE
Financial, claims ownership of the following registered mark: Smart Travel.
Birchtree Financial Services, Inc. claims ownership of the following
unregistered service marks and trademarks: Birchtree Financial Services (logo)
and Birchtree.com.
Option One claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
AppOne
CorOne
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Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
PartnerPlus
SumOne
The Big 2
Competitive Conditions. OLDE Discount competes directly with a broad
range of companies seeking to attract consumer financial assets, including
full-service discount brokerage firms, mutual fund companies, investment banking
firms, commercial and savings banks, insurance companies and others. The
financial services industry has become considerably more concentrated as
numerous securities firms have been acquired by or merged into other firms. Some
of these competitors have greater financial resources than OLDE Discount and
offer certain additional financial products and services. In addition, OLDE
Discount expects competition from domestic and international commercial banks to
increase as a result of recent legislative and regulatory initiatives in the
U.S. (including the passage of the Gramm-Leach-Bliley Act in November 1999) to
remove or relieve certain restrictions on mergers between commercial banks and
other types of financial services providers. OLDE Discount primarily competes
with these firms on the basis of quality of customer service, breadth of
products and services offered, prices, accessibility through delivery channels,
and technological innovation and expertise.
Discount brokerage firms and online-only financial services providers
compete vigorously with OLDE Discount with respect to commission charges.
Full-commission brokerage firms also offer discounted commissions and on-line
services to selected retail brokerage customers. In addition, some competitors
in both the full-commission and discount brokerage industries have substantially
increased their spending on advertising and direct solicitation of customers.
Competition in the online-trading business has become similarly intense
as recent expansion and customer acceptance of conducting financial transactions
online has attracted new brokerage firms to the market. Price competition
continues to intensify in online investing as traditional brokerage firms have
entered the market and existing competitors have aggressively sought to gain
market share.
The securities business is directly affected by economic and political
conditions, trends in business and finance and changes in the conditions of the
securities markets in which OLDE Discount's customers trade.
Both the conventional and sub-prime sectors of the residential mortgage
loan market are highly competitive. The principal methods of competition are in
service, quality and price. There are a substantial number of companies
competing in the residential loan market, including mortgage banking companies,
commercial banks, savings associations, credit unions and other financial
institutions. No one firm is a dominant supplier of conforming and nonconforming
mortgage loans.
Seasonality of Business. The financial services operating segment does
not, as a whole, experience significant seasonal fluctuations.
Residential mortgage volume is subject to seasonal trends, with real
estate sales being generally lower in the first calendar quarter of the calendar
year, peaking in the spring and summer seasons, and
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then declining again in November and December. Accordingly, the revenues of the
mortgage operations reporting segment are generally higher in the peak months,
but the seasonal trends do not have a material impact on overall results of the
Company.
Government Regulation. The securities industry is subject to extensive
regulation covering all aspects of the securities business, including
registration of OLDE Discount's and Birchtree's offices and personnel, sales
methods, the acceptance and execution of customer orders, the handling of
customer funds and securities, trading practices, capital structure, record
keeping policies and practices, margin lending, execution and settlement of
transactions, the conduct of directors, officers and employees, and the
supervision our employees. The various governmental authorities and industry
self-regulatory organizations which have supervisory and regulatory jurisdiction
over the Company's broker-dealer subsidiaries generally have broad enforcement
powers to censure, fine, issue cease-and-desist orders or suspend or expel a
broker-dealer or any of its officers or employees who violate applicable laws or
regulations.
The Securities and Exchange Commission is the federal agency
responsible for the administration of the federal securities laws. OLDE
Discount is registered as broker-dealer, and OLDE Asset Management, Inc. is a
registered investment adviser with the SEC. Much of the regulation of
broker-dealers has been delegated by the SEC to self-regulatory organizations,
principally the Municipal Securities Rulemaking Board, the National Association
of Securities Dealers ("NASD") and the New York Stock Exchange ("NYSE"), which
has been designated by the SEC as OLDE Discount's primary regulator. These
self-regulatory organizations adopt rules (subject to approval by the SEC) that
govern the industry and conduct periodic examinations of the operations of OLDE
Discount's brokerage and clearing activities. Securities firms are also subject
to regulation by state securities administrators in those states in which they
conduct business.
As a registered broker-dealer, OLDE Discount is subject to the net
capital rule (Rule 15c3-1) promulgated by the SEC and adopted through
incorporation by reference in NYSE Rule 325. The Rule, which specifies minimum
net capital requirements for registered brokers and dealers, is designed to
measure the financial soundness and liquidity of a broker-dealer and requires at
least a minimum portion of its assets be kept in liquid form.
OLDE Discount has elected to compute net capital under the alternative
method of computation permitted by Rule 15c3-1 which required that net capital
be not less than the greater of $1,000,000 or 2% of aggregate debit balances
(primarily receivables from customers and other broker-dealers). In computing
net capital, various deductions are made from net worth and qualifying
subordinated indebtedness. These deductions include the book value of assets not
readily convertible into cash and prescribed percentages of securities owned or
sold short. Any failure of OLDE Discount to maintain the required net capital
may subject OLDE Discount to suspension or revocation of registration or other
limitations on the firm's activity by the SEC, and suspension or expulsion by
the NYSE, NASD or other regulatory bodies, and ultimately could require the
broker-dealer's liquidation. OLDE Discount could also be prohibited from paying
dividends and redeeming stock. OLDE Discount would be prohibited from prepaying
or making payments of principal on subordinated indebtedness if its net capital
were to become less than the greater of 5% of combined aggregate debit balances,
or $1,000,000.
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Under NYSE Rule 326, OLDE Discount is required to reduce its business
if its net capital is less than 4% of aggregate debit balances, and is
prohibited from expanding business or redeeming subordinated indebtedness if its
net capital is less than 5% of its aggregate debit balances.
