UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K/A
Amendment Number 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer 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, 1997, was $3,265,139,295.
Number of shares of registrant's Common Stock, without par value, outstanding on
June 1, 1997: 104,078,315.
Documents Incorporated by Reference
A certain specified portion of the registrant's annual report to security
holders for the fiscal year ended April 30, 1997, 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,
1997, 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 of CompuServe Corporation for the fiscal year ended April 30, 1997, 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 in the United States, (2) all of the
shares of Block Financial Corporation, a financial services subsidiary, 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. Indirect subsidiaries of H&R Block Group, Inc.
operate income tax return preparation and related services businesses in Canada,
Australia, the United Kingdom and Guam, and offer H&R Block franchises in other
parts of the world as a part of the operations of H&R Block International.
Developments within H&R Block Tax Services, Inc., H&R Block
International and Block Financial Corporation during fiscal year 1997 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 of CompuServe Corporation for the
fiscal year ended April 30, 1997, in the section entitled "Business and
Properties," and such descriptions are incorporated herein by reference. A copy
of the Form 10-K 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.
During fiscal year 1997, Frank L. Salizzoni became President and Chief
Executive Officer of the Company. Mr. Salizzoni replaced Richard H. Brown who,
on May 15, 1996, announced his intentions to become chief executive of Cable &
Wireless Group plc in London effective July 1, 1996. Mr. Salizzoni was elected
President and Chief Executive Officer of the Company on an interim basis
effective June 19, 1996, and on a permanent basis on October 11, 1996, when he
was also elected Chairman of the Board of CompuServe Corporation.
Just prior to the beginning of fiscal year 1997, H&R Block Group,
Inc.'s ownership of CompuServe stock was reduced from 100% to approximately
80.1% as a result of CompuServe's initial public offering of its common stock.
Pursuant to the April 1996 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!. The
August 28 announcement reiterated the Board of Directors' belief that a
separation of CompuServe is in the best interests of the Company's shareholders
and stated that the Board will continue to consider the matter.
On November 21, 1996, CompuServe confirmed its previously forecast
second-quarter loss, announced an accelerated amortization of previously
capitalized subscriber acquisition costs, and disclosed a shift in its mar-
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keting strategy to reduce costs and to focus on business and professional
subscribers to its online service, as well as the profitable segments of the
consumer market. As a part of the shift in strategy, CompuServe announced the
withdrawal of the family-oriented WOW! online service from the marketplace
effective January 31, 1997.
On February 17, 1997, CompuServe Corporation announced that Robert J.
Massey had resigned as CompuServe's President and Chief Executive Officer,
effective immediately. His duties were assumed on an interim basis by Frank L.
Salizzoni, CompuServe's Chairman of the Board.
In April 1997, the Company and CompuServe each announced that they were
engaged in external discussions regarding a possible business combination
involving CompuServe. The announcements stated that there were no assurances
that such discussions would result in any agreement or transaction.
On September 7, 1997, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") under which a subsidiary of WorldCom, Inc.
("WorldCom") would acquire CompuServe Corporation ("CompuServe"). At the
effective time of the merger, each of the outstanding shares of CompuServe
common stock (including 74,200,000 shares owned by the Company) are to be
converted into the right to receive, and there shall be paid and issued, in
exchange for each of the CompuServe shares, .40625 of a share of WorldCom stock,
subject to adjustment as provided in the Merger Agreement. The transaction is
subject to the satisfaction of certain conditions, including, among others, the
expiration or termination of any applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
foreign competition law or similar law, the receipt of other regulatory
approvals, the absence of certain adverse material changes, and CompuServe
shareholder approval and adoption of the Merger Agreement. The Company has
agreed to vote all of its directly and indirectly owned shares of CompuServe
common stock in favor of the merger and such action is sufficient to approve the
transaction. The transaction will be treated as a sale of assets for tax
purposes and it is expected to close as soon as practicable after the
satisfaction of all the conditions set forth in the Merger Agreement. In the
Company's consolidated statement of earnings for the three years ended April 30,
1997, 1996 and 1995, the consolidated statement of cash flows for the year ended
April 30, 1997 and the consolidated balance sheet as of April 30, 1997 included
in this Form 10-K/A, Amendment Number 2, CompuServe's results are reflected as
discontinued operations.
During the year ended April 30, 1997, 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.
On April 16, 1997, the Company announced that Block Financial
Corporation had agreed to purchase all of the stock of Option One Mortgage
Corporation ("Option One") from Fleet Financial Group, Inc. ("Fleet"). Option
One engages in the origination, purchase, servicing, securitization and sale of
one-to-four family residential mortgage loans made primarily to subprime
borrowers who do not qualify for loans which conform to FNMA or FHLMC
guidelines. It is based in Santa Ana, California, with a network of more than
5,000 mortgage brokers in 46 states. On June 17, 1997, Block Financial
Corporation completed the purchase. The purchase price was $218.1 million in
cash, consisting of $28.1 million in adjusted stockholder's equity and a premium
of $190 million. In addition, Block Financial Corporation made a cash payment of
$456 million to Fleet to eliminate intercompany loans made to Option One to
finance Option One's mortgage loan business. Both payments are subject to
post-closing adjustments. The $456 million payment was recorded as an
intercompany loan from Block Financial Corporation to Option One and was repaid
by Option One by the end of June 1997 after Option One sold mortgage loans to a
third-party in the ordinary course of business.
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 1,640 regular full-time employees. The highest number of persons
employed by the Company during the fiscal year ended April 30, 1997, including
seasonal employees, was approximately 78,900. As of April 30, 1997, CompuServe
had approximately 3,050 full-time employees.
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Description of Business
Diversified Services
Through its subsidiaries, 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, credit cards, nonconforming
mortgages, franchise equity lines of credit, personal productivity computer
software, online and Internet access services, and network access, management
and applications. The Company also purchases participation interests in refund
anticipation loans made by a third-party lending institution and offers equity
lines of credit to the Company's franchisees. The description of the business of
CompuServe Corporation is contained in the annual report on Form 10-K of
CompuServe Corporation for the fiscal year ended April 30, 1997, 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 and an
electronic refund service in conjunction with its electronic filing service. H&R
Block also markets its knowledge of how to prepare income tax returns through
its income tax training schools.
In May 1996, the Company announced that its tax operations would 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., focuses on tax business operations in the United States. H&R
Block Premium, a division of Tax Services, competes for those clients who
typically have more complex income tax returns and features meetings by
appointment any time of the year, private offices and more experienced
preparers. H&R Block International focuses on strengthening current foreign
markets, such as Canada and Australia, and identifying and developing 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, as well as those foreign subsidiaries of the Company 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 18,190,000 taxpayers
worldwide during fiscal year 1997, an increase from the 17,415,000 taxpayers
served in fiscal year 1996. The number of taxpayers served by H&R Block in
fiscal year 1997 in the United States alone was approximately 15,600,000,
compared to 14,800,000 in fiscal 1996. "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 1997 income tax filing season
(January 2 through April 30), H&R Block offices prepared approximately
14,302,000 individual United States income tax returns, compared to the
preparation of 13,360,000 such returns in fiscal year 1996. These U.S. returns
constituted about 13% of an IRS estimate of total U.S. individual income tax
returns filed during fiscal year 1997. 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:
Tax Season Ended April 30
(in thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Returns Prepared 12,968 13,036 12,918 13,360 14,302
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. Pursuant to the one-stop service offered at Company-owned
offices in 1997, the return is reviewed for accuracy and presented to the
customer for signature and filing during his or her initial visit to the office.
The income tax preparation procedures must be modified somewhat for customers
who desire to have their returns electronically filed (see "Electronic Filing,"
below).
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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 "Additional 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 576 in
fiscal year 1996 to 614 in 1997. In fiscal 1997, the number of H&R Block Premium
clients increased to approximately 698,000, compared to approximately 643,200 in
1996. 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 1997 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Beneficial National Bank in
amounts based upon the customers' anticipated Federal income tax refunds. Income
tax return information is simultaneously transmitted by H&R Block to the IRS and
the lending bank. Within a few days after the date of filing, a check in the
amount of the loan, less the bank's transaction fee and H&R Block's tax return
preparation fee and 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 also offers an electronic refund service pursuant to which
an eligible electronic filing service customer's income tax refund is directly
deposited into a bank account at Mellon Bank, N.A. within approximately three
weeks after the tax return is electronically filed, and a check is thereafter
issued to the taxpayer in the amount of the refund, less the bank's transaction
fee and H&R Block's tax return preparation fee and electronic filing fee.
Tax Services and its franchisees filed approximately 7,279,000 U.S. tax
returns electronically in 1997, compared to 6,298,000 in fiscal 1996.
Approximately 2,573,000 refund anticipation loans were processed in 1997 by H&R
Block, compared to 2,361,000 in fiscal 1996. Approximately 1,871,300 electronic
refunds were processed in fiscal 1997 by H&R Block, compared to 1,283,000 in
fiscal 1996.
In 1997, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 34 states and the District of
Columbia (compared to 33 states in fiscal 1996) 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 1997 fiscal year, 125,333 students enrolled in H&R
Block's basic and advanced income tax courses, compared to 123,159 students
during fiscal year 1996.
Additional Products and Services. In fiscal year 1997, the "Peace of
Mind" Program, whereby customers are essentially offered an extended warranty
with respect to their tax returns, was offered nationwide in all Company-owned
and participating franchise locations. 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
additional taxes owed by the customer (for which liability would not ordinarily
accrue) resulting from such errors or from revised interpretations of tax laws
by the IRS. The Peace of Mind Program has a per customer cumulative limit of
$4,000 ($5,000 at H&R Block Premium offices) in additional taxes paid with
respect to the Federal, state and local tax returns prepared by H&R Block for
the taxable year covered by the Program. The Company also offered at its offices
in fiscal year 1997 the Last Will and Testament Kit and the Living Will Kit,
each a simple, self-service instrument. During the 1997 tax season, Tax Services
tested the origination of nonconforming mortgage loans in 31 tax offices in four
states in cooperation with Block Financial Corporation (see "Financial
Services," below), college financial aid services in 531 tax offices, and
immigration processing services in 28 tax offices in Southern California.
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
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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 1997, H&R Block also operated 932 offices in department
stores, including 799 offices in Sears, Roebuck & Co. stores operated as "Sears
Income Tax Service by H&R Block." During the 1997 tax season, the Sears'
facilities constituted approximately eight percent of the tax office locations
of H&R Block. Tax Services is a party to a license agreement with Sears under
which Tax Services will continue to operate in Sears locations throughout the
United States. Such license agreement expires on December 31, 2004. Tax Services
believes its relations with Sears to be excellent and that both parties to the
license arrangement view the operations thereunder to date as satisfactory.
On April 15, 1997, there were 9,937 H&R Block offices in operation
principally in all 50 states, the District of Columbia, Canada, Australia and
Europe, compared to 9,678 offices in operation on April 15, 1996. Of the 9,937
offices, 5,215 were owned and operated by Tax Services (compared to 4,738 in
fiscal year 1996) and 4,722 were owned and operated by independent franchisees
(compared to 4,940 in fiscal 1996). Of such franchised offices, 3,290 were owned
and operated by "satellite" franchisees of Tax Services (described below), 845
were owned and operated by "major" franchisees (described below) and 587 were
owned and operated by satellite franchisees of major franchisees. In the United
States alone, H&R Block operated 8,554 offices in fiscal year 1997, compared to
8,308 offices in fiscal 1996. Of the 8,554 offices, 4,483 were owned and
operated by Tax Services and 4,071 were owned and operated by franchisees.
