EXHIBIT 13 COMMON STOCK DATA Stock Price Cash Dividend High Low Paid per Share ------ ------ -------------- 1993 Fiscal Year: Quarter ended 7/31/92 34 7/8 30 5/8 .22 Quarter ended 10/31/92 38 1/4 32 3/8 .25 Quarter ended 1/31/93 40 5/8 37 3/8 .25 Quarter ended 4/30/93 42 3/8 33 1/4 .25 1994 Fiscal Year: Quarter ended 7/31/93 37 1/2 31 7/8 .25 Quarter ended 10/31/93 41 1/2 35 3/4 .28 Quarter ended 1/31/94 44 1/2 37 5/8 .28 Quarter ended 4/30/94 48 3/4 41 3/4 .28 <FN> Traded on the New York Stock Exchange; Ticker Symbol: HRB </FN> SELECTED FINANCIAL DATA Year Ended April 30 --------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- -------- ---------- -------- FOR THE YEAR: Total revenues $1,238,677 $1,074,263 $986,109 $ 925,262 $820,356 Net earnings from continuing operations<F1> $ 163,995 $ 171,017 $153,744 $ 131,255 $114,435 Net earnings $ 200,528 $ 180,705 $162,253 $ 140,108 $123,529 AT YEAR END: Total assets $1,074,704 $1,005,834 $962,664 $1,035,781 $941,530 Cash and marketable securities $ 620,091 $ 439,526 $391,386 $ 354,916 $342,717 Long-term debt - - - - $ 4,937 Stockholders' equity $ 707,875 $ 650,488 $613,713 $ 573,589 $503,348 Shares outstanding 106,149 106,355 106,598 106,487 105,628 MEASUREMENTS: Per share of common stock: Net earnings from continuing operations<F1> $1.54 $1.59 $1.41 $1.22 $1.07 Net earnings $1.88 $1.68 $1.49 $1.31 $1.15 Cash dividends declared $1.09 $ .97 $ .85 1/2 $ .74 1/2 $ .61 Return on total revenues 13.2% 15.9% 15.6% 14.2% 13.9% Return on beginning stockholders' equity 30.8% 29.4% 28.3% 27.8% 27.7% <FN> <F1>1994 includes a charge to earnings of $25,072, or $.24 per share, for purchased research and development in connection with the acquisition of MECA Software, Inc. See notes to financial statements. Data has been adjusted to give effect to the two-for-one stock split applicable to fiscal year 1991. </FN> MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS Two significant transactions occurred in fiscal 1994: the sale of the Company's wholly-owned subsidiary, Interim Services Inc., through an initial public offering and the acquisition of MECA Software, Inc. The Company's net earnings for the year include a net gain of $27.3 million, or $.26 per share, from the sale of Interim and a charge to earnings which is not deductible for income tax purposes of $25.1 million, or $.24 per share, for purchased research and development related to the acquisition of MECA Software, Inc. Interim's results are reflected as discontinued operations, and all amounts for prior periods have been similarly reported. Interim's operations contributed $.09 per share up to the date of sale compared to $.09 per share in 1993 and $.08 per share in 1992. Consolidated revenues increased 15.3% to a record $1.239 billion, compared to $1.074 billion in 1993 and $986.1 million in 1992. Consolidated net earnings increased 11.0% to $200.5 million, compared to $180.7 million in 1993 and $162.3 million in 1992. Earnings per share increased 11.9% to $1.88 compared to $1.68 in 1993 and $1.49 in 1992. Net earnings from continuing operations decreased 4.1% to $164.0 million, compared to $171.0 million in 1993 and $153.7 million in 1992. Earnings per share from continuing operations were $1.54 compared to $1.59 in 1993 and $1.41 in 1992. The decrease in earnings and earnings per share from continuing operations was due to a nonrecurring charge of $25.1 million, or $.24 per share, for purchased research and development. Additional information on each of the Company's operating segments follows: TAX SERVICES Revenues increased 3.0% to $755.5 million, compared to $733.4 million in 1993 and $698.3 million in 1992. The increases in revenues in 1994 and 1993 over the preceding year resulted primarily from increases in tax preparation fees, electronic filing fees, and franchise royalties. In Canada, discounted return fees decreased 35.4% as compared to 1993 due to tax law changes which eliminated many discounted returns. Due to the decline in Canada, the total number of returns prepared worldwide fell fractionally from the previous year. Pretax earnings increased 3.9% to $198.7 million, compared to $191.3 million in 1993 and $183.8 million in 1992. The increase this year as compared to last year was adversely affected by a significant decrease in Canadian earnings due to the decline in refunds discounted. Pretax earnings as a percent of revenues was 26.3% this year, compared to 26.1% in 1993 and 26.3% in 1992. The increase in margins in 1994 resulted from better control of facility and supply expenses. COMPUTER SERVICES Revenues increased 36.3% to $429.9 million, compared to $315.4 million in 1993 and $280.9 million in 1992. The increase in each year as compared to the preceding year was due to growth in consumer and