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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-6089
H&R BLOCK, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0607856
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(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation Number)
4400 Main Street, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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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.
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DOCUMENTS INCORPORATED BY REFERENCE
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Certain specified portions of the registrant's annual report to security
holders for the fiscal year ended April 30, 1997, are incorporated herein by
reference in response to Part I, Item 1, Part II, Items 5 through 8, inclusive,
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
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ITEM 1. BUSINESS.
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GENERAL DEVELOPMENT OF BUSINESS
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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.
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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
marketing 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.
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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.
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 sub-prime 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
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The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 1997, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
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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
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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.
DESCRIPTION OF BUSINESS
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DIVERSIFIED SERVICES
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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, 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
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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
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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
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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).
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
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"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
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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 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.
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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.
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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.
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.
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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.
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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
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
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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.
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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 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.
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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.
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
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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(SM) 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 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, bad debt expense associated with such accounts also increased
substantially. 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. CONDUCTOR allows, or will in the future
allow, subscribers to engage in online electronic bill payment, discounted
brokerage and mutual fund transactions, and the review of other financial
account statements.
BFC offers to franchisees of Tax Services lines of credit with reasonable
interest rates under a program designed to better enable the franchisees to
refinance existing business debt, expand or renovate offices or meet off-season
cash flow needs. A franchise equity loan is a revolving line of credit secured
by the H&R Block franchise and the underlying business.
BFC's software business develops and markets the Kiplinger TaxCut(R) tax
preparation software package, as well as markets the Kiplinger Home Legal
Advisor(SM) and Kiplinger Small Business Attorney(SM) software products. 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%.
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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 and Trademarks. 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
FINANCIAL FINDER
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.
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.
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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 and expanded or redesigned in
1965, 1973, 1981, and 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, 1997, in the section entitled "Business and Properties," and such
description is incorporated herein by reference.
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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 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.
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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 (74) Chairman of the Board since August 1992; Chairman
of the Board and Chief Executive Officer from
August 1989 through July 1992; Member of the
Board of Directors since 1955.
Frank L. Salizzoni (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
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Name and age Office(s)
------------ ---------
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.
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 (46) 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,
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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
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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.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1997,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- -------------------------------------------------------------------------------
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1997,
under the heading "Management's Discussion and Analysis," and is hereby
incorporated by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The information called for by this item and listed at Item 14(a)1 is
contained in the Company's annual report to security holders for the fiscal
year ended April 30, 1997, and is hereby incorporated by reference.
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
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section titled "Election of Directors," and is incorporated herein by reference.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
- -----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
The following consolidated financial statements of H&R Block,
Inc., and subsidiaries are incorporated by reference from the
Company's annual report to security holders for the fiscal year
ended April 30, 1997:
Page
----
Consolidated Statements of Earnings 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25
Quarterly Financial Data 36
Independent Auditors' Report 38
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.
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.
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25
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
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26
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.
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
26
27
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.
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 are expressly
incorporated by reference in this filing.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified Public
Accountants, is located immediately after the signature pages
contained in this filing.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The 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.
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
June 18, 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 Director (principal
Frank L. Salizzoni 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
Director
- -----------------------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
- -----------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- -----------------------------------
Roger W. Hale
/s/ Marvin L. Rich Director
- -----------------------------------
Marvin L. Rich
/s/ Morton I. Sosland Director
- -----------------------------------
Morton I. Sosland
(Signed as to each on June 18, 1997)
28
29
Signature Title
--------- -----
/s/ Ozzie Wenich Senior Vice President,
- ----------------------------------- Chief Financial Officer and
Ozzie Wenich Treasurer (principal financial
officer)
/s/ Patrick D. Petrie Vice President and Corporate
- ----------------------------------- Controller (principal accounting
Patrick D. Petrie officer)
(Signed as to each on June 18, 1997)
29
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INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8, Registration
Statement No. 33-54985 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8, Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock
issuable under the Spry, Inc. 1995 Stock Option Plan) on Form S-8, and
Registration Statement No. 333-09577 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issuable under the Third Stock Option Plan
for Seasonal Employees) on Form S-8 of our reports dated June 17, 1997,
appearing in and incorporated by reference in this 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
July 28, 1997
30
31
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; such consolidated financial statements and report are included in
your 1997 Annual Report to Stockholders and are incorporated herein by
reference. 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
31
32
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 $ 7,848,000 $90,134,000 $ - $62,964,000 $35,018,000
=========== =========== ======== =========== ===========
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
=========== =========== ======== =========== ===========
1
EXHIBIT 10(O)
H&R BLOCK, INC.
1989 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
(AS AMENDED)
1. PURPOSES. The purposes of this 1989 Stock Option Plan for Outside
Directors are to attract and retain experienced and qualified directors who are
not employees of the Company or any Subsidiary of the Company, and to secure
for the Company and its shareholders the benefits of stock ownership in the
Company by those directors.
2. DEFINITIONS.
(a) "Board of Directors" shall mean the board of directors of the Company
or any Subsidiary of the Company, as the case may be.
(b) "Common Stock" shall mean the common stock, without par value, of the
Company.
(c) "Company" shall mean H&R Block, Inc., a Missouri corporation.
(d) "Director" shall mean a member of the Board of Directors of the
Company or a member of the Board of Directors of any Subsidiary of the Company,
as the case may be.
(e) "Outside Director" shall mean a member of the Board of Directors of
the Company or any Subsidiary of the Company who is not an employee of the
Company on the date of grant of the Stock Option. As used herein, "employee of
the Company" means any full-time employee of the Company, its subsidiaries and
their respective divisions, departments and subsidiaries and the respective
divisions, departments and subsidiaries of such subsidiaries who is employed at
least thirty-five (35) hours a week; provided, however, it is expressly
understood that an employee of the Company does not include independent
contractors or other persons not otherwise employed by the Company or any
Subsidiary of the Company but who provide legal, accounting, investment banking
or other professional services to the Company or any Subsidiary of the Company.
(f) "Plan" shall mean this 1989 Stock Option Plan for Outside Directors,
as the same may be amended from time to time.