Net capital rules could limit OLDE Discount's ability to engage in new
activities and expansion, and could restrict the Company's ability to withdraw
capital from its brokerage subsidiaries. Such a restriction in turn, could limit
the Company's ability to repay or reduce indebtedness (including subordinated
debentures of the Company) and pay dividends. Further, a significant operating
loss or an extraordinary charge against net capital could adversely affect OLDE
Discount's ability to expand or maintain its current levels of business. At
April 30, 2000, OLDE Discount's net capital of $340.4 million, which was 11.46%
of aggregate debit items, exceeded by $281 million its minimum required net
capital of $59.4 million. OLDE Discount has declared a dividend of $33.3 million
payable to OLDE Financial on or before July 31, 2000. Had the anticipated
dividend occurred at April 30, 2000, OLDE Discount's net capital ratio would
have been 10.34%
H&R Block Financial Corporation is subject to SEC Uniform Net Capital
Rule 15c3-3, which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital (net capital ratio),
shall not exceed 15 to 1. At April 30, 2000, H&R Block Financial Corporation had
net capital of $1.9 million, which was $1.7 million in excess of its required
net capital of $250,000. The ratio of aggregate indebtedness to net capital was
.03 to 1.
Birchtree is subject to substantially the same laws and regulations as
OLDE Discount.
The Company believes that Federal and state statutes and regulations
governing mortgage lending have not had and will not have a material adverse
effect on the operations of its mortgage subsidiaries. However, the Company
cannot predict what the effect may be of the enactment of new statutes or the
adoption of new regulations.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure and, unless an exemption is available,
require licensing of the originators of certain mortgage loans. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, and
practices that may apply to the origination, servicing and collection of
mortgage loans. The mortgage loans purchased or originated by of the Company's
mortgage subsidiaries are also subject to Federal laws, including, without
limitation, the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act, the Real Estate Settlement Procedures
Act, the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, and
certain other laws and regulations. Under environmental legislation and case law
applicable in certain states, it is possible that liability for environmental
hazards in respect of real property may be imposed on a holder of a mortgage
note secured by real property.
BUSINESS SERVICES
Generally. The business services operating segment provides accounting,
tax and consulting services to business clients, primarily mid-sized companies,
and tax, estate planning and financial planning services to individuals in the
Unites States through a network of 100 offices.
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In addition to providing these services to the public, the subsidiaries
involved in the business services segment provide management and administrative
services to the public accounting firms from which non-attest assets have been
acquired. The subsidiaries receive fees from the public accounting firms, which
continue to provide to the public "attest" services that constitute the practice
of public accounting which H&R Block and its subsidiaries, by regulation,
generally cannot provide.
RSM McGladrey, Inc. On August 2, 1999, the Company made its largest
acquisition in the accounting sector when it completed the purchase of
substantially all of the non-attest assets of McGladrey & Pullen, LLP. At the
time of the acquisition, 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
million in cash payments over four years and the assumption of certain pension
liabilities with a present value of approximately $52.7 million at the time of
the acquisition. See "General Development of Business," above for additional
details regarding the acquisition. Prior to the McGladrey acquisition, HRB
Business Services, Inc., an indirect subsidiary of the Company, had acquired
regional accounting firms in Kansas City, Chicago, Indianapolis, Buffalo,
Dallas, Baltimore and Philadelphia.
The Company is in the process of integrating its previously acquired
regional accounting firms into RSM. Upon completion of the integration, RSM will
have 100 offices and offer services in 13 of the top 25 U.S. markets. This
national accounting firm will also share a single client service philosophy and
have more than 470 managing directors and approximately 4,000 employees.
In January 2000, RSM acquired Toback CPAs, P.C., a Phoenix-based
accounting firm recognized throughout the Southwest United States for serving
the accounting and business consulting needs of closely-held, privately owned
businesses. Toback's attest business was combined with that of McGladrey.
RSM continues to be a member of RSM International, the world's tenth
largest accounting and consulting organization with 400 offices in 75 countries.
McGladrey's attest business (including audit, reviews and other engagements in
which the firm issues written opinions evaluating client financial statements)
remains in a partnership owned by the McGladrey & Pullen, LLP partners and is
not affiliated with the Company.
As noted above, in the Company's acquisition of certain assets of
McGladrey in August 1999, it did not acquire assets of McGladrey relating to
McGladrey's audit business because of regulatory and other concerns. In
connection with this acquisition and the evaluation of the regulatory
restrictions and environment, the Company and McGladrey had discussions with the
staff of the SEC regarding appropriate disclosure of the policy and procedures
being implemented by McGladrey, RSM and the Company to safeguard McGladrey's
independence and integrity as an audit firm in compliance with applicable
regulations and professional responsibilities.
While such discussions have not yet resulted in any definitive
pronouncement by the SEC staff on this matter, investors should be aware that
the Company and McGladrey are tentatively considered by the SEC staff to be one
entity for purposes of applying applicable auditor independence rules with
respect to McGladrey and its clients who are required to file audited financial
statements with the SEC ("SEC Audit Clients"). Because of this consideration,
any financial interest or business relationship of the Company or its officers,
directors, principal shareholders, control persons or affiliates with a SEC
22
<PAGE> 23
Audit Client will be regarded by the SEC staff as a financial interest or
business relationship between McGladrey and the SEC Audit Client for purposes of
applying the SEC's rules regarding auditor independence. Under such rules,
McGladrey and its partners are precluded from holding certain financial
interests in and entering into certain business relationships with a SEC Audit
Client for whom McGladrey performs audit services. As presently interpreted by
the SEC staff, any such financial interest or business relationship, whether
held or engaged by McGladrey or its partners or by the Company, its officers,
directors, principal shareholders, control persons or affiliates, would threaten
to impair McGladrey's independence as an auditor of the SEC Audit Client so
involved.
The Company and McGladrey have enacted certain policies and controls to
monitor and prevent violations by them of the SEC's auditor independence rules
as so interpreted by the SEC staff. These policies and controls include the
following:
- The Company has informed its officers, directors and affiliates
(the Company has no principal shareholders or control persons for
these purposes) of the SEC staff's interpretation that certain
financial interests and business relationships with McGladrey SEC
Audit Clients are prohibited in as much as they would be deemed
to impair McGladrey's independence as an auditor.
