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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment Number 1
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED
APRIL 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ____________.
COMMISSION FILE NUMBER 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 EXCHANGE ON WHICH REGISTERED
Common Stock, New York Stock Exchange
Without Par Value 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, 1996, was $3,425,760,718.
Number of shares of registrant's Common Stock, without par value,
outstanding on June 1, 1996: 103,419,705.
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DOCUMENTS INCORPORATED BY REFERENCE
A certain specified portion of the registrant's annual report to
security holders for the fiscal year ended April 30, 1996, is incorporated
herein by reference in response to Part II, Item 5, and certain specified
portions of the registrant's definitive proxy statement filed within 120 days
after April 30, 1996, are incorporated herein by reference in response to Part
III, Items 10 through 13, inclusive. A certain specified portion of the annual
report on Form 10-K/A of CompuServe Corporation for the fiscal year ended April
30, 1996, is incorporated herein by reference in response to Part I, Item 1,
and Part I, Item 2.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a diversified services 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 owner of (1) all of the shares of
H&R Block Tax Services, Inc., the Company's subsidiary involved in the business
of income tax return preparation, electronic filing of income tax returns and
the performance of other tax related services, (2) all of the shares of Block
Financial Corporation, a subsidiary that develops and provides technology-driven
financial services, and (3) approximately 80.1% of the shares of CompuServe
Corporation ("CompuServe"), a corporation that offers worldwide online and
Internet access services to consumers and worldwide network access, management
and applications, and Internet services to businesses.
Developments within H&R Block Tax Services, Inc. and Block Financial
Corporation during fiscal year 1996 are described in the section below entitled
"Description of Business." The descriptions of the business and properties of
CompuServe Corporation are contained in the annual report on Form 10-K/A of
CompuServe Corporation for the fiscal year ended April 30, 1996, in the section
entitled "Business and Properties," and such descriptions are incorporated
herein by reference. A copy of the Form 10-K/A of CompuServe Corporation will
be provided free of charge upon request sent to H&R Block, Inc., 4400 Main
Street, Kansas City, Missouri 64111, Attention: Investor Relations.
The reduction during fiscal year 1996 of H&R Block Group, Inc.'s
ownership of CompuServe stock from 100% to approximately 80.1% is the result of
CompuServe's initial public offering of its common stock in April 1996.
Pursuant to such offering, CompuServe sold 18.4 million shares of its common
stock to the public at $30.00 per share. The net proceeds of the initial public
offering received by CompuServe were $518,819,000. The initial public offering
was the initial phase of a complete separation of CompuServe Corporation from
the Company first announced in February 1996. In July 1996, the Company
indicated its intent to complete the separation by means of a pro rata
distribution of the remaining 74,200,000 shares of CompuServe Corporation stock
to shareholders of the Company on or about November 1, 1996, subject to certain
conditions, including shareholder approval of the distribution at the 1996
annual meeting of shareholders of the Company and the receipt of a favorable
ruling from the Internal Revenue Service ("IRS") as to the tax-free nature of
the transaction.
On August 28, 1996, the Company's Board of Directors announced its
decision not to present to shareholders at the September 1996 annual meeting of
shareholders the proposed pro rata distribution of the remaining CompuServe
shares. The decision was based, in part, on CompuServe's first quarter and
projected second quarter losses, market uncertainties related to the online
industry and the planned September introduction of new interfaces for
CompuServe's online services, CompuServe Information Service and WOW!.
During the year ended April 30, 1996, 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 otherwise than in the ordinary course
of business. See, however, the discussion above concerning the initial public
offering by CompuServe Corporation of 18.4 million shares of its common stock in
April 1996.
On May 1, 1995, the Company sold MECA Software, Inc. ("MECA"), a
Delaware corporation involved in developing, publishing and marketing personal
productivity software products, to Bank of America, N.T. & S.A., and
NationsBank, N.A. (Carolinas) for $35 million. The sale resulted in a pretax
gain of $12.4 million. MECA's primary product was Managing Your Money(R),
computer software designed to assist individuals in managing personal finances.
The sale was exclusive of the Company's rights to publish Kiplinger TaxCut(R)
and several other software products.
Thomas M. Bloch resigned as President, Chief Executive Officer and a
director of the Company, effective
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August 5, 1995, in order to pursue non-business alternatives. Richard
H. Brown succeeded Thomas Bloch and served as President, Chief Executive Officer
and a director of the Company from August 5, 1995, until his resignation from
such positions effective June 19, 1996, in order to become chief executive of
Cable & Wireless Group plc in London, England. On June 19, 1996, Frank L.
Salizzoni, a director of the Company, was elected its President and Chief
Executive Officer and will serve as such on an interim basis until a successor
for Mr. Brown is elected. A search committee consisting of three members of the
Board of Directors was appointed to assist in the process of selecting a new
Chief Executive Officer of the Company.
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 Item 8 of Part II of this report and is
incorporated herein by reference.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned
subsidiaries, has approximately 1,300 regular full-time employees. The highest
number of persons employed by the Company during the fiscal year ended April 30,
1996, including seasonal employees, was approximately 79,000. As of April 30,
1996, CompuServe had approximately 3,650 full-time employees.
DESCRIPTION OF BUSINESS
DIVERSIFIED SERVICES
The Company provides to the public diversified services that include
income tax return preparation, electronic filing and other services related to
income tax return preparation, technology-driven financial services, online and
Internet access services, and network access, management and applications. The
description of the business of CompuServe Corporation is contained in the annual
report on Form 10-K/A of CompuServe Corporation for the fiscal year ended April
30, 1996, in the section entitled "Business and Properties," and such
description is incorporated herein by reference.
TAX SERVICES
Generally. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public through a system of offices operated by the Company or by
others to whom the Company has granted franchises. The Company and its
franchisees provide income tax return preparation services, electronic filing
services and other services relating to income tax return preparation in many
parts of the world. For U.S. returns, H&R Block offers a refund anticipation
loan 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. As discussed below, H&R Block introduced new products and
services to its tax customers during fiscal year 1996.
Following the end of fiscal year 1996, the Company announced that its
tax operations will be divided structurally into three areas, each targeting
specific markets and focusing on new products and services and areas for
expansion. H&R Block Tax Services, Inc., will focus on tax business operations
in the United States. H&R Block Premium, a division of Tax Services, will
compete for those clients who typically employ accounting firms to prepare their
tax returns. H&R Block International will focus on strengthening current
foreign markets, such as Canada and Australia, and identify and develop new
ones.
References in this section to "Tax Services" include H&R Block Tax
Services, Inc., and its subsidiaries involved in the income tax return
preparation business (including those foreign subsidiaries now operating as a
part of H&R Block International). References in this section to "H&R Block"
include both Tax Services and its franchisees.
Taxpayers Served. H&R Block served approximately 17,415,000 taxpayers
worldwide during fiscal year 1996, an increase from the 17,060,000 taxpayers
served in fiscal year 1995. The number of taxpayers served by H&R Block in the
United States alone was approximately 14,800,000. "Taxpayers served" includes
taxpayers for whom H&R Block prepared income tax returns as well as taxpayers
for whom Block provided only electronic filing services.
Tax Return Preparation. During the 1996 income tax filing season
(January 2 through April 30), H&R Block offices prepared approximately
13,360,000 individual United States income tax returns, compared to the
preparation of 12,918,000 such returns in fiscal year 1995. These U.S. returns
constituted about 12% of an IRS estimate of total U.S. individual income tax
returns filed during fiscal year 1996. The following table shows the
approximate number of U.S. income tax returns prepared at H&R Block offices
during the last five tax filing seasons:
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Year Ended April 30
1996 1995 1994 1993 1992
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(In thousands)
Returns Prepared 12,973 12,968 13,036 12,918 13,360
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 customer's tax return is prepared in his or her
presence, in most instances in less than one hour, on the basis of information
furnished by the customer. In all company-owned offices and most franchised
offices, tax returns are prepared with the assistance of a computer. After the
customer's return has been initially prepared, he or she is advised of the
amount of his or her tax due or refund. The return, however, is retained and
reviewed for accuracy. After completion of this review and after copies of the
return have been made, the return is presented to the customer for signature and
filing. These post-preparation procedures must be modified somewhat for
customers who desire to have their returns electronically filed (see "Electronic
Filing," below).
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
under "New Products and Services," below), it guarantees payment of the interest
and penalties.
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 and Canada. Appealing to taxpayers with more complicated returns, H&R
Block Premium, formerly known as Executive Tax Service, stresses the convenience
of appointments, year-round tax service from the same preparer and private
office interviews. The number of H&R Block Premium offices increased from 528
in fiscal year 1995 to 576 in 1996. In fiscal 1996, the number of H&R Block
Premium clients increased to approximately 643,200, compared to approximately
552,800 in 1995. The Company plans to continue to expand the H&R Block Premium
segment of its tax return preparation business.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 1996 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Beneficial National Bank in
amounts based upon the customer's 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 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.
Tax Services and its franchisees filed approximately 6,298,000 U.S. tax
returns electronically in 1996, compared to 5,941,000 in fiscal 1995 and
7,538,000 in fiscal 1994. Approximately 2,361,000 refund anticipation loans
were processed in 1996 by H&R Block, compared to 2,325,000 in fiscal 1995 and
5,554,000 in 1994.
In 1996, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 33 states (compared to 28
states in fiscal 1995) and plans to continue to expand this program as more
states make this filing alternative available to their taxpayers.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide Tax Services with a source of trained income tax
return preparers. During the 1996 fiscal year, 123,159 students enrolled in H&R
Block's basic and advanced income tax courses, compared to 118,316 students
during fiscal year 1995.
New Products and Services. In fiscal year 1996, H&R Block introduced
five new products and services. Under the "Peace of Mind" Program, customers
are essentially offered an extended warranty with respect to their tax returns.
In addition to the Company's standard guarantee to pay penalty and interest
attributable to errors made by an H&R Block preparer, under the Peace of Mind
Program, the Company agrees to pay any additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from such errors,
from tax law changes or from revised interpretations of Treasury Regulations.
The Company also offered "Block at Home," an in-home tax preparation service for
those customers who prefer both convenience and privacy, and the Last Will and
Testament Kit, a simple, self-service instrument. "BlockCheck" was a new
service aimed at self-preparers desiring
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a second opinion about their tax returns. Finally, "Block Value Club,"
a consumer-friendly packaging of new services, was offered during fiscal year
1996. For a single, low fee, Value Club members received a discount on tax
return preparation fees, personal copy and faxing services, a CompuServe trial
membership, a discount on the H&R Block income tax return preparation course and
travel discounts.
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 1996, H&R Block also operated 910 offices in department
stores, including 765 offices in Sears, Roebuck & Co. stores operated as "Sears
Income Tax Service by H&R Block." During the 1996 tax season, the Sears'
facilities constituted approximately 7.9% of the tax office locations of H&R
Block. Tax Services is a party to a license agreement with Sears under which
Tax Services will continue to operate in Sears locations throughout the United
States. Such license agreement expires on December 31, 2004. Tax Services
believes its relations with Sears to be excellent and that both parties to the
license arrangement view the operations thereunder to date as satisfactory.
On April 15, 1996, there were 9,678 H&R Block offices in operation
principally in all 50 states, the District of Columbia, Canada, Australia and
Europe, compared to 9,703 offices in operation on April 15, 1995. Of the 9,678
offices, 4,738 were owned and operated by Tax Services and 4,940 were owned and
operated by independent franchisees. Of such franchised offices, 3,341 were
owned and operated by "satellite" franchisees of Tax Services (described below),
925 were owned and operated by "major" franchisees (described below) and 674
were owned and operated by satellite franchisees of major franchisees. In the
United States alone, H&R Block operated 8,308 offices.
Two types of franchises have principally been granted by the Company and
its subsidiaries. "Major" franchisees entered into agreements with the Company
(primarily in the Company's early years) covering larger cities and counties and
providing for the payment of franchise royalties based upon a percentage of
gross revenues of their offices. Under the agreements, the Company granted to
each franchisee the right to the use of the name "H&R Block" and provided a
Policy and Procedure Manual and other supervisory services. Tax Services offers
to sell furniture, signs, advertising materials, office equipment and supplies
to major franchisees. Each major franchisee selects and trains the employees
for his or her office or offices. Since March 1993, HRB Royalty, Inc., a
wholly-owned subsidiary of Tax Services, has served as the franchisor under the
major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services
signs, designated equipment, specialized forms, local advertising, initial
training, and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the
satellite franchises of Tax Services are located in cities with populations of
15,000 or less. Some major franchisees also grant satellite franchises in their
respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and competing tax return preparation businesses and it will continue
to do so if future conditions warrant such acquisitions and satisfactory terms
can be negotiated.
