1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, without par
value, at March 1, 1999 was 97,188,921 shares.
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TABLE OF CONTENTS
Page
----
PART I Financial Information
Consolidated Balance Sheets
January 31, 1999 and April 30, 1998........................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 1999 and 1998.................. 2
Nine Months Ended January 31, 1999 and 1998................... 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1999 and 1998................... 4
Notes to Consolidated Financial Statements....................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Quantitative and Qualitative Disclosures about Market Risk....... 21
PART II Other Information................................................ 22
SIGNATURES................................................................ 23
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
January 31, April 30,
1999 1998
---- ----
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 188,340 $ 900,856
Marketable securities 91,582 346,158
Receivables, less allowance for doubtful accounts of $21,302
and $45,314 896,363 793,237
Prepaid expenses and other current assets 94,477 48,944
---------- ----------
TOTAL CURRENT ASSETS 1,270,762 2,089,195
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 221,069 343,178
Excess of cost over fair value of net tangible assets
acquired, net of accumulated amortization 355,987 288,580
Other 127,084 105,809
---------- ----------
704,140 737,567
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 100,597 77,321
---------- ----------
$2,075,499 $2,904,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 805,985 $ 643,002
Accounts payable, accrued expenses and deposits 135,394 114,875
Accrued salaries, wages and payroll taxes 55,229 96,168
Accrued taxes on earnings 26,648 422,847
---------- ----------
TOTAL CURRENT LIABILITIES 1,023,256 1,276,892
LONG-TERM DEBT 249,692 249,675
OTHER NONCURRENT LIABILITIES 43,269 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 411,428 432,335
Retained earnings 857,837 1,010,545
Accumulated other comprehensive income (loss) (27,017) (24,515)
---------- ----------
1,243,337 1,419,454
Less cost of 11,751,531 and 1,992,043 shares of common stock
in treasury 484,055 77,822
---------- ----------
759,282 1,341,632
---------- ----------
$2,075,499 $2,904,083
========== ==========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
Three Months Ended
------------------
January 31,
-----------
1999 1998
---- ----
REVENUES
Service revenues $213,156 $151,185
Product revenues 60,110 36,176
Royalties 12,961 10,562
Other 5,255 853
-------- --------
291,482 198,776
-------- --------
OPERATING EXPENSES
Employee compensation and benefits 124,718 93,703
Occupancy and equipment 54,829 48,796
Interest 23,689 12,371
Marketing and advertising 17,824 13,978
Supplies, freight and postage 22,616 16,077
Other 56,156 38,872
-------- --------
299,832 223,797
-------- --------
Operating loss (8,350) (25,021)
OTHER INCOME
Investment income, net 4,641 1,107
Other, net (879) (17)
-------- --------
3,762 1,090
Loss from continuing operations before income tax benefit (4,588) (23,931)
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (less applicable income
tax benefit of ($175) and ($663)) (273) (2,452)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
Weighted average number of common shares outstanding 97,481 105,050
======== ========
Basic and diluted net loss per share from continuing operations $ (.03) $ (.14)
======== ========
Basic and diluted net earnings (loss) per share $ (.24) $ 2.04
======== ========
Dividends per share $ .25 $ .20
======== ========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
REVENUES
Service revenues $ 308,466 $ 219,426
Product revenues 111,906 64,388
Royalties 17,023 14,980
Other 10,273 3,596
--------- ---------
447,668 302,390
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 216,711 162,546
Occupancy and equipment 137,058 122,012
Interest 53,889 26,819
Marketing and advertising 30,088 24,646
Supplies, freight and postage 31,230 23,794
Other 103,602 73,587
--------- ---------
572,578 433,404
--------- ---------
Operating loss (124,910) (131,014)
OTHER INCOME
Investment income, net 28,177 9,490
Other, net (879) (5)
--------- ---------
27,298 9,485
Loss from continuing operations before income tax benefit (97,612) (121,529)
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (less applicable income
tax benefit of ($953) and ($11,823)) (1,490) (21,307)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
Weighted average number of common shares outstanding 100,526 104,568
========= =========
Basic and diluted net loss per share from continuing operations $ (.60) $ (.72)
========= =========
Basic and diluted net earnings (loss) per share $ (.82) $ 1.29
========= =========
Dividends per share $ .70 $ .60
========= =========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (82,008) $ 135,212
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 45,066 34,637
Net (gain) loss on sale of discontinued operations 19,978 (231,867)
Other noncurrent liabilities 7,385 2,480
Changes in:
Receivables (232,429) 82,717
Prepaid expenses and other current assets (45,533) (44,304)
Net assets of discontinued operations - 13,665
Accounts payable, accrued expenses and deposits 18,477 (64,385)
Accrued salaries, wages and payroll taxes (40,939) (65,796)
Accrued taxes on earnings (385,928) (123,339)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (695,931) (260,980)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (227,381) (133,774)
Maturities of marketable securities 709,106 202,473
Purchases of property and equipment (52,365) (30,633)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (83,048) (237,786)
Other, net (28,040) (14,283)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 318,272 (214,003)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (7,301,430) (8,499,105)
Proceeds from issuance of notes payable 7,464,413 8,405,163
Proceeds from issuance of long-term debt - 249,663
Dividends paid (70,700) (62,676)
Payments to acquire treasury shares (490,868) -
Proceeds from stock options exercised 63,728 32,416
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (334,857) 125,461
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (712,516) (349,522)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 188,340 $ 107,557
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 360,959 $ 58,746
Interest paid 59,392 35,492
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 1999, the Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998, and the Consolidated Statements of Cash Flows for the nine months
ended January 31, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at January 31, 1999 and for
all periods presented have been made.
Reclassifications have been made to prior periods to conform with the current
period presentation.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, all majority-owned subsidiaries and companies
that are directly or indirectly controlled by the Company through majority
ownership or otherwise.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1998 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in the
months of January through April. Thus, the nine-month results are not
indicative of results to be expected for the year.
2. On January 29, 1999, the Company completed the sale of its WebCard Visa
portfolio. The Company recorded a $20.0 million loss, net of taxes, on the
transaction. The $127.6 million receivable for the sale of the portfolio was
treated as a noncash investing activity in the Consolidated Statement of Cash
Flows for the nine months ended January 31, 1999. The Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998 have been reclassified to reflect the Company's Credit Card
operations segment as discontinued operations.
3. On January 31, 1998, the Company completed the sale of all of its interest
in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc.
(WorldCom). The Consolidated Statements of Operations for the three and nine
months ended January 31, 1998 and the Consolidated Statement of Cash Flows
for the nine months ended January 31, 1998 reflect CompuServe as discontinued
operations.
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4. Revenues from discontinued operations for the nine months ended January 31,
1999 and 1998 were $24.1 million and $657.2 million, respectively. Revenues
for the three months ended January 31, 1999 and 1998 were $7.8 million and
$227.2 million, respectively.
5. Receivables consist of the following:
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
Mortgage loans held for sale $387,500 $448,102
Participation in refund anticipation loans 201,890 39,165
Receivable from sale of discontinued operations 127,639 -
Credit card loans - 202,852
Other 200,636 148,432
-------- --------
917,665 838,551
Allowance for doubtful accounts 21,302 45,314
-------- --------
$896,363 $793,237
======== ========
6. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
7. The Company securitized $1.7 billion in mortgage loans during the nine
months ended January 1999. The retained interests from the securitizations
of $104.3 million were treated as noncash investing activities in the
Consolidated Statement of Cash Flows for the nine months ended January 31,
1999.
8. Basic and diluted net earnings (loss) per share is computed using the
weighted average number of shares outstanding during each period. Diluted
net loss per share excludes the impact of common stock options outstanding
of 5,884,733 shares and the conversion of 712 shares of preferred stock to
common stock, as they are antidilutive. The weighted average shares
outstanding for the nine months ended decreased to 100,526,000 from
104,568,000 last year, due to the purchase of treasury shares by the Company
during the period from February 1998 to January 1999. The decrease was
partially offset by stock option exercises during fiscal 1998 and 1999.
9. During the nine months ended January 31, 1999 and 1998, the Company issued
1,996,012 and 1,025,326 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the nine
months ended January 31, 1999, the Company acquired 11,792,500 shares of its
common stock at an aggregate cost of $490,868.
10. CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits allege
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServe's public
filings related to its initial public offering in April 1996. One state
lawsuit also alleges certain oral omissions and misstatements in connection
with such offering. Relief sought in the
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lawsuits is unspecified, but includes pleas for rescission and damages. One
Federal lawsuit names the lead underwriters of CompuServe's initial public
offering as additional defendants and as representatives of a defendant
class consisting of all underwriters who participated in such offering. The
Federal suits were consolidated, the defendants filed a motion to dismiss
the consolidated suits, the district court stayed all proceedings pending
the outcome of the state court suits, and the United States Court of Appeals
for the Sixth Circuit affirmed such stay. The four state court lawsuits
also allege violations of various state statutes and common law of negligent
misrepresentation in addition to the 1933 Act claims. The state lawsuits
were consolidated for discovery purposes and defendants filed a motion for
summary judgment covering all four state lawsuits. In the state lawsuits,
the court entered an order in July 1998 that the suits entitled Harvey
Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et
al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were
damaged thereby. All named defendants to these consolidated actions,
members of their immediate families, any entity in which they have a
controlling interest, and their legal representatives, heirs, successors or
assigns are excluded from the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the
class certification order as the plaintiff in such case did not seek class
certification of its action. As a part of the sale of its interest in
CompuServe, the Company agreed to indemnify WorldCom and CompuServe against
80.1% of any losses and expenses incurred by them with respect to these
lawsuits. The defendants are vigorously defending these lawsuits.
11. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
Condensed balance sheets:
Cash and cash equivalents $ 48,724 $ 30,895
Finance receivables, net 659,658 737,005
Other assets 558,536 311,759
---------- ----------
Total assets $1,266,918 $1,079,659
========== ==========
Commercial paper $ 804,672 $ 643,002
Long-term debt 249,692 249,675
Other liabilities 77,032 57,372
Stockholder's equity 135,522 129,610
---------- ----------
Total liabilities and stockholder's equity $1,266,918 $1,079,659
========== ==========
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Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Condensed statements of
operations:
Revenues $110,472 $59,648 $217,699 $115,104
Earnings from continuing
operations 19,904 7,960 35,357 11,497
Net earnings (loss) (8,026) 2,291 233 (297)
12. The Company sells short treasury securities under an open repurchase
agreement that can be adjusted at any time by either party. The position on
certain or all of the fixed rate mortgages is closed when the Company enters
into a forward commitment to sell those mortgages. The effectiveness of the
hedge is measured by a historical and probable future high correlation of
changes in the fair value of the hedging instruments with changes in value
of the hedged item. If correlation ceases to exist, hedge accounting will
be terminated and gains or losses are recorded in revenues. During the
second quarter of fiscal 1999, the Company's short treasury securities no
longer correlated with the hedged item and, therefore, the hedge was
terminated. A loss of $2.5 million was recognized upon termination in the
second quarter. At January 31, 1999, the Company had no hedging instruments
in place.
13. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in the first quarter of fiscal
1999. SFAS 130 requires that all changes in equity during the period,
except those resulting from investments by and distributions to owners, be
reported as "comprehensive income" in the financial statements. The
Company's comprehensive income is comprised of net earnings (loss), foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements. The components of
comprehensive income (loss) during the three and nine months ended January
31, 1999 and 1998 were:
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings (loss) $(23,096) $214,578 $(82,008) $135,212
Change in net unrealized
gain (loss) on mkt. securities 2,113 226 3,945 121
Change in foreign currency
translation adjustments 2,458 (5,813) (6,447) (7,082)
-------- -------- -------- --------
Comprehensive income (loss) $(18,525) $208,991 $(84,510) $128,251
======== ======== ======== ========
14. In the third quarter of fiscal 1999, the Company elected early adoption of
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134). SFAS 134
requires that mortgage-backed securities or other interests retained after a
securitization be classified based on the intent to sell or hold the
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investments. The Company has classified its retained interests as
available-for-sale securities, which are included in Investments in
marketable securities on the Consolidated Balance Sheet.
15. In the first quarter of fiscal year 1999, the Company acquired operations
that management determined to be a new reportable operating segment. The
new segment, Business services, is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. The Business
services segment currently offers its services through regional accounting
firms based in Kansas City, Missouri; Chicago, Illinois; Indianapolis,
Indiana; Buffalo, New York and Dallas, Texas. Revenues of this segment are
seasonal in nature, with peak revenues occurring during January through
April.
Information concerning the Company's operations by reportable operating
segments for the three and nine months ended January 31, 1999 and 1998 is as
follows:
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
U.S. tax operations $189,083 $152,773 $ 219,662 $ 181,912
International tax operations 6,776 7,371 22,030 24,221
Mortgage operations 79,333 37,522 184,926 93,039
Business services 15,271 - 18,135 -
Unallocated corporate 1,019 1,110 2,915 3,218
-------- -------- --------- ---------
$291,482 $198,776 $ 447,668 $ 302,390
======== ======== ========= =========
Earnings (loss) from
continuing operations:
U.S. tax operations $(18,845) $(19,050) $(137,977) $(123,233)
International tax operations (7,508) (6,925) (15,742) (13,174)
Mortgage operations 24,305 7,682 48,630 19,756
Business services (8) - (220) -
Unallocated corporate (2,735) (2,314) (7,161) (5,029)
Interest exp. on LT debt (4,438) (4,431) (13,319) (9,339)
Investment income, net 4,641 1,107 28,177 9,490
-------- -------- --------- ---------
Loss from continuing operations
before income tax benefit $ (4,588) $(23,931) $ (97,612) $(121,529)
======== ======== ========= =========
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN
THIS DISCUSSION ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, YEAR 2000 READINESS OF THE
COMPANY, ITS FRANCHISEES OR THIRD PARTIES; AND ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND VARIOUS OTHER FACTORS AFFECTING THE COMPANY'S OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES.