- McGladrey's Independence and Relationship Policies and the Code
of Conduct promulgated by the American Institute of Certified
Public Accountants ("AICPA"), which address auditor independence
issues, have been distributed to all of the Company's executive
officers and directors.
- McGladrey's Prohibited Securities List, which lists securities of
McGladrey SEC Audit Clients, is distributed to the Company's
executive officers and directors on a monthly basis so that they
can detect whether they own such securities and ensure that they
do not acquire such securities.
- Each of the Company's executive officers, directors and
affiliates periodically submits an Independence Compliance
Questionnaire ("Questionnaire") that addresses auditor
independence issues. Each Questionnaire is reviewed by
McGladrey's partner responsible for independence matters.
- McGladrey informs the audit committee of each SEC Audit Client,
in writing, of the SEC staff's interpretation regarding the
attribution to McGladrey, for purposes of McGladrey's auditor
independence, of the financial interests and business
relationships of the Company, its officers, directors and
affiliates with SEC Audit Clients.
- McGladrey informs the audit committee of each SEC Audit Client of
the SEC staff's interpretation that ownership of the Company's
stock by such SEC Audit Client or its officers, directors,
controlling shareholders or affiliates could affect McGladrey's
independence as an auditor, and McGladrey obtains confirmation
and representations from such parties that they own no shares of
the Company.
- McGladrey has designated a partner responsible for independence
matters who reports directly to its Managing Partner. The partner
responsible for independence matters monitors changes in
independence standards promulgated by the AICPA, the Independence
Standards Board ("ISB") and the SEC. This partner periodically
recommends corresponding modifications to McGladrey's
Independence Relationship Policies that become effective upon the
approval of McGladrey's Board of Directors.
- RSM has agreed to comply and cause its employees to comply with
the Independence and Relationship policies of McGladrey.
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<PAGE> 24
- Employees of RSM and employees of McGladrey are informed of
changes to McGladrey's Independence and Relationship Policies and
its Prohibited Securities List on a monthly basis via electronic
bulletin boards.
- Employees of RSM and partners and employees of McGladrey
periodically complete an Independence Compliance Questionnaire
that is reviewed and approved by McGladrey's National Office of
Audit & Accounting. All exceptions are reviewed by and approved
by McGladrey's partner responsible for independence matters, its
Managing Partner and its Board of Directors.
- As mandated by its membership in the SEC Practice Section of the
AICPA, McGladrey has implemented independence training programs
and is in the process of implementing programs to test compliance
with its Independence and Relationship Policies and the
completeness and accuracy of Independence Compliance
Questionnaires.
- McGladrey has established consultation procedures for the
resolution of all identified exceptions to its policies and
AICPA, ISB or SEC independence requirements. The Company and RSM
have agreed to fully cooperate with McGladrey in the resolution
of all exceptions and the implementation of any remedial actions,
including disciplinary actions.
While the Company and McGladrey believe that their policies and
controls in place regarding auditor independence are reasonable and adequate to
address the matters involved, there can be no assurance (and the SEC staff has
indicated that it cannot provide any assurance) that such policies and controls
will positively ensure complete compliance by the Company, RSM and McGladrey
with the SEC auditor independence rules as so interpreted by the SEC staff. Any
noncompliance by the Company, RSM or McGladrey with such rules may impair
McGladrey's independence as an auditor of SEC Audit Clients and may adversely
affect the ability of McGladrey to attract and retain such clients and perform
audits of financial statements filed with the SEC.
Seasonality of Business. Revenues for this segment are seasonal in
nature, with peak revenues occurring during January through April.
Service Marks and Trademarks. RSM claims ownership of the following
service marks and trademarks registered on the principal register of the United
States Patent and Trademark Office:
Don't Be A Sitting Duck Pulsemark
M (and design) Pyramid (and design)
Med-Rate Renaissance
Operations Diagnosis Roger
RSM claims ownership of the following unregistered service marks and
trademarks:
Business Recovery Planning System E-Accounting
Business Continuity Planning System PersonProsperity
E.Vantage! Retirement Link
FERS Business Services, Inc. ("FERS"), a wholly owned subsidiary of HRB
Business Services, Inc., claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
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<PAGE> 25
Because Results Come First
FERS Profit Edge
Pension Resources
Tonelink
FERS also claims ownership of the following unregistered service mark
and trademark:
Benelink
Practice Development Institute, a wholly owned subsidiary of HRB
Business Services, Inc., claims ownership of the following unregistered service
marks and trademarks:
Certified Profit Enhancement Consultant
CPEC
Turning Your Firm's Potential Into Profit
Toback, Inc., a wholly owned subsidiary of RSM, claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Solutions for Today. Strategies for Tomorrow
The Local Firm with a National Reputation
Competitive Conditions. The accounting and consulting business is
highly competitive. There are a substantial number of accounting firms offering
similar services at the nationwide, regional and local levels.
Government Regulation. Many of the same Federal and state regulations
relating to tax preparers and the information concerning tax reform discussed
above in "Government Regulation" section of "U.S. Tax Operations" apply to
Business Services as well, except that accountants are not subject to the same
prohibition on the use or disclosure of certain income tax return information as
the Tax Services income tax return preparers are. These accounting firms are
also subject to state and Federal regulations governing accountants, auditors
and financial planners. The Company believes that these state and Federal
regulations do not and will not have a material adverse effect on the operations
of the Company and its subsidiaries, but it cannot predict what the effect of
future regulations may be.
ITEM 2. PROPERTIES.