(g) "Recipient" shall mean an Outside Director of the Company or any
Subsidiary of the Company who has been granted a Stock Option under the Plan or
any person who succeeds to the rights of such Outside Director under this Plan
by reason of the death of such Outside Director.
(h) "Stock Option" shall mean the right to purchase, upon exercise of a
Stock Option granted under this Plan, shares of the Common Stock. Such Stock
Options are non-statutory stock options and are not intended to be "incentive
stock options" as defined in the Internal Revenue Code of 1986, as amended.
(i) "Subsidiary of the Company" shall mean a subsidiary of the Company,
its divisions, departments, and subsidiaries and the respective divisions,
departments and subsidiaries of such subsidiaries.
3. ADMINISTRATION OF THE PLAN. The Plan may be administered by the
Company's Board of Directors or an Option Committee (the "Committee"), as the
Board of Directors of the Company may in its sole discretion decide. All
Outside Directors shall be ineligible to vote upon any matter concerning the
Stock Options including adoption of this Plan. The Committee, if it is
established by the Company's Board of Directors to administer the Plan, shall
consist of directors of the Company who are not Outside Directors, to be
appointed by and to serve at the pleasure of the Board of Directors of the
Company. A majority of the Committee members shall constitute a quorum and the
acts of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by all members of the Committee, shall be
valid acts of the Committee. All references herein to the Committee shall be
deemed to mean any successor to the Committee,
1
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however designated, or the Board of Directors of the Company if the Board has
not approved a Committee.
The Committee shall have full power and authority to construe, interpret
and administer the Plan and, subject to the powers herein specifically reserved
to the Company's Board of Directors and subject to the other provisions of this
Plan, to make determinations which shall be final, conclusive and binding upon
all persons, including, without limitation, the Company, the shareholders of
the Company, the Board of Directors, the Recipients and any persons having any
interest in any Stock Options which may be granted under this Plan. The
Committee shall impose such additional conditions upon Stock Options granted
under this Plan and the exercise thereof as may from time to time be deemed
necessary or advisable, in the opinion of counsel to the Company, to comply
with applicable laws and regulations. The Committee from time to time may
adopt rules and regulations for carrying out the Plan and written policies for
implementation of the Plan. Such policies may include, but need not be limited
to, the type, size and terms of Stock Options to be granted to Outside
Directors of the Subsidiaries of the Company and the conditions for payment of
Stock Options by Recipients.
The initial Committee shall consist of Henry W. Bloch, Chairman and Chief
Executive Officer of the Company, Jerome B. Grossman, Vice Chairman of the
Company, and Thomas M. Bloch, President of the Company.
4. ABSOLUTE DISCRETION. The Committee may, in its sole and absolute
discretion, from time to time during the continuance of the Plan, (i) determine
which Outside Directors of any Subsidiary of the Company shall be granted Stock
Options under the Plan, (ii) grant Stock Options to any Outside Directors of
any Subsidiary of the Company so selected, (iii) determine the type, date of
grant, size and terms of Stock Options to be granted to Outside Directors of
any Subsidiary of the Company (subject to Sections 7, 9 and 10 hereof, as the
same may be hereafter amended), (iv) determine the terms other than the date of
grant, size and stock option price of Stock Options granted pursuant to Section
6 hereof to Outside Directors of the Company, (v) place conditions or
restrictions on the receipt of Stock Options by Outside Directors of any
Subsidiary of the Company or on the payment or exercise of any Stock Options,
and (vi) do all other things necessary and proper to carry out the intentions
of this Plan.
5. ELIGIBILITY. Stock Options may be granted to any Outside Director;
however, subject to Section 6 hereof, no Outside Director or other person shall
have any claim or right to be granted a Stock Option under the Plan. No member
of the Committee (other than an ex officio member) shall be eligible for grants
of Stock Options under the Plan.
6. PRESCRIBED STOCK OPTIONS FOR OUTSIDE DIRECTORS OF THE COMPANY. During
the continuance of the Plan, a Stock Option to purchase an aggregate of 2,000
shares of Common Stock shall be granted on each date of grant specified in this
Section 6 to each Outside Director of the Company serving as such on such date
of grant. Stock Options specified in this Section 6 shall be granted on
September 11, 1991, and on June 30 of each year thereafter in which the Plan is
in effect. The stock option price of each share of Common Stock subject to a
Stock Option granted pursuant to this Section 6 shall be determined in
accordance with Section 9 hereof. Outside Directors of the Company shall not
be granted Stock Options pursuant to the Plan other than as specified in this
Section 6, provided that no Stock Options granted pursuant to this Plan prior
to September 11, 1991, shall be invalidated or otherwise affected by the
provisions of this Section 6. This Section 6 shall not apply to Outside
Directors of Subsidiaries of the Company who are not also Outside Directors of
the Company on the date of grant.
7. STOCK SUBJECT TO THE PLAN. The total number of shares of Common Stock
issuable under this Plan may not at any time exceed 150,000 shares, subject to
adjustment as provided in Sections 14 and 15 hereof. Shares of Common Stock
not actually issued pursuant to Stock Options shall be available for future
Stock Options. Shares of Common Stock to be delivered or purchased under the
Plan may be either authorized but unissued Common Stock or treasury shares.
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8. VESTING REQUIREMENTS. The Committee may determine that all or a
portion of a Stock Option shall be vested at such times and upon such terms as
may be selected by it. All Stock Options shall expire as to all of their
unexercised shares ten years after the date of their grant.
9. STOCK OPTION PRICE. The purchase price per share of Common Stock under
each Stock Option granted hereunder shall be equal to the last reported sale
price, regular way, for the Common Stock on the New York Stock Exchange on the
date of grant (or, if said date of grant falls on a non-business day, then on
the next preceding business date on which the stock is quoted) of such Stock
Option.
10. PAYMENT OF STOCK OPTION PRICE. Payment for exercise of any Stock
Option granted hereunder shall be made (a) in cash, or (b) by delivery of
Common Stock having a market value equal to the aggregate option price, or (c)
by a combination of payment of cash and delivery of Common Stock in amounts
such that the amount of cash plus the market value of the Common Stock equals
the aggregate option price.