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased to $247.5 million at January 31, 1999 from $812.3
million at April 30, 1998. The working capital ratio at January 31, 1999 is 1.2
to 1, compared to 1.6 to 1 at April 30, 1998. The decrease in working capital
and the working capital ratio is primarily due to the repurchase of treasury
shares and, to a lesser extent, the seasonal nature of the Company's U.S. tax
operations segment. Tax return preparation occurs almost entirely in the fourth
quarter and has the effect of increasing certain assets and liabilities during
this time.
The Company maintains seasonal lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its nonconforming mortgage loan and other financial services
programs. These short-term borrowings in the U.S. are supported by a $1.85
billion back-up credit facility through November 1999, subject to renewal.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first nine months were funded through internally-generated
funds.
At January 31, 1999, short-term borrowings used to fund mortgage loans and other
programs increased to $806.0 million from $643.0 million at April 30, 1998 due
mainly to the funding of mortgage operations. For the nine months ended January
31, 1999 and 1998, interest expense was $53.9 million and $26.9 million,
respectively. The increase in interest expense is primarily attributable to the
funding of mortgage operations with short-term borrowings and the debt incurred
to fund the acquisition of Option One Mortgage Corporation (Option One) in June
1997.
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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
in the open market over a two-year period following the separation of CompuServe
Corporation. At January 31, 1999, 17.0 million shares had been repurchased.
The Company plans to continue to purchase its shares on the open market in
accordance with these authorizations, subject to various factors including the
price of the stock, availability of excess cash, the ability to maintain
financial flexibility, securities laws restrictions and other investment
opportunities available.
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RESULTS OF OPERATIONS
- ---------------------
FISCAL 1999 COMPARED TO FISCAL 1998
The analysis that follows should be read in conjunction with the table below
and the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO
-----------------------------------------------
THREE MONTHS ENDED JANUARY 31, 1998
-----------------------------------
(amounts in thousands)
Revenues Earnings (loss)
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $189,083 $152,773 $(18,845) $(19,050)
International tax operations 6,776 7,371 (7,508) (6,925)
Mortgage operations 79,333 37,522 24,305 7,682
Business services 15,271 - (8) -
Unallocated corporate 1,019 1,110 (2,735) (2,314)
Interest expense on LT debt - - (4,438) (4,431)
Investment income, net - - 4,641 1,107
-------- -------- -------- --------
$291,482 $198,776 (4,588) (23,931)
======== ========
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (273) (2,452)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
Consolidated revenues for the three months ended January 31, 1999 increased
46.6% to $291.5 million from $198.8 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $79.3 million, a 111.4%
increase over last year and U.S. tax operations, a 23.8% increase. The new
Business services segment, acquired in May 1998, also contributed $15.3 million
to the increase.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $23.9 million in the third quarter of
last year. The decrease is attributable to increased earnings from Mortgage
operations and higher investment income.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $14.8 million, or $.14 per share, for the same period last year.
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An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 23.8% to $189.1 million from $152.8 million last year,
resulting primarily from increased revenues from tax-related services that are
attributable to an increase in the number of clients served and price increases.
During the first month of the U.S. tax-filing season, the number of clients
served in company-owned offices increased 4.8%. Improved software sales and
revenues from Refund Anticipation Loan (RAL) participations also contributed to
the increase.
The pretax loss decreased 1.1% to $18.8 million from $19.1 million in the third
quarter of last year due to the strong increase in revenues. The increase in
revenues completely offset the increase in expenses over the prior year. The
increase in expenses is attributable to normal increases in compensation and
benefits related to tax services, a more conservative loss reserve related to
RAL participations than in the same period last year and an increase in the
number of tax offices. Due to the nature of this segment's business, the results
for the first month of the tax-filing season are not necessarily indicative of
expected results for the entire tax season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 8.1% to $6.8 million compared to $7.4 million in the prior
year's third quarter. The decrease is principally attributable to increased
competitive conditions related to discounted returns and a slower start to the
Canadian tax-filing season. The number of regular and discounted returns
prepared in company-owned offices in Canada during the month of January
decreased 27.5% from the prior year. The decline in Canada was partially offset
by increased revenues in Australia.
The pretax loss increased 8.4% to $7.5 million from $6.9 million last year. The
increase is due to compensation and other facility-related expenses in Canada
primarily attributable to normal operational increases and an increase in the
number of tax offices, as well as decreased revenues. Due to the nature of this
segment's business, third quarter operating results are not indicative of
expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 111.4% to $79.3 million from $37.5 million in the same period
last year. The increase is attributable to a higher volume of loans sold or
securitized and increased interest income over the prior year. Option One
originated and sold or securitized $930.2 million and $1.3 billion in loans,
respectively, during the third quarter of fiscal 1999, compared to $507.0
million originated and $466.0 million sold in the third quarter last year. Both
Option One and Companion Mortgage had higher interest income earned related to
higher balances of mortgage loans held for sale during the quarter.
Mortgage operations pretax earnings of $24.3 million increased 216.4% this year
compared to $7.7 million during the third quarter of fiscal 1998, driven
entirely by the increase in revenues. Increases in compensation and benefits and
marketing and advertising expense had a negative impact on pretax earnings due
primarily to the continued expansion of Option One's operations.
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16
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $15.3 million and a pretax loss of $8
thousand for the third quarter of fiscal 1999, including goodwill amortization
of $1.1 million. Due to the nature of this segment's business, revenues are
seasonal, while expenses are relatively fixed throughout the year. Results for
the third quarter are not indicative of the expected results for the entire
year.
INVESTMENT INCOME, NET
Net investment income increased 319.2% to $4.6 million from $1.1 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 18.2% to $2.7 million from $2.3 million in the comparable period last
year. The increase is a result of higher employee costs.
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THREE MONTHS ENDED JANUARY 31, 1999 (THIRD QUARTER) COMPARED TO
---------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31, 1998 (SECOND QUARTER)
----------------------------------------------------
(amounts in thousands)
Revenues Earnings (loss)
----------------- -------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
-------- ------- -------- --------
U.S. tax operations $189,083 $18,400 $(18,845) $(61,316)
International tax operations 6,776 11,817 (7,508) (2,263)
Mortgage operations 79,333 52,888 24,305 10,538
Business services 15,271 1,534 (8) (98)
Unallocated corporate 1,019 974 (2,735) (2,318)
Interest expense on LT debt - - (4,438) (4,438)
Investment income, net - - 4,641 9,646
-------- ------- -------- --------
$291,482 $85,613 (4,588) (50,249)
======== =======
Income tax benefit (1,743) (19,094)
-------- --------
Net loss from continuing operations (2,845) (31,155)
Net loss from discontinued operations (273) (18)
Net loss on sale of discontinued operations (19,978) -
-------- --------
Net loss $(23,096) $(31,173)
======== ========
Consolidated revenues for the three months ended January 31, 1999 increased
240.5% to $291.5 million from $85.6 million reported in the second quarter of
fiscal 1999. The increase is primarily due to revenues from U.S. tax operations
related to the beginning of the U.S. tax-filing season, as well as increased
revenues from Mortgage operations and Business services.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $50.2 million in the second quarter
of this year. The decrease is attributable to U.S. tax operations, which
incurred a pretax loss of $18.8 million this quarter compared to a pretax loss
of $61.3 million in the second quarter, and improved results from Mortgage
operations.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $31.2 million, or $.31 per share, for the second quarter.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased 927.6% to $189.1 million from $18.4 million in the second
quarter. The pretax loss decreased 69.3% to $18.8 million from $61.3 million in
the three months ended October 31, 1998. The improved results are due to the
onset of the U.S. tax-filing season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 42.7% to $6.8 million compared to the second quarter revenues
of $11.8 million. The pretax loss increased 231.8% to $7.5 million from $2.3
million in the second quarter. The decreased results are due to the timing of
the tax-filing seasons in Australia and Canada. The Australian tax season ends
in October while the Canada tax season begins in late January.
MORTGAGE OPERATIONS
Revenues increased 50.0% to $79.3 million from $52.9 million in the prior
quarter. Pretax earnings increased 130.6% to $24.3 million from $10.5 million in
the three months ended October 31, 1998. The improved results are due to the
timing of loan sales, increased interest income earned on higher loan balances
and a one-time loss of $2.5 million on the termination of a hedging instrument
incurred during the second quarter. The increased earnings were partially
reduced by increases in compensation and benefits expenses. Option One sold or
securitized $1.3 billion in loans in the current quarter compared to $539.6
million in the second quarter.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Revenues increased 895.5% to $15.3 million from $1.5 million in the three months
ended October 31, 1998. The pretax loss decreased 91.8% to $8 thousand from $98
thousand in the prior quarter. The improved results are due to acquisitions made
during the third quarter and the onset of the accounting firms' tax and
accounting season.
INVESTMENT INCOME, NET
Net investment income decreased 51.9% to $4.6 million from $9.6 million in the
second quarter of fiscal 1999. The decrease resulted from less funds available
for investment due to the purchase of treasury shares.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 18.0% to $2.7 million from $2.3 million in the second quarter. The
increase is due to higher charitable contributions, employee costs and
consultant fees. Improved results at the Company's captive insurance subsidiary
partially offset the increased loss.
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NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO
----------------------------------------------
NINE MONTHS ENDED JANUARY 31, 1998
----------------------------------
(amounts in thousands)
Revenues Earnings (loss)
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $219,662 $181,912 $(137,977) $(123,233)
International tax operations 22,030 24,221 (15,742) (13,174)
Mortgage operations 184,926 93,039 48,630 19,756
Business services 18,135 - (220) -
Unallocated corporate 2,915 3,218 (7,161) (5,029)
Interest expense on LT debt - - (13,319) (9,339)
Investment income, net - - 28,177 9,490
-------- -------- --------- ---------
$447,668 $302,390 (97,612) (121,529)
======== ========
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (1,490) (21,307)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
Consolidated revenues for the nine months ended January 31, 1999 increased 48.0%
to $447.7 million from $302.4 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $184.9 million, a 98.8%
increase over last year, a 20.8% increase in revenues from U.S. tax operations
and revenues from the new Business services segment.
The consolidated pretax loss from continuing operations for the first nine
months of fiscal 1999 decreased to $97.6 million from $121.5 million last year.
The decrease is attributable to higher earnings from Mortgage operations and
increased investment income, which were reduced by increased losses from U.S.
tax operations.
The net loss from continuing operations was $60.5 million, or $.60 per share,
compared to $75.3 million, or $.72 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
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20
U.S. TAX OPERATIONS
Revenues increased 20.8% to $219.7 million from $181.9 million last year,
resulting primarily from higher revenues from tax related services that are
attributable to a 3.8% increase in clients served and price increases. Revenues
from software sales and RAL participations also contributed to the increase.
The pretax loss increased 12.0% to $138.0 million from $123.2 million in the
comparable period last year due to normal operational increases in compensation,
rent and other facility-related expenses. Also contributing to the increases in
rent and other facility-related expenses is an increase in the amount of tax
office space maintained under lease during this year's off-season, as well as an
additional 236 tax offices this tax season compared to last year's tax season.
The increased loss was partially offset by earnings from software sales. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 9.0% to $22.0 million compared to $24.2 million in the prior
year. The decrease is due to foreign currency translation of Australia
operations and a decline in tax preparation and discounted return fees in
Canada. Discounted returns prepared in company-owned offices declined 19.0% from
the prior year. The number of tax returns prepared in company-owned offices
declined 12.6% from last year.
The pretax loss increased 19.5% to $15.7 million from $13.2 million last year.
The increase is due to higher facility-related expenses in Canada, which is
attributable to the increase in the number of offices and normal operational
increases, and increased compensation and benefits in the United Kingdom. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 98.8% to $184.9 million from $93.0 million in the same period
last year. The increase is essentially attributable to Option One, which was
acquired on June 17, 1997. Option One contributed revenues of $157.8 million for
the nine months, a $76.9 million increase over the seven-and-a-half month period
last year. Option One originated and sold or securitized $2.5 billion in loans
during the first nine months of fiscal 1999. Companion Mortgage also contributed
revenues of $27.1 million, a 123.9% increase over last year, due to interest
income earned on higher balances of mortgage loans held for sale.
Pretax earnings increased 146.2% to $48.6 million from $19.8 million in the
prior year. The increase is primarily due to Option One, which contributed
earnings of $46.7 million compared to earnings of $19.3 million last year and
increased earnings from Companion Mortgage. Earnings were reduced by increased
losses from an equity investment.
-18-
21
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $18.1 million and a pretax loss of
$220 thousand for the nine months ended January 31, 1999, including goodwill
amortization of $1.3 million. Due to the nature of this segment's business,
revenues are seasonal, while expenses are relatively fixed throughout the year.
Results for the nine months are not indicative of the expected results for the
entire year.
INVESTMENT INCOME, NET
Net investment income increased 196.9% to $28.2 million from $9.5 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the nine months
increased 42.4% to $7.2 million from $5.0 million in the comparable period last
year. The increase is a result of increased employee costs and the start-up of a
business that offers financial planning services through the Company's tax
offices.