Two types of franchises have principally been granted by the Company
and its subsidiaries. "Major" franchisees entered into agreements with the
Company (primarily in the Company's early years) covering larger cities and
counties and providing for the payment of franchise royalties based upon a
percentage of gross revenues of their offices. Under the agreements, the Company
granted to each franchisee the right to the use of the name "H&R Block" and
provided a Policy and Procedure Manual and other supervisory services. Tax
Services offers to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major franchisee selects and
trains the employees for his or her office or offices. Since March 1993, HRB
Royalty, Inc., a wholly-owned subsidiary of Tax Services, has served as the
franchisor under the major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local advertising, initial training,
and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the satellite
franchises of Tax Services are located in cities with populations of 15,000 or
less. Some major franchisees also grant satellite franchises in their respective
areas. It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and 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 fiscal year 1997, Tax Services acquired
251 tax offices in the United States, including 73 competitor offices and 178
H&R Block franchise offices. The largest franchise acquisition during fiscal
year 1997 occurred in June 1996, when the Company acquired Bay Colony, Ltd., a
major franchise operation serving central and eastern Virginia and the northeast
corner of North Carolina through 145 offices and 33 satellite offices.
H&R Block International. H&R Block prepares U.S. income tax returns in
other countries, Canadian tax returns in Canada, and Australian tax returns in
Australia. With the commencement of tax season in the United Kingdom in April
1997, H&R Block also began offering tax return preparation services in the
United Kingdom, as its tax system requires more taxpayers to calculate their own
tax liabilities. On April 16, 1997, the Company purchased The Tax Team Limited,
a Horsham-based firm with 12 offices throughout the United Kingdom. The Tax Team
has retained its name and is opening additional offices in major markets across
the United Kingdom. The Tax Team is expanding its offerings to include financial
planning and accounting services.
The returns prepared at offices in countries outside of the United
States constituted 15.2% of the total returns prepared by H&R Block in the last
fiscal year. The Company is studying potential international markets outside of
Canada, Australia and the United Kingdom and is also considering acquisition of
other U.K. tax preparation and accounting companies to expand its service
offerings in the United Kingdom.
H&R Block offers 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.
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Canadian Operations. H&R Block Canada, Inc. and its franchisees
prepared approximately 2,156,000 Canadian returns filed with Revenue Canada
during the 1997 income tax filing season, compared with 2,223,000 Canadian
returns prepared in the previous year. The number of offices operated by H&R
Block in Canada increased from 1,016 in fiscal year 1996 to 1,021 in fiscal year
1997. Of the 1,021 offices in Canada, 562 were owned and operated by H&R Block
Canada, Inc. and 459 were owned and operated by franchisees.
The Company and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must follow
in conducting the program are specified by Canadian law. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by H&R Block to the
customer for an amount which is equal to the sum of (1) 85% of that portion of
the anticipated refund which is less than or equal to $300 and (2) 95% of that
portion of the refund in excess of $300. The customer assigns to H&R Block the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to H&R Block and deposited by H&R Block
in its bank account. In accordance with the law, the discount is deemed to
include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowing. The number of
returns discounted under the CashBack program decreased to approximately 583,000
in fiscal year 1997 from 681,000 in fiscal year 1996. H&R Block's introduction
in 1997 of more stringent eligibility requirements for refund discounting
accounted for the decrease in CashBack returns.
In January 1997, H&R Block Canada, Inc. acquired Cashplan Systems Inc.,
a company providing check-cashing and other low-end financial services through a
network of 40 offices. Operating under the name "CashPlan," the new service
complements the CashBack service.
In 1997, H&R Block Canada, Inc. tested the separation of CashBack
offices from regular tax return preparation offices in some parts of Canada.
Twenty-five offices offered refund discounting services under the "CashBack"
name without H&R Block signage.
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 403,000 in fiscal year 1997 from 389,000 in fiscal
year 1996. The number of offices operated by H&R Block in Australia in fiscal
year 1997 was 302, compared to 297 offices operated in fiscal 1996. Of the 302
offices, 167 were owned and operated by H&R Block Limited and 135 were
franchised offices. The tax season in Australia begins in July and ends in
October.
Management Changes. Effective June 1, 1996, Thomas L. Zimmerman was
elected President of H&R Block Tax Services, Inc. Mr. Zimmerman had been
Executive Vice President of such subsidiary from May 1994 through May 1996.
Ozzie Wenich was elected President, H&R Block International, effective June 1,
1996. Mr. Wenich had served as Vice President, Finance and Treasurer of the
Company from October 1994 through May 1996. In addition to his responsibilities
as President, H&R Block International, Mr. Wenich was elected Senior Vice
President, Chief Financial Officer and Treasurer of the Company after the end of
fiscal year 1997.
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
H&R Block Premium
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In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks.
Someone You Can Count On
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 businesses are 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 and accounting firms that offer tax return preparation
services. Many tax return preparation firms, and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that in terms of the number of
offices and tax returns electronically filed in fiscal year 1997, it is the
largest provider of electronic filing services in the United States.
Government Regulation. Several countries and states have enacted, or
have considered, legislation regulating commercial tax return preparers. In the
United States, primary efforts toward the regulation of such preparers have
historically been made at the Federal level. Federal legislation requires income
tax return preparers to, among other things, set forth their signatures and
identification numbers on all tax returns prepared by them, and retain for three
years all tax returns prepared. Federal laws also subject income tax return
preparers to accuracy-related penalties in connection with the preparation of
income tax returns. Preparers may be enjoined from further acting as income tax
return preparers if the preparers continuously and repeatedly engage in
specified misconduct. With certain exceptions, the Internal Revenue Code also
prohibits the use or disclosure by income tax return preparers of certain income
tax return information without the prior written consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
its operations. In addition, no present state or foreign statutes of this nature
have had a material adverse effect on the business of the Company. However, the
Company cannot predict what the effect may be of the enactment of new statutes
or adoption of new regulations.
The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon application, be
accepted into the electronic filing program. Once accepted, electronic filers
must comply with all publications and notices of the IRS applicable to
electronic filing, provide certain information to the taxpayer, comply with
advertising standards for electronic filers, and be subjected to possible
monitoring by the IRS, penalties for disclosure or use of income tax return
preparation and other preparer penalties, and suspension from the electronic
filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans, money borrowed by a taxpayer
that is based on the taxpayer's anticipated income tax refund. Electronic filers
must clearly explain that the refund anticipation loan is in fact a loan, and
not a substitute for or a quicker way of receiving an income tax refund. The
Federal laws place restrictions on the fees that an electronic filer may charge
in connection with refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect its operations.
However, the Company cannot predict what the effect may be of the enactment of
new statutes or the adoption of new regulations pertaining to electronic filing
and/or refund anticipation loans.
The Canadian government regulates the refund discounting program in
Canada, as discussed under "Canadian Operations," above. These laws have not
materially affected the Company.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the world under the name "H&R Block"
are operated by franchisees. Certain aspects of the franchisor/franchisee
relationship have been the subject of regulation by the Federal Trade Commission
and by various states. The extent of such regulation varies, but relates
primarily to disclosures to be made in connection
8
with the grant of franchises and limitations on termination by the franchisor
under the franchise agreement. To date, no such regulation has materially
affected the Company's business. However, the Company cannot predict what the
effect may be of the enactment of new statutes or adoption of new regulations
pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals have fallen short
of adoption, such issues received more serious attention during the 1996
election year than ever before. Historically, changes in tax laws have increased
the Company's business. The immediate result of tax law changes has been an
increase in complexity. The transition from the current system to a new,
untested system is likely to take a number of years and, under most serious tax
reform proposals, Americans will still need to file Federal and state tax
returns. The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the Company's business
over time is uncertain, and such legislation could have a material adverse
effect on the Company's business and results of operations.
Financial Services
Generally. The businesses of Block Financial Corporation ("BFC") include: (1)
the purchase of participation interests in refund anticipation loans;(2) the
origination, servicing, sale and securitization of nonconforming mortgage loans;
(3) credit cards; (4) financial services delivered by technology and financial
service delivery technology; (5) franchise equity lines of credit; and (6)
software.
In July 1996, BFC announced its agreement with Beneficial National Bank
to purchase a participation interest in refund anticipation loans provided by
Beneficial to H&R Block tax customers. See "Electronic Filing" under "Tax
Services," above. In the 10-year agreement, BFC agreed to purchase an initial
40% participation interest in such RALs, which interest would be increased to
nearly 50% in specified circumstances. BFC's purchases of the participation
interests are financed through short-term borrowing. BFC bears all of the risks
associated with its interests in the RALs. BFC's total RAL revenue in fiscal
year 1997 was approximately $54.5 million, generating approximately $8.1 million
in pretax profits.
BFC completed its first securitization of nonconforming mortgage loans
during the third quarter of fiscal year 1997, recording a gain of approximately
$3 million on a $102 million asset-backed security issue that closed on January
30, 1997. Such securitization resulted from BFC's development of 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.
Substantially all of the mortgages involved in the January 1997 securitization
were mortgages offered through independent mortgage brokers.
H&R Block Mortgage Company, L.L.C. ("Block Mortgage"), a limited
liability company in which H&R Block Tax Services, Inc. owns a 99% membership
interest and BFC owns a 1% membership interest, offers nonconforming mortgage
loans at H&R Block tax offices. Block Mortgage is a strategic initiative
involving Tax Services and BFC in which the goal is to develop a retail mortgage
business. During the 1997 tax season, nonconforming mortgages were offered
through 31 tax offices in Colorado, Indiana, North Carolina and Virginia. Block
Mortgage plans to continue the test of this business in additional offices
during fiscal year 1998.
The Company's commitment to the nonconforming mortgage business is
exemplified by the purchase of Option One Mortgage Corporation following the end
of fiscal year 1997. See the discussion of such acquisition in the last
paragraph under "General Development of Business," above. Option One originated
more than $1 billion in mortgage loans in calendar year 1996 and provides the
Company with experienced associates in the nonconforming mortgage lending
business. It is intended that Option One will assist BFC and Tax Services in
handling mortgage applications, loan processing and underwriting of mortgages
generated through the Block Mortgage operations.
BFC's credit cards (which include Gold and Classic versions of the
CompuServe Visa and WebCard(Service Mark) Visa cards) are currently issued under
a co-branding agreement between BFC and Columbus Bank and Trust Company,
Columbus, Georgia. Approximately 110,000 CompuServe Visa credit cards were
issued by the end of fiscal year 1997, compared to 113,425 accounts at the end
of fiscal 1996. The number of WebCard Visa accounts at April 30, 1997, was
57,223, compared to approximately 6,000 accounts at the end of fiscal year 1996.
The WebCard was introduced in January 1996. The aggregate portfolio for the
credit cards issued by
9
BFC increased from approximately $165 million at the end of fiscal year 1996 to
more than $246 million by the end of fiscal year 1997. While the aggregate
number of BFC's credit cards increased during fiscal year 1997, the dollar
amount of bad debt expense associated with such accounts also increased
substantially. The increase in bad debt expense resulted from the increase in
the credit card receivables portfolio and a deterioration in credit quality
arising from the maturation of the credit card portfolio. BFC is placing greater
emphasis on collections management in fiscal year 1998.
BFC developed the CONDUCTOR(R) service, a technology that facilitates
the delivery of financial services online through existing commercial online
services, the Internet or directly through leased networks. CONDUCTOR features 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.
The Company is evaluating the possible sale of its credit card
operations, including its receivables portfolio and the CONDUCTOR service.
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(Service Mark) and Kiplinger Small Business Attorney(Service Mark)
software products. As a result of the increase in sales of TaxCut's final
edition in fiscal year 1997, BFC's share of the income tax return preparation
software market is now greater than 30%.
Following the end of fiscal year 1997, William P. Anderson resigned as
President of BFC to become President and Chief Executive Officer of Bank Rate
Monitor, effective July 1, 1997. Frank L. Salizzoni has been elected President
of BFC on an interim basis.
Seasonality of Business. BFC's income tax return preparation software
and RAL participation businesses are seasonal, with the substantial portion of
the revenues from these businesses generated during the tax season.