The executive offices of the Company, Tax Services, BFC and HRB
Business Services, Inc. are located at 4400 Main Street, Kansas City, Missouri,
in a multi-level building owned by Tax Services. The building was constructed in
1963 and expanded or redesigned in 1965, 1973, 1981, and 1996. Shortly after the
end of the 1999 fiscal year, Tax Services entered into a 20-year lease for a
newly constructed building located at 4400 East Blue Parkway, Kansas City,
Missouri, which is being utilized by Tax Services and its affiliates as a
service center. Most other offices of Tax Services (except those in department
stores) are operated in premises held under short-term leases providing fixed
monthly rentals, usually with renewal options. BFC also leases other office
space in Kansas City, Missouri.
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<PAGE> 26
OLDE's executive offices are located at 751 Griswold, Detroit, Michigan
in a building owned by OLDE. Many branch offices of OLDE Discount are located in
facilities owned by various real estate subsidiaries of OLDE Financial and
leased primarily to OLDE Discount. Some branch offices and H&R Block Financial
Centers are operated in leased premises. OLDE Discount's branch offices and H&R
Block Financial Centers are located in 35 states and the District of Columbia.
Birchtree Financial Services, Inc. is headquartered in leased offices in Kansas
City, Missouri.
Option One's executive offices are located in leased offices at 3 Ada,
Irvine, California. Option One also leases offices for its branch office
operations throughout the United States. H&R Block Mortgage Corporation is
headquartered in leased offices in Burlington, Massachusetts. H&R Block Mortgage
also leases offices in Arizona, California, Colorado, Connecticut, Florida,
Illinois, Indiana, Massachusetts, Maine, Michigan, New Hampshire, New Jersey,
Ohio and Virginia.
RSM's executive offices are located in leased offices at 3600 West 80th
Street, Bloomington, Minnesota. Its administrative offices are located in leased
offices at 220 North Main Street, Davenport, Iowa. RSM and the other accounting
firm subsidiaries of HRB Business Services, Inc. lease office space in 22
states.
ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation ("CompuServe"), certain current and former
officers and directors of CompuServe and the Company have been named as
defendants in six lawsuits pending before the state and Federal courts in
Columbus, Ohio. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in connection
with CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit also alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the lead
underwriters of CompuServe's initial public offering as additional defendants
and as representatives of a defendant class consisting of all underwriters who
participated in such offering. The Federal suits were consolidated, the
defendants filed a motion to dismiss the consolidated suits, the district court
stayed all proceedings pending the outcome of the state court suits, and the
United States Court of Appeals for the Sixth Circuit affirmed such stay. The
four state court lawsuits also allege violations of various state statutes and
common law of negligent misrepresentation in addition to the 1933 Act claims.
The state lawsuits were consolidated for discovery purposes and defendants filed
a motion for summary judgment covering all four state lawsuits. In July 1998,
the state court certified a plaintiff class of all persons and entities who
purchased shares of common stock of CompuServe between April 18, 1996 and July
16, 1996 pursuant to the initial public offering or on the open market, and who
were damaged thereby, excluding the named defendants and their affiliates. The
named plaintiffs in three of the state court cases were designated class
representatives.
On July 24, 2000, after the end of fiscal year 2000, the class
representatives and the defendants in the class action pending in state court,
by their authorized counsel, entered into a Stipulation of Settlement, pursuant
to which the defendants will pay a gross settlement amount of $9.5 million in
exchange for dismissal of the class action suit and a release of all claims.
Payment of plaintiffs' attorneys' fees and expenses are to be paid out of the
gross settlement fund. The gross settlement fund will be paid in its entirety by
the Company's insurance carrier. Among other things, the settlement is subject
to certain contingencies relating to the number of class members that choose to
exclude themselves from the settlement and the final approval of the settlement
by the court. The Stipulation is
26
<PAGE> 27
not an admission of the validity of any claim or any fact alleged by the
plaintiffs and defendants continue to deny any wrongdoing and any liability. The
Stipulation states that the defendants consider it desirable to settle to avoid
further expense, inconvenience, and delay, and to put to rest all controversy
concerning all claims.
As a part of the sale of its interest in CompuServe, the Company agreed
to indemnify WorldCom and CompuServe against 80.1% of any losses and expenses
incurred by them with respect to these lawsuits. In the opinion of management,
the ultimate resolution of these suits through the agreed upon settlement or
otherwise will not have a material adverse impact on the Company's consolidated
financial position or results of operations. The lawsuits discussed herein were
reported in the Company's Forms 10-Q for the first, second and third quarters of
fiscal year 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Henry W. Bloch (77) Chairman of the Board since August 1989; Chief Executive
Officer from August 1989 through July 1992; Member of the
Board of Directors since 1955. See Note 1.
Frank L. Salizzoni (62) Chief Executive Officer since June 1996; President, from
June 1996 through September 1999; Member of the Board of
Directors since 1988. See Note 2.
Mark A. Ernst (42) President of the Company since September 1999; Chief
Operating Officer since September 1998; Executive Vice
President from September 1998 until September 1999. See Note
3.
David F. Byers (37) Senior Vice President and Chief Marketing Officer since June
1999. See Note 4.
Frank J. Cotroneo (41) Senior Vice President and Chief Financial Officer since
February 2000. See Note 5.
Gene S. Goldenberg (55) Senior Vice President, Software and E-Commerce, Block
Financial Corporation, since July 1999; Vice President and
Publisher in Charge of Software
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Operations, Block Financial Corporation, July 1995 to July
1999. See Note 6.
Stephanie R. Otto (39) Senior Vice President, Human Resources effective July 2000;
Vice President, Human Resources August 1999
through June 2000; Vice President, National Director of
Finance, HRB Business Services, Inc., October 1998 through
August 1999; Director, Internal Audit, December 1995 until
October 1998.
James D. Rose (49) Senior Vice President and Chief Information Officer since
July 1999; Vice President and Chief Information Officer from
June 1997 through June 1999. See Note 7.
Robert E. Dubrish (48) President and Chief Executive Officer, Option One Mortgage
Corporation, since March 1996; Executive Vice President and
Chief Operating Officer, Option One Mortgage Corporation,
from December 1992 until March 1996. See Note 8.
David J. Kasper (48) President, Financial Services Group, Block Financial
Corporation, since February 2000. See Note 9.