OTHER ISSUES
- ------------
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, evaluate and mitigate
potential Year 2000 related issues. As part of its program, the Company has
identified three key categories of software and systems, including information
technology (IT) systems, non-IT systems (systems with internal clocks or
imbedded microprocessors) and systems of third parties with which it interacts,
for which the Company has developed detailed plans to address the Year 2000
issue.
The Company has identified 9 mission critical business functions (i.e. U.S. tax
preparation services, wholesale loan services, etc.) and 28 non-mission critical
business functions (i.e. TaxCut(R) software, Australian tax operations, etc.).
Within each of the business functions, key IT and non-IT systems have been
inventoried and assessed for compliance and detailed plans are in place for
required system modifications or replacements. Currently remediation projects
are at different phases of completion. One hundred and thirty-five remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 87 are complete and
successfully tested, 23 are in the testing phase and 25 are still in progress.
Of the projects currently in the testing phase, 82% are scheduled to be
completed by April 30, 1999. The remaining projects will be completed after the
1998 tax season due to the nature of the Company's business.
The Company has initiated communications and surveyed state, Federal and foreign
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 issues. The Company is relying on their responses to
determine if key suppliers will be Year 2000 compliant. One of the Company's key
third parties is the Internal Revenue Service (IRS). In a report given to the
House Committee on Ways and Means on Year 2000 Conversion Efforts on
-19-
22
February 24, 1999, the Commissioner of the IRS reported the status of the IRS's
Year 2000 effort. He stated: "Nearly all of our (IRS) mission critical systems
were made Y2K compliant and were placed back into production for the 1999 Filing
Season. Approximately half of these systems have been successfully tested
"end-to-end" with the clocks rolled forward. We (IRS) will continue focusing our
repair efforts on mission critical systems from now until the end of March. From
April through the end of 1999, most of the effort will be applied to wrapping up
some smaller systems and, most importantly, completing the full-scale End-to-End
Testing." The Company is also in the process of completing a survey and
inventory of tax franchisees. Some readiness issues have been identified and the
Company is assisting its franchisees with their remediation programs to help
mitigate their risk. Assurances from franchisees of Year 2000 readiness are
scheduled to be obtained after the end of the current tax season. The Company
will continue to monitor its third party relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred. Total
costs are currently estimated at $3.7 million, with approximately $1.8 million
incurred to date. The costs associated with the replacement of computer systems,
hardware or equipment (currently estimated to be $12.9 million in total, with
$10.4 million incurred to date), substantially all of which would be
capitalized, are not included in the above estimates. All costs related to the
Year 2000 issue are being funded through internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will not be
Year 2000 compliant and the Company would not be able to process electronic
filings or refund anticipation loans. The Company believes that its competitors
will face the same risks.
The Company is currently identifying and developing contingency plans for Year
2000 related interruptions in the event that internal and/or external
remediation projects are not completed on a timely basis or that they fail to
meet anticipated needs. The contingency plans are scheduled to be completed by
June 1999.
The Company's Year 2000 program is an ongoing process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its business
activities, it can not make any assurances that its systems, the systems of the
state, Federal and foreign governments, tax franchisees and suppliers will be
Year 2000 compliant and will not interrupt business. While the impact can not be
fully determined, the inability of these systems to be ready could result in
significant difficulties in processing and completing fundamental transactions.
In such event, the Company's results of operations and financial position could
be adversely affected in a material manner.
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23
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of January 31, 1999, there has been no change in the Company's market risk
exposure related to interest rates on investments in fixed-rate mortgage loans
held for resale or securitization from what was reported in the Company's Form
10-Q for the quarter ended October 31, 1998. As previously reported in the
Company's Annual Report on Form 10-K for April 30, 1998, the Company hedged its
fixed-rate mortgage portfolio by selling short treasury securities and utilizing
forward commitments. This is still the Company's policy, however, due to market
conditions it became apparent that the performance of selling short treasury
securities was not correlating with the value of fixed-rate mortgages in the
whole loan market. Therefore, at January 31, 1999 the Company had no outstanding
hedges to minimize market risk on the fixed-rate mortgage loan portfolio. The
Company is evaluating other alternatives to minimize market risk. At January 31,
1999, the fixed-rate portfolio represents 20.3% of all mortgage loans held for
sale and 3.8% of total assets. Mortgage loans held for sale are recorded at the
lower of cost or market value. If it is determined that the market value drops
below cost, a valuation allowance would be set up and the loss would be
recognized in the current period. No valuation allowance has been recorded at
January 31, 1999.
The Company estimates that an increase in interest rates on fixed-rate mortgages
of 50 basis points would result in a decline in value of approximately $3.4
million, which would be recorded as a loss in the consolidated income statement
to the extent that the market value dropped below cost. Such impact would
represent approximately 6.9% of the pretax earnings from Mortgage operations and
3.5% of the Company's consolidated pretax loss for the nine months ended January
31, 1999, assuming the entire decline was recognized as a lower of cost or
market adjustment.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Form 10-Q for the first
and second quarters of fiscal 1999. CompuServe, certain current and former
officers and directors of CompuServe and the registrant have been named as
defendants in six lawsuits pending before the state and Federal courts in
Columbus, Ohio. All suits involve claims based on allegations of omissions
and misstatements of fact in connection with CompuServe's initial public
offering in April 1996. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. The Federal suits were
consolidated, the defendants filed a motion to dismiss the consolidated
suits, the district court stayed all proceedings pending the outcome of the
state court suits, and the United States Court of Appeals for the Sixth
Circuit affirmed such stay. The state lawsuits were consolidated for
discovery purposes and defendants filed a motion for summary judgment
covering all four state lawsuits. In the state lawsuits, the court entered an
order in July 1998 that the suits entitled Harvey Greenfield v. CompuServe
Corporation, et al., Jeffrey Schnipper v. CompuServe Corporation, and Philip
Silverglate v. CompuServe Corporation, et al. be maintained as a class action
on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were damaged
thereby. All named defendants to these consolidated actions, members of their
immediate families, any entity in which they have a controlling interest, and
their legal representatives, heirs, successors or assigns are excluded from
the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the class
certification order as the plaintiff in such case did not seek class
certification of its action. The defendants continue to vigorously defend
these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 H&R Block Deferred Compensation Plan for Executives, as
Amended and Restated.
for Executives, as Amended and Restated.
10.2 Amendment No. 1 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
27 Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the third
quarter of fiscal 1999.
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25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
-------------------------------
(Registrant)
DATE 03/16/99 BY /s/ Ozzie Wenich
--------------- ---------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 03/16/99 BY /s/ Cheryl L. Givens
--------------- ---------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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1
EXHIBIT 10.1
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
JANUARY 1, 1999
2
H & R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
TABLE OF CONTENTS
Page
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT........................................ 3
Section 1.1 Establishment of Account....................................... 3
Section 1.2 Property of Company and Participating Affiliates............... 3
ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER...................................... 3
Section 2.1 Definitions.................................................... 3
Section 2.2 Gender and Number.............................................. 9
ARTICLE 3 PARTICIPATION........................................................ 9
Section 3.1 Who May Participate............................................ 9
Section 3.2 Time and Conditions of Participation........................... 9
Section 3.3 Termination of Participation................................... 9
Section 3.4 Missing Persons................................................ 9
Section 3.5 Relationship to Other Plans.................................... 10
Section 3.6 Participants Employed By CompuServe............................ 10
ARTICLE 4 ENTRIES TO THE ACCOUNT............................................... 10
Section 4.1 Contributions.................................................. 10
Section 4.2 Crediting Rate................................................. 12
Section 4.3 Crediting Rate Upon Retirement, Disability, Continued
Employment After Reaching the Age of 75, Death or
Termination of Employment with all Affiliates as a
Result of a Change in Control.................................. 13
Section 4.4 Crediting Rate Upon Resignation or Discharge................... 13
ARTICLE 5 VESTING.............................................................. 14
Section 5.1 Participant Deferrals and Vesting Schedule for Company
Contributions.................................................. 14
Section 5.2 Exceptions to Vesting Schedule................................. 14
ARTICLE 6 DISTRIBUTION OF BENEFITS............................................. 14
Section 6.1 Payments After Termination of Employment....................... 14
Section 6.2 Form of Benefits Upon Retirement, Disability or Continued
Employment After Reaching the Age of 75........................ 15
Section 6.3 Form of Benefits Upon Resignation or Discharge, or Termination
of Employment with all Affiliates as Result of a Change in
Control........................................................ 16
Section 6.4 Amount of Benefit.............................................. 17
1
3
Section 6.5 Time of Payment............................................. 18
Section 6.6 Death Benefits.............................................. 19
Section 6.7 Hardships................................................... 20
Section 6.8 Claims Procedure............................................ 21
Section 6.9 Alternate Forms of Benefit Distribution..................... 21
Section 6.10 Distributions on Plan Termination........................... 21
ARTICLE 7 FUNDING.............................................................. 22
Section 7.1 Source of Benefits.......................................... 22
Section 7.2 No Claim on Specific Assets................................. 22
ARTICLE 8 ADMINISTRATION AND FINANCES......................................... 22
Section 8.1 Administration.............................................. 22
Section 8.2 Powers of Committee......................................... 22
Section 8.3 Actions of the Committee.................................... 22
Section 8.4 Delegation.................................................. 22
Section 8.5 Reports and Records......................................... 22
ARTICLE 9 AMENDMENTS AND TERMINATION.......................................... 23
Section 9.1 Amendments.................................................. 23
Section 9.2 Termination................................................. 23
Section 9.3 Accelerated Vesting. ....................................... 23
ARTICLE 10 ACCELERATED VESTING................................................ 24
Section 10.1 Accelerated Vesting......................................... 24
Section 10.2 Change in Control........................................... 24
ARTICLE 11 MISCELLANEOUS....................................................... 24
Section 11.1 No Guarantee of Employment.................................. 24
Section 11.2 Individual Account Plan..................................... 24
Section 11.3 Release..................................................... 24
Section 11.4 Notices..................................................... 24
Section 11.5 Non-Alienation.............................................. 24
Section 11.6 Tax Liability............................................... 24
Section 11.7 Captions.................................................... 25
Section 11.8 Applicable Law.............................................. 25
2
4
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
H&R Block, Inc. (the "Company") established, effective August 1, 1987, a
nonqualified deferred compensation plan for the benefit of specified Executives
of the Company, and specified affiliates of the Company. This plan became known
as the H&R Block Deferred Compensation Plan for Executives (the "DCP"). The
Company amended the DCP by Amendment No. 1 effective December 15, 1990; by
Amendment No. 2 effective January 1, 1990; by Amendment No. 3 effective
September 1, 1991; by Amendment No. 4 effective January 1, 1994; by Amendment
No. 5 effective May 1, 1994; by Amendment No. 6 effective August 1, 1995; by
Amendment No. 7 effective December 11, 1996; by Amendment No. 8 effective
January 1, 1998; by Amendment No. 9 effective as of January 1, 1997; by
Amendment No. 10 effective in part March 1, 1998 and in part April 1, 1998; and
by Amendment No. 11 effective as of May 15, 1998.
The Company adopted the H&R Block Supplemental Deferred Compensation Plan
for Executives (the "Supplemental Plan") effective as of May 1, 1994. The
Company amended said Supplemental Plan by Amendment No. 1 effective September
7, 1994; by Amendment No. 2 effective August 1, 1995; by Amendment No. 3
effective December 11, 1996; by Amendment No. 4 effective January 1, 1998; by
Amendment No. 5 effective May 1, 1997; by Amendment No. 6 effective in part
March 1, 1998 and in part April 1, 1998; and by Amendment No. 7 effective as of
May 15, 1998.
The Company continues to retain the right to amend the DCP and the
Supplemental Plan pursuant to action by the Company's Board of Directors. The
Company hereby exercises that right by combining the DCP and the SDCP into one
plan to be known as the H&R Block Deferred Compensation Plan for Executives, as
Amended and Restated (the "Plan") and by making other amendments to the Plan.
The Plan shall be effective as of January 1, 1999. Like its predecessors, the
Plan is intended to be an unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees as described in Sections 201(2), 301 (a)(3) and 401(a)(1)
of the Employee Retirement Income Security Act of 1974 ("ERISA").
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT
Section 1.1 Establishment of Account. The Company shall establish an
account ("Account") for each Participant which shall be utilized solely as a
device to measure and determine the amount of deferred compensation to be paid
under the Plan. For each Participant in the DCP or each Participant in both the
DCP and the Supplemental Plan as of December 31, 1998, the "Account" shall
include those accounts that existed under such plans for such Participant as of
the close of business on December 31, 1998.
Section 1.2 Property of Company and Participating Affiliates. Any amounts
so set aside for benefits payable under the Plan are the property of the
Company and its participating affiliates ("Participating Affiliates"), except,
and to the extent, of any assignment of such assets to an irrevocable trust.
ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER
Section 2.1 Definitions. Whenever used in the Plan, the following words
and phrases
3
5
shall have the meanings set forth below unless the context plainly requires a
different meaning, and when a defined meaning is intended, the term is
capitalized.
2.1.1 "Account" means the device used to measure and determine
the amount of deferred compensation to be paid to a Participant or
Beneficiary under the Plan, and may refer to the separate Accounts that
represent amounts deferred by a Participant under separate Permissible
Deferral elections or by the Company pursuant to Section 4.1.
2.1.2 "Account Executive" means a person who has the title of
Account Executive, is employed on a full-time basis by a Participating
Affiliate, and is responsible for managing, overseeing, directing or
handling the accounts of clients of the Participating Affiliate.
2.1.3 "Accounting Firm" means an accounting firm in which the
Company has no direct or indirect ownership interest but with which an
Accounting Subsidiary has a contractual relationship in respect of one or
more employees who are employees of both such accounting firm and such
Accounting Subsidiary.