Service Marks, Trademarks and Patents. BFC claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
CONDUCTOR
CONDUCTOR and Hand-Held Baton Design
CONDUCTOR CARD REVIEW
TaxCut
In addition, BFC claims ownership of the following unregistered service
marks and Trademarks:
Audit Buster NetGuard
B and Design Small Business Attorney
Block Financial Web
Block Financial and Design WebAccount
CONDUCTOR and Baton Design WebBank
CONDUCTOR.COM WebBroker
DittoCard WebBuyer
Download Depot WebCard
Fast Lane WebCheck
FINANCIAL CONDUCTOR WebChecking
Home Legal Advisor WebPay
Names & Dates WebQuote
Competitive Conditions. The financial services 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 is
considered to occupy a dominant position.
10
Government Regulation. The repayment of RALs generally depends on IRS
direct deposit procedures. The IRS may from time to time change its direct
deposit procedures or may determine not to make direct deposits of all or
portions of a borrower's Federal income tax refund. The failure of the IRS to
make direct deposits of refunds may impair the lender's ability to collect a RAL
and result in a loss to BFC.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure and, unless an exemption is available,
require licensing of the originators of certain mortgage loans. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, and
practices that may apply to the origination, servicing and collection of
mortgage loans. The mortgage loans purchased or originated by BFC and its
subsidiaries are also subject to Federal laws, including, without limitation,
the Federal Truth in Lending Act and Regulation Z promulgated thereunder, the
Equal Credit Opportunity Act and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, the Real Estate Settlement Procedures Act, the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, and certain other laws and
regulations. Certain mortgage loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, which incorporates the Home
Ownership and Equity Protection Act of 1994. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high up-front fees and charges,
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions, and may affect the enforceability of the related mortgage
loans. Under environmental legislation and case law applicable in certain
states, it is possible that liability for environmental hazards in respect of
real property may be imposed on a holder of a mortgage note secured by real
property.
The Company believes that Federal and state statutes and regulations
regulating electronic filing, refund anticipation loans and mortgage lending
have not had and will not have a material adverse effect on its operations.
However, the Company cannot predict what the effect may be of the enactment of
new statutes or the adoption of new regulations.
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 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 plaintiffs in the Acker litigation
voluntarily dismissed the suit and joined the plaintiffs in the Romine
litigation. A fourth purported shareholder class action suit was filed in April
1997 against CompuServe, the Company and the lead underwriters in the IPO in the
United States District Court for the Southern District of Ohio in a case
entitled Mitelman v. CompuServe Corporation, et al. In Mitelman, plaintiffs have
named the lead underwriters as defendants and as representatives of a defendant
class consisting of all underwriters who, pursuant to a single underwriting
agreement, participated in the IPO. The complaints in these four purported class
actions also name certain current and former officers and directors of
CompuServe at the time of the IPO as additional defendants. In a complaint filed
in the Court of Common Pleas, Franklin County, Ohio, in March 1997, in a case
entitled Florida State Board of Administration
11
v. CompuServe Corporation, H&R Block, Inc. and H&R Block Group, Inc., the
plaintiff seeks recovery of damages from the defendants relating to the IPO, but
does not seek class action status. Each of the aforementioned suits 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 and presentations related to the IPO. The Greenfield suit also alleges
similar violations of the Ohio Securities Code and common law of negligent
misrepresentation. The Florida State Board of Administration suit also alleges
violations of Colorado, Florida and Ohio statutes and common law of negligent
misrepresentation. Relief sought in the aforementioned lawsuits 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 additional claim
relating to IPO disclosures. The defendants are vigorously defending these
suits. The Greenfield, Romine, Acker, and Schnipper lawsuits discussed herein
were reported in the Forms 10-Q for the first, second and third quarters of
fiscal year 1997.
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, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and principal occupations (for the past five years) of the
executive officers of the Company, each of whom has been elected to serve at the
discretion of the Board of Directors of the Company, are:
Name and age Office(s)
- ------------ ---------
Henry W. Bloch (75) Chairman of the Board since August 1992; Chairman of
the Board and Chief Executive Officer from August 1989
through July 1992; Member of the Board of Directors
since 1955.
Frank L. Salizzoni (59) President and Chief Executive Officer since June 1996;
Member of the Board of Directors since 1988. See
Note 1.
Ozzie Wenich (54) Senior Vice President, Chief Financial Officer and
Treasurer since June 18, 1997; President, H&R Block
International, since June 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. See Note 2.
William P. Anderson (48) President of Block Financial Corporation from May 1992
through June 30, 1997; Senior Vice President and Chief
Financial Officer from September 1994 until September
1995; Vice President, 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.
Thomas L. Zimmerman (47) President, H&R Block Tax Services, Inc., since June
1996; Executive Vice President, Field Operations, H&R
Block Tax Services, Inc. from May 1994 through May
1996; Senior Vice President, Central Tax Services, H&R
Block Tax Services, Inc., from April 1993 through
April 1994; Vice President, Director of Central Tax
Operations, H&R Block, Inc., from May 1992 through
March 1993.
James H. Ingraham (43) Vice President, Legal since October 1996; Secretary
since June 1990; Assistant Vice President, Corporate
Legal and Human Resources from December 1995 until
October 1996; Assistant Vice President, Legal from May
1994 until December 1995; Assistant Vice President,
Corporate Counsel and Secretary, H&R Block Tax
Services, Inc., from April 1993 until May 1994;
Associate Corporate Counsel from December 1990 until
April 1993.
12
Name and age Office(s)
- ------------ ---------
Patrick D. Petrie (38) Vice President and Corporate Controller since October
1996; Vice President, Service Operations and
Treasurer, H&R Block Tax Services, Inc., from June
1996 until October 1996; Assistant Vice President,
Treasurer and Controller, H&R Block Tax Services,
Inc., from July 1993 through May 1996; Assistant Vice
President and Controller, H&R Block Tax Services,
Inc., from April 1993 until July 1993; Assistant
Controller from April 1991 until April 1993.
James D. Rose (47) Vice President and Chief Information Officer since
June 2, 1997. See Note 4.
Robert A. Weinberger (53) Vice President, Government Relations, since March
1996. See Note 5.
Note 1: Mr. Salizzoni was President and Chief Operating Officer of USAir Group,
Inc. and USAir, Inc. from March 1994 until April 1996 and Executive
Vice President - Finance, USAir, Inc. from 1990 until March 1994.
Note 2: Mr. Wenich was elected Senior Vice President, Chief Financial Officer
and Treasurer of the Company effective June 18, 1997, succeeding George
T. Robson in such capacity. Prior to his resignation effective May 31,
1997, Mr. Robson had been Senior Vice President and Chief Financial
Officer of the Company since January 1996 and Treasurer since June
1996. 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: On June 3, 1997, the Company announced that Mr. Anderson had resigned
as President of Block Financial Corporation as of June 30, 1997.
Note 4: Mr. Rose served as Vice President, Chief Information Officer, Integon
Insurance Corporation, Winston-Salem, North Carolina, from May 1996
until June 1, 1997, and as Director of Information Systems, National
Association of Insurance Commissioners, Kansas City, Missouri, from
November 1987 until May 1996.
Note 5: Mr. Weinberger was Director, Washington Affairs, Unilever United
States, Inc., from February 1991 until April 1995.
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, 1997, 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,
1997, there were 33,053 stockholders of the Company.
13
ITEM 6. SELECTED FINANCIAL DATA
Year Ended April 30
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
In thousands, except per share amounts and number of shareholders
FOR THE YEAR:
Total revenues $1,097,456 $ 871,533 $ 766,323 $ 806,721 $ 759,630
Net earnings from continuing operations* $ 143,777 $ 125,089 $ 97,989 $ 103,052 $ 126,556
Net earnings* $ 47,755 $ 177,168 $ 107,259 $ 200,528 $ 180,705
AT YEAR END:
Total assets $1,692,706 $1,755,891 $1,097,313 $1,093,245 $1,017,601
Cash, cash equivalents and marketable securities $ 539,107 $ 745,693 $ 444,981 $ 620,091 $ 439,526
Stockholders' equity $ 999,097 $1,039,593 $ 685,865 $ 707,875 $ 650,488
Shares outstanding 104,067 103,417 104,863 106,149 106,355
Number of shareholders 33,517 35,634 38,053 35,514 33,457
MEASUREMENTS:
Per share of common stock:
Net earnings from continuing operations* $ 1.36 $ 1.18 $ .92 $ .97 $ 1.18
Net earnings* $ .45 $ 1.67 $ 1.01 $ 1.88 $ 1.68
Cash dividends declared $ 1.04 $ 1.27 1/4 $ 1.21 3/4 $ 1.09 $ .97
Net tangible book value $ 8.88 $ 9.46 $ 5.79 $ 6.03 $ 4.93
Return on total revenues** 13.1% 14.4% 12.8% 15.9% 16.7%
Return on beginning stockholders' equity 4.6% 25.8% 15.2% 30.8% 29.4%
* Fiscal 1994 includes a charge to earnings from continuing operations of
$25,072 ($.24 per share) for purchased research and development in
connection with the acquisition of MECA Software, Inc. Fiscal 1995
includes a charge to earnings from discontinued operations of $83,508
($.79 per share) for purchased research and development in connection
with the acquisition of SPRY, Inc. See notes to consolidated financial
statements.
** 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 1997
On September 7, 1997, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") under which a subsidiary of WorldCom, Inc. ("WorldCom")
would acquire CompuServe Corporation ("CompuServe"). At the effective time of
the merger, each of the outstanding shares of CompuServe common stock (including
74,200,000 shares owned by the Company) are to be converted into the right to
receive, and there shall be paid and issued, in exchange for each of the
CompuServe shares, .40625 of a share of WorldCom stock, subject to adjustment as
provided in the Merger Agreement. The transaction is subject to the satisfaction
of certain conditions, including, among others, the expiration or termination of
any applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and any foreign competition law or similar
law, the receipt of other regulatory approvals, the absence of certain adverse
material changes, and CompuServe shareholder approval and adoption of the Merger
Agreement. The Company has agreed to vote all of its directly and indirectly
owned shares of CompuServe common stock in favor of the merger and such action
is sufficient to approve the transaction. The transaction will be treated as a
sale of assets for tax purposes and it is expected to close as soon as
practicable after the satisfaction of all the conditions set forth in the Merger
Agreement. CompuServe's results have been reflected as discontinued operations.
CompuServe contributed $(.91), $.49 and $.88 per share in 1997, 1996 and 1995,
respectively, exclusive of a charge of $83.5 million for purchased research and
development in 1995.
On June 17, 1997, the Company completed the purchase of Option One
Mortgage Corporation ("Option One"). Option One engages in the origination,
purchase, servicing, securitization and sale of nonconforming mortgage loans.
Based in Santa Ana, California, Option One has a network of more than 5,000
mortgage brokers in 46 states. The cash purchase price was $218.1 million. In
addition, the Company made a cash pay-
14
ment of $456 million to Option One's parent to eliminate intercompany loans made
to Option One to finance its mortgage operations. Both payments are subject to
post-closing adjustments. The $456 million payment was recorded as an
intercompany loan and was repaid to the Company by the end of June 1997 after
Option One sold the mortgage loans to a third party in the ordinary course of
business. The acquisition will be accounted for as a purchase.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), effective for fiscal years beginning after December 15, 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 requires that the
Company (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The Company
does not anticipate that the implementation of SFAS 130 will have a material
impact on the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that companies report information about operating segments in annual financial
statements and requires that those companies report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company does not anticipate that the
implementation of SFAS 131 will have a material impact on the consolidated
financial statements.