Jeffery W. Yabuki (40) President, H&R Block International since September 1999.
See Note 10.
Thomas L. Zimmerman (50) President, H&R Block Tax Services, Inc., since June 1996;
Executive Vice President, Field Operations, H&R Block Tax
Services, Inc. from May 1994 through May 1996.
Cheryl L. Givens (34) Vice President and Corporate Controller since July 1998;
Assistant Vice President and Assistant Controller from
October 1996 until July 1998; Assistant Vice President and
Corporate Controller from June 1996 until October 1996;
Corporate Accounting Manager from May 1994 until May 1996.
James H. Ingraham (46) Vice President, General Counsel since July 1999; Secretary
since June 1990; Vice President, Legal from October 1996
through June 1999; Assistant Vice President, Corporate Legal
and Human Resources from December 1995 until October 1996;
Assistant Vice President, Legal from May 1994 until December
1995.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Linda M. McDougall (47) Vice President, Communications since July 1999; Assistant
Vice President, Communications from November 1995 through
June 1999. See Note 11.
Brian N. Schell (34) Vice President and Treasurer since December 1997; Director
of Investor Relations since November 1996; Assistant
Treasurer from November 1996 until December 1997; Director
of Corporate Development from May 1995 until December 1997.
Robert A. Weinberger (56) Vice President, Government Relations, since March 1996.
Bret G. Wilson (41) Vice President, Corporate Planning and Development since
September 1999; Vice President, Corporate Development, from
December 1997 until September 1999; Vice President, Mortgage
Operations, Block Financial Corporation, since March 1997;
Vice President, Corporate Counsel and Secretary, Block
Financial Corporation, from June 1994 until March 1997.
Robert D. Wilson (41) Vice President, Business Development since July 1999; Vice
President, Tax Services Marketing, H&R Block Tax Services,
Inc., from September 1998 through
June 1999; Assistant Vice President, Marketing, H&R Block Tax
Services, Inc., from February 1996 until September 1998.
See Note 12.
</TABLE>
Note 1: Mr. Bloch will retire as Chairman of the Board of Directors
and as a director in September 2000.
Note 2: The Board of Directors of the Company has approved a
succession plan pursuant to which Mr. Salizzoni will serve as
Chairman of the Board and Chief Executive Officer of the
Company from September 13, 2000 through December 31, 2000, and
as Chairman of the Board thereafter. Mr. Salizzoni was
President and Chief Operating Officer of USAir Group, Inc. and
USAir, Inc. from March 1994 until April 1996. He served as
Chairman of the Board of CompuServe Corporation from October
1996 until January 1998.
Note 3: The Board of Directors of the Company has approved a
succession plan pursuant to which Mr. Ernst will become
President and Chief Executive Officer of the Company effective
January 1, 2001. Mr. Ernst served as Senior Vice President,
Third Party and International Distribution for American
Express Company, Minneapolis, Minnesota, from July 1997 until
June 1998; Senior Vice President, WorkPlace Financial
Services,
29
<PAGE> 30
American Express Company, from November 1995 until July 1997
and Vice President, Retail Services Group, American Express
Company, from December 1993 until November 1995.
Note 4: Mr. Byers was employed by Foote, Cone and Belding, an
advertising agency in San Francisco, California, from June
1987 until May 1999, most recently serving as the Senior Vice
President and Director of Business Development.
Note 5: Mr. Cotroneo served as the Chief Financial Officer of
MasterCard International, Inc., New York, New York from 1996
to February 2000 and as Regional Financial Officer, MasterCard
International, Inc., Singapore, from 1992 to 1996.
Note 6: Mr. Goldenberg was employed by The Kiplinger Washington
Editors, Inc., in Washington, DC from 1985 through July 1995,
most recently serving as Director, New Product Development.
Note 7: Mr. Rose served as Vice President, Chief Information Officer,
Integon Insurance Corporation, Winston-Salem, North Carolina,
from May 1996 until June 1997, and as Director of Information
Systems, National Association of Insurance Commissioners,
Kansas City, Missouri, from November 1987 until May 1996.
Note 8: Block Financial Corporation acquired Option One Mortgage
Corporation on June 17, 1997, at which time Mr. Dubrish became
an employee of a subsidiary of the Company.
Note 9: Mr. Kasper was Executive Vice President, National Sales
Manager, Norwest Investment Services, Inc., Minneapolis,
Minnesota from 1998 to February 2000; and Senior Vice
President, Regional Sales Manager, Norwest Investment
Services, Inc., from 1989 to 1998.
Note 10: Mr. Yabuki served as President and Chief Executive Officer of
American Express Tax & Business Services, Inc., New York, New
York, from 1998 to September 1999; Vice President, Mergers and
Acquisitions, American Express, Minneapolis, Minnesota, from
1996 to 1998; and Regional Vice President, American Express
Tax & Business Services, Inc., Los Angeles, California and
Minneapolis, Minnesota, from 1991 to 1996.
Note 11: Ms. McDougall was the District Manager, Creative Services for
AT&T Corp., Basking Ridge, New Jersey, from September 1993
until October 1995.
Note 12: Mr. Robert Wilson was Senior Product Manager for
Thompson*Minwax from September 1993 until February 1996.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in part in the
Company's annual report to security holders for the fiscal year ended April 30,
2000, under the heading "Common Stock Data," and is hereby incorporated by
reference. The Company's Common Stock is traded principally on the New York
Stock Exchange. The Company's Common Stock is also traded on the Pacific Stock
Exchange. On June 12, 2000, there were 33,305 shareholders of record of the
Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2000,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2000,
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
- interest rates on debt, cash equivalents, available-for-sale
securities, trading securities, mortgage loan origination
commitments, investments in mortgage loans for resale or
securitization and residual interests in securitizations; and
- foreign exchange rates, generating translation gains and
losses
Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have market risk sensitive instruments
entered into for "non-trading" and "trading" purposes. The Company's
broker-dealers hold marketable securities for trading purposes.