11. CONTINUATION AS DIRECTOR. The Committee shall require that a
Recipient be an Outside Director at the time a Stock Option is granted and may
require that a Recipient be an Outside Director at the time a Stock Option is
exercised. The Committee may provide for the termination of an outstanding
Stock Option if a Recipient ceases to be an Outside Director and may establish
such other provisions with respect to the termination or disposition of a Stock
Option on the death or retirement of a Recipient as it, in its sole discretion,
deems advisable. The Committee shall have the sole power to determine the date
of any circumstances which shall constitute cessation as a Director and to
determine whether such cessation is the result of retirement, death or any
other reason.
12. REGISTRATION OF STOCK. No Stock Option may be exercised at any time
when its exercise or the delivery of shares of Common Stock or other securities
thereunder would, in the opinion of counsel for the Company, be in violation of
any state or federal law, rule or ordinance, including any state or federal
securities laws or any regulation or ruling of the Securities and Exchange
Commission. If at any time counsel for the Company shall determine that
qualification or registration under any state or federal law of the shares of
Common Stock or other securities thereby covered, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition of
or in connection with the exercise of such Stock Option or the purchase of
shares thereunder, the Stock Option may not be paid or exercised in whole or in
part unless and until such qualification, registration, consent or approval
shall have been effected or obtained free of any conditions such counsel deems
unacceptable.
13. NON-ASSIGNABILITY. No Stock Option granted pursuant to the Plan shall
be transferable or assignable by the Recipient other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
as defined by the Internal Revenue Code of 1986, as amended, or Title I of the
Employee Retirement Security Act, or the rules thereunder. During the lifetime
of the Recipient a Stock Option granted pursuant to the Plan shall be
exercisable only by the Recipient.
14. DILUTION OR OTHER ADJUSTMENTS. In the event of any change in the
capital structure of the Company, including but not limited to a change
resulting from a stock dividend or split-up, or combination or reclassification
of shares, the Board of Directors of the Company shall make such equitable
adjustments with respect to the Stock Options or any provisions of this Plan as
it deems necessary or appropriate, including, if necessary, any adjustment in
the maximum number of shares of Common Stock subject to an outstanding Stock
Option.
15. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. If the
Company shall become a party to any corporate merger, consolidation, major
acquisition of property for stock, reorganization or liquidation, the Board of
Directors of the Company shall make such arrangements it deems advisable with
respect to outstanding Stock Options, which shall be binding upon the
Recipients of outstanding Stock Options, including, but not limited to, the
substitution of new Stock Options for any Stock Options then outstanding, the
assumption of such Stock Options and the termination of or payment for such
Stock Options.
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16. COSTS AND EXPENSES. The cost and expenses of administering the Plan
shall be borne by the Company and not charged to any Stock Option nor to any
Recipient.
17. STOCK OPTION AGREEMENTS. The Committee shall have the power to
specify the form of Stock Option Agreements to be granted from time to time
pursuant to and in accordance with the provisions of the Plan and such
agreements shall be final, conclusive and binding upon the Company, the
shareholders of the Company and the Recipients. No Recipient shall have or
acquire any rights under the Plan except such as are evidenced by a duly
executed agreement in the form thus specified.
18. NO SHAREHOLDER PRIVILEGES. Neither the Recipient nor any person
claiming under or through him or her shall be or have any of the rights or
privileges of a shareholder of the Company in respect to any of the Common
Stock issuable upon the exercise of any Stock Option, unless and until
certificates evidencing such shares of Common Stock shall have been duly issued
and delivered.
19. GUIDELINES. The Board of Directors of the Company shall have the
power to provide guidelines for administration of the Plan by the Committee and
to make any changes in such guidelines as from time to time the Board deems
necessary.
20. AMENDMENT AND DISCONTINUANCE. The Board of Directors of the Company
shall have the right at any time during the continuance of the Plan to amend,
modify, supplement, suspend or terminate the Plan, provided that (a) no
amendment, supplement, modification, suspension or termination of the Plan
shall in any manner affect any Stock Option of any kind theretofore granted
under the Plan without the consent of the Recipient of the Stock Option, unless
such amendment, supplement, modification, suspension or termination is by
reason of any change in capital structure referred to in Section 14 hereof or
unless the same is by reason of the matters referred to in Section 15 hereof;
(b) Sections 6 and 9 herein shall not be amended or modified more than once in
any six-month period, other than to comport with changes in the Internal
Revenue Code of 1986, as amended, or the rules thereunder and (c) if the Plan
is duly approved by the shareholders of the Company, no amendment, modification
or supplement to the Plan shall thereafter, in the absence of the approval of
the holders of a majority of the shares of Common Stock of the Company present
in person or by proxy at a duly constituted meeting of shareholders of the
Company, (i) increase the aggregate number of shares which may be issued under
the Plan, unless such increase is by reason of any change in capital structure
referred to in Section 14 hereof, (ii) change the termination date of the Plan
provided in Section 21 hereof, or (iii) delete or amend the provisions of
Section 9 hereof relating to the establishment of the stock option price.
21. TERMINATION. Stock Options may be granted in accordance with the
terms of the Plan until December 5, 1999, on which date this Plan will
terminate except as to Stock Options then outstanding hereunder, which Stock
Options shall remain in effect until they have expired according to their
terms.
22. APPROVAL. This Plan shall take effect upon due approval by the Board
of Directors of the Company.