SIGNIFICANT EVENTS IN FISCAL 1997
The Company, through its wholly owned subsidiary, Block Financial Corporation
("BFC"), is party to a 10-year agreement with Beneficial National Bank which
enables it to purchase a participation interest in Refund Anticipation Loans
("RALs") made to clients in its tax offices. RALs are loans expected to be
retired by income tax refunds. During 1997, the Company held a participation
interest of 40% in RALs made, which generated $54.5 million in revenues and $8.1
million in operating earnings. Over the term of the agreement, the Company may
increase its participation in the RAL program up to nearly 50%.
SIGNIFICANT EVENTS IN FISCAL 1996
On April 19, 1996, CompuServe effected an initial public offering of 18,400,000
shares of its common stock at $30.00 per share (the "IPO"), 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 $518.8 million.
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.
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 recognized an impairment loss
of $8.4 million, representing the amount by which the carrying value of the tax
preparation software assets at BFC, including goodwill, exceeded the estimated
fair value of those assets. The impairment loss is included in other expenses in
the consolidated statements of earnings for the year ended April 30, 1996.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
effective for periods ending after December 15, 1997. SFAS 128 requires the
disclosure of basic earnings per share and diluted earnings per share on the
face of the income statement, and a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation in the notes to the
financial statements. The Company will fully adopt the provisions of SFAS 128
beginning with the quarter ending January 31, 1998. The adoption of SFAS 128
will not have a material effect on reported net earnings per share from
continuing operations and net earnings per share as presented herein.
15
1997 COMPARED TO 1996
CONSOLIDATED RESULTS
Revenues increased 25.9% to $1.097 billion compared to $871.5 million in 1996.
Net earnings from continuing operations increased 14.9% to $143.8 million from
$125.1 million in the prior year. Net earnings per share from continuing
operations increased to $1.36 from $1.18 last year.
Except for historical information contained herein, the matters
addressed in this discussion are forward-looking statements that are subject to
risks and uncertainties which could cause actual results to differ materially.
Such risks and uncertainties include, but are not limited to, economic,
competitive and governmental factors affecting the Company's operations,
markets, products, services, prices and various other factors. The Company
cannot assume, for example, that revenues of either of its operating segments
will increase in fiscal 1998, or that any increase in revenues will favorably
impact operating earnings.
Additional information on each of the Company's operating segments follows.
TAX SERVICES
Revenues increased 19.5% to $993.9 million from $831.5 million in the prior
year. Tax preparation fees increased $122.0 million, or 21.3%, as a result of a
7.1% increase in the number of returns prepared by company-owned offices, with
the remainder attributable to price increases and a change in the complexity of
returns prepared which results in higher fees. In the United States, fees from
electronic filing were up $26.9 million, or 23.7%, due primarily to an increase
in the number of U.S. Federal and state returns filed electronically by 15.7%
and 29.2%, respectively. Royalties increased by $11.2 million, or 11.6%,
reflecting improved results reported by franchises as a result of greater
revenues from electronic filing, a 5.4% increase in the number of returns
prepared by franchises and increases in pricing.
Operating earnings increased 11.5% to $217.1 million from $194.8
million in 1996. The pretax margin was 21.8% compared to 23.4% in the prior
year. The decline in margin resulted from increased bad debt associated with
electronic filing, marketing expenses targeted at gaining new customers and
costs connected with the implementation of a new, computerized bookkeeping and
management reporting system.
Management believes that Tax Services revenues will increase at a lower
rate than that experienced in fiscal 1997, due to an anticipated smaller
increase in pricing and in the number of taxpayers served. Also, the Company
acquired a major franchise in June 1996 which favorably impacted Tax Services
fiscal 1997 revenues.
FINANCIAL SERVICES
Revenues increased 204.1% to $110.8 million from $36.4 million in 1996. The
increase is largely due to the Company's participation in the RAL program, which
contributed revenues of $54.5 million. Additionally, revenues from
mortgage-related operations, which are new this year, amounted to $8.7 million,
including a gain recognized on the Company's first securitization of
nonconforming mortgage loans, which approximated $3 million. Credit card
revenues increased 26.0% to $30.9 million due to the increased number of cards
outstanding and higher revolving balances.
Operating earnings were $7.1 million compared to a loss of $7.4 million
in the prior year. Exclusive of an impairment loss of $8.4 million recognized on
the tax preparation software business assets in 1996, operating earnings for
1996 were $1.0 million. This improvement in operating earnings is mainly due to
RAL program participation, which contributed pretax earnings of $8.1 million,
and the securitization gain of approximately $3 million. Operating earnings were
negatively impacted by a 60.7% increase in credit card bad debt expense to $14.6
million. This variance resulted from an increase in the credit card receivables
portfolio by 49%, and a deterioration in credit quality arising from the
maturation of the credit card portfolio.
Management believes that revenues from Financial Services will increase
by at least 50% in fiscal 1998 primarily as a result of the Company's
acquisition of Option One.
INVESTMENT INCOME, NET
Net investment income increased 28.0% to $10.9 million from $8.5 million in
1996. The Company incurred $2.0 million of interest expense on corporate
borrowings in 1996, as compared to $.2 million in 1997.
16
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss decreased 8.2% to $10.0
million compared to $10.9 million in 1996. The improvement was due to an
increase in the cash values of corporate-owned whole-life insurance contracts
used to informally fund deferred compensation plans. The Company also favorably
adjusted its liability for certain insurance contingencies based upon actuarial
valuations.
INCOME TAX EXPENSE
The effective tax rate was 36.1% for fiscal 1997, compared to 36.7% for 1996,
caused by a decrease in state and local income taxes.
1996 COMPARED TO 1995
CONSOLIDATED RESULTS
Revenues increased 13.7% to $871.5 million compared to $766.3 million in 1995.
Net earnings from continuing operations increased 27.7% to $125.1 million from
$98.0 million in the prior year. Net earnings per share from continuing
operations increased to $1.18 from $.92 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.
Operating 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 elimination of the Direct
Deposit Indicator ("DDI") by the Internal Revenue Service ("IRS"). 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.
FINANCIAL SERVICES
Revenues increased 1.5% to $36.4 million from $35.9 million in 1995. Excluding
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.
The operating loss was $7.4 million, compared to a loss of $5.8 million
in the prior year. Exclusive of 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 $1.0 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.
INVESTMENT INCOME, NET
Net investment income declined 64.2% to $8.5 million from $23.7 million in 1995,
which is attributable to three factors. Less funds were available for investment
in 1996 due to strategic investments made in CompuServe. Additionally,
investment income in 1995 included gains of $4.9 million from the sale of
securities during the fourth quarter, whereas investment income in 1996 was
reduced by interest expense on corporate borrowings of $2.0 million.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss decreased 11.3% to
$10.9 million compared to $12.3 million in 1995, primarily due to a write-up in
the CompuServe investment as a result of the IPO.
17
INCOME TAX EXPENSE
The effective tax rate increased to 36.7%, compared to 36.1% in 1995. The
increase resulted principally from a decrease in income from tax-exempt
investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with cash and marketable
securities of $539.1 million at April 30, 1997, compared to $435.2 million
(excluding CompuServe) at the end of 1996. Stockholders' equity at April 30,
1997 and 1996 was $999.1 million and $1,039.6 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. Net accounts receivable at April
30, 1997 and 1996 include amounts due from Revenue Canada of $5.4 million and
$11.5 million, respectively.
BFC incurs short-term borrowings throughout the year to fund
receivables associated with its credit card, nonconforming mortgage loan and
other financial services programs. During January through April in 1997, BFC
used short-term borrowings to purchase a participation interest of 40% in
certain RALs through its agreement with Beneficial National Bank, described
above. In December 1996, BFC obtained a one-year, $1.25 billion backup credit
facility to support its various financial activities. This facility reduced to
$400 million on April 30, 1997, and, subsequent to year end, was increased to $1
billion through the end of its term. Outstanding commercial paper related to
credit card receivables and loans held for sale amounted to $269.6 million and
$72.7 million, respectively, at April 30, 1997 and 1996. Credit cards
receivables amounted to $247.9 million and $166.0 million at April 30, 1997 and
1996, respectively, and loans held for sale totaled $107.1 million and $8.7
million, respectively.
The Company completed its first securitization of nonconforming
mortgage loans in January 1997, recognizing a gain of approximately $3 million
on the transaction, and, in anticipation of future securitizations, continues to
purchase such loans utilizing its commercial paper program. As part of its risk
management strategy prior to securitization, the Company hedges interest rate
risk related to its mortgage portfolio by utilizing treasury rate guarantees.
The Company purchases treasury rate guarantees from certain broker-dealer
counterparties. The Company's policy is to utilize such treasury rate guarantees
only for the purpose of offsetting or reducing the risk of loss associated with
a defined or quantified exposure. As a matter of practice, the Company limits
the counterparties to major banks and financial institutions.
Management anticipates capital expenditures of approximately $50
million in 1998 related to its Tax Services and Financial Services groups,
exclusive of competitor and franchise acquisitions. The Company will pay
CompuServe $67.1 million in the second quarter of fiscal 1998 for the tax
benefits derived by the Company from CompuServe's operating losses in the 1996
calendar year using internally-generated funds. Such payment will be made in
accordance with the Tax Sharing Agreement between the Company and CompuServe.
The Company will continue to use short-term financing in the United
States to finance various financial activities conducted by BFC, including the
funding of loan originations by Option One, and in Canada to finance the
Canadian refund discount program. In addition, management anticipates that
short-term borrowing will be used in December through February each year to
finance seasonal working capital needs and the January shareholder dividend
payment. To ultimately finance the acquisition of Option One, the Company
intends to issue medium-term notes in the second quarter of fiscal 1998.
Upon completion of the CompuServe transaction, the Company will hold an
approximate three percent stake in WorldCom and will evaluate various
alternatives to convert its holdings into cash in a timely manner. The proceeds
will be used to assist the Company in growing its core tax and financial
services businesses and to fund the Company's stock repurchase program as
discussed below.
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, of which 4.8
million had been purchased at April 30, 1997. In July 1996, the Company
announced its intention to repurchase up to 10 million additional shares on the
open market over a two-year period following the separation of CompuServe. Such
authorization is in addition to the 1993 authorization. Following the completion
of the CompuServe transaction, the Company plans to continue to purchase its
shares on the open market in accordance with these authorizations. However, the
repurchase program will depend on the price of the stock, availability of excess
cash, the ability to maintain financial flexibility, and other investment
opportunities available.
18
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, 1997 and 1996, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1997, 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 advertising costs during the year
ended April 30, 1996.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 17, 1997, except for the "Subsequent Events" note to the consolidated
financial statements as to which the date is September 7, 1997
19
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
Year Ended April 30
1997 1996 1995
----------- ----------- -----------
REVENUES:
Service revenues $ 978,464 $ 764,618 $ 668,293
Royalties 107,508 96,356 90,556
Other income 11,484 10,559 7,474
----------- ----------- -----------
1,097,456 871,533 766,323
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 421,652 366,153 333,030
Occupancy and equipment 175,414 141,610 140,487
Marketing and advertising 78,139 57,105 55,330
Supplies, freight and postage 44,625 41,462 42,744
Other 163,438 88,681 65,040
----------- ----------- -----------
883,268 695,011 636,631
----------- ----------- -----------
Operating earnings 214,188 176,522 129,692
OTHER INCOME:
Investment income, net 10,870 8,490 23,703
Other, net -- 12,445 --
----------- ----------- -----------
10,870 20,935 23,703
----------- ----------- -----------
Earnings from continuing operations before income taxes 225,058 197,457 153,395
Taxes on earnings 81,281 72,368 55,406
----------- ----------- -----------
Net earnings from continuing operations 143,777 125,089 97,989
Net earnings (loss) from discontinued operations (less applicable
taxes (benefit) of ($53,421), $35,757 and $57,331) (96,022) 52,079 9,270
----------- ----------- -----------
NET EARNINGS $ 47,755 $ 177,168 $ 107,259
=========== =========== ===========
Net earnings per share from continuing operations $ 1.36 $ 1.18 $ .92
=========== =========== ===========
Net earnings per share $ .45 $ 1.67 $ 1.01
=========== =========== ===========
See notes to consolidated financial statements.