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<PAGE> 32
NON-TRADING
INTEREST RATES
The debt portfolio, rate-sensitive assets and related interest rate
risk are managed centrally by the office of the Chief Financial Officer of the
Company by taking into consideration investment opportunities and risks, tax
consequences and the financing strategies approved by the Finance Committee of
the Company's Board of Directors.
The available-for-sale investment portfolios of the Company and its
subsidiaries at April 30, 2000, primarily consisted of cash equivalents and
available-for-sale securities. Almost 31% of the Company's total cash and
available-for-sale securities are classified as long-term, compared to 41% in
1999. A majority of the long-term portfolio is made up of residual interests in
securitizations, 70% in 2000 and 54% in 1999. Assuming all cash equivalents and
available-for-sale securities (excluding residual interests) held at year-end
were variable rate investments, a 50 basis point change in interest (an
approximate 10% decline in interest rates) would negatively impact consolidated
pretax earnings by approximately $1.9 million, or about one-half percent. In
fiscal 1999, a 50 basis point change in interest (an approximate 10% decline in
interest rates) would have negatively impacted 1999 consolidated pretax earnings
by approximately $2 million, or about one-half percent.
The residual interests in securitizations are exposed to interest rate
risk related to the sensitivity of the residual interests to prepayments. A
mortgage borrower has the option to prepay a mortgage loan at any time. This
risk tends to increase when interest rates fall due to the benefits of
refinancing. Since the future prepayment behavior of the mortgages is uncertain,
the interest rate sensitivity of these residual interests can not be exactly
determined. Management has developed a number of assumptions for use in its cash
flow model to determine market value. Depending on the product or behavior in
question, each assumption will reflect some combination of market data, research
analysis and business judgment.
Under its risk management strategy, the Company may hedge its interest
rate risk related to its fixed-rate mortgage portfolio and debt by selling short
FNMA mortgage-backed securities and utilizing forward commitments. It is the
Company's policy to utilize these financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. They are purchased from certain broker-dealer counterparties. If the
counterparties do not fulfill their obligations, the Company may be exposed to
risk. As the risk of default depends on the creditworthiness of the
counterparty, the Company's policy requires that such transactions may be
entered into only with counterparties that are rated A or better (or an
equivalent rating) by recognized rating agencies. As a matter of practice, the
Company has limited the counterparties to major banks and financial institutions
meeting such standards. All interest rate contracts conform to the standard
International Swaps and Derivatives Association, Inc. documentation.
The Company's variable rate mortgage portfolios are generally
short-term in nature, as it is the Company's policy to sell or securitize these
loans quarterly, and such portfolios are carried at the lower of cost or market.
Because the Company funds these short-term assets with short-term, variable rate
debt, the Company is not significantly exposed to interest rate risk in this
area. As a result, any change in interest rates would not materially impact the
Company's consolidated pretax earnings.
32
<PAGE> 33
The Company's long-term debt consists primarily of fixed-rate Senior
notes; therefore, a change in interest rates would have no impact on
consolidated pretax earnings.
The Company's broker-dealers hold interest bearing receivables from
customers, brokers, dealers and clearing organizations which consist primarily
of amounts due on margin and cash transactions and are generally short-term in
nature. Because the Company funds these short-term assets with short-term
variable rate liabilities from customers, brokers and dealers, the Company is
not significantly exposed to interest rate risk in this area. As a result, any
change in interest rate would not materially impact the Company's consolidated
pretax earnings.
FOREIGN EXCHANGE RATES
The operation of the Company's subsidiaries in international markets
provides exposure to volatile movements in currency exchange rates. The
currencies involved are the Canadian dollar, the Australian dollar and the
British pound. International tax operations constituted approximately 1.2% of
the Company's fiscal year 2000 consolidated pretax earnings, compared to 1% in
fiscal 1999. As currency exchange rates change, translation of the financial
results of International tax operations into U.S. dollars does not presently
materially affect, and has not historically materially affected, the
consolidated financial results of the Company, although such changes do affect
the year-to-year comparability of the operating results of the international
businesses.
The Company does not hedge translation risks because (1) cash flows
from international operations are generally reinvested locally and (2) the
minimal exposure to material volatility to reported earnings does not justify
the cost.
The Company estimates that a 10% change in foreign exchange rates by
itself would impact reported pretax earnings from continuing operations by
approximately $425,000. Such impact represents approximately 9% of the pretax
earnings of International tax operations for fiscal year 2000, and approximately
.10% of the Company's pretax earnings for such year. In fiscal 1999, a 10%
change in interest rates would have impacted fiscal 1999 pretax earnings by
approximately $200,000 or .05 percent.
TRADING
The Company's trading portfolio is effected by changes in market
rates/prices. The risk is the loss of earnings arising from adverse changes in
the value of the trading portfolio. The Company's broker-dealers hold the
trading portfolio at quoted market prices and such represents .8% of the
Company's total assets. The market value of the Company's trading portfolio at
April 30, 2000 was approximately $45.4 million. The impact of a 10% change in
the market value of these investments would be approximately $4.5 million, or
about 1.1% of consolidated pretax earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a) 1 is
contained in the Company's annual report to security holders for the fiscal year
ended April 30, 2000, and is hereby incorporated by reference.
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<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the registrant's accountants during the two
most recent fiscal years or any subsequent interim time period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item with respect to directors of
the Company and with respect to compliance with Section 16(a) of the Securities
Exchange Act is included under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance," respectively, in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, and in Item 4a "Executive Officers of the Registrant"
in this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the section titled "Election of Directors," and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of
H&R Block, Inc., and subsidiaries are incorporated by
reference from the Company's annual report to
34
<PAGE> 35
security holders for the fiscal year ended April 30,
2000:
Page
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Stockholders' Equity 24
Notes to Consolidated Financial Statements 25
Quarterly Financial Data 39
Report of Independent Accountants 42
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule for
PricewaterhouseCoopers LLP, Certified Public Accountants
Independent Auditors' Consent and Report on Schedule for Deloitte &
Touche LLP, Certified Public Accountants
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the information
is not material or the information is set forth in the financial
statements or notes thereto.