In December 1995, Tax Services purchased the assets of Nationwide Income
Tax Service Company, headquartered in Dearborn, Michigan. Nationwide operated
eight company-owned offices and franchised 30 other locations, primarily in the
Detroit metropolitan area.
After the conclusion of fiscal year 1996, the Company acquired Bay
Colony, Ltd., a major franchise serving central and eastern Virginia and the
northeast corner of North Carolina through 145 offices and 33 satellite offices.
International Operations. H&R Block prepares U.S. income tax returns in
other countries, Canadian tax returns in Canada and Australian tax returns in
Australia. The returns prepared at offices in countries outside of the United
States constituted 16.4% of the total returns prepared by H&R Block in the last
fiscal year.
H&R Block also offered the electronic filing of U.S. income tax returns
at franchised offices located in Europe and the electronic filing of Australian
and Canadian income tax returns at H&R Block offices in Australia and Canada,
respectively.
Canadian Operations. H&R Block Canada, Inc., a Tax Services'
subsidiary, and its franchisees prepared approx-
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imately 2,223,000 Canadian returns filed with Revenue Canada during the
1996 income tax filing season, compared with 2,141,000 Canadian returns
prepared in the previous year. The number of offices operated by H&R Block in
Canada decreased from 1,054 in fiscal year 1995 to 1,016 in fiscal year 1996.
The Company and its franchisees offer a refund discount ("Cash Back")
program to their customers in Canada. The procedures which H&R Block must
follow in conducting the program are specified by Canadian law. In accordance
with current Canadian regulations, if a customer's tax return indicates that
such customer is entitled to a tax refund, a check is issued by H&R Block to
the customer for an amount which is equal to the sum of (1) 85% of that portion
of the anticipated refund which is less than or equal to $300 and (2) 95% of
that portion of the refund in excess of $300. The customer assigns to H&R
Block the full amount of the tax refund to be issued by Revenue Canada. The
refund check is then sent by Revenue Canada directly to H&R Block and deposited
by H&R Block in its bank account. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the fee for tax
refund discounting. This program is financed by short-term borrowing. The
number of returns discounted under the Cash Back program increased to
approximately 681,000 in fiscal year 1996 from 629,000 in fiscal year 1995.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's subsidiary in Australia, and by franchisees in
Australia, increased to approximately 389,000 in fiscal year 1996 from 362,000
in fiscal year 1995. The number of offices operated by H&R Block in fiscal
year 1996 was 297, compared to 293 offices operated in fiscal 1995. The tax
season in Australia begins in July and ends in October.
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 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.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware
corporation and a wholly-owned subsidiary of Tax Services, claims ownership of
the following service marks and trademark registered on the principal register
of the United States Patent and Trademark Office:
H&R Block in Two Distinct Designs
The Income Tax People
H&R Block Income Tax and Design
Income Tax Saver
Executive (when used in connection with the
preparation of income tax returns for others)
Rapid Refund H&R Block and Design
Accufile
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
Nation's Largest Tax Service
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.
Competitive Conditions. The tax return preparation and electronic
filing business is highly competitive. Tax Services considers its primary
source of tax return preparation competition to be the individual who prepares
his own tax return. In addition, there are a substantial number of tax return
preparation firms. Many of these 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
1996, it is the largest provider of electronic filing services in the United
States.
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FINANCIAL SERVICES
Generally. Block Financial Corporation ("BFC") is involved in the
following businesses:
(1) financial services delivered by technology and financial service
delivery technology;
(2) financial services associated with Tax Services and its typical
customer; and
(3) software.
BFC developed the CONDUCTOR(R) service, a technology that delivers
financial services online through existing commercial online services, the
Internet or directly through leased networks. CONDUCTOR provides a national
online electronic credit card statement that provides the cardholder with access
to transaction records and credit availability and the ability to download
transactions from the Internet into a personal financial software program. A
similar service that allows cardholders access online is offered on CompuServe's
information service. Through alliances formed by BFC with various financial
services providers, CONDUCTOR subscribers will use the service for electronic
bill payment and discounted brokerage services, and to review other financial
account statements. Financial institutions will use the system to communicate
directly with their customers.
In excess of 113,400 CompuServe Visa credit cards were issued by the end
of fiscal year 1996, compared to 88,600 accounts at the end of fiscal 1995. Such
cards are issued under a co-branding agreement between BFC and Columbus Bank and
Trust Company, Columbus, Georgia. The portfolio for such card increased from
approximately $107 million at the end of fiscal year 1995 to more than $162
million by the end of fiscal year 1996. BFC introduced the WebCard(SM) Visa in
January 1996, focusing its marketing efforts toward Internet/World Wide Web
users. The number of WebCard accounts at year end was approximately 6,000.
During fiscal year 1996, BFC sold approximately 19,000 H&R Block branded bank
card accounts with $17 million in outstanding balances.
BFC has developed a nonconforming mortgage origination and funding
operation in which fixed and adjustable rate mortgages, including purchase money
first mortgages, refinance first mortgages and second mortgages are offered to
the public. Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies. The loans are processed and serviced by
third-party service providers. At present, BFC offers mortgages through brokers
and through a few H&R Block franchisees. BFC plans to expand this business,
including offering these products through Tax Service's network of company-owned
offices.
BFC offers to franchisees of Tax Services lines of credit with
reasonable interest rates under a program designed to better enable the
franchisees to refinance existing business debt, expand or renovate offices or
meet off-season cash flow needs. A franchise equity loan is a revolving line of
credit secured by the H&R Block franchise and the underlying business.
BFC's software business develops and markets the Kiplinger TaxCut(R) tax
preparation software package, as well as markets the Kiplinger Home Legal
Advisor(SM) and Kiplinger Small Business Attorney(SM) software products. In May
1995, BFC sold MECA Software, Inc., the publisher of the Managing Your Money(R)
personal finance software.
Seasonality of Business. BFC's income tax return preparation software
business is seasonal, with the substantial portion of its revenues from this
business generated during the tax season.
Service Marks and Trademarks. BFC claims ownership of the following
service mark and trademark registered on the principal register of the United
States Patent and Trademark Office:
CONDUCTOR
TaxCut
In addition, BFC claims ownership of the following unregistered service marks:
B and Design Small Business Attorney
Block Financial Web
Block Financial and Design WebAccount
CONDUCTOR and Design WebBank
CONDUCTOR Card Review WebBroker
CONDUCTOR.COM WebBuyer
DittoCard WebCard
FINANCIAL FINDER WebCheck
FINANCIAL CONDUCTOR WebChecking
Home Legal Advisor WebPay
NetGuard WebQuote
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Competitive Conditions. The financial services, online financial
services delivery technology and software 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. In the other businesses
in which BFC competes, no single supplier can be considered to occupy a dominant
position.
ITEM 2. PROPERTIES.
The executive offices of both the Company and Tax Services are located
at 4400 Main Street, Kansas City, Missouri, in a multi-level building owned by
Tax Services. The building was constructed in 1963, expanded in 1965, 1973 and
1981, and again expanded with the completion of a four-story addition during
fiscal year 1996. Most other offices of Tax Services (except those in
department stores) are operated in premises held under short-term leases
providing fixed monthly rentals, usually with renewal options.
BFC's executive offices are located in leased offices at 4435 Main
Street, Kansas City, Missouri.
The description of the properties of CompuServe is contained in the
annual report on Form 10-K/A of CompuServe Corporation for the fiscal year ended
April 30, 1996, in the section entitled "Business and Properties," and such
description is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
In June 1996, a purported shareholder class action complaint was filed
against CompuServe and the Company in the Court of Common Pleas, Franklin
County, Ohio, in a case entitled Greenfield v. CompuServe Corporation, et al. A
second purported shareholder class action suit was filed in July 1996 against
CompuServe and the Company in the United States District Court for the Southern
District of Ohio in a case entitled Romine v. CompuServe Corporation, et al. A
third purported shareholder class action suit was filed in August 1996 against
CompuServe, the Company and the lead underwriters in CompuServe's initial public
offering of its common stock in April 1996 (the "IPO") in the United States
District Court for the District of Minnesota in a case entitled Acker v.
CompuServe Corporation, et al. The complaints in these three cases also name
certain officers and directors of CompuServe at the time of the IPO as
additional defendants. Each suit alleges 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 the IPO. The Greenfield
suit also alleges similar violations of the Ohio Securities Code and common law
of negligent misrepresentation. Relief sought is unspecified, but includes
pleas for rescission and damages. In August 1996, an action for discovery was
filed solely against CompuServe on behalf of a shareholder in the Court of
Common Pleas, Franklin County, Ohio, in a matter entitled Schnipper v.
CompuServe Corporation, seeking factual support for a possible fourth claim
relating to IPO disclosures. The defendants intend to vigorously defend these
suits.
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, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
Name and age Office(s)
Henry W. Bloch (74) Chairman of the Board since August 1992;
Chairman of the Board and Chief Executive Officer
from August 1989 through July 1992; Member of the
Board of Directors since 1955.
Frank L. Salizzoni (58)(1) President and Chief Executive Officer since June
1996; Member of the Board of Directors since 1988.
See Note 1.
George T. Robson (49) Senior Vice President and Chief Financial Officer
since January 1996; Treasurer since June 1, 1996;
See Note 2.
William P. Anderson (47) President of Block Financial Corporation since May
1992; Senior Vice President and Chief Financial
Officer from September 1994 until September 1995;
Vice President,
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Corporate Development and Chief Financial Officer
from August 1992 until September 1994; Vice
President, Corporate Development from December
1991 until August 1992; See Note 3.
Ozzie Wenich (53) President, H&R Block International, since June 1,
1996; Vice President, Finance and Treasurer from
October 1994 through May 1996; Vice President,
Corporate Controller and Treasurer from March 1994
until October 1994; Vice President and Corporate
Controller from September 1985 until March 1994.
Thomas L. Zimmerman (46) President, H&R Block Tax Services, Inc., since
June 1, 1996; Executive Vice President, Field
Operations, H&R Block Tax Services, Inc. from May
1994 through May 1996; Senior Vice President,
Central Tax Services, H&R Block Tax Services, Inc.,
from April 1993 through April 1994; Vice President,
Director of Central Tax Operations, H&R Block,
Inc., from May 1992 through March 1993; Regional
Director, H&R Block, Inc., from 1979 through April
1992.
Robert A. Weinberger (52) Vice President, Government Relations, since March
18, 1996. See Note 4.
Cheryl L. Givens (30) Assistant Vice President and Corporate Controller
since June 1, 1996; Corporate Accounting Manager
from May 1994 through May 1996; Special Projects
Accountant from March 1993 through April 1994.
See Note 5.
Note 1: The Board of Directors of the Company, at its meeting on June
19, 1996, elected Frank L. Salizzoni as President and Chief Executive
Officer of the Company, effective immediately. Mr. Salizzoni succeeded
Richard H. Brown, who resigned as President, Chief Executive Officer and
a director of the corporation upon acceptance of such resignation by the
Board of Directors on June 19, 1996.
Mr. Salizzoni was President and Chief Operating Officer of USAir
Group, Inc. and USAir, Inc. from March 1994 to April 1996 and Executive
Vice President - Finance, USAir, Inc. from 1990 until March 1994.
Mr. Brown, age 49, served as President and Chief Executive
Officer of the Company and as a member of its Board of Directors from
August 1995 until June 19, 1996. He served as Vice Chairman of
Ameritech Corporation from 1993 until August 1995 and as President and
Chief Executive Officer of Illinois Bell Telephone Co., a subsidiary of
Ameritech Corporation, from 1990 until 1993.
Note 2: Mr. Robson was Senior Vice President of Unisys Corporation from April
1991 until January 1996 and Chief Financial Officer of such corporation
from 1990 until January 1996.
Note 3: Mr. Anderson was a partner in KPMG Peat Marwick, accounting firm, from
1984 until December 1991, in Atlanta, Georgia, serving in various
capacities, including responsibility for the firm's national corporate
finance consulting practice.