2.1.4 "Accounting Subsidiary" means an indirect accounting firm
subsidiary of the Company that is involved in the provision of non-attest
accounting services, the management of one or more Accounting Firms,
and/or the ownership of one or more other accounting firm subsidiaries of
the Company.
2.1.5 "Affiliates" or "Affiliate" means a group of entities,
including the Company, which constitutes a controlled group of
corporations (as defined in section 414(b) of the Code), a group of
trades or businesses (whether or not incorporated) under common control
(as defined in section 414(c) of the Code), and members of an affiliated
service group (within the meaning of section 414(m) of the Code.)
2.1.6 "Age" of a Participant means the number of whole calendar
years that have elapsed since the date of the Participant's birth.
2.1.7 "Annual Deferral Amount" means the amount of Base Salary,
and/or Bonus that a Participant elects to defer each Plan Year under a
Permissible Deferral. The amount of Base Salary included in the Annual
Deferral Amount shall be equal to a percentage of the Participant's Base
Salary that is not less than three percent (3%) and not greater than
fifty percent (50%), and the amount of Bonus or Bonuses included in the
Annual Deferral Amount shall be equal to (i) a flat dollar amount,
expressed in one thousand dollar ($1,000) increments, or (ii) a
percentage of the Bonus or Bonuses paid during the Plan Year that is not
less than five percent (5%) and not greater than fifty percent (50%),
expressed in five percent (5%) increments. In the case of a Participant
who is an employee of both an Accounting Subsidiary and an Accounting
Firm, the calculation of the amount of the Annual Deferral Amount that
the Participant is permitted to elect shall be made by taking into
account the amount of salary and bonus paid to such Participant by the
Accounting Firm, but the actual deferral under the Plan shall only be
made out of the Base Salary and/or Bonus or Bonuses paid by all
Affiliates.
2.1.8 "Assumed Interest Rate" has the meaning specified in
Section 6.4.3.
2.1.9 "Base Salary" of an Executive for any Plan Year means the
total annual salary and wages paid by all Affiliates to such individual
during that Plan Year, including any amount which would be included in
the definition of Base Salary, but for the
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individual's election to defer some of his or her salary pursuant to this
Plan or some other deferred compensation plan established by an
Affiliate; but excluding any other remuneration paid by Affiliates, such
as overtime, net commissions, bonuses, stock options, distributions of
compensation previously deferred, restricted stock, allowances for
expenses (including moving, travel expenses, and automobile allowances),
and fringe benefits payable in a form other than cash. The "Base Salary"
of an Account Executive for any Plan Year means the total earnings and
wages, including any and all commissions, incentives and bonuses, paid by
all Affiliates to such individual during that Plan Year, including any
amount which would be included in the definition of Base Salary, but for
the individual's election to defer some of his or her earnings pursuant
to this Plan or some other deferred compensation plan established by an
Affiliate; but excluding any other remuneration paid by Affiliates, such
as overtime, stock options, distributions of compensation previously
deferred, restricted stock, allowances for expenses (including moving,
travel expenses, and automobile allowances), and fringe benefits payable
in a form other than cash. In the case of an individual who is a
participant in a plan sponsored by an Affiliate which is described in
Section 401(k) of the Code, the term Base Salary shall include any amount
which would be included in the definition of Base Salary, but for the
individual's election to reduce his salary or earnings and have the
amount of the reduction contributed to the 401(k) plan on his behalf.
2.1.10 "Beneficiary" or "Beneficiaries" means the persons or
trusts designated by a Participant in writing pursuant to Section 6.6.4
of the Plan as being entitled to receive any benefit payable under the
Plan by reason of the death of a Participant, or, in the absence of such
designation, the persons specified in Section 6.6.5 of the Plan.
2.1.11 "Board" means the Board of Directors of the Company as
constituted at the relevant time.
2.1.12 "Bonus" or "Bonuses" of an Executive for any Plan Year
means the total remuneration paid under the various annual management
bonus programs ("annual bonuses") by Affiliates to such individual for
that Plan Year including any amount which would be included in the
definition of Bonus, but for the individual's election to defer some or
all of his or her annual bonus pursuant to this Plan or some other
deferred compensation plan established by an Affiliate; but excluding any
other remuneration paid by Affiliates, such as Base Salary, overtime, net
commissions, stock options, distributions of compensation previously
deferred, restricted stock, allowances for expenses (including moving,
travel expenses, and automobile allowances), and fringe benefits payable
in a form other than cash. For purposes of this Plan, the terms Bonus and
Bonuses specifically exclude any and all types of commissions, incentives
or bonuses paid by any Affiliate to an Account Executive.
2.1.13 "Change in Control" has the meaning specified in
Section 10.2
2.1.14 "Closing Price" means the closing price of the Company's
Common Stock on the New York Stock Exchange as of the applicable date;
provided, however, that if no closing price is available for such date,
"Closing Price" means the closing price of the Company's Common Stock as
of the next most recent date for which a price is available.
2.1.15 "Code" means the Internal Revenue Code of 1986, as
amended from time to time and any successor statute. References to a
Code section shall be deemed to be to that section or to any successor to
that section.
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2.1.16 "Committee" means the Compensation Committee of the
Company's Board.
2.1.17 "Common Stock" means the common stock of the Company.
2.1.18 "Company" means H&R Block, Inc.
2.1.19 "Company Contribution" or "Company Contributions" means
the sum of (i) the Company Matching Contributions described in Section
4.1.2, and (ii) the additional Company contributions described in Section
4.1.3.
2.1.20 "DCP" means the H&R Block Deferred Compensation Plan for
Executives initially adopted by the Company effective as of August 1,
1987, as subsequently amended prior to the Effective Date of this Plan.
2.1.21 "Deferred Compensation Unit" means a unit equal in value
to one share of Common Stock and posted to a Participant's Account for
the purpose of measuring the benefits payable under the Plan.
2.1.22 "Disabled" or "Disability" with respect to a Participant
shall have the same definition as in the Company's then existing long
term group disability insurance program.
2.1.23 "Early Retirement Date" of a Participant means the first
day of the first calendar month commencing on or after the date on which
(i) the Participant has reached Age 55 while in the employ of an
Affiliate and (ii) the Participant has completed at least ten (10) Years
of Service."
2.1.24 "Effective Date" or "Effective Date of this Plan" means
the date on which the DCP became effective, i.e., August 1, 1987.
2.1.25 "Enrollment Period" for a Plan Year commencing on January
1 means the immediately preceding period of October 1 through December
15, inclusive. At its sole and absolute discretion, the Committee may
grant to a person eligible to participate in the Plan an "Enrollment
Period" consisting of the 30-day period immediately following the date on
which such person is first employed by a Participating Affiliate.
2.1.26 "Executive" means a person other than an Account
Executive with substantial responsibility in the management of a
Participating Affiliate employed on a full-time basis by that
Participating Affiliate.
2.1.27 "5-year payout" has the meaning specified in
Section 6.3.2.
2.1.28 "Fixed 120 Account" means an Account that represents
amounts deferred by a Participant under a Permissible Deferral
election(s) as a part of which the Participant elected the fixed rate
investment option described in the second paragraph of Section 4.2.1.
2.1.29 "Group A Participant" has the meaning specified in
Section 3.1.1.
2.1.30 "Group B Participant" has the meaning specified in
Section 3.1.2.
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2.1.31 "Hours of Service" means hours of service determined in
accordance with the provisions of the then existing H&R Block Employee
Profit Sharing Retirement Plan.
2.1.32 "Initial Payment Period" has the meaning specified in
Section 6.4.2.
2.1.33 "Matching Contributions" has the meaning specified in
Section 4.1.2.
2.1.34 "Normal Retirement Date" of a Participant means the last
day of the calendar month in which the Participant reaches the Age of 65
while in the employ of an Affiliate.
2.1.35 "Overall Payment Period" has the meaning specified in
Section 6.4.1.
2.1.36 "Participant" means an Executive or an Account Executive
who is eligible to participate in the Plan and has elected to participate
in the Plan.
2.1.37 "Participating Affiliate" or "Participating Affiliates"
means the Company and the following indirect subsidiaries of the Company,
each of which is an Affiliate: HRB Management, Inc., H&R Block Tax
Services, Inc., Block Financial Corporation, HRB Business Services, Inc.,
and the U.S. subsidiaries of such indirect subsidiaries; and such other
Affiliates as may be designated as such by the Company from time to time.
2.1.38 "Permissible Deferral" means, with respect to a Plan
Year, a deferral in that Plan Year of an Annual Deferral Amount. For all
Participants, the aggregate of all deferrals made under the Plan,
including the DCP and the Supplemental Plan, for all Plan Years may not
exceed one million dollars ($1,000,000.00).
In the case of a Participant who is an employee of both an
Accounting Subsidiary and an Accounting Firm, the calculation of the
amount of the Permissible Deferral shall be made by taking into account
the amount of salary and bonus paid to such Participant by the Accounting
Firm, but the actual deferral under the Plan shall only be made out of
Base Salary and/or Bonus or Bonuses paid by all Affiliates.
Deferrals may be made from Base Salary for a Plan Year and/or
from a Bonus or Bonuses applicable to the Plan Year. Deferrals from the
Base Salary or from a Bonus or Bonuses are made in separate elections by
the Participant during the Enrollment Period prior to the Plan Year
during which such Base Salary would otherwise be paid to the Participant
or the Bonus would be earned without further contingency (regardless of
when such Bonus is paid). Deferral elections must specify (i) the
percentage (stated as an integer) of the deferral that is intended to be
deducted from the Base Salary and (ii) the percentage (stated as an
integer) or the flat dollar amount of the deferral that is intended to be
deducted from the Bonus or Bonuses. Deferrals made from the Base Salary
shall be made in installments, as instructed and approved by the
Committee. Deferrals made from each Bonus shall be made at the time or
times during the applicable Plan Year that the Bonus would otherwise be
paid to the Participant (based upon the deferral election in effect for
the Plan Year when the Bonus was earned without further contingency).
Each installment of a deferral shall be rounded to the nearest whole
dollar amount.
A Participant may irrevocably elect at the time of making a
Permissible Deferral election to have the entire amount of his or her
Base Salary deferral for a Plan Year deferred from such Participant's
Bonus or Bonuses earned during such Plan Year without
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further contingency. The amount of the Base Salary deferral will be
determined as of January 1 of such Plan Year based on the annual rate of
Base Salary in effect for the Participant on that date. Such election may
be in addition to an election to defer Bonus itself and both the Base
Salary deferral amount and the Bonus deferral amount are eligible for
Company Contributions (subject to the limits specified in Article 4). For
example, Participant A, a 5-year Plan Participant, is paid a Base Salary
at an annual rate of $100,000 on January 1 of Plan Year X, and earns a
Bonus of $50,000 without further contingency during Plan Year X. During
the Enrollment Period prior to Plan Year X, A elected to defer 25% of
Base Salary and 25% of Bonus in Plan Year X. A also elected to have all
of the Base Salary deferral deferred from the Bonus. In this example,
$37,500 would be deferred from A's bonus ($25,000 of salary deferrals
(25% of $100,000) and $12,500 of bonus deferrals ($25% of $50,000)). The
entire $37,500 would be subject to Company Contributions under Article 4.
If, in such example, the actual Bonus amount is $35,000, all of the bonus
would be deferred and $2,500 of elected Base Salary deferrals would not
be deferred from Base Salary or Bonus applicable to such Plan Year
because the Bonus was not sufficiently large to cover both the elected
Base Salary deferral and the Bonus deferral.
2.1.39 "Plan" means the "H&R Block Deferred Compensation Plan
for Executives, as Amended and Restated" as of January 1, 1999, as set
forth herein and as further amended and/or restated from time to time.
2.1.40 "Plan Year" means the calendar year for all Permissible
Deferrals and for all purposes when used in Sections 4.3, 4.4, 6.2, 6.3,
6.4, 6.6 and 6.7. Except for Permissible Deferrals elected to commence on
March 1, 1998, and Permissible Deferrals elected during a discretionary
Enrollment Period in accordance with Section 2.1.25, "Plan Year " means
the calendar year (a) for all Permissible Deferrals elected by Group B
Participants, and (b) for Permissible Deferrals of Group A Participants
elected to commence January 1, 1991 or later. For Permissible Deferrals
of Group A Participants elected to commence on or before May 1, 1990,
"Plan Year" means the 12-month period ending each April 30, through April
30, 1997, the period between May 1, 1997 and December 31, 1997,
inclusive, and the calendar year thereafter. For Permissible Deferrals of
Participants elected to commence on March 1, 1998, "Plan Year" means the
10-month period between March 1, 1998 and December 31, 1998, inclusive,
and the calendar year thereafter. If the Committee grants to a person
eligible to participate in the Plan a discretionary Enrollment Period in
accordance with Section 2.1.25 and such person submits to the Company a
Permissible Deferral election, such Participant's first "Plan Year" shall
be the period (i) beginning on the first day of his or her first regular
pay period commencing not less than 30 days after the Company's receipt
of his or her Permissible Deferral election, and (ii) ending on December
31 of the year in which such pay period falls. Plan Years under the DCP
and Supplemental Plan shall constitute Plan Years under this Plan,
provided that, for all purposes hereunder, a Participant that
participated in both the DCP and the Supplemental Plan simultaneously
shall be considered to have participated in this Plan for only one Plan
Year for each Plan Year of simultaneous participation in the DCP and
Supplemental Plan.
2.1.41 "Plan Year Payment Period" has the meaning specified in
Section 6.4.2.