20
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except per share amounts
April 30
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 457,079 $ 685,660
Marketable securities 61,755 42,952
Receivables, less allowance for doubtful accounts of $30,144 and $7,848 407,441 333,734
Prepaid expenses and other current assets 31,671 59,912
Net assets of discontinued operations 522,144 --
---------- ----------
Total current assets 1,480,090 1,122,258
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 20,273 17,081
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $23,089 and $27,825 74,794 61,141
Deferred subscriber acquisition costs, net of amortization -- 96,636
Other 66,836 59,201
---------- ----------
161,903 234,059
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $142,894 and $315,195 65,065 399,574
---------- ----------
$1,707,058 $1,755,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 269,619 $ 72,651
Accounts payable, accrued expenses and deposits 164,872 201,320
Accrued salaries, wages and payroll taxes 105,326 109,870
Accrued taxes on earnings 129,192 94,406
---------- ----------
Total current liabilities 669,009 478,247
DEFERRED INCOME TAXES -- 46,700
OTHER NONCURRENT LIABILITIES 38,952 38,222
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST -- 153,129
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share:
authorized 400,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share: authorized 500,000 shares 4 4
Additional paid-in capital 502,308 504,694
Retained earnings 684,071 747,212
---------- ----------
1,187,472 1,252,999
Less cost of common stock in treasury 188,375 213,406
---------- ----------
999,097 1,039,593
---------- ----------
$1,707,058 $1,755,891
========== ==========
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands, except per share
Year Ended April 30
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 47,755 $ 177,168 $ 107,259
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 36,526 111,240 67,684
Amortization of deferred subscriber acquisition costs -- 22,585 --
Deferred subscriber acquisition costs -- (119,221) --
Provision for deferred taxes on earnings 538 52,639 (734)
Gain on sale of subsidiaries -- (12,445) (2,796)
Purchased research and development -- -- 83,508
Net gain on sales of marketable securities (454) (1,134) (6,664)
Other noncurrent liabilities 730 4,760 2,845
Changes in assets and liabilities:
Receivables (94,452) (70,621) (87,995)
Mortgage loans held for sale:
Originations and purchases (211,700) (8,674) --
Sales and principal repayments 113,259 -- --
Prepaid expenses and other current assets (15,455) (25,373) (1,735)
Net assets of discontinued operations 95,405 -- --
Accounts payable, accrued expenses and deposits 68,514 58,247 (24,994)
Accrued salaries, wages and payroll taxes 10,932 39,127 15,722
Accrued taxes on earnings 36,833 (17,554) (27,737)
----------- ----------- -----------
Net cash provided by operating activities 88,431 210,744 124,363
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (75,595) (162,544) (1,904,653)
Maturities of marketable securities 517 304,724 1,837,584
Sales of marketable securities 23,852 155,170 299,702
Purchases of property and equipment, net (44,277) (264,491) (123,337)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (17,249) (18,675) (47,773)
Proceeds from sale of subsidiaries -- 35,000 5,195
Other, net (16,038) (16,577) (5,856)
----------- ----------- -----------
Net cash provided by (used in) investing activities (128,790) 32,607 60,862
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (5,041,386) (2,252,761) (1,856,873)
Proceeds from issuance of notes payable 5,238,354 2,275,991 1,906,294
Net proceeds from sale of stock by subsidiary -- 518,819 --
Dividends paid (107,988) (131,263) (128,838)
Payments to acquire treasury shares -- (71,897) (114,900)
Proceeds from stock options exercised 3,439 13,172 57,997
----------- ----------- -----------
Net cash provided by (used in) financing activities 92,419 352,061 (136,320)
----------- ----------- -----------
Net increase in cash and cash equivalents 52,060 595,412 48,905
Cash and cash equivalents at beginning of the year 405,019 90,248 41,343
----------- ----------- -----------
Cash and cash equivalents at end of the year $ 457,079 $ 685,660 $ 90,248
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ (8,047) $ 73,041 $ 141,062
Interest paid 10,889 5,898 4,064
See notes to consolidated financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars 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 90% of total
revenues are generated from tax return preparation, electronic filing of tax
returns and other tax-related services. The Company also offers credit card
loans, nonconforming mortgages, personal productivity software and purchases
participation interests in refund anticipation loans made by a third party
lending institution.
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: Certain reclassifications have been made to prior
year amounts to conform with the current year presentation.
Management estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Marketable securities: Marketable debt and equity securities are
classified as available-for-sale securities, and are carried at market value,
based on quoted prices, with unrealized gains and losses included in
stockholders' equity.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
Receivables: Receivables consist primarily of credit card loans and
mortgage loans held for sale. Mortgage loans held for sale are carried at the
lower of cost or market value. The allowance for doubtful accounts represents an
amount considered by management to be adequate to cover potential credit losses.
Foreign currency translation: Assets and liabilities of the Company's
foreign 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. Subscriber
acquisition costs consist principally of direct mail costs, including mailing
lists, postage, related payroll and outsourcing costs, payments to Original
Equipment Manufacturers ("OEMs"), and disk and CD-ROM costs, all of which result
in a direct revenue-generating response. The Company makes payments to OEMs in
exchange for packaging of the Company's software with their products (e.g.
desktop computers and modems). The net effect of the change in accounting
increased assets by $96,636 at April 30, 1996, and increased net earnings of
discontinued operations by $57,305 and net earnings per share by $.54 for the
year ended April 30, 1996. The Company expenses advertising costs not classified
as direct response the first time the advertising takes place.
In October 1996, the Company changed its rate of amortization of
subscriber acquisition costs from a period of 24 months, with 60% amortized in
the first 12 months, to a rate which more closely correlates with recent trends
in subscriber retention rates and member net revenues. The new rate of
amortization is 50% in the first three months, 30% in the next nine months, and
20% in the subsequent year. In conjunction with this change, the Company
accelerated amortization of previously deferred CompuServe Interactive Service
("CSi") subscriber acquisition costs of $34,500. Additionally, all previously
deferred subscriber acquisition costs for WOW! and SPRYNET, totaling $8,321 and
$2,560, respectively, were written off due to the costs to service these high
usage, flat priced services. The WOW! service was withdrawn from the marketplace
as of January 31, 1997. All future subscriber acquisition costs for SPRYNET will
be expensed as incurred. The total adjustment of $45,381 to subscriber
acquisition costs ($23,200 after taxes, or $.22 per share) is included in net
loss of discontinued operations in the consolidated statements of earnings for
the year ended April 30, 1997.
Excess of cost over fair value of net tangible assets acquired: The
excess of cost of purchased subsidiaries, operating offices and franchises over
the fair value of net tangible assets acquired is being amortized over an
average life of 21 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.
23
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389,
which is included in other expenses in the consolidated statements of earnings
for the year ended April 30, 1996. The impairment loss represents the amount by
which the carrying value of the tax preparation software business assets,
including goodwill, exceeded the estimated fair value of those assets. The
estimated fair value was determined as the present value of estimated expected
future cash flows using a discount rate appropriate for the risks associated
with the personal software industry.
Depreciation and amortization: Buildings and equipment are depreciated
over the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the period of the respective lease
using the straight-line method.
Notes payable: The Company uses short-term borrowings to finance
temporary liquidity needs and various financial activities conducted by its
subsidiaries. The weighted average interest rates of notes payable at April 30,
1997 and 1996 were 5.7% and 5.4%, respectively.
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 compensation, and
depreciation.
The Company has entered into a Tax Sharing Agreement with CompuServe
Corporation ("CompuServe"), pursuant to which CompuServe is obligated to pay the
Company (or the Company is obligated to pay CompuServe) for CompuServe's
liability (or tax benefits) related to Federal, state, and local income taxes
during any taxable period.
Net earnings per share: Net earnings per share are computed based on
the weighted average number of common and common equivalent shares outstanding
during the respective years (105,840,000 in 1997, 106,059,000 in 1996, and
105,871,000 in 1995). Net 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 equivalents.
Disclosure regarding financial instruments: The carrying values
reported in the balance sheet for cash equivalents, receivables, notes payable,
accounts payable and accrued liabilities approximate fair market value due to
the relatively short-term nature of the respective instruments.
Stock plans: The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), in October 1995. SFAS 123 allows companies to
continue under the approach set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the provisions of SFAS 123 based on the estimated fair value
of employee stock options. Companies electing to retain the approach under APB
25 are required to disclose pro forma net earnings and net earnings per share in
the notes to the financial statements, as if they had adopted the fair value
accounting method under SFAS 123. The Company has elected to retain its current
accounting approach under APB 25.
New accounting standard: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), effective for periods ending after December
15, 1997. SFAS 128 requires the disclosure of basic earnings per share and
diluted earnings per share on the face of the income statement, and a
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation in the notes to the financial statements. The Company will fully
adopt the provisions of SFAS 128 beginning with the quarter ending January 31,
1998. The adoption of SFAS 128 will not have a material effect on reported net
earnings per share as presented herein.
24
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
April 30
1997 1996
-------- --------
Cash and interest-bearing deposits $ 58,671 $272,951
Commercial paper 195,015 105,216
Certificates of deposit 99,747 22,093
U.S. Government obligations 62,586 285,400
Other interest-bearing securities 41,060 --
-------- --------
$457,079 $685,660
======== ========
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30, 1997
and 1996 are summarized below:
1997 1996
------------------------------------------------- -------------------------------------------------
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 $ 6,167 $ 17 $ 12 $ 6,172 $ 13,182 $ 440 $ 79 $ 13,543
U.S. Government obligations 15,047 8 9 15,046 3,492 3 -- 3,495
Other debt investments 40,406 131 -- 40,537 25,852 82 20 25,914
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
61,620 156 21 61,755 42,526 525 99 42,952
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noncurrent:
Municipal bonds 15,039 325 135 15,229 11,013 310 37 11,286
Preferred stock 647 299 -- 946 1,511 316 32 1,795
Common stock 2,625 1,476 3 4,098 3,085 935 20 4,000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
18,311 2,100 138 20,273 15,609 1,561 89 17,081
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 79,931 $ 2,256 $ 159 $ 82,028 $ 58,135 $ 2,086 $ 188 $ 60,033
========== ========== ========== ========== ========== ========== ========== ==========
All marketable securities at April 30, 1997 are classified as
available-for-sale. Proceeds from the sales of available-for-sale securities
were $23,852, $155,170 and $299,702 during 1997, 1996 and 1995, respectively.
Gross realized gains on those sales during 1997, 1996 and 1995 were $600, $1,520
and $7,014, respectively; gross realized losses were $146, $386 and $350,
respectively. At April 30, 1997 and 1996, the net unrealized holding gain on
available-for-sale securities included in stockholders' equity in the
consolidated balance sheet was $1,326 and $1,169, respectively.