Note 4: Mr. Weinberger was Director, Washington Affairs, Unilever United States,
Inc., from February 1991 until April 1995.
Note 5: Ms. Givens was Senior Auditor, Price Waterhouse, from July 1991 until
March 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1996,
under the heading "Common Stock Data," and is hereby incorporated by reference.
The Company's Common Stock is traded principally on the New York Stock
Exchange. The Company's Common Stock is also traded on the Pacific Stock
Exchange. On June 10, 1996, there were 35,634 stockholders of the Company.
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ITEM 6. SELECTED FINANCIAL DATA.
Year Ended April 30
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
In thousands, except per share amounts and number of shareholders
FOR THE YEAR:
Total revenues $1,679,601 $1,360,318 $1,238,677 $1,074,263 $986,109
Net earnings from continuing operations
before charge for purchased research
and development $ 177,168 $ 190,767 $ 189,067 $ 171,017 $153,744
Net earnings from continuing operations(1) $ 177,168 $ 107,259 $ 163,995 $ 171,017 $153,744
Net earnings(1) $ 177,168 $ 107,259 $ 200,528 $ 180,705 $162,253
AT YEAR END:
Total assets $1,755,891 $1,097,313 $1,093,245 $1,017,601 $973,773
Cash and marketable securities $ 745,693 $ 444,981 $ 620,091 $ 439,526 $391,386
Stockholder's equity $1,039,593 $ 685,865 $ 707,875 $ 660,488 $613,713
Shares outstanding 103,417 104,863 106,149 106,355 106,598
Number of shareholders 36,634 38,053 35,514 33,457 31,520
MEASUREMENTS:
Per share of common stock:
Net earnings from continuing operations
before charge for purchased research
and development $1.67 $1.80 $1.77 $1.59 $1.41
Net earnings from continuing operations(1) $1.67 $1.01 $1.54 $1.59 $1.41
Net earnings(1) $1.67 $1.01 $1.88 $1.68 $1.49
Cash dividends declared $1.27 1/4 $1.21 3/4 $1.09 $ .97 $ .85 1/2
Net tangible book value $9.46 $5.79 $6.03 $4.93 $4.61
Return on total revenues(2) 10.5% 14.0% 15.3% 15.9% 15.6%
Return on beginning stockholders' equity 25.8% 15.2% 30.8% 29.4% 28.3%
(1) Fiscal 1995 and 1994 include charges to earnings of $85,508 ($.79 per
share) and $25,072 ($.24 per share), respectively, for purchased
research and development in connection with acquisitions which are not
deductible for income tax purposes.
(2) Before charge for purchased research and development.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS SUBSEQUENT TO FISCAL 1996
On July 16, 1996, the Company's Board of Directors approved a plan to
spin off the Company's remaining interest in CompuServe Corporation
("CompuServe") on or about November 1, 1996. The spin-off was subject to, among
other things, shareholder approval at the Company's annual meeting on September
11, 1996 and a favorable ruling from the Internal Revenue Service as to the
tax-free nature of the distribution.
On August 28, 1996, the Board of Directors decided not to present the
proposed spin-off to shareholders at the September 1996 annual meeting. This
decision was based, in part, on CompuServe's reported first quarter and
projected second quarter losses, market uncertainties related to the online
industry and the planned September introduction of new interfaces for CompuServe
Information Service and WOW!.
SIGNIFICANT EVENTS IN FISCAL 1996
On February 20, 1996, the Company announced its intention to fully
separate CompuServe, its wholly owned subsidiary. The initial phase of this
separation was completed on April 19, 1996 through CompuServe's initial public
offering of 18,400,000 shares of its common stock at $30.00 per share (the
"IPO"), which reduced the
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Company's ownership in CompuServe to just over 80%. In its February
announcement, the Company stated its intention to distribute its remaining
ownership interest in CompuServe by means of a spin-off or split-off within
approximately 12 months after the IPO.
In August 1995, the Company's Board of Directors approved a series of
investment initiatives for CompuServe designed to enhance its long-term
competitiveness and take advantage of accelerating growth opportunities in the
market for online services. These initiatives included the launch of a new
consumer online service, a simplified and less expensive pricing structure, two
new interfaces, infrastructure expenditures and expansion of Internet activities
offered through the various online services. This undertaking reduced the
Company's liquidity during 1996 and negatively impacted net earnings.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc. ("MECA"), exclusive of its rights to publish TaxCut, for $35
million. The sale resulted in a pretax gain of $12.4 million.
SIGNIFICANT EVENTS IN FISCAL 1995
On October 26, 1994, the IRS announced it would eliminate the Direct
Deposit Indicator ("DDI") as a result of concerns relating to fraudulent tax
refund claims. Previously, the IRS used the DDI to notify the electronic filer
after receiving the taxpayer's electronically filed tax return that the direct
deposit of the refund would be honored. The DDI was a key element of the Refund
Anticipation Loan ("RAL") program because it minimized loan losses and thus
encouraged participating financial institutions to make RALs under relatively
favorable terms to taxpayers. RALs are loans made by financial institutions
that are expected to be retired by an income tax refund. In addition to the
removal of the DDI, the IRS instituted other changes during the tax season to
curb possible fraud in the tax system. As a result of these IRS changes, more
stringent criteria were adopted in the loan approval process and the cost to the
consumer increased. These changes resulted in a 21% decline in the number of
returns filed electronically and a 50% decline in the number of RALs processed
by company-owned and franchised offices. Due to these changes, the Company
experienced a decline in revenues for the first time in its 40-year history, and
only the second decline in pretax earnings.
On April 4, 1995, the Company acquired SPRY, Inc. ("SPRY") for total
consideration of $101.6 million, including cash, Convertible Preferred Stock and
options for Convertible Preferred Stock. In connection with the acquisition,
the Company recorded a charge to earnings of $83.5 million, or $.79 per share,
for purchased research and development. The Company contributed its investment
in SPRY to CompuServe on January 30, 1996.
NEW ACCOUNTING STANDARDS
On May 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used. In
connection with the adoption of this Statement, the Company recognized an
impairment loss of $8.4 million, representing the amount by which the carrying
value of the tax preparation software assets at Block Financial Corporation,
including goodwill, exceeded the estimated fair value of those assets. The
impairment loss is included in other expenses in the consolidated statements of
earnings.
The Company changed its method of accounting for direct response
advertising costs to conform with the American Institute of Certified Public
Accountants Statement of Position 93-7, "Reporting on Advertising Costs,"
effective May 1, 1995. Under this accounting method, direct response
advertising costs that meet certain criteria are capitalized and amortized on a
cost-pool-by-cost-pool basis over the period during which the future benefits
are expected to be received. Deferred subscriber acquisition costs are being
amortized over 24 months, beginning the month after such costs are incurred,
with 60% amortized in the first 12 months. The net effect of the change in
accounting increased assets by $96.6 million at April 30, 1996, and increased
net earnings by $60.0 million and net earnings per share by $.57 for the year
ended April 30, 1996.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years beginning
after December 15, 1995. This Statement requires the disclosure of the
estimated fair value of stock-based compensation arrangements with employees and
encourages, but does not require, the recognition of such expense. The Company
does not intend to adopt the recognition provisions of this Statement.
Therefore, the adoption of this Statement will have no effect on the Company's
financial condition or results from operations.
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1996 COMPARED TO 1995
CONSOLIDATED RESULTS
Revenues increased 23.5% to a record $1.680 billion compared to $1.360
billion in 1995. Net earnings increased 65.2% to $177.2 million from $107.3
million in the prior year. Net earnings per share increased to $1.67 from $1.01
in 1995. Exclusive of the charge for purchased research and development in 1995
associated with the acquisition of SPRY, net earnings per share decreased to
$1.67 in 1996 from $1.80 in 1995.
Additional information on each of the Company's operating segments
follows.
TAX SERVICES
Revenues increased 13.9% to $831.5 million from $729.7 million in the
prior year. Tax preparation fees increased $66.6 million, or 13.1%, as a result
of a 3.7% increase in the number of returns prepared by company-owned offices,
with the remainder attributable to price increases. In the United States, fees
from electronic filing were up $13.6 million, or 16.7%, due to a 1.6% increase
in returns electronically filed by company-owned offices and an increase in
state electronic filing fees, resulting from an increase in the number of states
where electronic filing is offered and package pricing. Royalties increased by
$5.8 million, or 6.4%, reflecting improved results reported by franchises as a
result of a 2.9% increase in the number of returns prepared by franchises,
increases in pricing and greater revenues from electronic filing.
Pretax earnings increased 31.8% to $194.8 million from $147.7 million in
1995. The pretax margin was 23.4% compared to 20.2% in the prior year. The
margin improvement was primarily due to certain payroll and occupancy and
equipment expenses which did not increase proportionately with revenues, and
management efforts to contain normal operating expenses. Additionally, certain
expenses were incurred in 1995 associated with the changes in the electronic
filing program described above.
COMPUTER SERVICES
Revenues increased 36.1% to $793.2 million from $582.8 million last year
due to increases in both Online Services and Network Services revenues. Online
Services revenues increased 41.8% over the prior year primarily as a result of
an increase in the number of subscribers. The number of CompuServe Information
Service ("CIS") subscribers at April 30, 1996, exclusive of the Japanese
licensee, increased 43.9% to 3.2 million. This increase was offset by an 11.3%
decrease in average monthly CIS revenue per subscriber to $17.01 for 1996 from
$19.17 for 1995, caused by a price reduction implemented in February 1995 and a
new pricing structure introduced in September 1995. Network Services revenues
increased 34.6% to $198.8 million from $147.7 million in 1995 due to an increase
in the number of network customers and increased usage by existing customers.
The number of network customers increased 30.0% over last year to 966. Network
customer hours increased 43.1% to 45.1 million hours.
Pretax earnings decreased 41.5% to $87.8 million from $150.1 million in
1995. The decrease in pretax earnings resulted from several factors. Costs
directly associated with service revenues increased $156.3 million, or 67.6%, as
a result of online subscriber hours more than doubling from 50.3 million hours
in 1995 to 123.0 million hours in 1996. Marketing expenses increased $70.4
million, or 67.1%, due to increased general consumer advertising on television
and in periodicals, expanded international marketing efforts, the launch of WOW!
and special event promotions, and advertising expenses incurred by SPRY.
Depreciation and amortization expense increased $36.0 million, or 84.5%, as a
result of increased capital expenditures and the amortization of goodwill
related to the April 1995 SPRY acquisition. Product development costs increased
$9.4 million, or 49.5%, due primarily to the acquisition of SPRY, costs related
to the new WOW! online service and enhancements to the CIS interface. The
pretax margin was 11.1% compared to 25.8% in the prior year.
FINANCIAL SERVICES
Revenues increased 36.1% to $48.9 million from $35.9 million in 1995.
Excluding the $12.4 million gain on the sale of MECA in 1996 and MECA's revenues
in 1995, revenues increased $10.6 million, or 41.1%, over the prior year.
Credit card revenues were up $10.9 million, or 79.3%, primarily due to an
increase in the number of accounts and related revolving balances.
Pretax earnings were $5.1 million, compared to a loss of $5.8 million in
the prior year. Exclusive of the $12.4 million gain on the sale of MECA and an
impairment loss of $8.4 million recognized on the tax preparation software
business assets in 1996, and MECA's operating loss in 1995, pretax earnings for
1996 were $1.1 million compared to a pretax loss of $3.4 million in 1995. The
improvement over 1995 is attributable to both credit card and personal tax
software operations.
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CORPORATE INVESTMENT INCOME
Corporate investment income declined 55.8% to $10.5 million from $23.7
million in 1995, which is attributable to two factors. Fewer funds were
available for investment this year due to strategic investments made in
CompuServe, described previously. Additionally, investment income in 1995
included gains of $4.9 million from the sale of securities during the fourth
quarter.
CORPORATE AND ADMINISTRATIVE EXPENSES
Corporate and administrative expenses increased 4.9% to $12.9 million
compared to $12.3 million in 1995, primarily due to interest expense on
corporate borrowings in 1996. There were no corporate borrowings during 1995.
INCOME TAX EXPENSE
The effective tax rate decreased to 37.9% compared to 51.2% in 1995. The
decrease resulted from a charge for purchased research and development in 1995
that is not deductible for income tax purposes.