4
1
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
==== ===== =====
2
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
==== ===== =====
1
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
[Logo] Printed on recycled paper
40
2
SELECTED FINANCIAL DATA
In thousands, except per share amounts and number of shareholders
Year Ended April 30
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR:
Total revenues $1,929,663 $1,656,184 $1,333,819 $1,223,421 $1,059,225
Net earnings from
continuing
operations before
change for purchased
research and
development $ 47,755 $ 177,168 $ 190,767 $ 189,067 $ 171,017
Net earnings from
continuing
operations (1) $ 47,755 $ 177,168 $ 107,259 $ 163,995 $ 171,017
Net earnings (1) $ 47,755 $ 177,168 $ 107,259 $ 200,528 $ 180,705
AT YEAR END:
Total assets $1,906,258 $1,755,891 $1,097,313 $1,093,245 $1,017,601
Cash, cash equivalents
and marketable
securities $ 701,100 $ 745,693 $ 444,981 $ 620,091 $ 439,526
Stockholders' equity $ 999,097 $1,039,593 $ 685,865 $ 707,875 $ 650,488
Shares outstanding 104,056 103,417 104,863 106,149 106,355
Number of
shareholders 33,517 35,634 38,053 35,514 33,457
MEASUREMENTS:
Per share of common stock:
Net earnings from continuing
operations before charge for
purchased research and
development $ .45 $ 1.67 $ 1.80 $ 1.77 $ 1.59
Net earnings from
continuing operations (1) $ .45 $ 1.67 $ 1.01 $ 1.54 $ 1.59
Net earnings (1) $ .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 $ 8.83 $ 9.46 $ 5.79 $ 6.03 $ 4.93
Return on total revenues (2) 2.5% 10.7% 14.3% 15.5% 16.1
Return on beginning
stockholders' equity 4.6% 25.8% 15.2% 30.8% 29.4%
(1) Fiscal 1995 and 1994 include charges to earnings of $83,508 ($.79 per
share) and $25,072 ($.24 per share), respectively, for purchased research
and development in connection with acquisitions which are not deductible for
income tax purposes.
(2) Before charge for purchased research and development.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
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%.
CompuServe Corporation ("CompuServe"), a wholly owned subsidiary of the
Company, recorded pretax charges totaling $34.8 million during the year. Of the
total, $17.7 million 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. An additional $9.2 million 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. The remaining $7.9
million was due to the withdrawl of the WOW! online service from the
marketplace as of January 31, 1997.
CompuServe also changed its rate of amortization of capitalized 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 $34.5 million. Additionally, all
previously deferred subscriber acquisition costs for WOW! and SPRYNET, totaling
$10.8 million, were written off due to the costs to service these high usage,
flat priced services.
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 million
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.
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.
In August 1995, the Company's Board of Directors approved a series of
investment initiatives for CompuServe designed to enhance its long-term
competitiveness and take advantage of accelerating growth opportunities in the
market for online services. These initiatives included the launch of a new
consumer online service, a simplified and less expensive pricing structure, two
new interfaces, infrastructure expenditures and expansion of Internet
activities offered through the various online services. This undertaking
reduced liquidity during 1996 and negatively impacted net earnings.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc. ("MECA"), exclusive of its rights to publish TaxCut, for $35
million. The sale resulted in a pretax gain of $12.4 million.
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
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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.
1997 COMPARED TO 1996
CONSOLIDATED RESULTS
Revenues increased 16.5% to a record $1.930 billion compared to $1.656 billion
in 1996. Net earnings decreased 73.0% to $47.8 million from $177.2 million in
the prior year. Net earnings per share decreased to $.45 from $1.67 in 1996.
Net earnings were negatively impacted by a $186.5 million pretax loss reported
by CompuServe, of which the Company owns 80.1%. CompuServe's pretax loss
includes $80.1 million in nonrecurring charges and accelerated amortization of
subscriber acquisition costs, described above. Excluding CompuServe's results,
the Company's revenues increased 25.9% to $1.097 billion from $871.5 million
last year. Net earnings exclusive of CompuServe increased 14.9% to $143.8
million from $125.1 million in 1996.
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.
COMPUTER SERVICES
Revenues increased 6.2% to $841.9 million from $792.7 million last year due to
an increase in Network Services revenues. Network Services revenues increased
29.6% to $257.6 million from $198.8 million in 1996 due to an increase in the
number of network customers and increased usage by existing customers. The
number of network customers increased 24.2% over last year to 1,200.
Interactive Services revenues decreased .9% to $556.6 million from $561.4
million in the prior year primarily as a result of decreased usage by
subscribers. This decrease in usage was partially offset by an increase in
revenues earned from base monthly fees due to a larger average subscriber base
during 1997 as compared to 1996. The average number of CSi subscribers during
1997, exclusive of the Japanese licensee, increased 8.4% to 2.97 million from
2.74 million in 1996. The average monthly CSi revenue per subscriber decreased
to $14.90 from $17.01 in 1996, primarily due to a new pricing structure
introduced in September 1995.
The operating loss was $196.4 million this year, compared to operating
earnings of $87.3 million in 1996. Fiscal 1997 includes special pretax charges
of $34.8 million and accelerated amortization of deferred subscriber
acquisition costs of $45.3 million, described above. Exclusive of these
amounts, the operating loss for the year was $116.2 million. Costs directly
associated with revenues increased $158.7 million, or 41.0%, due to lower
revenues per member in 1997 and increased data communication costs,
particularly with respect to the expansion and upgrade of the European network.
Additionally, customer service costs and costs associated with uncollected fees
increased significantly from 1996. Depreciation and amortization expense
increased $39.2 million, or 52.5%, reflecting the capital expenditures
made to increase network capacity and upgrade service in the U.S. and Europe in
1996.
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
18
5
recognized on the Company's first securitization of nonconforming mortgage
loans, which approximated $3 million.
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.
INVESTMENT INCOME, NET
Net investment income increased 130.5% to $20.7 million from $9.0 million in
1996. More funds were available for investment this year, largely due to the
cash proceeds of $518.8 million from CompuServe's IPO in April 1996.
Additionally, the Company incurred $2.0 million of interest expense on
corporate borrowings in 1996, as compared to $.2 million in 1997.
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 37.9% for fiscal 1997 and 1996.
1996 COMPARED TO 1995
CONSOLIDATED RESULTS
Revenues increased 24.2% to a record $1.656 billion compared to $1.334 billion
in 1995. Net earnings increased 65.2% to $177.2 million from $107.3 million in
the prior year. Net earnings per share increased to $1.67 from $1.01 in 1995.