2.1.42 "Remainder Payment Period" has the meaning specified in
Section 6.4.2.
2.1.43 "Standard Form of Benefit" as to any Participant means
semimonthly payments for a fifteen (15) year period.
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2.1.44 "Supplemental Plan" means the H&R Block Supplemental
Deferred Compensation Plan for Executives initially adopted by the
Company effective as of May 1, 1994, as subsequently amended prior to the
Effective Date of this Plan.
2.1.45 "10-year payout" has the meaning specified in
Section 6.3.2.
2.1.46 "Trust" means the H&R Block, Inc. Deferred Compensation
Trust Agreement.
2.1.47 "Years of Service" means the number of consecutive Plan
Years (including years prior to the Effective Date of this Plan) for
which the Participant had at least 1,000 Hours of Service.
Section 2.2 Gender and Number. Except as otherwise indicated by
context, masculine terminology used herein also includes the feminine and
neuter, and terms used in the singular may also include the plural.
ARTICLE 3 PARTICIPATION
Section 3.1 Who May Participate. Participation in the Plan is
limited to Group A and Group B Participants, described as follows:
3.1.1 "Group A Participant" is an Executive of the
Company or of a Participating Affiliate (i) serving as a Vice
President of the Company or applicable Participating Affiliate,
or (ii) participating in the DCP as a "Group A Participant"
under the DCP as of December 31, 1998, as such term was defined
as of such date.
3.1.2 "Group B Participant" is an Executive or Account
Executive who does not qualify as a Group A Participant, but who
is designated by the Committee as eligible to participate in the
Plan.
Section 3.2 Time and Conditions of Participation. An eligible
Executive or Account Executive shall become a Participant only upon (i)
the individual's completion of a Permissible Deferral election for the
succeeding Plan Year or Plan Years during an Enrollment Period, in
accordance with a form established by the Company from time to time, and
(ii) compliance with such terms and conditions as the Committee may from
time to time establish for the implementation of the Plan, including, but
not limited to, any condition the Committee may deem necessary or
appropriate for the Company to meet its obligations under the Plan. An
individual may make a Permissible Deferral election for any succeeding
Plan Year during an Enrollment Period provided the total Permissible
Deferral elections do not exceed the limitation set forth in Section
2.1.38.
Section 3.3 Termination of Participation. Once an individual
has become a Participant in the Plan, participation shall continue until
the first to occur of (i) payment in full of all benefits to which the
Participant or Beneficiary is entitled under the Plan, or (ii) the
occurrence of an event specified in Section 3.4 which results in loss of
benefits, or (iii) for a Group B Participant, having an Annual Deferral
Amount that causes the Participant's Base Salary and Bonus for the Plan
Year, after reduction for the Annual Deferral Amount, to be less than
ninety-nine percent (99%) of the United States Social Security
Contribution and Benefit Base determined under Section 230 of
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the Social Security Act for such Plan Year. A Group B Participant whose
participation in the Plan is terminated under clause (iii) of the preceding
sentence shall be deemed for purposes of all Plan provisions (including Section
4.4, Section 5.1 and Section 6.3) to have voluntarily terminated employment with
the Company as of the date the Participant's Plan participation is terminated.
Such a Participant may then reenter the Plan during the following Enrollment
Period, assuming the Participant continues to be eligible to participate in the
Plan as provided in Section 3.1. Except as otherwise specified in the Plan, the
Company may not terminate an individual's participation in the Plan.
Section 3.4 Missing Persons. If the Company is unable to locate the
Participant or his Beneficiary for purposes of making a distribution, the amount
of a Participant's benefits under this Plan that would otherwise be considered
as non-forfeitable shall be forfeited effective four (4) years after (i) the
last date a payment of said benefit was made, if at least one such payment was
made, or (ii) the first date a payment of said benefit was directed to be made
by the Company pursuant to the terms of the Plan, if no payments had been made.
If such person is located after the date of such forfeiture, the benefits for
such Participant or Beneficiary shall not be reinstated hereunder.
Section 3.5 Relationship to Other Plans. Participation in the Plan shall
not preclude participation of the Participant in any other fringe benefit
program or plan sponsored by an Affiliate for which such Participant would
otherwise be eligible. For persons participating in the DCP and, if applicable,
the Supplemental Plan, as of December 31, 1998, who continue as Participants in
this Plan as of January 1, 1999, participation in this Plan shall be deemed to
be continued participation in the DCP and, if applicable, the Supplemental Plan,
but under the terms of this Plan.
Section 3.6 Changes in Employment Status. If a Participant has a change in
his or her employment responsibilities, title and/or compensation, such that the
Participant would not qualify for initial participation in the Plan as a Group A
Participant or Group B Participant, as determined by the Committee, (i) the
Participant shall continue to make deferrals in accordance with the
Participant's Permissible Deferral election for the Plan Year during which the
change in employment responsibilities, title and/or compensation occurs, (ii)
the Participant shall not be eligible to make Permissible Deferrals in Plan
Years following the Plan Year during which the change in employment
responsibilities, title and/or compensation occurs unless and until the
Participant again qualifies for initial participation as a Group A Participant
or a Group B Participant, as determined by the Committee, and (iii) the
Participant shall otherwise continue to participate in the Plan.
ARTICLE 4 ENTRIES TO THE ACCOUNT
Section 4.1 Contributions
4.1.1 Deferrals. During each Plan Year, if the Participant
elects the fixed rate and/or variable crediting rate option for measuring
the performance of the Account under Section 4.2, the Company shall post
to the Account of such Participant the dollar amount of Base Salary and
Bonuses to be deferred as designated by the Participant's Permissible
Deferral election in effect for that Plan Year. Deferrals from Base
Salary each calendar month shall be posted as of the first day of such
month and deferrals from Bonuses shall be posted as of the first day of
the calendar month in which the Bonus would otherwise have been paid to
the Participant.
During each Plan Year, if the Participant elects the Common
Stock crediting rate option for measuring the performance of the Account
under Section 4.2, the Company
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shall post to the Account of such Participant a number of Deferred
Compensation Units equivalent to the amount of Base Salary and Bonuses to
be deferred as designated by the Participant's Permissible Deferral
election in effect for that Plan Year. Deferrals from Base Salary each
calendar month (and the corresponding number of Deferred Compensation
Units) shall be posted as of the first day of such month and deferrals
from Bonuses shall be posted as of the first day of the calendar month in
which the Bonus would otherwise have been paid to the Participant. The
number of Deferred Compensation Units posted for each calendar month
shall be calculated by dividing: (i) the dollar amount deferred during
that month; by (ii) the Closing Price on the first business day (i.e., a
day on which the Common Stock is traded on the New York Stock Exchange)
of that month.
4.1.2 Company Matching Contributions. The Company shall post
"Matching Contributions" to the Account of each Participant as follows.
For each $1.00 of Base Salary or Bonus deferred pursuant to Section
4.1.1, the Company shall post an additional $.25 to the Participant's
Account, provided, however, that the maximum percentage of each of Base
Salary and Bonus to which a Matching Contribution shall be made with
respect to a Plan Year shall be dependent upon the number of Plan Years
in which the Participant has participated in the Plan, as follows:
Maximum Percentage
of Base Salary and Bonus
Plan Year of Participation Matched by a Company Contribution
-------------------------- ---------------------------------
1st and 2nd Year of Participation 10%
3rd and 4th Year of Participation 20%
5th Year of Participation and After 25%
and, provided further, that the total of all Matching Contributions made
pursuant to this Plan after December 31, 1998 shall not exceed
twenty-five percent (25%) of the amount by which $1,000,000.00 exceeds
the aggregate amount of Permissible Deferrals completed by the
Participant pursuant to the Plan on or before December 31, 1998.
The combination of the DCP and the Supplemental Plan into this
Plan shall not result in the posting of any Company Matching
Contributions to any accounts applicable to the Supplemental Plan (which
had no Matching Contributions), nor shall such combination affect any
Company Matching Contributions posted to accounts pursuant to the DCP.
Deferrals made on and after January 1, 1999, by Participants who were
participants in the Supplemental Plan shall result in the posting of
Company Matching Contributions to the extent permitted by the immediately
preceding paragraph of this Section 4.1.2.
If the Participant elects the Common Stock crediting rate option
for measuring the performance of the Account under Section 4.2, the
Company shall post to the Account of such Participant for each calendar
month a number of Deferred Compensation Units equal to (i) the dollar
amount of Matching Contributions posted to the Account during such month;
divided by (ii) the Closing Price on the first business day of that
month. Deferred Compensation Units attributable to Matching
Contributions shall be posted as of the same time as the corresponding
Matching Contributions.
4.1.3 Additional Company Contributions. The Company shall also
post to the Account of each Participant once each Plan Year the
difference, if any, between (a) the amount for that Plan Year which would
have been contributed on behalf of the Participant to any profit sharing
plan which is deemed to be a "qualified plan" under the Code if the
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Participant had not made a Permissible Deferral election under the Plan;
and (b) the amount for that Plan Year contributed on behalf of the
Participant to such a plan.
If the Participant elects the Common Stock crediting rate option
for measuring the performance of the Account under Section 4.2, the
Company shall post to the Account of such Participant for the calendar
month in which any Plan Year contribution is made by the Company pursuant
to the first paragraph of this Section 4.1.3 a number of Deferred
Compensation Units equal to (i) the dollar amount of any such Plan Year
contribution made during such month; divided by (ii) the Closing Price on
the first business day of that month. Deferred Compensation Units
attributable to any contribution made by the Company pursuant to the
first paragraph of this Section 4.1.3 shall be posted as of the same time
as such corresponding contributions.
4.1.4 Disability. During the first 90-day period in which a
Participant is Disabled, deferrals and Company Contributions (and, if
applicable, the corresponding number of Deferred Compensation Units)
shall continue to be posted as described in Sections 4.1.1, 4.1.2 and
4.1.3. If a Participant continues to be Disabled after such 90-day
period, deferrals will cease but Company Contributions will continue for
the balance of the Participant's Permissible Deferral period as if the
Participant's deferrals had continued. A Participant may resume deferrals
upon his or her return to work.
4.1.5 Fixed 120 Account Permissible Deferral Elections. A
Participant making Base Salary and/or Bonus deferrals into a Fixed 120
Account under the DCP as of December 31, 1997 who did not make the
special, one-time election provided under the DCP to have all then
outstanding and incomplete Fixed 120 Account deferral cycles deemed
completed as of December 31, 1997, shall continue to make such deferrals
in accordance with the Participant's original Permissible Deferral
election.
Section 4.2 Crediting Rate. Gains or losses shall be posted to the
Account in accordance with the Participant's election of investment options
which will be a reference for measuring the performance of the Account, as
modified, if applicable, by Section 4.3 or Section 4.4. The Company intends to
measure the performance of the Account in accordance with the Participant's
election but reserves the right to do otherwise. The Participant shall elect
from among the following investment options: (i) a fixed rate as described in
4.2.1, (ii) a variable rate as described in 4.2.2, or (iii) a Common Stock
crediting rate as described in 4.2.3. On a monthly basis, Participants may elect
to reallocate all or any portion of their Account balances, including the entire
balance in a Fixed 120 Account, among the available investment options,
including those funds selected by the Company for the variable rate investment
option, provided said reallocations are in at least ten percent (10%)
increments. If a Participant does elect to reallocate his or her entire Fixed
120 Account balance to another investment option, said Fixed 120 Account will be
deemed closed and terminated. In no event shall a Participant be entitled to
reallocate an Account balance that is not a Fixed 120 Account balance into a
Fixed 120 Account.
Participants may change their crediting rate elections during an
Enrollment Period or once each calendar month by giving the Company written
notice of such change on a form provided by the Company for that purpose. Upon
receipt of such notice submitted with enrollment materials during an Enrollment
Period, the crediting rate change shall be made as of the first day of the Plan
Year to which the Enrollment Period relates. Upon receipt of such notice other
than in connection with enrollment materials, the Company will effect the change
on the first day of the calendar month immediately following the month in which
such notice was received. Any change in crediting rate made in accordance with
such notice procedures will govern the Participant's
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Account balance and future deferrals occurring after the effective date.
4.2.1 Fixed Rate. If a Participant elects a fixed rate, the
interest will be compounded on a daily basis and posted to the
Participant's Account per each pay period at an effective annual yield
equal to the rate of ten-year United States Treasury notes. The rate will
be determined once each Plan Year and will be the rate in effect as of
September 30 of the Plan Year immediately prior to the Plan Year to which
it applies, as published by Salomon Brothers Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
For Permissible Deferrals elected under the DCP and commencing
prior to January 1, 1995, the effective annual yield for the fixed rate
crediting option shall be equal to one hundred twenty percent (120%) of
the ten-year rolling average rate of ten-year United States Treasury
notes. The ten-year rolling average rate will be the rate in effect as of
September 30 of the Plan Year immediately prior to the Plan Year to which
it applies, as published by Salomon Brothers Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
4.2.2 Variable Rate. If a Participant elects a variable rate,
the Participant's Account will be credited or debited as if the Account
balance were invested in one or more funds selected by the Company in the
proportions elected by the Participant. Statements will be provided on a
quarterly basis. Initially the funds will be from the Pruco Variable
Appreciable Life Insurance Contracts and include the Equity Portfolio,
the Flexible Managed Portfolio, the Conservative Balanced Portfolio, the
Money Market Portfolio, the Diversified Bond Portfolio, the High Yield
Bond Portfolio and the Real Property Portfolio. Participants may elect to
have their Accounts treated as if they were invested in one or more of
the funds selected, provided the election is in at least ten percent
(10%) increments of the Account.