1995 COMPARED TO 1994
CONSOLIDATED RESULTS
Revenues increased 9.8% to a record $1.360 billion from $1.239 billion
in 1994. Net earnings decreased 46.5% to $107.3 million from $200.5 million in
1994. Net earnings per share decreased to $1.01 from $1.88 in 1994. However,
exclusive of the charges for purchased research and development and discontinued
operations, net earnings per share increased to $1.80 from $1.77 in 1994.
Additional information on each of the Company's operating segments
follows.
TAX SERVICES
Revenues decreased 3.4% to $729.7 million from $755.5 million in 1994.
The decrease in revenues was due primarily to a 31.1% decline in electronic
filing fees and a 49.5% decline in RAL license fees received from participating
institutions. These decreases resulted from IRS actions discussed earlier. Tax
return preparation fees increased 5.7% to $517.0 million in 1995.
Pretax earnings decreased 25.7% to $147.7 million from $198.7 million in
1994. The decrease resulted from the decline in electronic filing revenues and
greater expenses associated with the changes in the electronic filing program.
Pretax earnings as a percentage of revenues was 20.2% in 1995 compared to 26.3%
in 1994.
COMPUTER SERVICES
Revenues increased 35.6% to $582.8 million from $429.9 million in 1994.
The increase was due to growth in Online Services and Network Services revenues.
Online Services revenues increased 48.3%, due primarily to the increase in the
number of subscribers. The number of CIS subscribers, exclusive of the Japanese
licensee, increased 61.2% to 2.2 million. The average monthly revenue per
subscriber in 1995 was $19.17 compared to $19.35 in 1994, reflecting the impact
of a price reduction in February 1994, partially offset by higher usage. Network
Services revenues increased 35.0% due to an increase in the number of network
customers and greater usage by existing customers. The number of network
customers increased 26.8% to 743. Network customer hours increased 57.2% to 31.5
million hours.
Pretax earnings increased 46.7% to $150.1 million from $102.3 million in
1994. The pretax margin was 25.8% in 1995 compared to 23.8% in 1994. The record
results were attributable primarily to the strong performances of the Online and
Network Services divisions. The increase in the pretax margin resulted mainly
from the exceptional increases in revenues that outpaced expenses, a significant
portion of which are not directly associated with revenues.
FINANCIAL SERVICES
Revenues decreased 14.7% to $35.9 million from $42.1 million in 1994.
The pretax loss in 1995 was $5.8 million, compared to pretax earnings of $9.4
million in 1994. The decline in revenues and pretax earnings resulted primarily
from the decision not to make investments in RALS due to IRS changes that
increased the RAL risk.
CORPORATE INVESTMENT INCOME
Corporate investment income improved 55.4% to $23.7 million from $15.3
million in 1994. Corporate investment income in 1995 included gains of $4.9
million from the sale of securities during the fourth quarter. Exclusive of such
gains, corporate investment income increased 23.4% over 1994 and resulted
primarily from more funds
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being available for investment in 1995, including the proceeds from the
sale of Interim Services Inc. received in the fourth quarter of fiscal 1994.
CORPORATE AND ADMINISTRATIVE EXPENSES
Corporate and administrative expenses decreased 29.8% to $12.3 million
from $17.5 million in 1994. The decrease resulted from the allocation of certain
employee benefit expenses to operating segments and reduced discretionary
corporate expenses related to community welfare.
INCOME TAX EXPENSE
The effective tax rate increased to 51.2% compared to 42.1% in 1994. The
increase resulted from a charge for purchased research and development that is
not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with cash and
marketable securities of $745.7 million at April 30, 1996, compared to $445.0
million and $620.1 million at the end of 1995 and 1994, respectively. Cash and
marketables increased in 1996 due to proceeds from the IPO of $518.8 million,
offset by a significant increase in capital expenditures and costs associated
with subscriber acquisition and marketing at CompuServe. The significant
decrease in cash and marketables in 1995 as compared to 1994 was due to
significant share repurchases and capital expenditures during 1995 totaling
$114.9 million and $123.3 million, respectively, and cash paid in connection
with the acquisition of SPRY of $41.8 million. Stockholders' equity at April 30,
1996, 1995 and 1994 was $1,039.6 million, $685.9 million and $707.9 million,
respectively.
The Company maintains lines of credit to support short-term borrowing
facilities in the United States and Canada. The balance of these lines
fluctuates according to the amount of borrowing outstanding during the year.
From January through April each year, the Company uses Canadian borrowings to
purchase refunds due its clients from Revenue Canada. Maturities of these
borrowings range from 30 to 90 days. Collection of receivables from Revenue
Canada occurs substantially in the last month of the fiscal year and the first
quarter of the subsequent fiscal year. Net accounts receivable at April 30, 1996
and 1995 include amounts due from Revenue Canada of $11.5 million and $16.4
million, respectively. Prior to 1995, Block Financial Corporation ("BFC") used
borrowings to purchase an interest in a trust to which certain RALs made by
Mellon Bank (DE) National Association were sold. BFC purchased an interest of
just under 50% in those RALs subject to its agreement with Mellon. BFC financed
these purchases through short-term borrowing in the third and fourth quarters of
fiscal 1994.
The Company maintains a year-round $150 million line of credit to
primarily support the funding of credit card receivables by BFC and a $25
million line of credit to fulfill short-term cash requirements at CompuServe. At
April 30, 1996 and 1995, net credit card receivables amounted to $162.3 million
and $122.5 million, respectively, and outstanding commercial paper related to
credit card receivables amounted to $72.7 million and $49.4 million,
respectively. Additionally, in order to meet CompuServe's substantial funding
requirements during fiscal 1996, the Company obtained a $200 million corporate
credit facility in December 1995. This line of credit was repaid and expired at
the end of fiscal 1996.
With the exception of corporate borrowings in 1996, the Company has
historically generated sufficient funds to provide for the off-season working
capital needs of the Company, which experiences losses for the period May
through December, capital investments, the operating and expansion needs of its
subsidiaries, cash for acquisitions and the maintenance of a strong dividend
policy. Management believes the Company will continue to generate sufficient
funds internally to finance its investment program and normal working capital
requirements outside of CompuServe. Furthermore, management believes the
proceeds from the IPO will be sufficient to meet presently anticipated funding
requirements at CompuServe, including capital expenditures and cash outlays for
subscriber acquisition and marketing, for approximately 18 months to two years.
The Company will continue to use short-term financing in the United States to
finance temporary liquidity needs and various financial activities conducted by
BFC, and in Canada to finance the Canadian refund discount program.
In connection with the investment initiatives for CompuServe, the
Company expects to spend approximately $175 million for subscriber acquisition
and marketing and $190 million for capital expenditures in 1997. Capital
expenditures include approximately $50 million for deployment of TCP/IP
(Transmission Control Protocol/Internet Protocol, a suite of network protocols
that allows computers with different architectures and operating system software
to communicate with other computers on the Internet) across CompuServe's
network. In addition, management estimates that the full deployment of TCP/IP
across CompuServe's network will cost approximately $200 million over the next
three years, beginning in 1997. Management anticipates that capital
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expenditures will continue to increase in the near term due to equipment
replacements and purchases of additional equipment at CompuServe to support the
increased base of online subscribers, growth in corporate network customers and
additional facilities.
In February 1996, the Company's Board of Directors stated its intention
to maintain the quarterly dividend at $.32 per share until the distribution of
CompuServe was completed, subject to, among other things, developments in the
Company's business and results of operations. At that time, the Board declared a
dividend in the amount of $.32 per share payable April 1, 1996 to shareholders
of record on March 11, 1996. On June 19, 1996, the Board of Directors declared a
quarterly dividend of $.32 per share payable on October 1, 1996 to shareholders
of record on September 10, 1996. On July 16, 1996, the Board announced its plan
to reduce the cash dividend to $.20 per quarter following the spin-off of
CompuServe. The actual declaration of dividends will depend on the future
results of operations, capital requirements and the Company's financial
condition, as well as other factors considered appropriate by the Board of
Directors.
The Company announced in December 1993 its intention to repurchase from
time to time up to 10 million of its shares on the open market. During 1996, the
Company repurchased 1.8 million shares at an aggregate cost of $71.9 million. In
July 1996, the Company announced its intention to repurchase up to 10 million
additional shares in the open market over a two-year period following the
spin-off of CompuServe. Such authorization is in addition to the 1993
authorization.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of H&R Block, Inc.
and subsidiaries as of April 30, 1996 and 1995, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of H&R Block, Inc., and
subsidiaries as of April 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1996, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its method of accounting for its marketable securities during
the year ended April 30, 1995 and advertising costs during the year ended April
30, 1996.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 18, 1996, except for the "Subsequent Events" note to the consolidated
financial statements as to which the date is September 26, 1996.
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H&R Block, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
Year Ended April 30
1996 1995 1994
---- ---- ----
REVENUES:
Service revenues $1,543,104 $1,233,815 $1,118,566
Royalties 99,717 92,436 96,766
Investment income 10,972 23,703 15,256
Other income 25,808 10,364 8,089
---------- ---------- ----------
1,679,601 1,360,318 1,238,677
---------- ---------- ----------
EXPENSES:
Employee compensation and benefits 517,727 442,504 404,367
Occupancy and equipment 402,835 295,528 242,391
Marketing and advertising 113,204 84,905 60,783
Supplies, freight and postage 95,621 71,542 60,182
Other 264,920 162,335 162,698
Purchased research and development _ 83,508 25,072
---------- ---------- ----------
1,394,307 1,140,322 955,493
---------- ---------- ----------
Earnings from continuing operations
before taxes on earnings 285,294 219,996 283,184
Taxes on earnings 108,126 112,737 119,189
---------- ---------- ----------
Net earnings from continuing operations 177,168 107,259 163,995
Net earnings from discontinued operations
(less applicable taxes of $8,706) _ _ 9,268
Net gain on sale of discontinued operations
(less applicable taxes of $16,711) _ _ 27,265
---------- ---------- ----------
Net earnings $ 177,168 $ 107,259 $ 200,528
========== ========== ==========
Earnings per share from continuing operations $1.67 $1.01 $1.54
========== ========== ==========
Earnings per share $1.67 $1.01 $1.88
========== ========== ==========
See notes to consolidated financial statements.
17
18
H&R Block, Inc.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
April 30
1996 1995
---------- ----------
ASSETS
CURRENT ASSETS:
Cash (including certificates of deposit of
$22,093 and $25,781) $ 339,055 $ 90,248
Marketable securities 389,557 263,239
Receivables, less allowance for doubtful
accounts of $7,848 and $7,274 333,734 260,198
Prepaids and other current assets 59,912 38,659
---------- ----------
Total current assets 1,122,258 652,344
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 17,081 91,494
Excess of cost over fair value of net
tangible assets acquired, less accumulated
amortization of $27,825 and $46,770 61,141 78,205
Deferred subscriber acquisition costs, net of
amortization 96,636 --
Other 59,201 47,822
---------- ----------
234,059 217,521
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $315,195 and
$227,056 399,574 227,448
---------- ----------
$1,755,891 $1,097,313
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 72,651 $ 49,421
Accounts payable, accrued expenses and
deposits 201,320 145,909
Accrued salaries, wages and payroll taxes 109,870 71,281
Accrued taxes on earnings 94,406 111,375
---------- ----------
Total current liabilities 478,247 377,986
DEFERRED INCOME TAXES 46,700 --
OTHER NONCURRENT LIABILITIES 38,222 33,462
MINORITY INTEREST 153,129 --
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share:
authorized 200,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share: authorized 500,000 shares 4 4
Additional paid-in capital 504,694 140,578
Retained earnings 747,212 700,423
---------- ----------
1,252,999 842,094
Less cost of common stock in treasury 213,406 156,229
---------- ----------
1,039,593 685,865
---------- ----------
$1,755,891 $1,097,313
========== ==========
See notes to consolidated financial statements.