Contractual maturities of available-for-sale debt securities at April
30, 1997 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 $ 61,620 $ 61,755
After one year through five years 6,846 7,034
After five years through 10 years 8,193 8,195
---------- ----------
$ 76,659 $ 76,984
========== ==========
25
RECEIVABLES
Receivables consist of the following:
April 30
1997 1996
-------- --------
Credit card loans $247,889 $166,008
Mortgage loans held for sale 107,115 8,674
Other 82,581 166,900
-------- --------
437,585 341,582
Allowance for doubtful accounts 30,144 7,848
-------- --------
$407,441 $333,734
======== ========
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30
1997 1996
-------- --------
Land $ 2,568 $ 7,084
Buildings 19,812 87,523
Computer and other equipment 154,268 582,815
Leasehold improvements 31,311 37,347
-------- --------
207,959 714,769
Less accumulated depreciation and amortization 142,894 315,195
-------- --------
$ 65,065 $399,574
======== ========
Depreciation and amortization expense for 1997, 1996 and 1995 amounted
to $30,727, $21,006 and $20,690, respectively.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
management employees to defer portions of their compensation and accrue earnings
on the deferred amounts. The compensation, together with Company matching of
deferred amounts, has been accrued, and the only expenses related to these plans
are the Company match and the earnings on the deferred amounts, which are not
material to the financial statements. Included in other noncurrent liabilities
is $32,990 at the end of 1997 and $31,146 at the end of 1996 to reflect the
liability under these plans. The Company purchased whole-life insurance
contracts on certain related directors and employees to recover distributions
made or to be made under the plans and has recorded the cash surrender value of
the policies in other assets. If all the assumptions regarding mortality,
earnings, policy dividends and other factors are realized, the Company will
ultimately realize its full investment plus a factor for the use of its money.
26
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years ended
April 30, 1997 are summarized below:
Convertible
Common Stock Preferred Stock
------------------------- --------------------------
Shares Amount Shares Amount
------------------------------------------------------
Balances at May 1, 1994 108,972,699 $ 1,089 -- --
Net earnings for the year -- -- -- --
Stock options exercised -- -- -- --
Unrealized gain on translation -- -- -- --
Acquisition of treasury shares -- -- -- --
Stock issued for acquisition -- -- 401,768 $ 4
Cumulative effect of change in
accounting for marketable
securities, net of taxes -- -- -- --
Change in net unrealized gain
on marketable securities -- -- -- --
Cash dividends paid--
$1.21 3/4 per share -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1995 108,972,699 1,089 401,768 4
Net earnings for the year -- -- -- --
Stock options exercised -- -- 3,031 --
Restricted stock granted -- -- -- --
Unrealized loss on translation -- -- -- --
Acquisition of treasury shares -- -- -- --
Sale of stock by subsidiary -- -- -- --
Change in net unrealized gain
on marketable securities -- -- -- --
Cash dividends paid--
$1.27 1/4 per share -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1996 108,972,699 1,089 404,799 4
Net earnings for the year -- -- -- --
Stock options exercised -- -- 2,280 --
Cancellation of restricted stock -- -- -- --
Unrealized loss on translation -- -- -- --
Repurchase of Convertible
Preferred Stock -- -- (391) --
Stock issued for acquisition -- -- -- --
Change in net unrealized gain
on marketable securities -- -- -- --
Cash dividend paid--
$1.04 per share -- -- -- --
----------- ----------- ----------- -----------
Balances at April 30, 1997 108,972,699 $ 1,089 406,688 $ 4
=========== =========== =========== ===========
Additional Treasury Stock
Paid-in Retained --------------------------
Capital Earnings Shares Amount
--------------------------------------------------------
Balances at May 1, 1994 $ 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 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 140,578 700,423 (4,109,662) (156,229)
Net earnings for the year -- 177,168 -- --
Stock options exercised (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 504,694 747,212 (5,556,097) (213,406)
Net earnings for the year -- 47,755 -- --
Stock options exercised 24 -- 88,945 3,415
Cancellation of restricted stock -- -- (28,217) (1,044)
Unrealized loss on translation -- (3,065) -- --
Repurchase of Convertible
Preferred Stock -- -- -- --
Stock issued for acquisition (2,410) -- 589,948 22,660
Change in net unrealized gain
on marketable securities -- 157 -- --
Cash dividend paid--
$1.04 per share -- (107,988) -- --
----------- ----------- ----------- -----------
Balances at April 30, 1997 $ 502,308 $ 684,071 (4,905,421) $ (188,375)
=========== =========== =========== ===========
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1997, the Company had 5,592,921 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.
27
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, 1997, 1996 and 1995 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, 1997, 1996 and 1995 under
these plans were as follows:
1997 1996 1995
-------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------- ------------------------- -------------------------
Options outstanding, beginning of year 6,413,928 $ 37.93 4,865,814 $ 35.73 3,538,341 $ 32.05
Options granted 3,124,588 32.34 3,545,692 40.35 3,912,763 38.53
Options exercised (90,045) 20.08 (362,849) 29.02 (1,624,203) 33.21
Options which expired (3,230,772) 37.16 (1,634,729) 38.63 (961,087) 37.79
Options outstanding, end of year 6,217,699 35.78 6,413,928 37.93 4,865,814 35.73
Shares exercisable, end of year 4,506,372 36.00 4,029,301 37.56 2,727,540 34.42
Shares reserved for future grants, end of year 13,660,778 13,554,594 15,465,557
A summary of stock options outstanding and exercisable at April 30,
1997 follows:
Outstanding Exercisable
------------------------------------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at April 30 Contractual Life Exercise Price at April 30 Exercise Price
- ----------------------------- ------------------------------------------------ ---------------------------
$6.9525 - 16.25 36,337 2 years $14.50 36,337 $14.50
$17.4375 - 28.75 529,720 7 years 25.99 278,970 24.52
$30.6875 - 39.875 3,586,278 9 years 34.41 2,548,222 34.33
$40 - 44.375 2,065,364 9 years 41.04 1,642,843 41.02
--------- ---------
6,217,699 4,506,372
========= =========
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 1997 and 1996, options to purchase
Convertible Preferred Stock of 2,280 and 3,031, respectively, were exercised,
and 11,163 and 2,052, respectively, were terminated. At April 30, 1997, 33,302
of such options were outstanding, with exercise prices ranging from $9.54 to
$19.08.
The Company applies APB 25 in accounting for its stock option plans,
under which no compensation cost has been recognized for stock option awards.
Had compensation cost for the stock option plans been determined in accordance
with the fair value accounting method prescribed under SFAS 123, the Company's
net earnings and net earnings per share on a pro forma basis would have been as
follows:
Year Ended April 30
1997 1996
----------- -----------
Net earnings:
As reported $ 47,755 $ 177,168
Pro forma 34,891 168,232
Net earnings per share:
As reported $ .45 $ 1.67
Pro forma .33 1.59
28
The SFAS 123 fair value method of accounting is not required to be
applied to options granted prior to May 1, 1995, therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years. Compensation cost for 1997 includes options granted during a two-year
period, whereas 1996 includes compensation cost for options granted during that
year.
For the purposes of computing the pro forma effects of stock option
grants under the fair value accounting method, the fair value of each stock
option grant was estimated on the date of the grant using the Black-Scholes
option pricing model. The weighted-average fair value of stock options granted
during 1997 and 1996 was $6.14 and $8.46, respectively. The following
weighted-average assumptions were used for grants during the following periods:
Year Ended April 30
1997 1996
------- -------
Risk-free interest rate 6.28% 5.89%
Expected life 3 years 3 years
Expected volatility 34.08% 35.32%
Dividend yield 2.42% 1.99%
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.
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 net earnings per share.
29
OTHER EXPENSES
Included in other expenses are the following:
Year Ended April 30
1997 1996 1995
-------- -------- --------
Bad debts $ 65,865 $ 20,261 $ 9,760
Purchased services 14,504 10,866 10,450
Interest 11,641 3,969 4,056
Taxes and licenses 10,475 8,788 7,792
Refund anticipation loan servicing fees 9,838 -- 519
Travel and entertainment 9,773 7,370 7,750
Legal and professional 6,105 6,360 1,909
Amortization of goodwill 5,531 11,471 4,319
TAXES ON EARNINGS
The components of earnings from continuing operations before income taxes upon
which Federal and foreign income taxes have been provided are as follows:
Year Ended April 30
1997 1996 1995
-------- -------- --------
United States $214,469 $188,749 $146,521
Foreign 10,589 8,708 6,874
-------- -------- --------
$225,058 $197,457 $153,395
======== ======== ========
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
1997 1996 1995
-------- -------- --------
Currently payable:
Federal $ 67,992 $ 59,234 $ 43,486
State 7,710 7,891 6,343
Foreign 5,041 4,060 3,253
-------- -------- --------
80,743 71,185 53,082
-------- -------- --------
Deferred:
Federal 542 900 2,457
State 61 118 340
Foreign (65) 165 (473)
-------- -------- --------
538 1,183 2,324
-------- -------- --------
$ 81,281 $ 72,368 $ 55,406
======== ======== ========
Provision is not made for possible income taxes payable upon
distribution of unremitted earnings of foreign subsidiaries. Such unremitted
earnings aggregated $62,270 at December 31, 1996. Management believes the cost
to repatriate these earnings would not be material.
The following table reconciles the U.S. Federal income tax rate to the
Company's effective tax rate:
Year Ended April 30
1997 1996 1995
-------- -------- --------
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in income taxes resulting from:
State income taxes, net of Federal income tax benefit 2.2% 2.6% 2.7%
Foreign taxes, net of Federal income tax benefit .6% .5% .5%
Nontaxable Federal income (.5%) (.8%) (3.2%)
Other (1.2%) (.6%) 1.1%
-------- -------- --------
Effective rate 36.1% 36.7% 36.1%
======== ======== ========
30
A summary of deferred income taxes follows:
April 30
1997 1996
--------------------
Gross deferred tax assets:
Accrued expenses $ (5,920) $(13,336)
Other (142) --
-------- --------
Current (6,062) (13,336)
-------- --------
Deferred compensation (10,841) (12,155)
Depreciation (2,330) --
-------- --------
Noncurrent (13,171) (12,155)
-------- --------
Gross deferred tax liabilities:
Accrued income 2,072 --
-------- --------
Depreciation 1,767 20,375
Deferred subscriber acquisition costs -- 36,403
Product development costs -- 1,361
Capitalized research and development 1,042 716
-------- --------
Noncurrent 2,809 58,855
-------- --------
Net deferred tax (assets) liabilities $(14,352) $ 33,364
======== ========
State net operating loss carryforwards will expire on various dates
through 2011.
ACQUISITIONS
On April 14, 1997, the Company signed a definitive agreement to acquire Option
One Mortgage Corporation ("Option One"), a California-based originator of
nonconforming mortgage loans, for a cash purchase price equal to $190,000 plus
adjusted stockholder's equity of Option One on the closing date. The
acquisition, which will be accounted for as a purchase, was completed on June
17, 1997, subject to post-closing adjustments.
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. On January 30, 1996, the Company contributed its investment in SPRY to
CompuServe; SPRY's operations are therefore included in discontinued operations
since the date of acquisition. In connection with the purchase, the Company
acquired certain intangible assets, including software technology, tradenames
and an assembled workforce totalling $11,656. These intangibles are being
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. Net
earnings from discontinued operations 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.
During fiscal 1997, 1996 and 1995, 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 SPRY had been acquired as of the beginning of the period presented
would not be materially different from reported results.
SALE OF SUBSIDIARIES
On April 19, 1996, CompuServe effected an initial public offering of 18,400,000
shares of its common stock at $30.00 per share, which reduced the Company's
ownership in CompuServe to just over 80%. The Company did not recognize a gain
on this transaction. Additional paid-in capital was increased by the change in
the Company's proportionate share of CompuServe's equity as a result of the
initial public offering, from which the net proceeds to CompuServe were
$518,819.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc., exclusive of its rights to publish TaxCut, for $35,000 cash. The
sale resulted in a gain of $12,445, which is included in other income for the
year ended April 30, 1996.
On June 30, 1994, the Company sold the stock of Collier-Jackson, Inc.,
a wholly owned subsidiary of CompuServe, for $5,195 in cash. The operating
results of Collier-Jackson, Inc. through the date of disposition and the gain on
the sale of $2,680 are included in earnings from discontinued operations.
31
COMMITMENTS AND CONTINGENCIES
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, 1997, for fiscal 1998, 1999, 2000, 2001 and 2002 aggregated $68,714,
$50,251, $33,848, $18,082 and $9,488, respectively, with no significant
commitments extending beyond that period of time. The Company's rent expense for
the years 1997, 1996 and 1995 aggregated $78,034, $65,462 and $62,127,
respectively.