3. Exhibits
3.1 Restated Articles of Incorporation of H&R Block, Inc., as amended,
filed as Exhibit 3(b) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1996, are incorporated herein by
reference.
3.2 Amended and Restated Bylaws of H&R Block, Inc., as amended, filed as
Exhibit 3.1 to the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1999, are incorporated herein by reference.
4.1 Indenture dated as of October 20, 1997, among H&R Block, Inc., Block
Financial Corporation and Bankers Trust Company, as Trustee, filed as
Exhibit 4(a) to the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated herein by reference.
4.2 First Supplemental Indenture, dated as of April 18, 2000, among H&R
Block, Inc., Block Financial Corporation, Bankers Trust Company and the
Bank of New York, filed as Exhibit 4(a) to the Company's current report
on Form 8-K dated April 13, 2000, is incorporated herein by reference.
4.3 Form of 6 3/4% Senior Note due 2004 of Block Financial Corporation,
filed on October 23, 1997 as Exhibit 2.2 to the Company's current
report on Form 8-K, is incorporated herein by reference.
35
<PAGE> 36
4.4 Form of 8.50% Senior Note due 2007 of Block Financial Corporation,
filed as Exhibit 4(b) to the Company's current report on Form 8-K dated
April 13, 2000, is incorporated herein by reference.
4.5 Copy of Rights Agreement dated March 25, 1998 between H&R Block, Inc.
and ChaseMellon Shareholder Services, L.L.C., filed on July 22, 1998 as
Exhibit 1 to the Company's Registration Statement on Form 8-A, is
incorporated herein by reference.
4.6 Form of Certificate of Designation, Preferences and Rights of
Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(e)
to the Company's annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
4.7 Form of Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(j) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1998 is incorporated by reference.
4.8 Form of Certificate of Designation, Preferences and Rights of Delayed
Convertible Preferred Stock of H&R Block, Inc., filed as Exhibit 4(f)
to the Company's annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
10.1 The Company's 1993 Long-Term Executive Compensation Plan, as amended
through September 8, 1999, filed as Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the quarter ended October 31, 1999,
is incorporated herein by reference.
10.2 The H&R Block Deferred Compensation Plan for Directors, as amended
through March 9, 1994.
10.3 Amendment No. 2 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1997, is incorporated herein by
reference.
10.4 Amendment No. 3 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated herein by
reference.
10.5 Amendment No. 4 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(d) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated herein by
reference.
10.6 Amendment No. 5 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1998, is incorporated herein by
reference.
36
<PAGE> 37
10.7 Amendment No. 6 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10.2 to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 2000, is incorporated by reference.
10.8 The H&R Block Deferred Compensation Plan for Executives, as Amended and
Restated, filed as Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the quarter ended January 31, 1999, is incorporated
herein by reference.
10.9 Amendment No. 1 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.2.to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 1999, is incorporated herein by reference.
10.10 Amendment No. 2 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1999, is incorporated herein by reference.
10.11 Amendment No. 3 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.5 to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1999, is incorporated herein by reference.
10.12 Amendment No. 4 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 2000, is incorporated herein by reference.
10.13 The H&R Block Short-Term Incentive Plan, filed as Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1996, is incorporated herein by reference.
10.14 The Company's 1989 Stock Option Plan for Outside Directors, as amended,
filed as Exhibit 10.1 to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1998, is incorporated herein by
reference.
10.15 The H&R Block Stock Plan for Non-Employee Directors, filed as Exhibit
10(e) to the Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1997, is incorporated herein by reference.
10.16 Employment Agreement dated October 11, 1996, between the Company and
Frank L. Salizzoni, filed as Exhibit 10(b) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10.17 Employment Agreement dated July 16, 1998, between the Company and Mark
A. Ernst, filed as Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1998, is incorporated herein
by reference.
37
<PAGE> 38
10.18 Employment Agreement dated January 20, 1998, between H&R Block Tax
Services, Inc, and Thomas L. Zimmerman, filed as Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 2000, is incorporated herein by reference.
10.19 Employment Agreement dated September 7, 1999, between HRB Management,
Inc. and Jeffery Yabuki, filed as Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarter ended January 31, 2000,
is incorporated herein by reference.
10.20 Employment Agreement dated January 26, 2000, between HRB Management,
Inc. and Frank J. Cotroneo, filed as Exhibit 10.5 to the Company's
quarterly report on Form 10-Q for the quarter ended January 31, 2000,
is incorporated herein by reference.
10.21 Employment Agreement dated January 31, 2000, between Block Financial
Corporation and David J. Kasper.
10.22 Employment Agreement dated May 15, 1998, between Terrence E. Putney and
DMJK Business Services, Inc.
10.23 Senior Managing Director Employment Agreement dated August 2, 1999,
between RSM McGladrey, Inc. and Thomas G. Rotherham.
10.24 Agreement dated February 21, 2000, between HRB Management, Inc. and
Ozzie Wenich.
10.25 Asset Purchase Agreement dated June 28, 1999 by and among H&R Block,
Inc., MGP Business Services, Inc., HRB Business Services, Inc.,
McGladrey & Pullen, LLP, MP Active Partner Trust, Clifford Newman,
Trustee, and MP Retired Partner Trust, Clifford Newman, Trustee, filed
as Exhibit 10.1 to the Company's Form 8-K on July 8, 1999, is
incorporated herein by reference.
10.26 Stock Purchase Agreement dated August 31, 1999 among Block Financial
Corporation, H&R Block, Inc., OLDE Financial Corporation, Financial
Marketing Services, Inc. and the Shareholders of OLDE Financial
Corporation and Financial Marketing Services, Inc., filed as Exhibit
10.1 to the Company's Form 8-K filed September 10, 1999, is
incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges for the five years
ended April 30, 2000.