18
19
H&R Block, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
Year Ended April 30
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 177,168 $ 107,259 $ 200,528
Adjustments to reconcile net earnings to net
cash provided:
Depreciation and amortization 111,240 67,684 57,117
Amortization of deferred subscriber acquisition costs 22,585 _ _
Deferred subscriber acquisition costs (119,221) _ _
Provision for deferred taxes on earnings 52,639 (734) (6,775)
Gain on sale of subsidiaries (12,445) (2,796) (27,265)
Purchased research and development _ 83,508 25,072
Net gain on sales of marketable securities (1,142) (6,664) (307)
Other noncurrent liabilities 4,760 2,845 5,197
Changes in assets and liabilities net of effects of
purchase and disposition of subsidiaries:
Receivables (79,295) (87,995) 2,284
Prepaids and other current assets (25,373) (1,735) (412)
Net assets of discontinued operations _ _ (17,370)
Accounts payable, accrued expenses and deposits 58,247 (24,994) 31,000
Accrued salaries, wages and payroll taxes 39,127 15,722 14,659
Accrued taxes on earnings (17,554) (27,737) 3,740
----------- ----------- -----------
Net cash provided by operating activities (210,736) (124,363) (287,468)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (880,304) (1,904,653) (1,522,609)
Maturities of marketable securities 501,925 1,837,584 891,299
Sales of marketable securities 329,132 299,702 448,978
Purchases of property and equipment, net (264,491) (123,337) (83,744)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (18,675) (47,773) (46,570)
Proceeds from sale of subsidiaries 35,000 5,195 188,500
Proceeds from term loan to former subsidiary _ _ 30,000
Other, net (16,577) (5,856) (24,198)
----------- ----------- -----------
Net cash provided by (used in) investing activities (313,990) 60,862 (118,344)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (2,252,761) (1,856,873) (2,435,254)
Proceeds from issuance of notes payable 2,275,991 1,906,294 2,398,087
Net proceeds from sale of stock by subsidiary 518,819 _ _
Dividends paid (131,263) (128,838) (115,451)
Payments to acquire treasury shares (71,897) (114,900) (68,899)
Proceeds from stock options exercised 13,172 57,997 50,319
----------- ----------- -----------
Net cash provided by (used in) financing activities 352,061 (136,320) (171,198)
----------- ----------- -----------
Net increase (decrease) in cash 248,807 48,905 (2,074)
Cash at beginning of the year 90,248 41,343 43,417
----------- ----------- -----------
Cash at end of the year $ 339,055 $ 90,248 $ 41,343
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ 73,041 $ 141,062 $ 131,124
Interest paid 5,898 4,064 4,169
See notes to consolidated financial statements.
19
20
H&R BLOCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar in thousands, except share data
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: H&R Block, Inc. (the "Company") provides a variety of
services to the general public, principally in the United States, but also in
Canada, Australia and other foreign countries. Approximately one-half of
total revenues are generated from tax return preparation, electronic filing
of tax returns and other tax-related services. The Company provides
computer-based information and communication services to businesses
and individual owners of personal computers through its CompuServe
Corporation ("CompuServe") subsidiary. The Company also offers credit
cards and personal productivity software.
Principles of consolidation: The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries. All
material intercompany transactions and balances have been eliminated.
Reclassifications: Reclassifications have been made to prior year
amounts to conform with the current year presentation.
Management estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Marketable securities: On May 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This Statement addresses the reporting for debt
and equity securities by requiring such investments to be classified in
held-to-maturity, available-for-sale or trading categories. All marketable debt
and equity securities were classified as available-for-sale securities on the
date of adoption, and are carried at market value, based on quoted prices, with
unrealized gains and losses included in stockholders' equity. The adoption of
the Statement resulted in an increase in stockholders' equity of $5,526, net of
taxes. In accordance with the Statement, prior years' financial statements have
not been restated.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
Foreign currency translation: Assets and liabilities of the Company's
foreign branches and subsidiaries are translated into U.S. dollars at exchange
rates prevailing at the end of the year. Revenue and expense transactions are
translated at the average of exchange rates in effect during the period.
Translation gains and losses are recorded directly to stockholders' equity.
Deferred subscriber acquisition costs: Effective May 1, 1995, the
Company changed its method of accounting for direct response advertising costs
to conform with the American Institute of Certified Public Accountants
Statement of Position 93-7, "Reporting on Advertising Costs." Under this
accounting method, direct response advertising costs that meet certain criteria
are capitalized and amortized on a cost-pool-by-cost-pool basis over the period
during which the future benefits are expected to be received. The Company
amortizes its subscriber acquisition costs over 24 months, beginning the month
after such costs are incurred, with 60% amortized in the first 12 months. At
April 30, 1996, subscriber acquisition costs consist principally of direct mail
costs, including mailing lists, postage, related payroll and outsourcing costs,
payments to OEMs, and disk and CD-ROM costs, all of which result in a direct
revenue-generating response. The net effect of the change in accounting
increased assets by $96,636 at April 30, 1996, and increased net earnings by
$60,011 and net earnings per share by $.57 for the year ended April 30, 1996.
The Company expenses advertising costs not classified as direct response the
first time the advertising takes place.
Excess of cost over fair value of net tangible assets acquired: The
excess of cost of purchased subsidiaries, operating offices and franchises over
the fair value of net tangible assets acquired is being amortized over periods
of up to 40 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been impaired based on several criteria,
including, but not limited to, revenue trends, undiscounted operating cash
flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389.
The impairment loss represents the amount by which the carrying value of the
tax preparation software business assets, including goodwill, exceeded the
estimated fair value of those assets. The estimated fair value was determined
as the present value of estimated expected future cash flows using a discount
rate appropriate for the risks associated with the personal software industry.
The loss is included in other expenses in the consolidated statements of
earnings.
Depreciation and amortization: Buildings and equipment are depreciated
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the period of the respective lease
using the straight-line method.
Notes payable: The Company uses short-term borrowings to finance
temporary liquidity needs and various financial activities conducted by its
subsidiaries. The weighted average interest rate of notes payable at April 30,
1996 was 5.4%.
20
21
Revenue recognition: Service revenues are recorded in the period in
which the service is performed. The Company records franchise royalties, based
upon the contractual percentages of franchise revenues, in the period in which
the franchise provides the service.
Taxes on earnings: The Company and its subsidiaries file a consolidated
federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes are provided for temporary differences
between financial and tax reporting, which consist principally of differences
between accrual and cash basis accounting, deferred subscriber acquisition
costs, deferred compensation and depreciation.
Prior to May 1, 1993, taxes on earnings were determined under
Accounting Principles Board Opinion Number 11, whereby the income tax provision
was calculated using the deferred method. Effective May 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which provides for the recognition of deferred
tax assets and liabilities for the tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The cumulative effect of the change in method as of May
1, 1993 was not material.
The Company has entered into a Tax Sharing Agreement with CompuServe,
pursuant to which CompuServe is obligated to pay the Company for CompuServe's
liability for federal, state and local income taxes incurred during any taxable
period.
Earnings per share: Earnings per share are computed based on the
weighted average number of common and common equivalent shares outstanding
during the respective years (106,059,000 in 1996, 105,871,000 in 1995 and
106,769,000 in 1994). Earnings per share assuming full dilution have not been
shown as there would be no material dilution.
Consolidated statements of cash flows: For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash.
Disclosure regarding financial instruments: The carrying values
reported in the balance sheet for certificates of deposit, receivables, notes
payable, accounts payable and accrued liabilities approximate fair market value
due to the relatively short-term nature of the respective instruments.
New accounting standard: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," effective for transactions entered
into in fiscal years beginning after December 15, 1995. This Statement requires
the disclosure of the estimated fair value of stock-based compensation
arrangements with employees and encourages, but does not require, the
recognition of such expense. The Company does not intend to adopt the
recognition provisions of this Statement. Therefore, the adoption of this
Statement will have no effect on the Company's financial condition or results
from operations.
21
22
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30,
1996 and 1995 are summarized below:
1996 1995
--------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Current:
Municipal bonds and notes $ 13,182 $ 440 $ 79 $ 13,543 $ 88,894 $ 310 $ 94 $ 89,110
U.S. Government obligations 288,892 10 1 288,901 52,091 48 - 52,139
Other equity investments - - - - 49,100 - - 49,100
Other debt investments 87,057 76 20 87,113 72,830 61 1 72,890
-------- ------- ----- --------- -------- ------- ------- ---------
389,131 526 100 389,557 262,915 419 95 263,239
-------- ------- ----- --------- -------- ------- ------- ---------
Noncurrent:
Municipal bonds 11,013 310 37 11,286 82,702 1,676 1,325 83,053
Preferred stock 1,511 316 32 1,795 1,511 245 131 1,625
Common stock 3,085 935 20 4,000 2,737 396 115 3,018
Other equity investments - - - - 3,488 - 692 2,796
Other debt investments - - - - 999 3 - 1,002
-------- ------- ----- --------- -------- ------- ------- ---------
15,609 1,561 89 17,081 91,437 2,320 2,263 91,494
$404,740 $ 2,087 $ 189 $ 406,638 $354,352 $ 2,739 $ 2,358 $ 354,733
======== ======= ===== ========= ======== ======= ======= =========
All marketable securities at April 30, 1996 are classified as available-
for-sale. Proceeds from the sales of available-for-sale securities were
$329,132, $299,702 and $448,978 during 1996, 1995 and 1994, respectively. Gross
realized gains on those sales during 1996, 1995 and 1994 were $1,528, $7,014 and
$393, respectively; gross realized losses were $386, $350 and $86, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
1996 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
Amortized Market
Cost Value
--------- --------
Within one year $376,708 $376,776
After one year through five years 10,748 11,184
After five years through 10 years 12,688 12,883
-------- --------
$400,144 $400,843
======== ========
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30
1996 1995
-------- --------
Land $ 7,084 $ 7,116
Buildings 87,523 50,625
Computer and other equipment 582,815 367,420
Leasehold improvements 37,347 29,343
-------- --------
714,769 454,504
Less accumulated depreciation and amortization 315,195 227,056
-------- --------
$399,574 $227,448
======== ========
Depreciation and amortization expense for 1996, 1995 and 1994 amounted to
$90,829, $62,809 and $52,091, respectively.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
management employees to defer portions of their compensation and earn interest
on the deferred amounts. The compensation, together with Company matching of
deferred amounts, has been accrued, and the only expenses related to these plans
are the Company match and the interest on the deferred amounts, which are not
material to the financial statements. Included in Other Noncurrent Liabilities
is $31,146 at the end of 1996 and $27,112 at the end of 1995 to reflect the
liability under these plans. The Company purchased whole-life insurance
contracts on the related directors and employees to recover distributions made
or to be made under the plans and has recorded the cash surrender value of the
policies in Other Assets. If all the assumptions regarding mortality, interest
rates, policy dividends and other factors are realized, the Company will
ultimately realize its full investment plus a factor for the use of its money.
22
23
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years
ended April 30, 1996 are summarized below:
Convertible
Common stock preferred stock Additional Treasury stock
--------------------- ---------------- paid-in Retained -----------------------
Shares Amount Shares Amount capital earnings Shares Amount
----------- ------- ------ ------ ---------- -------- ---------- ---------
Balances at May 1, 1993 108,972,699 $1,089 - - $101,038 $643,757 (2,617,463) $ (95,396)
Net earnings for the year - - - - - 200,528 - -
Stock options exercised - - - - (10,486) - 1,677,674 60,805
Unrealized loss on translation - - - - - (9,110) - -
Acquisition of treasury shares - - - - - - (1,883,816) (68,899)
Cash dividends paid -
$1.09 per share - - - - - (115,451) - -
----------- ------ ------- ----- -------- -------- ---------- ---------
Balances at April 30, 1994 108,972,699 1,089 - - 90,552 719,724 (2,823,605) (103,490)
Net earnings for the year - - - - - 107,259 - -
Stock options exercised - - - - (4,164) - 1,624,843 62,161
Unrealized gain on translation - - - - - 2,043 - -
Acquisition of treasury shares - - - - - - (2,910,900) (114,900)
Stock issued for acquisition - - 401,768 $ 4 54,190 - - -
Cumulative effect of change in
accounting for marketable
securities, net of taxes - - - - - 5,526 - -
Change in net unrealized gain
on marketable securities - - - - - (5,291) - -
Cash dividends paid -
$1.21 3/4 per share - - - - - (128,838) - -
----------- ------ ------- ----- -------- -------- ---------- ---------
Balances at April 30, 1995 108,972,699 1,089 401,768 4 140,578 700,423 (4,109,662) (156,229)
Net earnings for the year - - - - - 177,168 - -
Stock options exercised - - 3,031 - (1,501) - 340,395 12,957
Restricted stock granted - - - - (47) - 46,370 1,763
Unrealized loss on translation - - - - - (50) - -
Acquisition of treasury shares - - - - - - (1,833,200) (71,897)
Sale of stock by subsidiary - - - - 365,664 - - -
Change in net unrealized gain
on marketable securities - - - - - 934 - -
Cash dividends paid -
$1.27 1/4 per share - - - - - (131,263) - -
----------- ------ ------- ----- -------- -------- ---------- ---------
Balances at April 30, 1996 108,972,699 $1,089 404,799 $ 4 $504,694 $747,212 (5,556,097) $(213,406)
=========== ====== ======= ===== ======== ======== ========== =========
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1996, the Company had 5,595,201 shares of
authorized but unissued Preferred Stock. Of the unissued shares, 600,000 shares
have been designated as Participating Preferred Stock in connection with the
Company's shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a
series of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. On April 4, 1995, 401,768 shares of
Convertible Preferred Stock were issued to certain shareholders of SPRY, Inc.