The Company has commitments to its credit card holders to the extent of
the unused credit limits on credit card loans. These commitments amounted to
$923,348 and $712,314 at April 30, 1997 and 1996, respectively. The Company does
not require collateral to secure credit card loan agreements. Commitments on
credit card loans are cancelable by the Company at any time and do not
necessarily represent future cash requirements.
The Company is obligated to purchase 80% of the mortgage loan volume of
a third party which meets certain criteria as established by the Company. The
Company purchased $122,535 of such loans during the year ended April 30, 1997,
which may not be indicative of future obligations. The Company also extends
warehouse financing of $50,000 to such third party to facilitate the
accumulation of mortgage loans, of which $8,199 was drawn at April 30, 1997.
At April 30, 1997, the Company maintained a $400,000 line of credit to
support various financial activities conducted by Block Financial Corporation
and its commercial paper program. This line of credit was increased to
$1,000,000 subsequent to April 30, 1997. The annual commitment fee required to
support the availability of this facility is seven basis points per annum on the
unused portion of the facility.
During fiscal 1997, CompuServe, certain current and former officers and
directors of CompuServe, and the Company were named as defendants in four
purported class action lawsuits and one lawsuit based on the same allegations in
which the plaintiff does not seek class action status. One purported class
action lawsuit was voluntarily dismissed by the plaintiffs and such plaintiffs
have joined as plaintiffs in one of the remaining class action lawsuits. One
suit names the lead underwriters in the CompuServe initial public offering as
additional defendants and as representatives of a defendant class consisting of
all underwriters who participated in such offering. Each pending 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.
Another suit also alleges violations of Colorado, Florida and Ohio statutes and
common law of negligent misrepresentation. Relief sought is unspecified but
includes pleas for rescission and damages. In addition to the five previously
mentioned lawsuits, an action for discovery was filed during fiscal 1997 solely
against CompuServe. In such action the plaintiff seeks factual support for a
possible additional claim relating to initial public offering disclosures. The
defendants are vigorously defending these suits. In the opinion of management,
the ultimate resolution of these suits will not have a material adverse impact
on the Company's consolidated financial position or future results of
operations.
FINANCIAL INSTRUMENTS
The Company securitizes and sells fixed and variable rate mortgage loan
receivables. As a part of its interest rate risk management strategy, the
Company may choose to hedge its interest rate risk related to its mortgage
portfolio by utilizing treasury rate guarantees. The Company classifies these
treasury rate guarantees as hedges of specific loan receivables. The gains and
losses derived from these treasury rate guarantees are deferred and included in
the carrying amounts of the related hedged items and ultimately recognized in
earnings. Deferred losses on the treasury rate guarantees used to hedge the
anticipated transactions amounted to $142 at April 30, 1997. The contract value
and market value of these treasury rate guarantees as of April 30, 1997 was
$40,000 and $39,925, respectively.
The Company purchases treasury rate guarantees from certain
broker-dealer counterparties. In the event counterparties do not fulfill their
obligations, the Company may be exposed to risk. The risk of default depends on
the creditworthiness of the counterparty. It is the Company's policy to review,
as necessary, the credit standing of each counterparty.
The Company is exposed to on-balance sheet credit risk related to its
receivables. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has commited to buy and commitments
made to credit card holders to meet their financing needs.
32
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1997 Quarter Ended
------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31,
1997 1997 1996 1996
------------------------------------------------
Revenues $ 880,597 $ 155,137 $ 41,107 $ 20,615
========= ========= ========= =========
Continuing operations:
Earnings (loss) before
income taxes (benefits) $ 337,847 $ (22,418) $ (44,484) $ (45,887)
Taxes (benefits) on earnings 124,028 (8,496) (16,860) (17,391)
--------- --------- --------- ---------
Net earnings (loss) 213,819 (13,922) (27,624) (28,496)
Net earnings (loss) from
discontinued operations (14,384) (11,404) (46,504) (23,730)
--------- --------- --------- ---------
Net earnings (loss) $ 199,435 $ (25,326) $ (74,128) $ (52,226)
========= ========= ========= =========
Net earnings (loss) per share
from continuing operations $ 2.03 $ (.13) $ (.27) $ (.27)
========= ========= ========= =========
Net earnings (loss) per share $ 1.90 $ (.24) $ (.71) $ (.50)
========= ========= ========= =========
Fiscal 1996 Quarter Ended
-----------------------------------------------
April 30, Jan. 31, Oct. 31, July 31,
1996 1996 1995 1995
-----------------------------------------------
Revenues $ 709,225 $ 110,812 $ 34,673 $ 16,823
========= ========= ========= =========
Continuing operations:
Earnings (loss) before
income taxes (benefits) $ 297,913 $ (26,129) $ (37,205) $ (37,122)
Taxes (benefits) on earnings 112,943 (10,432) (14,835) (15,308)
--------- --------- --------- ---------
Net earnings (loss) 184,970 (15,697) (22,370) (21,814)
Net earnings (loss) from
discontinued operations 741 10,226 14,072 27,040
--------- --------- --------- ---------
Net earnings (loss) $ 185,711 $ (5,471) $ (8,298) $ 5,226
========= ========= ========= =========
Net earnings (loss) per share
from continuing operations $ 1.74 $ (.15) $ (.21) $ (.20)
========= ========= ========= =========
Net earnings (loss) per share $ 1.75 $ (.05) $ (.08) $ (.05)
========= ========= ========= =========
Included in discontinued operations in the first quarter of fiscal 1997
is a charge of $17,713 related to the potential sale or other disposition of
certain assets and business operations of a corporate computer software group;
the consolidation of certain U.S.-based staff functions and office facilities;
the renegotiation of certain third-party customer service agreements; and the
write-off of certain obsolete software costs for billing and customer service
systems.
Included in discontinued operations in the second quarter of fiscal
1997 are pretax charges of $34,500 related to accelerated amortization of
previously deferred CSi subscriber acquisition costs; $10,881 due to the
write-off of all previously deferred subscriber acquisition costs for WOW! and
SPRYNET; and $7,850 related to the withdrawal of the WOW! online service from
the marketplace.
Included in discontinued operations in the fourth quarter of fiscal
1997 is a pretax charge of $9,191 related to further consolidation of
Columbus-area office facilities and the sale or write-down of certain equity
investments in providers of content and technologies.
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.
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 card loans, nonconforming
mortgages and other financial services to existing CompuServe and Tax Services
customers. This segment also provides personal productivity software to the
general public and purchases participation interests in refund anticipation
loans made by a third party lending institution.
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.
33
Information concerning the Company's operations by industry segment for
the years ended April 30, 1997, 1996 and 1995 is as follows:
1997 1996 1995
-----------------------------------------
REVENUES:
Tax Services $ 993,924 $ 831,455 $ 729,718
Financial Services 110,830 36,442 35,910
Unallocated corporate 1,012 3,636 695
Intersegment sales (8,310) -- --
----------- ----------- -----------
Total revenues $ 1,097,456 $ 871,533 $ 766,323
=========== =========== ===========
OPERATING EARNINGS:
Tax Services $ 217,124 $ 194,771 $ 147,740
Financial Services 7,053 (7,368) (5,788)
Unallocated corporate (9,989) (10,881) (12,260)
----------- ----------- -----------
Total operating earnings 214,188 176,522 129,692
Investment income, net 10,870 8,490 23,703
Other, net -- 12,445 --
----------- ----------- -----------
Earnings from continuing operations before income taxes $ 225,058 $ 197,457 $ 153,395
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Tax Services $ 35,300 $ 23,499 $ 21,991
Financial Services 1,093 8,929 2,992
Corporate 133 129 62
----------- ----------- -----------
Total depreciation and amortization $ 36,526 $ 32,557 $ 25,045
=========== =========== ===========
IDENTIFIABLE ASSETS:
Tax Services $ 217,720 $ 141,031 $ 117,560
Financial Services 415,900 208,489 186,859
Corporate 551,294 455,700 482,501
----------- ----------- -----------
Total assets $ 1,184,914 $ 805,220 $ 786,920
=========== =========== ===========
CAPITAL EXPENDITURES:
Tax Services $ 43,159 $ 36,724 $ 26,033
Financial Services 1,450 938 2,135
Corporate 144 354 45
----------- ----------- -----------
Total capital expenditure $ 44,753 $ 38,016 $ 28,213
=========== =========== ===========
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Block Financial Corporation, a wholly owned
subsidiary of the Company, is presented below.
April 30
1997 1996
------------------------
Condensed balance sheets:
Cash and cash equivalents $ 3,425 $ 3,871
Finance receivables, net 380,206 191,210
Other assets 34,657 10,490
----------- -----------
Total assets $ 418,288 $ 205,571
=========== ===========
Commercial paper $ 269,619 $ 72,651
Other liabilities 26,867 15,451
Stockholder's equity 121,802 117,469
----------- -----------
Total liabilities and stockholder's equity $ 418,288 $ 205,571
=========== ===========
34
Year Ended April 30
1997 1996 1995
-------- -------- --------
Condensed statements of operations:
Revenues $110,777 $ 36,854 $ 35,909
Earnings (loss) from operations 7,053 (7,368) (5,788)
Earnings (loss) before income taxes (benefit) 7,053 5,077 (5,788)
Net earnings (loss) 4,337 (255) (4,284)
SUBSEQUENT EVENTS
On September 7, 1997, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") under which a subsidiary of WorldCom, Inc. ("WorldCom")
would acquire CompuServe. At the effective time of the merger, each of the
outstanding shares of CompuServe common stock (including the 74,200,000 shares
owned by the Company) are to be converted into the right to receive, and there
shall be paid and issued, in exchange for each of the CompuServe shares, .40625
of a share of WorldCom stock, subject to adjustment as provided in the Merger
Agreement. The transaction is subject to the satisfaction of certain conditions,
including, among others, the expiration or termination of any applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and any foreign competition law or similar law, the receipt of other
regulatory approvals, the absence of certain adverse material changes, and
CompuServe shareholder approval and adoption of the Merger Agreement. The
Company has agreed to vote all of its directly or indirectly owned shares of
CompuServe common stock in favor of the merger and such action is sufficient to
approve the transaction. The transaction will be treated as a sale of assets for
tax purposes and it is expected to close as soon as practicable after the
satisfaction of all the conditions set forth in the Merger Agreement.
The consolidated statements of earnings for the three years ended April
30, 1997, 1996 and 1995, the consolidated statement of cash flows for the year
ended April 30, 1997, and the consolidated balance sheet as of April 30, 1997
have been reclassified to reflect CompuServe's operations as discontinued in
accordance with Accounting Principles Board Opinion No. 30.
Summarized financial information for CompuServe follows:
April 30
1997 1996
-----------------------
Condensed balance sheets:
Current assets $ 382,816 $ 485,890
Noncurrent assets 419,720 479,938
---------- ----------
$ 802,536 $ 965,828
========== ==========
Current liabilities $ 114,989 $ 138,399
Noncurrent liabilities 36,111 56,763
Stockholders' equity 651,436 770,666
---------- ----------
$ 802,536 $ 965,828
========== ==========
Year Ended April 30
1997 1996 1995
---------- ---------- ----------
Condensed statements of operations:
Revenues $ 841,887 $ 793,165 $ 582,793
Operating earnings (loss) (196,344) 87,836 68,279
Net earnings (loss) (119,834) 49,094 8,798
35
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, 1997, 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, 1997, 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, 1997, 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, 1997, 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, related notes
and report of H&R Block, Inc., and subsidiaries appear in Part
II, Item 8, Financial Statements and Supplementary Data,
included in this Amendment Number 2 to the Annual Report on
Form 10-K:
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 information is set forth in
the financial statements or notes thereto.
36
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block, Inc., as
amended, filed as Exhibit 3(b) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1996,
are incorporated herein by reference.