Exclusive of the charge for purchased research and development in 1995
associated with the acquisition of SPRY of $83.5 million, net earnings per
share decreased to $1.67 in 1996 from $1.80 in 1995.
Additional information on each of the Company's operating segments follows.
TAX SERVICES
Revenues increased 13.9% to $831.5 million from $729.7 million in the prior
year. Tax preparation fees increased $66.6 million, or 13.1%, as a result of a
3.7% increase in the number of returns prepared by company-owned offices, with
the remainder attributable to price increases. In the United States, fees from
electronic filing were up $13.6 million, or 16.7%, due to a 1.6% increase in
returns electronically filed by company-owned offices and an increase in state
electronic filing fees, resulting from an increase in the number of states
where electronic filing is offered and package pricing. Royalties increased by
$5.8 million, or 6.4%, reflecting improved results reported by franchises as a
result of a 2.9% increase in the number of returns prepared by franchises,
increases in pricing and greater revenues from electronic filing.
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.
COMPUTER SERVICES
Revenues increased 36.7% to $792.7 million from $580.0 million last year due to
increases in both Interactive Services and Network Services revenues.
Interactive Services revenues increased 41.8% over the prior year primarily as
a result of an increase in the number of subscribers. The number of CSi
subscribers at April 30, 1996, exclusive of the Japanese licensee, increased
43.9% to 3.16 million. This increase was offset by an 11.3% decrease in average
monthly CSi revenue per subscriber to $17.01 for 1996 from $19.17 for 1995,
caused by a price reduction implemented in February 1995 and a new pricing
structure introduced in September 1995. Network Services revenues increased
34.6% to $198.8 million from $147.7 million in 1995 due to an increase in the
number of network customers and increased usage by existing customers. The
number of network customers increased 30.0% over last year to 966.
Operating earnings decreased 40.7% to $87.3 million from $147.3 million in
1995. The decrease in operating earnings resulted from several factors. Costs
directly associated with service revenues increased $156.3 million, or
19
6
67.6%, as a result of online subscriber hours more than doubling from 50.3
million hours in 1995 to 123.0 million hours in 1996. Marketing expenses
increased $70.4 million, or 67.1%, due to increased general consumer
advertising on television and in periodicals, expanded international marketing
efforts, the launch of WOW! and special event promotions, and advertising
expenses incurred by SPRY. Depreciation and amortization expense increased
$36.0 million, or 84.5%, as a result of increased capital expenditures and the
amortization of goodwill related to the April 1995 SPRY acquisition. Product
development costs increased $9.4 million, or 49.5%, due primarily to the
acquisition of SPRY, costs related to the new WOW! online service and
enhancements to the CSi interface. The pretax margin was 11.0% compared to
25.4% in the prior year.
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 62.1% to $9.0 million from $23.7 million in
1995, which is attributable to several factors. Fewer funds were available for
investment in 1996 due to strategic investments made in CompuServe, described
previously. Additionally, the Company incurred $2.0 million in interest expense
on corporate borrowings in 1996, and investment income in 1995 included gains
of $4.9 million from the sale of securities during the fourth quarter.
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.
INCOME TAX EXPENSE
The effective tax rate decreased to 37.9% compared to 51.2%. The decrease
resulted from a charge for purchased research and development in 1995 that is
not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with cash and marketable
securities of $701.1 million at April 30, 1997, compared to $745.7 million 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.
CompuServe also maintained a $25 million line of credit to fulfill short-term
cash requirements. This line expired in June 1997.
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
20
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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.
CompuServe, of which the Company owns just over 80%, plans to spend
approximately $100 million for subscriber acquisition and marketing and up to
$100 million in capital investments in 1998. Management also 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 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 related to the tax business and the January shareholder dividend
payment. Management believes that its CompuServe subsidiary will be able to
meet its presently anticipated funding requirements with the remaining proceeds
from the IPO, coupled with an expected payment in the second quarter of fiscal
1998 from the Company for the tax benefits derived by the Company from
CompuServe's operating losses. Such payment would be made in accordance with
the Tax Sharing Agreement between the Company and CompuServe. To ultimately
finance the acquisition of Option One, the Company intends to issue medium-term
notes in the second quarter of fiscal 1998.
The Company announced in December 1993 its intention to repurchase from
time to time up to 10 million of its shares on the open market. In July 1996,
the Company announced its intention to repurchase up to 10 million additional
shares on the open market over a two-year period following the ultimate
separation of CompuServe. Such authorization is in addition to the 1993
authorization.
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CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
Year Ended April 30
1997 1996 1995
- -----------------------------------------------------------------------------------------------
REVENUES:
Service revenues $1,805,711 $1,543,104 $1,233,815
Royalties 110,519 99,717 92,436
Other income 13,433 13,363 7,568
---------- ---------- ----------
1,929,663 1,656,184 1,333,819
---------- ---------- ----------
EXPENSES:
Employee compensation and benefits 604,336 517,727 442,504
Occupancy and equipment 583,420 402,835 295,528
Marketing and advertising 239,255 113,204 84,905
Supplies, freight and postage 69,929 95,621 71,542
Other 414,897 262,942 162,335
Purchased research and development -- -- 83,508
---------- ---------- ----------
1,911,837 1,392,329 1,140,322
----------- ---------- ----------
Operating earnings 17,826 263,855 193,497
OTHER INCOME:
Investment income, net 20,730 8,994 23,703
Other, net -- 12,445 2,796
---------- ---------- ----------
20,730 21,439 26,499
---------- ---------- ----------
Earnings before income taxes and minority
interest 38,556 285,294 219,996
Taxes on earnings 14,613 108,126 112,737
---------- ---------- ----------
Net earnings before minority interest 23,943 177,168 107,259
Minority interest in consolidated subsidiary (23,812) -- --
---------- ---------- ----------
NET EARNINGS $ 47,755 $ 177,168 $ 107,259
========== ========== ==========
Net earnings per share $.45 $1.67 $1.01
========== ========== ==========
See notes to consolidated financial statements.