("SPRY" in connection with the Company's acquisition of such corporation. Each
share of Convertible Preferred Stock is convertible on or after April 5, 1998
into four shares of Common Stock of the Company, subject to adjustment upon
certain events. The holders of the Convertible Preferred Stock are not entitled
to receive dividends paid in cash, property or securities and, in the event of
any dissolution, liquidation or winding-up of the Company, will share ratably
with the holders of Common Stock then outstanding in the assets of the Company
after any distribution or payments are made to the holders of Participating
Preferred Stock or the holders of any other class or series of stock of the
Company with preference over the Common Stock.
23
24
STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors and a
plan for eligible seasonal employees. The 1993 plan was approved by the
shareholders in September 1993 to replace the 1984 Long-Term Executive
Compensation Plan, which terminated at that time except with respect to
outstanding awards thereunder. Under the 1993 and 1989 plans, options
may be granted to selected employees and outside directors to purchase
the Company's Common Stock for periods not exceeding 10 years at a price
that is not less than 100% of fair market value on the date of the grant. A
majority of the options are exercisable each year either starting one year
after the date of the grant or on a cumulative basis at the annual rate of
33 1/3% of the total number of option shares. Other options are
exercisable commencing three years after the date of the grant on a
cumulative basis in annual increments of 60%, 20% and 20% of the total
number of option shares.
The plan for eligible seasonal employees, as amended, provided for the
grant of options on June 30, 1996, 1995 and 1994 at the market price on the
date of the grant. The options are exercisable during September in each of the
two years following the calendar year of the grant.
Changes during the years ended April 30, 1996, 1995 and 1994 under
these plans were as follows:
1996 1995 1994
-------------- ------------- ------------
Options outstanding, beginning of year 4,865,814 3,538,341 3,901,373
Options granted 3,545,692 3,912,763 2,410,317
Options exercised (362,849) (1,624,203) (1,677,674)
Options which expired (1,634,729) (961,087) (1,095,675)
Options outstanding, end of year 6,413,928 4,865,814 3,538,341
Shares exercisable, end of year 4,029,301 2,727,540 2,807,255
Shares reserved for future grants,
end of year 13,554,594 15,465,557 18,417,233
Option prices per share:
Exercised during the year $ 6.9525-39.25 $ 5.515-39.25 $5.515-35.75
Outstanding, end of year $9.9688-44.375 $6.9525-44.00 $5.515-44.00
In connection with the acquisition of SPRY, outstanding options to
purchase SPRY common stock under an employee stock option plan were converted on
April 4, 1995 into options to purchase 51,828 shares of the Company's
Convertible Preferred Stock. During 1996, 3,031 options to purchase Convertible
Preferred Stock were exercised, and 2,052 were cancelled. At April 30, 1996,
46,745 of such options were outstanding, with exercise prices ranging from $9.54
to $19.08.
During 1996, the Company granted 46,370 shares of restricted stock at
a fair market value of $37.00 per share under the 1993 Long-Term Executive
Compensation Plan, of which 18,153 were vested at April 30, 1996. The remainder
vests ratably over three years starting one year after the date of the grant.
SHAREHOLDER RIGHTS PLAN
On July 14, 1988, the Company's Board of Directors adopted a shareholder
rights plan to deter coercive or unfair takeover tactics and to prevent a
potential acquiror from gaining control of the Company without offering a
fair price to all of the Company's stockholders. The plan was amended by
the Board of Directors on May 9, 1990, September 11, 1991, and May 10,
1995. Under the plan, a dividend of one right (a "Right") per share was
declared and paid on each share of the Company's Common Stock
outstanding on July 25, 1988. As to shares issued after such date, rights
automatically attach to them after their issuance.
Under the plan, as amended, a right becomes exercisable when a person or
group of persons acquires beneficial ownership of 10% or more of the outstanding
shares of the Company's Common Stock without the prior written approval of the
Company's Board of Directors (an "Unapproved Stock Acquisition"), and after 10
business days following the commencement of a tender offer that would result in
an Unapproved Stock Acquisition. When exercisable, the registered holder of each
Right may purchase from the Company one two-hundredths of a share of a new class
of the Company's Participating Preferred Stock, without par value, at a price of
$60.00, subject to adjustment. The registered holder of each Right then also has
the right (the "Subscription Right") to purchase for the exercise price of the
Right, in lieu of shares of Participating Preferred Stock, a number of shares of
the Company's Common Stock having a market value equal to twice the exercise
price of the Right. Following an Unapproved Stock Acquisition, if the Company is
involved in a merger, or 50% or more of the Company's assets or earning power
are sold, the registered holder of each Right has the right (the "Merger Right")
to purchase for the exercise price of the Right a number of shares of the common
stock of the surviving or purchasing company having a market value equal to
twice the exercise price of the Right.
24
25
After an Unapproved Stock Acquisition, but before any person or group
of persons acquires 50% or more of the outstanding shares of the Company's
Common Stock, the Board of Directors may exchange all or part of the then
outstanding and exercisable Rights for Common Stock at an exchange ratio of one
share of Common Stock per Right (the "Exchange"). Upon any such Exchange, the
right of any holder to exercise a Right terminates. Upon the occurrence of any
of the events giving rise to the exercisability of the Subscription Right or
the Merger Right or the ability of the Board of Directors to effect the
Exchange, the Rights held by the acquiring person or group become void as they
relate to the Subscription Right, the Merger Right or the Exchange.
The Company may redeem the Rights at a price of $.005 per Right at any
time prior to an Unapproved Stock Acquisition (and after such time in certain
circumstances). The Rights expire on July 25, 1998, unless extended by the
Board of Directors. Until a Right is exercised, the holder thereof, as such,
has no rights as a stockholder of the Company, including the right to vote or
to receive dividends. The issuance of the Rights alone has no dilutive effect
and does not affect reported earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
Year Ended April 30
1996 1995 1994
-------- -------- --------
Royalties $ 77,926 $ 59,027 $ 39,827
Legal and professional 52,826 15,271 14,445
Bad debts 27,465 13,619 24,977
Travel and entertainment 24,197 19,470 15,039
Amortization of goodwill 14,595 4,875 5,026
Taxes and licenses 7,253 8,915 13,285
Interest 5,529 4,060 3,798
TAXES ON EARNINGS
The components of earnings from continuing operations before taxes on
earnings upon which federal and foreign income taxes have been provided are as
follows:
Year Ended April 30
1996 1995 1994
-------- -------- --------
United States $276,586 $213,122 $276,329
Foreign 8,708 6,874 6,855
-------- -------- --------
$285,294 $219,996 $283,184
======== ======== ========
Deferred income tax provisions (benefits) reflect the impact of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. The current and
deferred components of taxes on earnings from continuing operations is
comprised of the following:
Year Ended April 30
1996 1995 1994
-------- -------- --------
Currently payable:
Federal $ 47,357 $ 96,686 $ 99,419
State 6,047 13,511 23,347
Foreign 2,083 3,274 3,198
-------- -------- --------
55,487 113,471 125,964
-------- -------- --------
Deferred:
Federal 44,926 (625) (5,347)
State 5,736 (88) (1,256)
Foreign 1,977 (21) (172)
-------- -------- --------
52,639 (734) (6,775)
-------- -------- --------
$108,126 $112,737 $119,189
======== ======== ========
Provision is not made for possible income taxes payable upon
distribution of unremitted earnings of foreign subsidiaries. Such unremitted
earnings aggregated $56,695 at December 31, 1995. Management believes the cost
to repatriate these earnings would not be material.
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The following table reconciles the U.S. federal income tax rate to the
Company's effective tax rate:
Year Ended April 30
1996 1995 1994
----- ----- -----
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in income taxes resulting from:
State income taxes, net of federal income tax benefit 2.7% 4.0% 5.1%
Foreign taxes, net of federal income tax benefit .4% .3% .2%
Purchased research and development _ 13.3% 3.1%
Nontaxable federal income (.7%) (2.3%) (1.5%)
Other .5% .9% .2%
----- ----- -----
Effective rate 37.9% 51.2% 42.1%
===== ===== =====
A summary of deferred income taxes follows:
Year Ended April 30
1996 1995
-------- --------
Gross deferred tax assets:
Accrued expenses $(13,336) $(14,142)
Other _ (2,694)
--------- ---------
Current (13,336) (16,836)
--------- ---------
Deferred compensation (12,155) (10,767)
Other _ (757)
--------- ---------
Noncurrent (12,155) (11,524)
--------- ---------
(25,491) (28,360)
--------- ---------
Gross deferred tax liabilities:
Deferred subscriber acquisition costs 36,403 _
Depreciation 20,375 9,085
Other 2,077 _
--------- ---------
Noncurrent 58,855 9,085
--------- ---------
Net deferred tax liabilities (assets) $(33,364) $(19,275)
========= =========
ACQUISITIONS
On April 4, 1995, the Company acquired SPRY for $41,785 in cash and issued
Convertible Preferred Stock valued at $54,194. In addition, outstanding options
for SPRY common stock were converted into options for Convertible Preferred
Stock valued at $5,641. The transaction was accounted for as a purchase and,
accordingly, the consolidated statements of earnings includes SPRY's operations
from the date of acquisition. On January 30, 1996, the Company contributed its
investment in SPRY to CompuServe. In connection with the purchase, the Company
acquired certain intangible assets, including software technology, tradenames
and an assembled workforce totalling $11,656. These intangibles will be
amortized on a straight-line basis over five years. The Company also acquired
research and development projects related to SPRY's next product generation.
These projects represent SPRY's research and development efforts prior to the
merger, which had not yet reached the stage of technological feasibility and had
no alternative future use; thus, the ultimate revenue generating capability of
these projects was uncertain. The purchased research and development was valued
at $83,508 using a discounted, risk-adjusted future income approach. The
consolidated statements of earnings includes a charge for the purchased research
and development which is not deductible for income tax purposes. The fair value
of assets acquired, including intangibles, was $106,371; liabilities assumed
were $4,751. Liabilities assumed and the Convertible Preferred Stock and stock
options issued were non-cash items excluded from the consolidated statements of
cash flows.
On November 24, 1993, the Company acquired MECA Software, Inc. for $45,384
in cash. The transaction was accounted for as a purchase and, accordingly, the
consolidated statements of earnings includes MECA's results since the date of
acquisition. The purchase price has been allocated to assets acquired and
liabilities assumed based on their fair value at the date of acquisition. The
excess of the purchase price over the fair value of the net tangible assets
acquired was $55,978, of which $25,072 was allocated to purchased research and
development, $4,900 was allocated to various other intangibles including
technology, software and trademarks, and the remainder was allocated to
goodwill. Goodwill and other intangibles will be amortized on a straight-line
basis over their estimated useful lives of three to 15 years. The consolidated
statements of earnings includes a charge for the purchased research and
development which is not deductible for income tax purposes. The fair value of
assets acquired, including
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intangibles, was $62,004; liabilities assumed were $16,620. Liabilities assumed
in connection with the acquisition were non-cash items excluded from the
consolidated statements of cash flows.
During fiscal 1996, 1995 and 1994, the Company made other acquisitions
which were accounted for as purchases. Their operations, which are not material,
are included in the consolidated statements of earnings. Pro forma results
assuming MECA and SPRY had been acquired as of the beginning of the periods
presented would not be materially different from reported results.