4.2.3 Common Stock Crediting Rate. If a Participant elects the
Common Stock crediting rate, the Participant's Account will be valued as
if his or her Account were invested in shares of Common Stock equal to
the number of Deferred Compensation Units posted to his or her Account.
The value of a Participant's Account will vary with the value of the
Company's Common Stock. The Participant's Account will be credited, as of
the applicable dividend payment date, with additional Deferred
Compensation Units equal in value to any dividends declared on the
Company's Common Stock based on the number of Deferred Compensation Units
posted to the Participant's Account as of the record date with respect to
the declaration of such dividend. As of any date of valuation, the value
of a Participant's Account will be equal to the value (at the Closing
Price on such date) of the number of shares of Common Stock represented
by the Deferred Compensation Units credited to the Account as of that
date.
Section 4.3 Crediting Rate Upon Retirement, Disability, Continued
Employment After Reaching the Age of 75, Death or Termination of Employment with
all Affiliates as a Result of a Change in Control. If a Participant (i)
terminates employment at or after Normal Retirement Date or Early Retirement
Date, (ii) is Disabled, or (iii) continues employment after reaching the Age of
75 and has completed ten (10) Years of Service, gains and losses shall be
credited as described in Section 4.2 to that Participant's Accounts. If a
Participant dies prior to termination of employment, gains and losses shall be
credited, to date of death, as described in Section 4.2 to that Participant's
Accounts. If a Participant terminates employment with all Affiliates before
Normal Retirement Date or Early Retirement Date as a result of a Change in
Control, gains and losses to all of that Participant's Accounts shall be
credited as described in Section 4.2 up to, but not after,
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the date of the Change in Control.
Section 4.4 Crediting Rate Upon Resignation or Discharge.
4.4.1 For a Participant whose employment with all Affiliates
terminates on or after August 1, 1995, but before the Normal Retirement
Date or the Early Retirement Date, for reasons other than death,
Disability or a Change in Control, gains and losses shall be credited to
that Participant's Account as described in Section 4.2 up to the date of
termination of employment, and the crediting shall continue after such
date for those Participants who elected a 10-year payout or a 5-year
payout, as such terms are defined in Section 6.3.2. If a Participant
elected to be paid in a lump sum, there shall be no further crediting to
the Participant's Account following the date of termination of
employment.
4.4.2 For a Participant whose employment with all Affiliates
terminated prior to August 1, 1995, and before the Normal Retirement Date
or the Early Retirement Date, for reasons other than death, Disability or
a Change in Control, gains and losses to that Participant's Accounts that
represent completed deferral cycles shall be credited as described in
Section 4.2 up to the date of termination of employment. Gains and losses
to that Participant's Accounts that do not represent completed deferral
cycles and gains and losses after the date of termination of employment
shall be credited at an interest rate equal to the average of (i) the
interest rate set by the Chief Financial Officer of the Company in his
discretion for the Plan Year in which the termination of employment
occurs, which rate shall not be less than the rate then payable on
Investment Savings Accounts of $1,000 or less at Commerce Bank of Kansas
City, N.A., Kansas City, Missouri, or any successor thereto, and (ii) the
respective interest rates so set by the Chief Financial Officer of the
Company for each of the two Plan Years immediately prior to the Plan Year
in which the termination of employment occurs.
ARTICLE 5 VESTING
Section 5.1 Participant Deferrals and Vesting Schedule for Company
Contributions. Participant deferrals pursuant to Section 4.1.1 are fully vested
immediately. The Participant's interest in the Company Matching Contributions
under Section 4.1.2 and the Company Contributions described in Section 4.1.3
shall vest according to the following schedule:
Percentage of
Company Contributions
Years of Service Vested
---------------- ---------------------
Less than 2 None
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
For purposes of crediting Years of Service under the foregoing Schedule,
Participants will be credited with Years of Service beginning with the year in
which the Participant began participation
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in the Plan. A Disabled Participant will be credited with any Hours of Service
with which he or she would have been credited but for the Disability.
Section 5.2 Exceptions to Vesting Schedule. Company Contributions are
fully vested upon a Participant's death prior to termination of employment, and
upon a Change in Control as defined in Section 10.2. Participants who have
attained Age 65 prior to the date on which they first became eligible to
participate in the Plan and who have completed ten (10) Years of Service are
fully vested. Participants who have attained Age 55 (but are less than Age 65)
prior to the date on which they first became eligible to participate in the Plan
and who have completed ten (10) Years of Service, vest according to the
following formula:
Years of Service since initial Plan eligibility date
------------------------------------------------------------
65 minus Participant's Age on initial Plan eligibility date.
ARTICLE 6 DISTRIBUTION OF BENEFITS
Section 6.1 Payments After Termination of Employment. Generally, payments
of benefits to a Participant shall be made by the Company only upon the
termination, voluntary or involuntary, of the Participant's employment with all
Affiliates, except where (i) a Participant is Disabled, (ii) the provisions of
Section 6.2.2 apply, or (iii) the provisions of Section 6.7 apply.
Section 6.2 Form of Benefits Upon Retirement, Disability or Continued
Employment After Reaching the Age of 75.
6.2.1 Retirement or Disability. Payments from the
Account shall be made in accordance with the Standard Form of
Benefit for Participants who terminate employment on or after
Normal Retirement Date or Early Retirement Date or are
Disabled. However, no less than 13 months prior to such
termination of employment, the Participant may petition the
Committee for, and the Committee may approve at such time, an
optional form of benefit.
6.2.2 Continued Employment After Reaching the Age of
75. If a Participant reaches the Age of 75 while in the employ
of an Affiliate, and has completed ten (10) Years of Service,
payment of benefits shall commence in the first pay period of
the first calendar quarter that begins at least forty-five (45)
days after the date on which the Participant reaches the Age of
75. Payments from the Account shall be made in accordance with
the Standard Form of Benefit. However, no less than 13 months
prior to the date on which the Participant reaches the Age of
75, the Participant may petition the Committee for, and the
Committee may approve at such time, an optional form of
benefit.
6.2.3 Lump-Sum Payment. Notwithstanding any other
provisions of the Plan, a Participant who terminates employment
on or after Normal Retirement Date or Early Retirement Date,
and a Participant who reaches the Age of 75 while in the employ
of an Affiliate may, at any time before or after a Change in
Control, as defined in Section 10.2, elect to receive an
immediate lump-sum payment of the
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aggregate of the balances of said Participant's Accounts
reduced by a penalty, which shall be forfeited to the Company,
in lieu of payments in accordance with the Standard Form of
Benefit or such optional form of benefit as may have previously
been approved by the Committee under this Section 6.2.3. The
penalty shall be equal to ten percent (10%) of the aggregate of
the balances of such Accounts if the election is made before a
Change in Control and shall be equal to five percent (5%) of
the aggregate of the balances of such Accounts if the election
is made after a Change in Control. However, the penalty shall
not apply if the Committee determines, based on advice of
counsel or a final determination or ruling by the Internal
Revenue Service or any court of competent jurisdiction, that by
reason of the provisions of this paragraph any Participant has
recognized or will recognize gross income for federal income
tax purposes under this Plan in advance of payment to the
Participant of Plan benefits. The Company shall notify all
Participants of any such determination by the Committee and
shall thereafter refund all penalties which were imposed
hereunder in connection with any lump-sum payments made at any
time during or after the first year to which the Committee's
determination applies (i.e., the first year for which, by
reasons of the provisions of this paragraph, gross income under
this Plan is recognized for federal income tax purposes in
advance of payment of benefits). Interest compounded annually
shall be paid by the Company to the Participant (or the
Participant's Beneficiary if the Participant is deceased) on
any such refund from the date of the Company's payment of the
lump sum at an annual rate equal to the rate of one-year United
States Treasury notes in effect as of September 30 of the Plan
Year immediately prior to the Plan Year in which such refund is
paid, as published by Salomon Brothers, Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the
Company. The Committee may also reduce or eliminate the penalty
if it determines that the right to elect an immediate lump-sum
payment under this paragraph, with the reduced penalty or with
no penalty, as the case may be, will not cause any Participant
to recognize gross income for federal income tax purposes under
this Plan in advance of payment to the Participant of Plan
benefits.
Section 6.3 Form of Benefits Upon Resignation or Discharge, or
Termination of Employment with all Affiliates as a Result of a Change in
Control.
6.3.1 Upon a Participant's termination of employment with all
Affiliates before Normal Retirement Date or Early Retirement Date, but
following a Change in Control, payments from the Account shall be paid in
a lump sum within forty-five (45) days after the date of the termination
of employment.
6.3.2 If a Change in Control has not occurred, for Participants
who terminate employment with all Affiliates on or after August 1, 1995,
but before the Normal Retirement Date or the Early Retirement Date, for
reasons other than Disability or death, payment(s) from the Account shall
be in the form of (a) semimonthly payments over a 10-year period (a
"10-year payout"); (b) semimonthly payments over a five-year period (a
"5-year payout"); or (c) a lump sum, as elected by the Participant at the
time of said Participant's first Permissible Deferral election, or, in
the case of a Participant who made one or more Permissible Deferral
elections prior to August 1, 1995, as elected by the Participant in
writing during a special election period between August 15, 1995 and
September 15, 1995, inclusive.
6.3.3 If a Change in Control has not occurred, for Participants
who terminated employment with all Affiliates prior to August 1, 1995,
but before the Normal Retirement
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Date or the Early Retirement Date, for reasons other than Disability or
death, payment(s) from the Account shall be in the form of (a)
semi-monthly payments over a three-year period for all Permissible
Deferrals that satisfy a completed deferral cycle, or (b) a lump sum for
all Permissible Deferrals that do not satisfy a completed deferral cycle.
6.3.4 If no election under Section 6.3.2 is made by the
Participant eligible to make such an election, payment from the Account
shall be in the form of a lump sum. An election made in accordance with
Section 6.3.2 shall apply to all Permissible Deferral elections made by
the Participant under the Plan and is irrevocable.
6.3.5 If an eligible Participant has elected a 10-year payout or
a 5-year payout pursuant to Section 6.3.2, and the amount of each
semimonthly installment, as initially calculated, is less than $500 (such
calculation to be accomplished by amortizing the aggregate of the
Participant's Account balances over the payment period using a crediting
rate equal to the rate of one-year United States Treasury notes in effect
as of September 30 of the Plan Year prior to the Plan Year in which the
termination of employment occurs), the form of payment(s) for such
Participant shall be a 5-year payout in lieu of an elected 10-year payout
(unless the amount of each semimonthly installment under a 5-year payout,
as so calculated, is also less than $500, in which case the form of
payment will be a single lump sum), or a lump sum in lieu of an elected
5-year payout, as the case may be.
6.3.6 Notwithstanding any other provisions of the Plan, an
eligible Participant who (1) elects either a 10-year payout or a 5-year
payout and either such payout is not automatically converted to a lump
sum pursuant to Section 6.3.5, and (2) terminates employment before the
Normal Retirement Date or the Early Retirement Date may, at any time
before or after a Change in Control, as defined in Section 10.2, elect to
receive an immediate lump-sum payment of the aggregate of the balances of
said Participant's Accounts reduced by a penalty, which shall be
forfeited to the Company, in lieu of payments in accordance with the
10-year payout or the 5-year payout, whichever is applicable. The penalty
shall be equal to ten percent (10%) of the aggregate of the balances of
such Accounts if the election is made before a Change in Control and
shall be equal to five percent (5%) of the aggregate of the balances of
such Accounts if the election is made after a Change in Control. However,
the penalty shall not apply if the Committee determines, based on advice
of counsel or a final determination or ruling by the Internal Revenue
Service or any court of competent jurisdiction, that by reason of the
provisions of this paragraph any Participant has recognized or will
recognize gross income for federal income tax purposes under this Plan in
advance of payment to the Participant of Plan benefits. The Company shall
notify all Participants of any such determination by the Committee and
shall thereafter refund all penalties which were imposed hereunder in
connection with any lump-sum payments made at any time during or after
the first year to which the Committee's determination applies (i.e., the
first year for which, by reasons of the provisions of this paragraph,
gross income under this Plan is recognized for federal income tax
purposes in advance of payment of benefits). Interest compounded
annually shall be paid by the Company to the Participant (or the
Participant's Beneficiary if the Participant is deceased) on any such
refund from the date of the Company's payment of the lump sum at an
annual rate equal to the rate of one-year United States Treasury notes in
effect as of September 30 of the Plan Year immediately prior to the Plan
Year in which such refund is paid, as published by Salomon Brothers,
Inc., or any successor thereto, or as determined by the Chief Financial
Officer of the Company. The Committee may also reduce or eliminate the
penalty if it determines that the right to elect an immediate lump-sum
payment under this paragraph, with the reduced penalty or with no
penalty, as the
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case may be, will not cause any Participant to recognize gross income for
federal income tax purposes under this Plan in advance of payment to the
Participant of Plan benefits.
Section 6.4 Amount of Benefit.
6.4.1 Except for distributions in the form of a lump sum,
benefit payments shall be in the form of semimonthly cash installments
paid during the applicable payment period (the "Overall Payment Period").
6.4.2 Except as provided in Section 6.4.4, the amount of each
installment payment shall be level during the portion of the Overall
Payment Period ending on December 31 of the Plan Year in which benefit
payments commence (the "Initial Payment Period"), during each complete
Plan Year of the Overall Payment Period thereafter (a "Plan Year Payment
Period"), and during any remaining period of the Overall Payment Period
following the last Plan Year Payment Period (the "Remainder Payment
Period"), but will vary from one such portion of the Overall Payment
Period to the next. If a Participant was receiving benefits pursuant to
Section 6.2 as of August 1, 1995, payments due on and after January 1,
1996 shall be made in accordance with this Section 6.4.2 and with Section
6.4.3.