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9
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
April 30
1997 1996
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 595,851 $ 685,660
Marketable securities 84,362 42,952
Receivables, less allowance for doubtful accounts of
$35,018 and $7,848 525,777 333,734
Prepaid expenses and other current assets 64,008 59,912
---------- ----------
Total current assets 1,269,998 1,122,258
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 20,887 17,081
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $30,431 and $27,825 80,133 61,141
Deferred subscriber acquisition costs, net of amortization 43,959 96,636
Other 71,003 59,201
---------- ----------
215,982 234,059
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $432,195 and $315,195 420,278 399,574
---------- ----------
$1,906,258 $1,755,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 269,619 $ 72,651
Accounts payable, accrued expenses and deposits 193,628 201,320
Accrued salaries, wages and payroll taxes 120,709 109,870
Accrued taxes on earnings 129,186 94,406
---------- ----------
Total current liabilities 713,142 478,247
DEFERRED INCOME TAXES 25,750 46,700
OTHER NONCURRENT LIABILITIES 38,952 38,222
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 129,317 153,129
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
---------- ----------
$1,906,258 $1,755,891
========== ==========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
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 166,811 111,240 67,684
Amortization of deferred subscriber acquisition costs 120,836 22,585 --
Deferred subscriber acquisition costs (68,159) (119,221) --
Provision for deferred taxes on earnings (13,968) 52,639) (734)
Gain on sale of subsidiaries -- (12,445) (2,796)
Purchased research and development -- -- 83,508
Noncash, nonrecurring charges 17,565 -- --
Net gain on sales of marketable securities (454) (1,134) (6,664)
Other noncurrent liabilities 730 4,760 2,845
Minority interest (23,812) -- --
Changes in assets and liabilities:
Receivables (93,802) (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 (13,888) (25,373) (1,735)
Accounts payable, accrued expenses and deposits (8,736) 58,247 (24,994)
Accrued salaries, wages and payroll taxes 10,839 39,127 15,722
Accrued taxes on earnings 34,698 (17,554) (27,737)
----------- ----------- ----------
Net cash provided by operating activities 77,974 210,744 124,363
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (220,677) (162,544) (1,904,653)
Maturities of marketable securities 152,302 304,724 1,837,584
Sales of marketable securities 23,852 155,170 299,702
Purchases of property and equipment, net (164,500) (264,491) (123,337)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (27,068) (18,675) (47,773)
Proceeds from sale of subsidiaries -- 35,000 5,195
Other, net (24,111) (16,577) (5,856)
----------- ----------- ----------
Net cash provided by (used in) investing activities (260,202) 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 (decrease) in cash and cash equivalents (89,809) 595,412 48,905
Cash and cash equivalents at beginning of the year 685,660 90,248 41,343
----------- ----------- ----------
Cash and cash equivalents at end of the year $ 595,851 $ 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.
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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 one-half of total
revenues are generated from tax return preparation, electronic filing of tax
returns and other tax-related services. The Company provides computer-based
information and communication services to businesses and individual owners of
personal computers through its CompuServe Corporation ("CompuServe")
subsidiary. The Company also offers credit 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: 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 OEMs, and
disk and CD-ROM costs, all of which result in a direct revenue-generating
response. The net effect of the change in accounting increased assets by
$96,636 at April 30, 1996, and increased net earnings by $60,011 and net
earnings per share by $.57 for the year ended April 30, 1996. The Company
expenses advertising costs not classified as direct response the first time the
advertising takes place.
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 ($22,383 after taxes, or $.21 per share) is
included in marketing expenses 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 20 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been
25
12
impaired based on several criteria, including, but not limited to, revenue
trends, undiscounted operating cash flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389,
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, depreciation,
and deferred subscriber acquisition costs.
The Company has entered into a Tax Sharing Agreement with 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.
26
13
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
April 30
1997 1996
-------------------------------
Cash and interest-bearing deposits $103,802 $272,951
Commercial paper 288,656 105,216
Certificates of deposit 99,747 22,093
U.S. Government obligations 62,586 285,400
Other interest-bearing securities 41,060 --
-------- --------
$595,851 $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 63,048 131 35 63,144 25,852 82 20 25,914
-------- -------- -------- -------- -------- -------- -------- --------
84,262 156 56 84,362 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 3,165 1,550 3 4,712 3,085 935 20 4,000
-------- -------- -------- -------- -------- -------- -------- --------
18,851 2,174 138 20,887 15,609 1,561 89 17,081
-------- -------- -------- -------- -------- -------- -------- --------
$103,113 $2,330 $194 $105,249 $ 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 $84,262 $84,362
After one year through five years 6,846 7,034
After five years through 10 years 8,193 8,195
-------- -------
$99,301 $99,591
======== =======
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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 205,791 166,900
-------- --------
560,795 341,582
Allowance for doubtful accounts 35,018 7,848
-------- --------
$525,777 $333,734
======== ========
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30
1997 1996
-----------------------
Land $ 7,072 $ 7,084
Buildings 95,707 87,523
Computer and other equipment 700,136 582,815
Leasehold improvements 49,558 37,347
-------- --------
852,473 714,769
Less accumulated depreciation and amortization 432,195 315,195
-------- --------
$420,278 $399,574
======== ========
Depreciation and amortization expense for 1997, 1996 and 1995 amounted to
$143,283, $90,829 and $62,809, 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.