SALE OF SUBSIDIARIES
On February 20, 1996, the Company announced its intention to fully separate its
wholly owned subsidiary, CompuServe. CompuServe provides computer-based
information and communication services to businesses and individual owners of
personal computers. The initial phase of this separation was completed on April
19, 1996 through CompuServe's initial public offering of 18,400,000 shares of
its common stock at $30.00 per share, which reduced the Company's ownership in
CompuServe to just over 80%. The Company did not recognize a gain on this
transaction. Additional paid-in capital was increased by the change in the
Company's proportionate share of CompuServe's equity as a result of the initial
public offering, from which the net proceeds to CompuServe were $518,819. In its
February announcement, the Company stated its intention to distribute its
remaining ownership interest in CompuServe by means of a spin-off or split-off
within approximately 12 months after the IPO.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc., exclusive of its rights to publish TaxCut, for $35,000 cash. The
sale resulted in a gain of $12,445, which is included in other income.
On June 30, 1994, the Company sold the stock of a wholly owned subsidiary
of CompuServe, Collier-Jackson, Inc., for $5,195 in cash. The operating results
of Collier-Jackson, Inc. are reflected in the consolidated statements of
earnings through the date of disposition, and the gain on the sale of $2,680 is
included in other income.
On January 27, 1994, the Company completed the sale of its interest in its
wholly owned subsidiary, Interim Services Inc. ("Interim"), through an initial
public offering of 10,000,000 shares at $20.00 per share. The net proceeds from
the sale and the receipt from the retirement of a term loan to Interim amounted
to $218,500. The Company recorded a net gain on the sale of the stock of
$27,265. Interim's results are reflected as discontinued operations. The net
sales of Interim were $399,573 for fiscal 1994.
COMMITMENTS
Substantially all of the Company's operations are conducted in leased premises.
Most of the operating leases are for a one-year period with renewal options of
one to three years and provide for fixed monthly rentals. Lease commitments at
April 30, 1996, for fiscal 1997, 1998, 1999, 2000 and 2001 aggregated $68,741,
$50,721, $32,748, $18,201 and $10,570, respectively, with no significant
commitments extending beyond that period of time. The Company's rent expense for
the years 1996, 1995 and 1994 aggregated $78,745, $70,377 and $63,655,
respectively.
The Company maintains a year-round $150,000 line of credit to support
various financial activities conducted by Block Financial Corporation and a
$25,000 line of credit to fulfill short-term cash requirements of CompuServe.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1996 Quarter Ended
-----------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31,
1996 1996 1995 1995
---------- --------- ---------- ----------
Revenues $925,502 $312,072 $223,913 $218,114
======== ======== ======== ========
Earnings (loss) before provision
for income taxes (benefits) $299,163 $ (8,882) $(13,470) $ 8,483
Provision for income taxes
(benefits) 113,452 (3,411) (5,172) 3,257
-------- -------- -------- --------
Net earnings (loss) $185,711 $ (5,471) $ (8,298) $ 5,226
======== ======== ======== ========
Earnings (loss) per share $ 1.75 $ (.05) $ (.08) $ .05
======== ======== ======== ========
Fiscal 1995 Quarter Ended
---------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31,
1995 1995 1994 1994
----------- ----------- ----------- ----------
Revenues $774,047 $268,014 $172,857 $145,400
======== ======== ======== ========
Earnings (loss) before provision
for income taxes (benefits) $213,720 $ 13,102 $ (2,029) $ (4,797)
Provision for income taxes
(benefits) 110,333 5,018 (777) (1,837)
-------- -------- -------- --------
Net earnings (loss) $103,387 $ 8,084 $ (1,252) $ (2,960)
======== ======== ======== ========
Earnings (loss) per share $.97 $.08 $(.01) $(.03)
======== ======== ======== ========
The Company recorded a charge to earnings of $83,508 ($.79 per share) for
purchased research and development in the fourth quarter of fiscal 1995.
SEGMENT INFORMATION
The principal business activity of the Company is providing services to the
general public and business community. It operates in the following industry
segments:
Tax Services: This segment is engaged in providing tax return preparation,
filing and related services to the general public on a fee basis. Revenues are
seasonal in nature and represent fees of company-owned offices and royalties
from franchised offices.
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Computer Services: This segment is engaged in providing computer
information and networking services to corporations and individual
computer owners via a proprietary data network and host servers located
in Columbus and Dublin, Ohio.
Financial Services: This segment provides and invests primarily in
financial services delivery technology and the related financial services
delivered by that technology as well as financial services associated with
Tax Services and its typical customer. It sponsors credit cards and other
financial services to existing CompuServe and Tax Services customers.
This segment also provides personal productivity software to the general
public.
Identifiable Assets: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated
with each segment of the Company's operations. The remaining assets are
classified as corporate assets and consist primarily of cash, marketable
securities and corporate equipment.
Information concerning the Company's operations by industry segment for
the years ended April 30, 1996, 1995 and 1994 is as follows:
1996 1995 1994
---------- ---------- ----------
REVENUES:
Tax Services $ 831,455 $ 729,718 $ 755,526
Computer Services 793,165 582,793 429,885
Financial Services 48,887 35,909 42,097
Intersegment Sales (8,010) (12,500) (13,185)
---------- ---------- ----------
Total operating revenues 1,665,497 1,335,920 1,214,323
Investment income 10,468 23,703 15,256
Corporate 3,636 695 9,098
---------- ---------- ----------
Total Revenues $1,679,601 $1,360,318 $1,238,677
========== ========== ==========
OPERATING PROFIT:
Tax Services $ 194,771 $ 147,740 $ 198,719
Computer Services 87,836 150,109 102,317
Financial Services 5,077 (5,788) 9,428
---------- ---------- ----------
Total operating profit 287,684 292,061 310,464
Investment income 10,468 23,703 15,256
Purchased research and development - (83,508) (25,072)
Unallocated corporate and administrative (12,858) (12,260) (17,464)
---------- ---------- ----------
Earnings from Continuing Operations Before Taxes $ 285,294 $ 219,996 $ 283,184
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Tax Services $ 23,499 $ 21,991 $ 24,899
Computer Services 78,683 42,639 29,876
Financial Services 8,929 2,992 2,277
Corporate 129 62 65
---------- ---------- ----------
Total Depreciation and Amortization $ 111,240 $ 67,684 $ 57,117
========== ========== ==========
IDENTIFIABLE ASSETS:
Tax Services $ 141,031 $ 117,560 $ 122,473
Computer Services 950,671 310,393 204,791
Financial Services 208,489 186,859 110,935
Corporate 455,700 482,501 655,046
---------- ----------- ----------
Total Assets $1,755,891 $1,097,313 $1,093,245
========== =========== ==========
CAPITAL EXPENDITURES:
Tax Services $ 36,724 $ 26,033 $ 11,411
Computer Services 227,710 99,690 73,359
Financial Services 938 2,135 615
Corporate 354 45 126
---------- ----------- ----------
Total Capital Expenditures $ 265,726 $ 127,903 $ 85,511
========== =========== ==========
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SUBSEQUENT EVENTS
Subsequent to April 30, 1996, CompuServe, certain officers and directors
of CompuServe, and the Company were named as defendants in three
purported class action lawsuits. Each suit alleges 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. One suit also alleges violations of
the Ohio Securities Code and common law of negligent misrepresentation.
Relief sought is unspecified but includes pleas for rescission and
damages. Also subsequent to April 30, 1996, an action for discovery was
filed solely against CompuServe. In such action the plaintiff seeks factual
support for a possible fourth claim relating to initial public offering
disclosures. The defendants intend to vigorously defend these suits.
In July 1996, the Company's Board of Directors approved a plan to spin off
the Company's remaining ownership interest in CompuServe on or about
November 1, 1996, subject to, among other things, shareholder approval at
the September 1996 annual meeting. On August 28, 1996, the Company's
Board of Directors decided not to present the proposed spin-off of
CompuServe to the Company's shareholders at the annual meeting. This
decision was based, in part, on CompuServe's reported first quarter and
projected second quarter losses, market uncertainties relating to the
online industry, and the planned September introduction of new interfaces
for the CompuServe Information Service and WOW! The net assets and
operating results of CompuServe have been reclassified from discontinued
operations to continuing operations in the accompanying financial
statements.
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30
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 is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1996, in the section titled "Election of Directors" and in
Item 4a of Part I of this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1996, 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, 1996, 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, 1996, 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, and the Independent Auditor's Report
are contained in Item 8 of this report, above:
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Quarterly Financial Data
Independent Auditors' Report
2. Financial Statement Schedules
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the
information is not material or the informa-
30
31
tion is set forth in the financial statements or notes thereto.
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block, Inc., as
amended, filed as Exhibit 4(a) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1991,
are incorporated herein by reference.
3(b) Bylaws of H&R Block, Inc., as amended, filed as Exhibit 3(b)
to the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1995, are incorporated herein by
reference.
4(a) Conformed copy of Rights Agreement dated as of July 14, 1988
between H&R Block, Inc., and Centerre Trust Company of
St. Louis, filed on August 9, 1993 as Exhibit 4(c) to the
Company's Registration Statement on Form S-8
(File No. 33-67170), is incorporated herein by reference.
4(b) Copy of Amendment to Rights Agreement dated as of May 9, 1990
between H&R Block, Inc. and Boatmen's Trust Company, filed as
Exhibit 4(b) to the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1995, is incorporated by
reference.
4(c) Copy of Second Amendment to Rights Agreement dated
September 11, 1991 between H&R Block, Inc. and Boatmen's
Trust Company, filed as Exhibit 4(c) to the Company's annual
report on Form 10-K for the fiscal year ended April 30, 1995,
is incorporated by reference.
4(d) Copy of Third Amendment to Rights Agreement dated May 10, 1995
between H&R Block, Inc. and Boatmen's Trust Company, filed as
Exhibit 4(d) to the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1995, is incorporated by
reference.
4(e) 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(f) Form of Certificate of Designation, Preferences and Rights of
Delayed Convertible Preferred Stock of H&R Block, Inc., filed
as Exhibit 4(f) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1995, is incorporated by
reference.
10(a) The Company's 1984 Long-Term Executive Compensation Plan, as
amended (terminated as of September 8, 1993, except with
respect to awards then outstanding thereunder), filed as
Exhibit 28(a) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1991, is incorporated herein
by reference.
10(b) The Company's 1993 Long-Term Executive Compensation Plan, as
amended, filed as Exhibit 10(a) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1996,
is incorporated herein by reference.
10(c) The H&R Block Long-Term Performance Program, as amended,
filed as Exhibit 10(c) to the Company's annual report on Form
10-K for the fiscal year ended April 30, 1994, is incorporated
herein by reference.
10(d) The H&R Block Deferred Compensation Plan for Directors, as
amended, filed as Exhibit 10 to the Company's quarterly report
on Form 10-Q for the quarter ended July 31, 1994, is
incorporated herein by reference.
10(e) The H&R Block Deferred Compensation Plan for Executives, as
amended (Amendments 1 through 5), filed as Exhibit 10(e) to
the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1994, is incorporated herein by reference.
10(f) Amendment No. 6 to H&R Block Deferred Compensation Plan for
Executives, filed as Exhibit 10(b) to the Company's quarterly
report on Form 10-Q for the quarter ended July 31, 1995, is
incorporated herein by reference.
10(g) The H&R Block Supplemental Deferred Compensation Plan for
Executives, filed as Exhibit 10(f) to the Company's annual
report on Form 10-K for the fiscal year ended April 30, 1994,
is incorporated herein by reference.
10(h) Amendment No. 1 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit 10(a) to
the Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1994, is incorporated herein by reference.
10(i) Amendment No. 2 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as
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Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1995, is incorporated herein by
reference.
10(j) The Amended and Restated H&R Block, Inc. Retirement Plan for
Non-Employee Directors, filed as Exhibit 10(h) to the
Company's annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated herein by reference.
10(k) The Company's 1989 Stock Option Plan for Outside Directors, as
amended, filed as Exhibit 28(b) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1991,
is incorporated herein by reference.
10(l) Executive Employment Agreement between the Company and Richard
H. Brown, filed as Exhibit 10(d) to the Company's quarterly
report on Form 10-Q for the quarter ended July 31, 1995, is
incorporated herein by reference.
10(m) Restricted Shares Agreement dated August 5, 1995, between the
Company and Richard H. Brown, filed as Exhibit 10 to the
Company's quarterly report on Form 10-Q for the quarter ended
October 31, 1995, is incorporated by reference.