6.4.3 The amount of each level payment for the Initial Payment
Period, if any, shall be calculated using the balance in the Account as
of the beginning of the Initial Payment Period and amortizing such
balance over the remaining Overall Payment Period using an assumed
interest rate equal to the rate of one-year United States Treasury notes,
said rate to be determined once each Plan Year and to be the rate in
effect as of the September 30 immediately preceding the payment period to
which it applies, as published by Solomon Brothers, Inc., or any
successor thereto, or as determined by the Chief Financial Officer of the
Company (the "Assumed Interest Rate"). The amount of each level payment
for each Plan Year Payment Period shall be calculated by taking the
balance in the Account as of November 30 of the Plan Year immediately
prior to such Plan Year Payment Period, subtracting the benefit payments
made during the portion of such preceding Plan Year following November
30, and amortizing the difference over the remaining Overall Payment
Period using the Assumed Interest Rate. The amount of each level payment
for the Remainder Payment Period, if any, shall be calculated by taking
the balance in the Account as of November 30 of the Plan Year immediately
prior to the Remainder Payment Period, subtracting the benefit payments
made during the portion of such preceding Plan Year following November
30, and amortizing the difference over the Remainder Payment Period using
an assumed interest rate of zero percent (0%) per annum. If the actual
crediting rate for the Remainder Payment Period is more than zero
percent, the additional gain resulting from the difference in crediting
rates shall be paid to the Participant in a single payment within six
months after the last day of the Remainder Payment Period.
6.4.4 If the Participant terminates employment with all
Affiliates prior to August 1, 1995, and receives benefits pursuant to
Section 6.3.3, semimonthly payments for Permissible Deferrals that
satisfy a completed deferral cycle shall be level during the entire
Overall Payment Period and shall be calculated using the balance in the
Account at the commencement of benefit payments, and amortizing such
balance over three years at the crediting rate determined in accordance
with Section 4.4.2.
6.4.5 Generally, the Account shall continue to be credited
during the Overall Payment Period with gains and losses as provided in
Section 4.3. However, if a Participant
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receives benefits pursuant to Section 6.3 (other than pursuant to Section
6.3.1), the Account shall be credited with gains and losses as provided
in Section 4.4. Except as provided otherwise, if a Participant dies,
Section 6.6 shall apply.
6.4.6 Notwithstanding anything in this Plan to the contrary, the
Committee may, in its sole discretion, (i) increase or reduce any assumed
interest rate set forth in this Section 6.4 and any such assumed interest
rate, as so adjusted, shall be effective for calculating level
semimonthly installments for Participants whose benefit payments commence
after the date of such adjustment, and (ii) change the date set forth in
Section 6.4.3 on which the balance in the Participant's Account is to be
determined for purposes of calculating the amount of each level payment
for each Plan Year Payment Period and each Remainder Payment Period, and
any such revised date shall be effective for calculating level
semimonthly installments for the Plan Year Payment Period or the
Remainder Payment Period beginning on or after the effective date of such
revision.
Section 6.5 Time of Payment. Generally, benefit payments to a Participant
shall commence in the first pay period of the calendar quarter that begins at
least forty-five (45) days after the date of termination of employment.
Notwithstanding the preceding sentence, if a Participant elected to be paid in a
lump sum, the benefit payment shall be made within forty-five (45) days after
the date of termination of employment. In the case of a Disabled Participant,
benefits shall commence no later than six (6) months after the Participant's
Early Retirement Date.
With respect to Permissible Deferral elections made under the DCP prior
to January 1, 1997, a Participant was permitted elect at the time of each
Permissible Deferral election to defer commencement of the payment of benefits
after termination of employment with respect to such Permissible Deferral
election until the earlier of: (a) five (5) years after termination of
employment; or (b) Age 70. If the Participant made such an election and did not
revoke such election pursuant to a one-time opportunity during the Enrollment
Period prior to the Plan Year commencing January 1, 1998, the Participant shall
receive benefit payments in accordance with said election, provided that the
Committee, upon written petition of the Participant, may begin benefit payments
at an earlier time after termination if it determines that compelling reasons
exist for such earlier payments. No elections to defer commencement of benefits
shall be permitted under this Plan with respect to Permissible Deferrals
commencing on or after January 1, 1998.
Section 6.6 Death Benefits.
6.6.1 Death After Benefit Commencement. In the event a
Participant dies after benefit payments have commenced (other than
payments made pursuant to Section 6.7), the remaining benefit payments,
if any, shall be paid to the Participant's Beneficiary in the same manner
such benefits would have been paid to the Participant had the Participant
survived. A Beneficiary may petition the Committee for an alternative
method of payment. If such benefits were payable pursuant to Section 6.3,
the Account shall continue to be credited during the payout period as
provided in Section 4.4, except that, if such benefits were payable
because of the Participant's termination of employment with all
Affiliates following a Change in Control, the Account shall continue to
be credited as provided in Section 4.3. If such benefits were payable
pursuant to Section 6.2, the Account shall be credited from the date of
the Participant's death at a rate equal to the rate of one-year United
States Treasury notes, said rate to be determined once each Plan Year and
to be the rate in effect as of September 30 of the Plan Year immediately
prior to the Plan Year to which it applies, as published by Salomon
Brothers, Inc., or any successor thereto, or as determined by the Chief
Financial Officer of the Company. The Participant's Beneficiary
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may make the election to receive an immediate lump-sum payment of the
balance of said Participant's Account in accordance with the provisions
of Section 6.2.3 or Section 6.3.6, whichever is applicable, and all
provisions set forth therein relating to penalties shall apply to any
such election.
In addition, if a Participant dies on or after such
Participant's Normal Retirement Date or Early Retirement Date after
having retired, or after benefits have commenced because of the
Participant's Disability, an annuity shall be paid to the Participant's
surviving spouse, if any (to whom he has been married at least one (1)
year prior to the date of death). The annuity shall be for the life of
the Participant's surviving spouse with each semimonthly payment equal to
fifty percent (50%) of the average amount which would have been payable
to the Participant and his or her Beneficiary if, on the date benefits
commenced, the Participant had received the Standard Form of Benefit
payment. If the Participant's surviving spouse is more than thirty-six
(36) months younger than the Participant, the survivor life annuity
payable to such spouse shall be reduced by one-half of one percent (.5%)
for each month the spouse is more than thirty-six (36) months younger
than the Participant. Payment shall commence on the first day of the
month following the later of (a) the Participant's death, (b) the
completion of the death benefits under the first paragraph of this
Section 6.6.1, or (c) fifteen (15) years from the date benefits commenced
or would have commenced to the Participant.
6.6.2 Death Prior to Benefit Commencement. In the event a
Participant dies before benefit payments have commenced, the Company
shall pay a pre-retirement death benefit to the Participant's
Beneficiary. The amount of such pre-retirement death benefit is the
greater of:
(a) the Participant's Account as of the date of
the Participant's death annuitized over a ten-year
period at an interest rate equal to the rate of
one-year United States Treasury notes in effect as of
September 30 of the Plan Year immediately prior to the
Plan Year in which payment of the pre-retirement death
benefit commences, as published by Salomon Brothers,
Inc., or any successor thereto, or as determined by
the Chief Financial Officer of the Company; or
(b) An annual benefit of twenty-five percent
(25%) of the total deferrals and Company Contributions
made as of the date of the Participant's death.
The pre-retirement death benefit shall be paid semimonthly for a ten-year
period. The Beneficiary may petition the Committee for an alternative
method of payment. If the pre-retirement death benefit is computed
pursuant to 6.6.2(a), the Account shall continue to be credited during
the payment period at an interest rate equal to the rate of one-year
United States Treasury notes, said rate to be determined once each Plan
Year and to be the rate in effect as of September 30 of the Plan Year
immediately prior to the Plan Year to which it applies, as published by
Salomon Brothers, Inc., or any successor thereto, or as determined by the
Chief Financial Officer of the Company. Commencement of benefits under
this Section 6.6.2 shall begin no later than six (6) months following the
death of the Participant notwithstanding any election which the
Participant may have made to defer benefits pursuant to Section 6.5.
6.6.3 Marital Deduction. Any benefits which become payable
under this Article 6 to the surviving spouse of a Participant shall be
paid in a manner which will qualify such
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benefits for a marital deduction in the estate of a deceased Participant
under the terms of Section 2056 of the Code, and unless specifically
directed by a Participant to the contrary pursuant to an effective
beneficiary designation, any portion of a Participant's death benefit
payable to a surviving spouse which remains unpaid at the death of such
spouse shall be paid to the spouse's estate.
6.6.4 Designation by Participant. Each Participant has the
right to designate primary and contingent Beneficiaries for death
benefits payable under the Plan. Such Beneficiaries may be individuals or
trusts for the benefit of individuals. A Beneficiary designation by a
Participant shall be in writing on a form acceptable to the Committee and
shall only be effective upon delivery to the Company. A Beneficiary
designation may be revoked by a Participant at any time by delivering to
the Company either written notice of revocation or a new Beneficiary
designation form. The Beneficiary designation form last delivered to the
Company prior to the death of a Participant shall control.
6.6.5 Failure to Designate Beneficiary. In the event there is
no Beneficiary designation on file with the Company, or all Beneficiaries
designated by a Participant have predeceased the Participant, the
benefits payable by reason of the death of the Participant shall be paid
to the Participant's spouse, if living; if the Participant does not leave
a surviving spouse, to the Participant's issue by right of
representation; or, if there are no such issue then living, to the
Participant's estate. In the event there are benefits remaining unpaid at
the death of a sole Beneficiary and no successor Beneficiary has been
designated, either by the Participant or the Participant's spouse
pursuant to 6.6.3, the remaining balance of such benefit shall be paid to
the deceased Beneficiary's estate; or, if the deceased Beneficiary is one
of multiple concurrent Beneficiaries, such remaining benefits shall be
paid proportionally to the surviving Beneficiaries.
Section 6.7 Hardships. Upon the application of any Participant, the
Committee, in accordance with its uniform, non-discriminatory policy, may permit
such Participant to terminate future deferrals or to withdraw his total Account.
A Participant must give a written petition of the termination of his or her
Permissible Deferral election at least thirty (30) days prior to the next
periodic (for Base Salary) or single sum (for Bonuses) deferral. A Participant
must give a written petition of the intent to withdraw the Account at least
sixty (60) days (or such shorter time as permitted by the Committee) prior to
the date of withdrawal. No termination or withdrawal shall be made under the
provisions of this Section except for the purpose of enabling a Participant to
meet immediate needs created by a financial hardship for which the Participant
does not have other reasonably available sources of funds, as determined by the
Committee in accordance with uniform rules. The term financial hardship shall
include the need for funds to: meet uninsured medical expenses for the
Participant or his dependents, meet a significant uninsured casualty loss for
the Participant or his dependents, and meet other catastrophes of a "sudden and
serious nature."
The Committee may permit a withdrawal of any deferrals. If a withdrawal
is permitted, a Participant's deferrals shall be credited at the lesser of (a)
the amount as described in Section 4.2; or (b) an interest rate equal to the
rate of one-year United States Treasury notes in effect as of September 30 of
the Plan Year immediately prior to the Plan Year in which application for such
withdrawal is made, as published by Salomon Brothers, Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
Withdrawals shall be distributed in the form of a lump sum as soon as is
reasonably convenient.
If a termination of deferrals or a withdrawal is made under this Section,
the Participant may not enter into a new Permissible Deferral election for two
(2) complete Plan Years after the date of
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the termination or withdrawal.
Section 6.8 Claims Procedure. The Committee shall notify a Participant in
writing within ninety (90) days of the Participant's written application for
benefits of his eligibility or non-eligibility for benefits under the Plan. If
the Committee determines that a Participant is not eligible for benefits or full
benefits, the notice shall set forth (a) the specific reasons for such denial,
(b) a specific reference to the provision of the Plan on which the denial is
based, (c) a description of any additional information or material necessary for
the claimant to perfect his claim, and a description of why it is needed, and
(d) an explanation of the Plan's claims review procedure and other appropriate
information as to the steps to be taken if the Participant wishes to have his
claim reviewed. If the Committee determines that there are special circumstances
requiring additional time to make a decision, the Committee shall notify the
Participant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional 90-day
period. If a Participant is determined by the Committee to be not eligible for
benefits, or if the Participant believes that he is entitled to greater or
different benefits, he shall have the opportunity to have his claim reviewed by
the Committee by filing a petition for review with the Committee within sixty
(60) days after receipt by him of the notice issued by the Committee. Said
petition shall state the specific reasons the Participant believes he is
entitled to benefits or greater or different benefits. Within sixty (60) days
after receipt by the Committee of said petition, the Committee shall afford the
Participant (and his counsel, if any) an opportunity to present his position to
the Committee orally or in writing, and said Participant (or his counsel) shall
have the right to review the pertinent documents, and the Committee shall notify
the Participant of its decision in writing within said sixty (60) day period,
stating specifically the basis of said decision written in a manner calculated
to be understood by the Participant and the specific provisions of the Plan on
which the decision is based. If, because of the need for a hearing, the sixty
(60) day period is not sufficient, the decision may be deferred for up to
another sixty (60) day period at the election of the Committee, but notice of
this deferral shall be given to the Participant.
Section 6.9 Alternate Forms of Benefit Distribution. Participants shall have
the right to petition the Committee to request methods of benefit distribution
other than those provided to Participants pursuant to this Article 6.