28
15
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 Additional Treasury Stock
------------------ --------------- Paid-in Retained ------------------
Shares Amount Shares Amount Capital Earnings Shares Amount
-------------------------------------------------------------------------------------
Balances at May 1, 1994 108,972,699 $1,089 - - $ 90,552 $719,724 (2,823,605) $(103,490)
Net earnings for the year - - - - - 107,259 - -
Stock options exercised - - - - (4,164) - 1,624,843 62,161
Unrealized gain on translation - - - - - 2,043 - -
Acquisition of treasury shares - - - - - - (2,910,900) (114,900)
Stock issued for acquisition - - 401,768 $ 4 54,190 - - -
Cumulative effect of change in
accounting for marketable
securities, net of taxes - - - - - 5,526 - -
Change in net unrealized gain
on marketable securities - - - - - (5,291) - -
Cash dividends paid -
$1.21 1/4 per share - - - - - (128,838) - -
----------- ------ ------- --- -------- -------- ----------- ----------
Balances at April 30, 1995 108,972,699 1,089 401,768 4 140,578 700,423 (4,109,662) (156,229)
Net earnings for the year - - - - - 177,168 - -
Stock options exercised - - 3,031 - (1,501) - 340,395 12,957
Restricted stock granted - - - - (47) - 46,370 1,763
Unrealized loss on translation - - - - - (50) - -
Acquisition of treasury shares - - - - - - (1,833,200) (71,897)
Sale of stock by subsidiary - - - - 365,664 - - -
Change in net unrealized gain
on marketable securities - - - - - 934 - -
Cash dividends paid -
$1.27 1/4 per share - - - - - (131,263) - -
----------- ------ ------- --- -------- -------- ----------- ----------
Balances at April 30, 1996 108,972,699 1,089 404,799 4 504,694 747,212 (5,556,097) (213,406)
Net earnings for the year - - - - - 47,755 - -
Stock options exercised - - 2,280 - 24 - 88,945 3,415
Cancellation of restricted stock - - - - - - (28,217) (1,044)
Unrealized loss on translation - - - - - (3,065) - -
Repurchase of Convertible
Preferred Stock - - (391) - - - - -
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 108,972,699 $1,089 406,688 $ 4 $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.
29
16
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.
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
========= =========
30
17
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
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
31
18
"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.
OTHER EXPENSES
Included in other expenses are the following:
Year Ended April 30
1997 1996 1995
-----------------------------------
Bad debts $90,134 $31,766 $13,983
Purchased services 71,901 44,646 18,211
Royalties 68,653 77,926 59,027
Legal and professional 30,626 23,877 8,969
Travel and entertainment 24,971 26,349 20,077
Taxes and licenses 21,141 11,151 11,943
Interest 11,661 3,969 4,060
Amortization of goodwill 8,878 14,595 4,875
Also included in other expenses for the year ended April 30, 1997 are
charges totaling $34,754. Of the total, $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. An additional $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. The remaining $7,850 was due to the withdrawal of the WOW! online
service from the marketplace as of January 31, 1997.
32
19
TAXES ON EARNINGS
The components of earnings before income taxes and minority interest upon which
Federal and foreign income taxes have been provided are as follows:
Year Ended April 30
1997 1996 1995
--------------------------------------
United States $27,967 $276,586 $213,122
Foreign 10,589 8,708 6,874
------- -------- --------
$38,556 $285,294 $219,996
======= ======== ========
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 is comprised of the following:
Year Ended April 30
1997 1996 1995
--------------------------------------
Currently payable:
Federal $20,504 $ 47,357 $ 96,686
State 3,036 6,047 13,511
Foreign 5,041 2,083 3,274
------- -------- --------
28,581 55,487 113,471
------- -------- --------
Deferred:
Federal (12,110) 44,926 (625)
State (1,793) 5,736 (88)
Foreign (65) 1,977 (21)
------- -------- --------
(13,968) 52,639 (734)
------- -------- --------
$14,613 $108,126 $112,737
======= ======== ========
Provision is not made for possible income taxes payable upon distribution of
unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $58,996 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 2.1% 2.7% 4.0%
Foreign taxes, net of Federal
income tax benefit 3.3% .4% .3%
Purchased research and development - - 13.3%
Nontaxable Federal income ( 3.2%) (.7%) ( 2.3%)
Other .7% .5% .9%
----- ----- -----
Effective rate 37.9% 37.9% 51.2%
===== ===== =====
33
20
A summary of deferred income taxes follows:
April 30
1997 1996
----------------------------------
Gross deferred tax assets:
Accrued expenses $(8,090) $(13,336)
Other (142) -
---------- ----------
Current (8,232) (13,336)
---------- ----------
Deferred compensation (13,414) (12,155)
Impairment of assets (2,573) -
Depreciation (2,330) -
State net operating loss carryforwards (2,530) -
---------- ----------
Noncurrent (20,847) (12,155)
---------- ----------
Gross deferred tax liabilities:
Accrued income 1,878 -
---------- ----------
Depreciation 28,095 20,375
Deferred subscriber acquisition costs 16,173 36,403
Product development costs 1,286 1,361
Capitalized research and development 1,043 716
---------- ----------
Noncurrent 46,597 58,855
---------- ----------
Net deferred tax liabilities $19,396 $ 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 and,
accordingly, the consolidated statements of earnings includes SPRY's operations
from the date of acquisition. On January 30, 1996, the Company contributed its
investment in SPRY to CompuServe. In connection with the purchase, the Company
acquired certain intangible assets, including software technology, tradenames
and an assembled workforce totalling $11,656. These intangibles 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. The
consolidated statements of earnings includes a charge for the purchased research
and development which is not deductible for income tax purposes. The fair value
of assets acquired, including intangibles, was $106,371; liabilities assumed
were $4,751. Liabilities assumed and the Convertible Preferred Stock and stock
options issued were non-cash items excluded from the consolidated statements of
cash flows.
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.
34
21
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. are reflected in the consolidated statements
of earnings through the date of disposition, and the gain on the sale of $2,680
is included in other income.
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 $94,770,
$73,394, $50,790, $24,699 and $13,393, respectively, with no significant
commitments extending beyond that period of time. The Company's rent expense
for the years 1997, 1996 and 1995 aggregated $96,795, $78,745 and $70,377,
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. The Company also maintained a $25,000 line
of credit to fulfill short-term cash requirements of CompuServe, which expired
in June 1997. There was no outstanding balance under these lines at April 30,
1997 and 1996.
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.