10(n) Letter dated December 20, 1995, setting forth the compensatory
arrangement for George T. Robson, Senior Vice President, Chief
Financial Officer and Treasurer of the Company, filed as
Exhibit 10(b) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1996, is incorporated by
reference.
10(o) Letter dated June 18, 1996, revising the compensatory
arrangement for George T. Robson, Senior Vice President, Chief
Financial Officer and Treasurer of the Company.
11 Statement re Computation of Per Share Earnings.
13 That portion of the annual report to security holders for the
fiscal year ended April 30, 1996 which is expressly
incorporated by reference in this filing.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified Public
Accountants, is located immediately after the signature
pages contained in this filing.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company did not file any current reports on Form 8-K during the
fourth quarter of the year ended April 30, 1996.
32
33
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.
September 26, 1996 By /s/ Frank L. Salizzoni
-------------------------
Frank L. Salizzoni, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
--------- -----
/s/ Frank L. Salizzoni President, Chief
- ----------------------- Executive Officer and
Frank L. Salizzoni Director (principal executive officer)
/s/ G. Kenneth Baum Director
- -----------------------
G. Kenneth Baum
/s/ Henry W. Bloch Director
- -----------------------
Henry W. Bloch
/s/ Robert E. Davis Director
- -----------------------
Robert E. Davis
/s/ Donna R. Ecton Director
- -----------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
- -----------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- -----------------------
Roger W. Hale
(Signed as to each on September 26, 1996)
33
34
Signature Title
--------- -----
/s/ Marvin L. Rich Director
- ---------------------
Marvin L. Rich
/s/ Morton I. Sosland Director
- ---------------------
Morton I. Sosland
/s/ George T. Robson Senior Vice President,
- --------------------- Chief Financial Officer
George T. Robson and Treasurer (principal
financial officer)
/s/ Cheryl L. Givens Assistant Vice President
- --------------------- and Corporate Controller
Cheryl L. Givens (principal accounting
officer)
(Signed as to each on September 26, 1996)
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35
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8, Registration
Statement No. 33-54985 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8, Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock issuable
under the Spry, Inc. 1995 Stock Option Plan) on Form S-8, and Registration
Statement No. 333-09577 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 of our reports dated June 18, 1996, except for the
"Subsequent Events" note to the consolidated financial statements as to which
the date is September 26, 1996, appearing in and incorporated by reference in
this Annual Report on Form 10-K/A of H&R Block, Inc. and subsidiaries for the
year ended April 30, 1996.
/s/Deloitte & Touche LLP
Kansas City, Missouri
September 26, 1996
35
36
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the consolidated financial statements of H&R Block,
Inc. and subsidiaries as of April 30, 1996 and 1995 and for each of the three
years in the period ended April 30, 1996, and have issued our report thereon
dated June 18, 1996, except for the "Subsequent Events" note to the
consolidated financial statements as to which the date is September 26, 1996;
such consolidated financial statements and report are included in Item 8 of
this report. Our audits also included the financial statement schedule of H&R
Block, Inc. and subsidiaries, listed in Item 14(a)(2). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
September 26, 1996
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37
H&R Block, Inc. and Subsidiaries
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Years ended April 30, 1996, 1995 and 1994
Additions
------------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
- -------------------------------- ------------ ----------- -------- ----------- -----------
Allowance for Doubtful Accounts_
deducted from accounts receivable
in the balance sheet
1996 $ 7,274,000 $27,465,000 $ - $26,891,000 $ 7,848,000
=========== =========== ======== =========== ===========
1995 $12,744,000 $13,619,000 $ - $19,089,000 $ 7,274,000
=========== =========== ======== =========== ===========
1994 $12,000,000 $24,977,000 $ - $24,233,000 $12,744,000
=========== =========== ======== =========== ===========
38
EXHIBIT INDEX
10(o) Letter dated June 18, 1996, revising the compensatory arrangement for
George T. Robson, Senior Vice President, Chief Financial Officer and
Treasurer of the Company.
11 Statement re Computation of Per Share Earnings.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
1
EXHIBIT 10(O)
H&R Block, Inc. Richard H. Brown
4410 Main Street President and
Kansas City, Missouri 64111 Chief Executive Officer
(816) 932-7577
Fax (816) 753-8628
June 18, 1996
Mr. George T. Robson
300 Caversham Road
Bryn Mawr, Pennsylvania 19010
Dear George:
This letter confirms our recent verbal agreement to revise the terms of
your employment with HRB Management, Inc. ("HRB"), and to make corresponding
changes to such terms as set forth in my December 20, 1995 letter to you (the
"Employment Letter").
We have agreed that, effective immediately, item 6 of the Employment
Letter is revised to read as follows:
"6. You will be protected against a "Change of Control" of Block that
is not initiated by Block, should such a Change of Control
occur during the five-year period following the commencement of your
employment with HRB. If at any time during the one-year period
following such Change of Control, your employment is terminated without
"cause" under Block's or HRB's policies in existence immediately prior
to the Change of Control, or if you terminate your employment for any
reason (or no reason) during the 60-day period following such Change of
Control of Block, certain elements of your compensation will continue.
"HRB will continue to pay your base salary for a two-year
period following such termination; HRB will pay to you bonus
compensation for the fiscal year in which the termination occurs and
for the fiscal year following the year of termination, such bonus
compensation to be equal to the target award amount for the year in
which the termination occurs; vesting of nonvested stock options will
accelerate and all stock options may be exercisable for three months
following termination; and HRB will continue health, life and
disability insurance benefits for up to two years following the
termination to the extent that you do not obtain similar benefits from
another party.
2
Mr. George T. Robson
June 18, 1996
Page Two
"A Change of Control means (i) acquisition of beneficial ownership of
50% or more of Block's voting securities by an individual, entity or
group other than Block or any of its affiliates; (ii) approval by
Block's stockholders of a reorganization, merger or consolidation of
Block (whether by a single transaction or a series of related
transactions), but only if the beneficial owners of Block common stock
immediately before the transaction (or related transactions) do not,
immediately after the transaction (or related transactions),
beneficially own, directly or indirectly, more than 50% of the company
resulting from the transaction (or related transactions); (iii) a
complete liquidation or dissolution of Block or of the sale or other
disposition of all or substantially all of the assets of Block; or (iv)
turnover of more than a majority of the directors on the Board of
Directors of Block as a result of a proxy contest or a series of proxy
contests under the Securities and Exchange Commission proxy rules. Any
event, transaction or series of transactions described in this
paragraph that is initiated by Block shall not constitute a Change of
Control under the terms of this letter.
"On the fifth anniversary of your employment by HRB, Block will
consider and discuss with you the possible extension of the Change of
Control provisions.
"The sale, distribution or other disposition by Block or any
subsidiary of Block of all or substantially all of the common stock
of CompuServe Corporation held directly or indirectly by Block on the
date of this letter shall not constitute a Change of Control under the
terms of this letter."
If the foregoing reflects your understanding of our agreement, please
sign and return a copy of this letter to me, and the terms of this letter will
become effective.
Very truly yours,
HRB Management, Inc. Accepted and agreed to this 18th
day of June, 1996:
/s/Richard H. Brown /s/George T. Robson
- ----------------------------- ---------------------------
Richard H. Brown George T. Robson
1
EXHIBIT 11
CALCULATION OF PRIMARY EARNINGS PER SHARE
Year Ended April 30,
-----------------------------------------------
1996 1995 1994
---- ---- ----
Net earnings $177,168,000 $107,259,000 $200,528,000
============ ============ ============
Weighted average number of shares outstanding-
primary: Weighted average number of
common shares outstanding 103,926,000 105,029,000 105,882,000
Dilutive effect of stock options after
application of treasury stock method 524,000 708,000 887,000
Dilutive effect of Convertible Preferred
Stock 1,609,000 134,000 -
------------ ------------ ------------
Weighted average number of shares outstanding 106,059,000 105,871,000 106,769,000
============ ============ ============
Earnings per share:
Primary $1.67 $1.01 $1.88
===== ===== =====
2
EXHIBIT 11
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended April 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
Net earnings $177,168,000 $107,259,000 $200,528,000
============ ============ ============
Weighted average number of shares outstanding -
fully diluted: Shares used in calculating
primary earnings per share 106,059,000 105,871,000 106,769,000
Additional effect of stock options after
application of treasury stock method - 155,000 203,000
------------ ------------ ------------
Weighted average number of shares outstanding 106,059,000 106,026,000 106,972,000
============ ============ ============
Earnings per share:
Fully diluted $1.67 $1.01 $1.87
===== ===== =====
1
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business
under their corporate names listed below or close derivatives thereof:
Name Jurisdiction in which organized
H&R Block Group, Inc Delaware (1)
Block Investment Corporation Delaware (1)
Bay Colony, Ltd. Virginia (1)
HRB Management, Inc. Missouri (2)
H&R Block Tax Services, Inc. Missouri (2)
H&R Block Eastern Tax Services, Inc. Missouri (3)
H&R Block of Dallas, Inc. Texas (3)
HRB Partners, Inc. Delaware (4)
H&R Block and Associates, L.P. Delaware (5)
HRB Royalty, Inc. Delaware (3)
BWA Advertising, Inc. Missouri (3)
H&R Block Canada, Inc. Canada (3)
H&R Block (Nova Scotia), Incorporated. Nova Scotia (6)
H&R Block (Guam), Inc. Guam (3)
H&R Block Limited. New South Wales (7)
H&R Block The Income Tax People Limited. New Zealand (3)
Block Financial Corporation Delaware (2)
Franchise Partner, Inc. Nevada (8)
HRB Financial Corporation Utah (8)
Chach Key Corporation Utah (8)
Companion Mortgage Corporation Delaware (8)
MECA Sub - LFOD, Ltd. New Hampshire (8)
Block Mortgage Company, L.L.C Virginia (9)
CompuServe Corporation Delaware(10)
CompuServe Incorporated Ohio (11)
CompuPlex Incorporated Ohio (12)
CompuServe Ventures Incorporated Ohio (12)
CompuServe Works of Wonder, Inc. Ohio (12)
CompuServe Systems Integration
Group Southwest, Inc. Texas (12)
CompuServe Canada Limited Canada (12)
CompuServe Consulting Services
(UK) Limited United Kingdom (12)
CompuServe Information Services
(UK) Limited United Kingdom (12)
CompuServe Information Services GMBH Germany (12)
CompuServe Information Services AG Switzerland (12)
CompuServe Information Systems S.A.R.L.. France (12)
CompuServe A.B. Sweden (12)
CompuServe Information Services, B.V The Netherlands (12)
CompuServe International Pty, Ltd. Australia (12)
CNS Information (S) Pte Ltd. Singapore (12)
Spry, Inc. Washington (12)
Spry Soft, Inc. Washington (13)
Network Publishing Inc. Utah (14)
Access Technology, Inc. Massachusetts (15)
Companion Insurance, Ltd. Bermuda (15)
HRB Investment, Inc. Delaware (15)
PM Industries, Inc. Kansas (15)
2
Notes to Subsidiaries of H&R Block, Inc.:
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of H&R Block Tax Services, Inc.
(4) Wholly owned subsidiary of H&R Block of Dallas, Inc.
(5) Limited partnership in which H&R Block Tax Services, Inc. is
a 1% general partner and HRB Partners, Inc. is a 99% limited
partner
(6) Wholly owned subsidiary of H&R Block Canada, Inc.
(7) Wholly owned subsidiary of HRB Royalty, Inc.
(8) Wholly owned subsidiary of Block Financial Corporation
(9) Limited liability company in which Bay Colony, Ltd. has a 99%
membership interest and Block Financial Corporation has a 1%
membership interest
(10) 80.1%-owned subsidiary of H&R Block Group, Inc.
(11) Wholly owned subsidiary of CompuServe Corporation
(12) Wholly owned subsidiary of CompuServe Incorporated
(13) Wholly owned subsidiary of Spry, Inc.
(14) 55%-owned subsidiary of CompuServe Incorporated
(15) Wholly owned subsidiary of HRB Management, Inc.
Exhibit 21 (continued)
5
YEAR
APR-30-1996
APR-30-1996
339055
389557
341582
7848
0
1122258
714769
315195
1755891
478247
0
0
4
1089
1038500
1755891
0
1679601
0
1394307
0
0
0
285294
108126
177168
0
0
0
177168
1.67
0