3(b) Bylaws of H&R Block, Inc., as amended, filed as Exhibit 3(b)
to the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1995, are incorporated herein by
reference.
4(a) 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) Stock Purchase Agreement dated April 14, 1997, among Fleet
Financial Group, Inc., Fleet Holding Corp., H&R Block, Inc.
and Block Financial Corporation, filed on July 2, 1997 as
Exhibit 2.1 to the Company's current report on Form 8-K, is
incorporated herein by reference
10(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) Amendment No. 2 to H&R Block Deferred Compensation Plan for
Directors, filed as Exhibit 10(c) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1997, is
incorporated herein by reference.
10(f) 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(g) 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(h) Amendment No. 7 to H&R Block Deferred Compensation Plan for
Executives, filed as Exhibit 10(a) to the Company's quarterly
report on Form 10-Q for the quarter ended January 31, 1997, is
incorporated herein by reference.
37
10(i) 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(j) 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(k) Amendment No. 2 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit 10(c) to
the Company's quarterly report on Form 10-Q for the quarter
ended July 31, 1995, is incorporated herein by reference.
10(l) Amendment No. 3 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit 10(b) to
the Company's quarterly report on Form 10-Q for the quarter
ended January 31, 1997, is incorporated herein by reference.
10(m) The H&R Block Short-Term Incentive Plan, filed as Exhibit
10(a) to the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1996, is incorporated herein by
reference.
10(n) 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(o) The Company's 1989 Stock Option Plan for Outside Directors, as
amended, filed as Exhibit 10(o) to the Company's annual report
on Form 10-K for the fiscal year ended April 30, 1997, is
incorporated herein by reference.
10(p) Employment Agreement dated October 11, 1996, between the
Company and Frank L. Salizzoni, filed as Exhibit 10(b) to the
Company's quarterly report on Form 10-Q for the quarter ended
October 31, 1996, is incorporated herein by reference.
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, 1997 which is expressly
incorporated by reference in this Amendment Number 2 to the
Annual Report on Form 10-K for such fiscal year. Portions of
such annual report to security holders not expressly
incorporated by reference in this Amendment Number 2 to the
Annual Report on Form 10-K are not deemed "filed" with the
Commission.
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 registrant filed a Current Report on Form 8-K on April 22,
1997, reporting as an "Other Event" the registrant's issuance
of a press release announcing the agreement of Block Financial
Corporation to purchase all of the stock of Option One
Mortgage Corporation. The press release was included as
Exhibit 99.1 to the Form 8-K. No financial statements were
filed as a part of the Form 8-K. Except for the Form 8-K filed
on April 22, 1997, the registrant did not file any reports on
Form 8-K during the fourth quarter of the year ended April 30,
1997.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment Number 2 to Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
H&R BLOCK, INC.
September 19, 1997 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
Director
- -------------------------
Roger W. Hale
/s/ Marvin L. Rich Director
- -------------------------
Marvin L. Rich
/s/ Morton I. Sosland Director
- -------------------------
Morton I. Sosland
(Signed as to each on September 19, 1997)
39
Signature Title
--------- -----
/s/ Ozzie Wenich Senior Vice President,
- ------------------------- Chief Financial Officer
Ozzie Wenich and Treasurer (principal
financial officer)
/s/ Patrick D. Petrie Vice President and
- ------------------------- Corporate Controller
Patrick D. Petrie (principal accounting
officer)
(Signed as to each on September 19, 1997)
40
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. 333-33039 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issuable under the Third Stock Option Plan for Seasonal
Employees) on Form S-8 of our reports dated June 17, 1997, except for the
"Subsequent Events" note to the consolidated financial statements as to which
the date is September 7, 1997, appearing in and incorporated by reference in
this Amendment Number 2 to Annual Report on Form 10-K of H&R Block, Inc. and
subsidiaries for the year ended April 30, 1997.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
September 24, 1997
41
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, 1997 and 1996 and for each of the three years in
the period ended April 30, 1997, and have issued our report thereon dated June
17, 1997, except for the "Subsequent Events" note to the consolidated financial
statements as to which the date is September 7, 1997; 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
June 17, 1997, except for the "Subsequent Events" note to the consolidated
financial statements as to which the date is September 7, 1997
42
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
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
1997 $ 4,419,000 $65,865,000 $ -- $40,140,000 $30,144,000
============ =========== ========== =========== ===========
1996 $ 7,274,000 $31,766,000 $ -- $31,192,000 $ 7,848,000
============ =========== ========== =========== ===========
1995 $ 12,744,000 $13,619,000 $ -- $19,089,000 $ 7,274,000
============ =========== ========== =========== ===========
43
Exhibit 11
----------
CALCULATION OF PRIMARY EARNINGS PER SHARE
Year Ended April 30,
1997 1996 1995
------------ ------------ ------------
Net earnings $ 47,755,000 $177,168,000 $107,259,000
------------ ------------ ------------
Weighted average number of shares outstanding --
primary: Weighted average number of common
shares outstanding 103,985,000 103,926,000 105,029,000
Dilutive effect of stock options after
application of treasury stock method 230,000 524,000 708,000
Dilutive effect of Convertible Preferred Stock 1,625,000 1,609,000 134,000
------------ ------------ ------------
Weighted average number of shares outstanding 105,840,000 106,059,000 105,871,000
------------ ------------ ------------
Net earnings per share:
Primary $ .45 $ 1.67 $ 1.01
------------ ------------ ------------
44
Exhibit 11
----------
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
Year Ended April 30,
1997 1996 1995
------------ ------------ ------------
Net earnings $ 47,755,000 $177,168,000 $107,259,000
------------ ------------ ------------
Weighted average number of shares outstanding -
fully diluted: Shares used in calculating
primary earnings per share 105,840,000 106,059,000 105,871,000
Additional effect of stock options after
application of treasury stock method 32,000 -- 155,000
------------ ------------ ------------
Weighted average number of shares outstanding 105,872,000 106,059,000 106,026,000
------------ ------------ ------------
Net earnings per share:
Fully diluted $ .45 $ 1.67 $ 1.01
------------ ------------ ------------
45
Exhibit 13
----------
COMMON STOCK DATA
Stock Price
---------------------- Cash Dividend
High Low Paid per Share
---- --- --------------
1996 Fiscal Year:
Quarter ended 7/31/95 42 5/8 34 1/2 .31 1/4
Quarter ended 10/31/95 43 36 1/8 .32
Quarter ended 1/31/96 48 7/8 31 1/2 .32
Quarter ended 4/30/96 42 1/8 32 5/8 .32
1997 Fiscal Year:
Quarter ended 7/31/96 36 3/8 23 5/8 .32
Quarter ended 10/31/96 30 1/8 23 5/8 .32
Quarter ended 1/31/97 32 3/4 24 3/4 .20
Quarter ended 4/30/97 33 28 5/8 .20
Traded on the New York Stock Exchange; Ticker Symbol: HRB
46
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)
HRB Management, Inc. ................................ Missouri (2)
H&R Block Tax Services, Inc. ........................ Missouri (2)
H&R Block Eastern Tax Services, Inc. ................ Missouri (3)
Bay Colony, Ltd. .................................... Virginia (4)
H&R Block of Dallas, Inc. ........................... Texas (3)
HRB Partners, Inc. .................................. Delaware (5)
H&R Block and Associates, L.P. ...................... Delaware (6)
HRB Royalty, Inc. ................................... Delaware (3)
BWA Advertising, Inc. ............................... Missouri (3)
H&R Block Canada, Inc. .............................. Canada (3)
H&R Block (Nova Scotia), Incorporated ............... Nova Scotia (7)
Cashplan Systems, Inc. .............................. British Columbia (7)
Two Dog Ranch Ltd ................................... British Columbia (7)
H&R Block (Guam), Inc. .............................. Guam (3)
H&R Block Limited ................................... New South Wales (8)
H&R Block The Income Tax People Limited ............. New Zealand (3)
Block Financial Corporation ......................... Delaware (2)
Franchise Partner, Inc. ............................. Nevada (9)
WebBank Corporation ................................. Utah (9)
MECA Sub - LFOD, Ltd. ............................... New Hampshire (9)
Companion Mortgage Corporation ...................... Delaware (9)
Block Mortgage Finance, Inc. ........................ Delaware (10)
Companion Servicing Company L.L.C. .................. Georgia (11)
Option One Mortgage Corporation ..................... California (9)
Option One Mortgage Acceptance Corporation .......... Delaware (12)
Premier Trust Deed Services, Inc. ................... California (12)
H&R Block Mortgage Company, L.L.C. .................. Virginia (13)
CompuServe Corporation .............................. Delaware (14)
CompuServe Incorporated ............................. Ohio (15)
CompuPlex Incorporated .............................. Ohio (16)
CompuServe Ventures Incorporated .................... Ohio (16)
CompuServe Works of Wonder, Inc. .................... Ohio (16)
CompuServe Systems Integration Group Southwest, Inc.. Texas (16)
CompuServe Canada Limited ........................... Canada (16)
CompuServe Consulting Services (UK) Limited ......... United Kingdom (16)
CompuServe Information Services (UK) Limited ........ United Kingdom (16)
CompuServe Information Services GMBH ................ Germany (16)
CompuServe Information Services AG .................. Switzerland (16)
CompuServe Information Systems S.A.R.L. ............. France (16)
CompuServe A.B. ..................................... Sweden (16)
CompuServe Information Services, B.V ................ The Netherlands (16)
CompuServe International Pty, Ltd. .................. Australia (16)
CNS Information (S) Pte Ltd. ........................ Singapore (16)
Spry, Inc. .......................................... Washington (16)
Network Publishing Inc. ............................. Utah (17)
Access Technology, Inc. ............................. Massachusetts (18)
Companion Insurance, Ltd. ........................... Bermuda (18)
H&R Block U.K. Ltd .................................. United Kingdom (18)
HRB Investment, Inc. ................................ Delaware (18)
PM Industries, Inc. ................................. Kansas (18)
47
Notes to Subsidiaries of H&R Block, Inc.:
(1) Wholly owned subsidiary of H&R Block, Inc.
(2) Wholly owned subsidiary of H&R Block Group, Inc.
(3) Wholly owned subsidiary of H&R Block Tax Services, Inc.
(4) Wholly owned subsidiary of H&R Block Eastern Tax Services,
Inc.
(5) Wholly owned subsidiary of H&R Block of Dallas, Inc.
(6) Limited partnership in which H&R Block Tax Services, Inc. is a
1% general partner and HRB Partners, Inc. is a 99% limited
partner
(7) Wholly owned subsidiary of H&R Block Canada, Inc.
(8) Wholly owned subsidiary of HRB Royalty, Inc.
(9) Wholly owned subsidiary of Block Financial Corporation
(10) Wholly owned subsidiary of Companion Mortgage Corporation
(11) Limited liability company in which Block Financial Corporation
has a 50% membership interest and a nonaffiliated individual
has a 50% membership interest
(12) Wholly owned subsidiary of Option One Mortgage Corporation
(13) Limited liability company in which H&R Block Tax Services,
Inc. has a 99% membership interest and Block Financial
Corporation has a 1% membership interest
(14) 80.1%-owned subsidiary of H&R Block Group, Inc.
(15) Wholly owned subsidiary of CompuServe Corporation
(16) Wholly owned subsidiary of CompuServe Incorporated
(17) 55%-owned subsidiary of CompuServe Incorporated
(18) Wholly owned subsidiary of HRB Management, Inc.
48
5
1000
YEAR
APR-30-1997
APR-30-1997
457079
61755
437585
30144
0
1480090
207959
142894
1707058
669009
0
0
4
1089
998004
1707058
0
1097456
0
883268
0
0
0
225058
81281
143777
(96022)
0
0
47755
.45
0.0
NET OF TAX BENEFIT OF $53421.