35
22
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 financial instruments 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.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1997 Quarter Ended Fiscal 1996 Quarter Ended
----------------------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1997 1997 1996 1996 1996 1996 1995 1995
--------------------------------------------- -------------------------------------------
Revenues $1,085,891 $363,064 $ 253,450 $227,258 $921,931 $311,845 $221,046 $201,362
========== ======== ========= ======== ======== ======== ======== ========
Earnings (loss) before
income taxes (benefits)
and minority interest $ 313,197 $(44,085) $(136,599) $(93,957) $299,163 $ (8,882) $(13,470) $ 8,483
Taxes (benefits) on earnings 117,329 (15,930) (50,940) (35,846) 113,452 (3,411) (5,172) 3,257
---------- -------- --------- -------- -------- -------- -------- --------
Net earnings (loss) before
minority interest 195,868 (28,155) (85,659) (58,111) 185,711 (5,471) (8,298) 5,226
Minority interest (3,567) (2,829) (11,531) (5,885) -- -- -- --
---------- -------- --------- -------- -------- -------- -------- --------
Net earnings (loss) $ 199,435 $(25,326) $(74,128) $(52,226) $185,711 $ (5,471) $ (8,298) $ 5,226
========== ======== ======== ======== ======== ======== ======== ========
Net earnings (loss) per share $ 1.90 $ (.24) $ (.71) $ (.50) $ 1.75 $ (.05) $ (.08) $ .05
========== ======== ======== ======== ======== ======== ======== ========
The Company recorded a charge to earnings of $17,713 in the first
quarter of 1997 due 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.
The Company also recorded charges to earnings in the second quarter of
1997 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.
Additionally, the Company recorded a charge to earnings of $9,191 in the
fourth quarter of 1997 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.
Computer Services: This segment is engaged in providing computer
information and networking services to corporations and individual computer
owners via a proprietary data network and host servers located in Columbus and
Dublin, Ohio.
36
23
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.
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
Computer Services 841,887 792,661 579,997
Financial Services 110,830 36,442 35,909
Unallocated corporate 1,012 3,636 695
Intersegment sales (17,990) (8,010) (12,500)
---------- ---------- ----------
Total revenues $1,929,663 $1,656,184 $1,333,819
========== ========== ==========
OPERATING EARNINGS:
Tax Services $ 217,124 $ 194,771 $ 147,740
Computer Services (196,362) 87,332 147,313
Financial Services 7,053 (7,368) (5,788)
Unallocated corporate (9,989) (10,880) (12,260)
Purchased research and development - - (83,508)
---------- ---------- ----------
Total operating earnings 17,826 263,855 193,497
Investment income, net 20,730 8,994 23,703
Other, net - 12,445 2,796
---------- ---------- ----------
Earnings before income taxes and
minority interest $ 38,556 $ 285,294 $ 219,996
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Tax Services $ 35,300 $ 23,499 $ 21,991
Computer Services 130,285 78,683 42,639
Financial Services 1,093 8,929 2,992
Corporate 133 129 62
---------- ---------- ----------
Total depreciation and amortization $ 166,811 $ 111,240 $ 67,684
========== ========== ==========
IDENTIFIABLE ASSETS:
Tax Services $ 213,455 $ 141,031 $ 117,560
Computer Services 731,666 950,671 310,393
Financial Services 415,717 208,489 186,859
Corporate 545,420 455,700 482,501
---------- ---------- ----------
Total assets $1,906,258 $1,755,891 $1,097,313
========== ========== ==========
CAPITAL EXPENDITURES:
Tax Services $ 43,159 $ 36,724 $ 26,033
Computer Services 125,753 227,710 99,690
Financial Services 1,450 938 2,135
Corporate 144 354 45
---------- ---------- ----------
Total capital expenditures $ 170,506 $ 265,726 $ 127,903
========== ========== ==========
37
24
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
The financial information in this Annual Report, including the consolidated
financial statements, has been prepared by the management of H&R Block, Inc.
Management believes the information presented in the Annual Report is
consistent with the financial statements, the financial statements are
prepared in accordance with generally accepted accounting principles, and the
financial statements do not contain material misstatements due to fraud or
error. Where appropriate, the financial statements reflect management's best
estimates and judgments.
Management also is responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance that
the Company's assets are safeguarded against material loss from unauthorized use
or disposition, and that authorized transactions are properly recorded to
permit the preparation of accurate financial data. However, limitations exist
in any system of internal controls based on a recognition that the cost of the
system should not exceed its benefits. The Company believes its system of
accounting controls, of which its internal auditing function is an integral
part, accomplishes the stated objectives.
Deloitte & Touche LLP, independent accountants, audit H&R Block's
consolidated financial statements and issue an opinion thereon. Their audits
are made in accordance with generally accepted auditing standards and include
an objective, independent review of the system of internal contols to the
extent necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed of outside
directors, meets periodically with management, the independent accountants and
the internal auditor to review matters relating to the Company's annual
financial statements, internal audit activities, internal accounting controls
and non-audit services provided by the independent accountants. The
independent accountants and the internal auditor have full access to the Audit
Committee and meet wih it, both with and without management present, to discuss
the scope and results of their audits including internal controls, audit and
financial matters.
/s/ Frank L. Salizzoni
Frank L. Salizzoni
President and Chief Executive Officer
/s/ Ozzie Wenich
Ozzie Wenich
Senior Vice President,
Chief Financial Officer and Treasurer
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
Deloitte & Touche LLP
Kansas City, Missouri
June 17, 1997
38
1
EXHIBIT 21
----------
SUBSIDIARIES OF H&R BLOCK, INC.
-------------------------------
The following is a list of the direct and indirect subsidiaries of H&R
Block, Inc., a Missouri corporation. All active subsidiaries do business under
their corporate names listed below or close derivatives thereof:
JURISDICTION IN
NAME 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)
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)
2
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
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)
- -------------------------
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.
2
5
1000
YEAR
APR-30-1997
APR-30-1997
595851
84362
560795
35018
0
1269998
852473
432195
1906258
713142
0
0
4
1089
998004
1906258
0
1929663
0
1911837
0
0
0
38556
14613
47755
0
0
0
47755
.45
0