Section 6.10 Distributions on Plan Termination. Notwithstanding anything in
this Article 6 to the contrary, if the Plan is terminated, distributions shall
be made in accordance with Section 9.2.
ARTICLE 7 FUNDING
Section 7.1 Source of Benefits. All benefits under the Plan shall be paid
when due by the Company out of its assets or from an irrevocable trust
established by the Company for that purpose. The Company may, but shall have no
obligations to, make such advance provision for the payment of such benefit as
the Board may from time to time consider appropriate.
Section 7.2 No Claim on Specific Assets. No Participant shall be deemed to
have, by virtue of being a Participant in the Plan, any claim on any specific
assets of the Company such that the Participant would be subject to income
taxation on his benefits under the Plan prior to distribution and the rights of
Participants and Beneficiaries to benefits to which they are otherwise entitled
under the Plan shall be those of an unsecured general creditor of the Company.
ARTICLE 8 ADMINISTRATION AND FINANCES
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Section 8.1 Administration. The Plan shall be administered by the Committee.
The Company shall bear all administrative costs of the Plan other than those
specifically charged to a Participant or Beneficiary.
Section 8.2 Powers of Committee. In addition to the other powers granted
under the Plan, the Committee shall have all powers necessary to administer the
Plan, including, without limitation, powers:
(a) to interpret the provisions of the Plan;
(b) to establish and revise the method of accounting for the
Plan and to maintain the Accounts; and
(c) to establish rules for the administration of the Plan
and to prescribe any forms required to administer the Plan.
Not in limitation, but in amplification of the foregoing and of the authority
conferred upon the Committee in Section 8.1, the Company specifically intends
that the Committee have the greatest permissible discretion to construe the
terms of the Plan and to determine all questions concerning eligibility,
participation and benefits. Any such decision made by the Committee is intended
to be subject to the most deferential standard of judicial review. Such standard
of review is not to be effected by any real or alleged conflict of interest on
the part of the Company or any member of the Committee.
Section 8.3 Actions of the Committee. Except as modified by the Company, all
determinations, interpretations, rules, and decisions of the Committee shall be
conclusive and binding upon all persons having or claiming to have any interest
or right under the Plan.
Section 8.4 Delegation. The Committee, or any officer designated by the
Committee, shall have the power to delegate specific duties and responsibilities
to officers or other employees of the Company or other individuals or entities.
Any delegation may be rescinded by the Committee at any time. Each person or
entity to whom a duty or responsibility has been delegated shall be responsible
for the exercise of such duty or responsibility and shall not be responsible for
any act or failure to act of any other person or entity.
Section 8.5 Reports and Records. The Committee and those to whom the
Committee has delegated duties under the Plan shall keep records of all their
proceedings and actions and shall maintain books of account, records, and other
data as shall be necessary for the proper administration of the Plan and for
compliance with applicable law.
ARTICLE 9 AMENDMENTS AND TERMINATION
Section 9.1 Amendments. The Company, by action of the Board, may amend the
Plan, in whole or in part, at any time and from time to time. Any such amendment
shall be filed with the Plan documents. No amendment, however, may be effective
to eliminate or reduce the benefits of any retired Participant or the
Beneficiary of any deceased Participant then eligible for benefits or the vested
portion of the benefits, if any, in any active Participant's Account immediately
before the effective date of such amendment, and each such Account will be
credited to the date of such amendment in accordance with Section 4.2.
Notwithstanding anything in this Section 9.1 to the contrary, the Committee may,
in its discretion, amend the Plan to reduce the rates set forth in Section 4.2
effective for crediting of Accounts from the date of any such amendment.
23
25
Notwithstanding anything in this Section 9.1 to the contrary, the Committee may,
in its discretion, (i) amend the Plan to reduce or eliminate the penalty
described in Section 6.2.3 and/or the penalty described in Section 6.3.6, in
accordance with the provisions of such Section 6.2.3 and/or such Section 6.3.6,
(ii) amend the Plan to increase or reduce any assumed interest rate set forth in
Section 6.4, in accordance with the provisions of Section 6.4.6, or (iii) amend
the Plan to change the date set forth in Section 6.4.3 on which the balance in
the Participant's Account is to be determined for purposes of calculating the
amount of each level payment for each Plan Year Payment Period and each
Remainder Payment Period, in accordance with the provisions of Section 6.4.6.
Section 9.2 Termination. The Company expects the Plan to be permanent, but
necessarily must, and hereby does, reserve the right to terminate the Plan at
any time by action of the Board. In all events, the Plan will be terminated if
the existence of a trust causes a federal court to hold that the Plan is
"funded" for ERISA purposes, as defined in Section 2.02-4 of the Trust and
appeals from that holding are no longer timely or have been exhausted, and the
trust is therefore terminated with respect to the Plan. Upon termination of the
Plan, all deferrals and Company Contributions will cease and no future deferrals
or Company Contributions will be made. Termination of the Plan shall not operate
to eliminate or reduce benefits of any retired Participant or the Beneficiary of
any deceased Participant then eligible for benefits. Active Participants shall
become vested in their accrued benefits to the extent and in the manner provided
in Section 9.3 as of the effective date of such termination and each account of
an active Participant shall be credited, to the date of distribution of all
benefits in each such Account, in accordance with Section 4.2., as it may be
amended from time to time pursuant to Section 9.1.
If the Plan is terminated, payments from the Accounts of all Participants
and Beneficiaries shall be made as soon as administratively convenient in the
form of monthly payments over a five (5) year period; however, the Committee in
its sole discretion may pay the benefits in a lump sum. Notwithstanding the
preceding sentence, if the termination occurs because the Plan is held to be
"funded" as described in the first paragraph of this Section 9.2, the
distribution will be paid in a lump sum not later than ninety (90) days after
such termination.
Section 9.3 Accelerated Vesting. Notwithstanding Article 5, upon termination
of the Plan a Participant shall vest in Company Contributions according to the
following schedule:
Percentage of Company
Years of Service Contributions Vested
---------------- ---------------------
Less than 1 None
1 20%
2 40%
3 60%
4 80%
5 or more 100%
Years of Service shall be credited in accordance with Section 5.1.
ARTICLE 10 ACCELERATED VESTING
Section 10.1 Accelerated Vesting. Notwithstanding Article 5, upon a Change
in Control as defined in Section 10.2, a Participant shall be fully vested in
Company Contributions.
Section 10.2 Change in Control. A Change in Control for any Participant
shall occur if there is a Change in Control of the Company as defined in Section
1.01-2 of the Trust or there is a
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26
Change in Control of a Participating Subsidiary, as defined in Section 1.01-2 of
the Trust, of the Participating Affiliate by whom the Participant is employed.
ARTICLE 11 MISCELLANEOUS
Section 11.1 No Guarantee of Employment. Neither the adoption and
maintenance of the Plan nor the execution by the Company of a Permissible
Deferral agreement with any Executive shall be deemed to be a contract of
employment between the Company and any Participant. Nothing contained herein
shall give any Participant the right to be retained in the employ of the Company
or to interfere with the right of the Company to discharge any Participant at
any time, nor shall it give the Company the right to require any Participant to
remain in its employ or to interfere with the Participant's right to terminate
his employment at any time.
Section 11.2 Individual Account Plan. If it is determined that the Plan is
not an unfunded deferred compensation plan maintained primarily for a select
group of management or highly compensated employees as described in Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA, then the Plan is intended to be an
individual account plan (other than a money purchase plan) as described in
Section 301(a)(8) of ERISA and the vesting schedule set forth in Article 5 shall
be replaced by the vesting schedule in the then current H&R Block Profit Sharing
Retirement Plan.
Section 11.3 Release. Any payment of benefits to or for the benefit of a
Participant or a Participant's Beneficiaries that is made in good faith by the
Company in accordance with the Company's interpretation of its obligations
hereunder, shall be in full satisfaction of all claims against the Company for
benefits under this Plan to the extent of such payment.
Section 11.4 Notices. Any notice permitted or required under the Plan shall
be in writing and shall be hand delivered or sent, postage prepaid, certified or
registered mail with return receipt requested, to the principal office of the
Company, if to the Company, or to the address last shown on the records of the
Company, if to a Participant or Beneficiary. Any such notice shall be effective
as of the date of hand delivery or mailing.
Section 11.5 Non-Alienation. No benefit payable at any time under this Plan
shall be subject in any manner to alienation, sale, transfer, assignment,
pledge, levy, attachment, or encumbrance of any kind.
Section 11.6 Tax Liability. The Company may direct the trustee of the Trust
to withhold from any payment of benefits under the Plan such amounts as the
Company determines are reasonably necessary to pay any taxes (and interest
thereon) required to be withheld or for which the trustee of the Trust may
become liable under applicable law. The Company may also direct the trustee of
the Trust to forward to the appropriate taxing authority any amounts required to
be paid by the Company or the Trust under the preceding sentence. Any amounts
withheld pursuant to this Section 11.6 in excess of the amount of taxes due (and
interest thereon) shall be paid to the Participant or Beneficiary upon final
determination, as determined by the Company, of such amount. No interest shall
be payable by the Company to any Participant or Beneficiary by reason of any
amounts withheld pursuant to this Section 11.6.
Section 11.7 Captions. Article and section headings and captions are
provided for purposes of reference and convenience only and shall not be relied
upon in any way to construe, define, modify, limit, or extend the scope of any
provision of the Plan.
Section 11.8 Applicable Law. The Plan and all rights hereunder shall be
governed by and construed according to the laws of the State of Missouri, except
to the extent such laws are
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27
preempted by the laws of the United States of America.
Dated: November 1, 1998 H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
---------------------------------------
Its: President and Chief Executive Officer
---------------------------------------
26
1
EXHIBIT 10.2
AMENDMENT NO. 1
TO THE
H&R BLOCK DEFERRED COMPENSATION PLAN
FOR EXECUTIVES, AS AMENDED AND RESTATED
H&R Block, Inc. (the "Company") adopted the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated (the "Plan"), effective as of
January 1, 1999. The Company retains the right to amend the Plan pursuant to
action by the Company's Board of Directors. The Company hereby exercises that
right. This Amendment No. 1 is effective as of January 1, 1999.
AMENDMENT
1. Section 2.1.25 of the Plan is amended by adding the following sentence
at the end of such Section:
"For persons eligible to participate in the Plan who were
employed prior to January 1, 1999 by a subsidiary of HRB
Business Services, Inc. that was incorporated after May 15,
1998, an 'Enrollment Period' is granted consisting of the period
between January 4, 1999 and January 31, 1999, inclusive."
2. Section 2.1.40 of the Plan is amended by (a) deleting the second
sentence thereof and replacing such second sentence with the following new
sentence:
"Except for Permissible Deferrals elected to commence on March
1, 1998, and Permissible Deferrals elected during an Enrollment
Period described in Section 2.1.25 other than a period comprised
of October 1 through December 15, inclusive, 'Plan Year' means
the calendar year (a) for all Permissible Deferrals elected by
Group B Participants, and (b) for Permissible Deferrals of Group
A Participants elected to commence January 1, 1991 or later.";
(b) deleting the fifth sentence thereof and replacing such fifth sentence with
the following new sentence:
"If the Committee grants to a person eligible to participate in
the Plan a discretionary Enrollment Period in accordance with
Section 2.1.25 and such person submits to the Company a
Permissible Deferrable election during such Enrollment Period,
such Participant's first 'Plan Year' shall be the period (i)
beginning on the first day of the first calendar month
commencing not less than 45 days after the date that such
Participant is first employed by a Participating Affiliate, and
(ii) ending on December 31 of the year in which such calendar
month falls."; and
2
(c) adding the following new sentence after the new fifth sentence of such
Section 2.1.40 and prior to the sixth sentence of said Section:
"For Permissible Deferrals of Participants elected during the
Enrollment Period consisting of the period between January 4,
1999 and January 31, 1999, inclusive, 'Plan Year' means the
10-month period between March 1, 1999 and December 31, 1999,
inclusive, and the calendar year thereafter."
3. Section 4.1.2 of the Plan is amended by (a) adding the following words
and punctuation after the words and punctuation "provided, however, that" and
before the words "the maximum percentage" in the first paragraph of said
Section:
"(i) each Participating Affiliate may elect before each
Enrollment Period to have no Matching Contributions posted
during the Plan Year (to which the Enrollment Period relates) to
the Accounts of Participants employed by such Participating
Affiliate, and (ii)";
and (b) adding the following new sentence at the end of the first paragraph of
said Section:
"If a Participating Affiliate elects to have Matching
Contributions posted to the Accounts of Participants employed by
such Participating Affiliate during a Plan Year, Matching
Contributions shall continue to be posted to such Accounts
during all subsequent Plan Years, provided that, not less than
four months prior to the beginning of any such subsequent Plan
Year, the Participating Affiliate may petition the Committee,
and the Committee may approve at such time, for no Matching
Contributions to be posted to the Accounts of such Participants
during such Plan Year."
4. Except as modified in this Amendment No. 1, the Plan shall remain in
full force and effect, including the Company's right to amend or terminate the
Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
---------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
2
5
1,000
9-MOS
APR-30-1999
JAN-31-1999
188,340
91,582
917,665
21,302
0
1,270,762
100,597
0
2,075,499
1,023,256
0
1,089
0
0
758,193
2,075,499
0
447,668
0
572,578
0
0
0
(97,612)
(37,072)
(60,540)
(21,468)
0
0
(82,008)
(.82)
(.82)
PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
NET OF TAX BENEFIT OF ($13,726)