13 That portion of the annual report to security holders for the fiscal
year ended April 30, 2000 which is expressly incorporated by reference
in this filing. Portions of such annual report to security holders not
expressly incorporated by this reference in this filing are not deemed
"filed" with the Commission.
38
<PAGE> 39
16 Letter regarding change in Certifying Accountants dated July
27, 1998 from Deloitte & Touche LLP addressed to the Securities
and Exchange Commission, filed on July 27, 1998 as Exhibit 16.1
to the Company's current report on Form 8-K, is incorporated
herein by reference. The statements contained in Item 4 of the
Company's Form 8-K dated July 27, 1998 to which Deloitte &
Touche LLP concurred in such letter are also contained in Item
9 of the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1998.
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants.
23.2 Consent of Deloitte & Touche LLP, Certified Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
(1) The Company filed a current report on Form 8-K/A on February
14, 2000 to file certain audited Financial Statements of OLDE
Financial Corporation and unaudited pro forma consolidated
financial statements of H&R Block, Inc., in connection with the
acquisition of OLDE Financial Corporation. Certain consents of
PricewaterhouseCoopers, LLP, Certified Public Accountants
Deloitte & Touch LLP, Certified Public Accountants; and Ernst &
Young LLP, Certified Public Accounts were included as Exhibit
23.1, and the press release dated December 1, 1999 announcing
the completion of the acquisition of OLDE Financial and
Financial Marketing Services, Inc. was included as Exhibit
99.1.
(2) The Company filed a current report on form 8-K on April 7,
2000, to file as exhibits certain consents of
PricewaterhouseCoopers, LLP, Certified Public Accountants;
Deloitte & Touche LLP, Certified Public Accountants; and Ernst
& Young, LLP, Certified Public Accountants. No financial
statements were filed as a part of the Form 8-K.
(3) The Company filed a current report on Form 8-K on April 17,
2000, to file as exhibits certain documents relating to 8.50%
Senior Notes Due 2007 to be issued by Block Financial
Corporation, an indirect, wholly-owned subsidiary of the
Company. No financial statements were filed as a part of the
Form 8-K.
Except for the Form 8-K/A filed on February 14, 2000, and the
Forms 8-K filed on April 7, 2000 and 17, 2000, the Company did
not file any reports on Form 8-K during the fourth quarter of
the year ended April 30, 2000.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
July 28, 2000 By /s/ Frank L. Salizzoni
-----------------------
Frank L. Salizzoni
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Frank L. Salizzoni Chief Executive Officer and
------------------------------------
Frank L. Salizzoni Director (principal executive officer)
/s/ G. Kenneth Baum Director
------------------------------------
G. Kenneth Baum
/s/Henry W. Bloch Director
------------------------------------
Henry W. Bloch
/s/ Robert E. Davis Director
------------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
------------------------------------
Donna R. Ecton
/s/ Mark A. Ernst Director
------------------------------------
Mark A. Ernst
/s/ Henry F. Frigon Director
------------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
------------------------------------
Roger W. Hale
/s/ Louis W. Smith Director
------------------------------------
Louis W. Smith
/s/ Morton I. Sosland Director
------------------------------------
Morton I. Sosland
</TABLE>
(Signed as to each on July 28, 2000)
40
<PAGE> 41
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Frank J. Cotroneo Senior Vice President and Chief Financial
---------------------------------
Frank J. Cotroneo Officer (principal financial officer)
/s/ Cheryl L. Givens Vice President and Corporate Controller
----------------------------------
Cheryl L. Givens (principal accounting officer)
</TABLE>
(Signed as to each on July 28, 2000)
41
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
H&R Block, Inc.
Our audits of the consolidated financial statements referred to in our report
dated June 20, 2000 appearing in the 2000 Annual Report to Shareholders of H&R
Block, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the information as of and for the years ended April 30, 2000 and April
30, 1999 presented in the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information as of and for the years
ended April 30, 2000 and 1999 set forth therein when read in conjunction with
the related consolidated financial statements. The information included in the
financial statement schedule as of and for the year ended April 30, 1998 was
audited by other independent accountants whose report dated June 16, 1998 and
July 12, 1999 (as to the effects of the discontinued credit card operations
described in the note to the consolidated financial statements on the sale of
subsidiaries) expressed an unqualified opinion on that information.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
June 20, 2000
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<PAGE> 43
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8; Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8; Registration
Statement No. 33-54989 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8; Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock issuable
under the Spry, Inc. 1995 Stock Option Plan) on Form S-8; Registration Statement
No. 333-62515 of H&R Block, Inc. and subsidiaries (relating to shares of Common
Stock issuable under the Third Stock Option Plan for Seasonal Employees) on Form
S-8; Registration Statement No. 333-42143 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the H&R Block Stock Plan for
Non-Employee Directors) on Form S-8; and Registration Statements Nos. 333-33655
and 333-33655-01 of Block Financial Corporation and H&R Block, Inc.,
respectively, (relating to debt securities of Block Financial Corporation) on
Form S-3 of our report dated June 16, 1998 (July 12, 1999 as to the effects of
the discontinued credit card operations described in the note on the sale of
subsidiaries), appearing in this Annual Report on Form 10-K of H&R Block, Inc.
and subsidiaries for the year ended April 30, 2000.
Our audit of the consolidated financial statements referred to in our
aforementioned report also included the 1998 financial statement schedule of
H&R Block, Inc., and subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit. In our opinion, such 1998
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 27, 2000
43
<PAGE> 44
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance Charged to Balance
Beginning Costs and Charged At End
Description Of Period Expenses To Other Deductions Of Period
-------------------------- ---------------- --------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts - deducted from
accounts receivable in
the balance sheet
2000 $61,872,000 $51,719,000 -- $63,230,000 $50,361,000
================ =============== ============= ================ ==================
1999 $45,314,000 $71,662,000 -- $55,104,000 $61,872,000
================ =============== ============= ================ ==================
1998 $30,144,000 $75,171,000 -- $60,001,000 $45,314,000
================ =============== ============= ================ ==================
</TABLE>