network services revenues. The consumer services customer base rose 46.1% in fiscal 1994. Network customers increased to 586 from 484 last year. Pretax earnings increased 38.2% to $102.3 million, compared to $74.0 million in 1993 and $55.4 million in 1992. The record results were attributable primarily to the continued strong performances of the Consumer and Network divisions. The pretax margin was 23.8% this year, compared to 23.5% in 1993 and 19.7% in 1992. The increase in margins in each year over the preceding year resulted primarily from the exceptional increases in revenues which outpaced expenses, a significant portion of which are fixed. FINANCIAL SERVICES Revenues increased 66.3% to $42.3 million from $25.4 million last year. The increase resulted from new credit card revenues, greater fees from services provided to franchises, and the personal finance software revenues of MECA Software, Inc. from date of acquisition. Pretax earnings decreased 13.9% to $8.7 million from $10.1 million in 1993. The decrease was due to losses from the personal finance software business attributable to development expenses associated with software updates, and start-up costs associated with credit card operations. OTHER SERVICES Results in 1994 represent the operations of the personal tax software business of MECA Software, Inc. from date of acquisition. INVESTMENT INCOME Investment income increased 1.4% to $15.3 million, compared to $15.0 million in 1993 and $20.1 million in 1992. The increase was due to more funds available for investment, particularly in the fourth quarter due to the sale of Interim, although yields were slightly lower than last year. The decrease in 1993 reflected lower interest rates, partially offset by more funds available for investment. CORPORATE & ADMINISTRATIVE EXPENSES The corporate and administrative pretax loss increased 14.8% to $16.7 million, compared to $14.6 million in 1993 and $12.5 million in 1992. The increase in 1994 as compared to 1993 resulted primarily from increases in legal and employee benefits expenses and lower miscellaneous income. The increase in 1993 as compared to 1992 resulted from increases in employee compensation and benefits. INCOME TAX EXPENSE The effective tax rate for continuing operations increased to 42.1%, compared to 38.0% in 1993 and 37.7% in 1992. The increase in 1994 as compared to 1993 resulted from a one percent increase in the federal income tax rate and the charge for purchased research and development which is not deductible for income tax purposes. The increase in 1993 as compared to 1992 was due to a decrease in tax exempt income. In August, 1993, the Clinton Administration enacted the Omnibus Budget Reconciliation Act of 1993. Its provisions increase the federal statutory income tax rate from 34% to 35% and allow for deduction from taxable income goodwill amortization arising from certain business acquisitions. This legislation increased the Company's effective tax rate, but management anticipates a slight decrease in the long-term as goodwill amortization related to certain future business acquisitions will be deductible. EFFECTS OF INFLATION The effects of inflation on the Company's operations were not significant during 1994, 1993 or 1992. MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remains strong with cash and marketable securities of $620.1 million at April 30, 1994, compared to $439.5 million and $391.4 million at the end of 1993 and 1992, respectively. The significant increase in cash and marketable securities in 1994 as compared to 1993 is due to the net proceeds from the sale of Interim of $188.5 million, and from the repayment of the term loan from Interim of $30.0 million, partially offset by a reduction in borrowings. Stockholders' equity at April 30, 1994, 1993, and 1992 was $707.9 million, $650.5 million and $613.7 million, respectively. The Company maintains seasonal lines of credit to support short-term borrowing facilities in the United States and Canada. The balance of these lines fluctuates according to the amount of borrowing outstanding during each respective year. United States borrowings are utilized by Block Financial Corporation (BFC) to purchase interests in a trust to which certain Refund Anticipation Loans (RALs) made by Mellon Bank (DE) National Association are sold. BFC purchased an interest of just under 50% in those RALs subject to its agreement with Mellon. RALs are loans made by financial institutions that are expected to be retired by an income tax refund. BFC financed these purchases through short-term borrowing in the third and fourth quarters of fiscal 1994 and 1993. Canadian borrowings are utilized to purchase refunds due its clients. The client assigns to the Company the full tax refund to be issued by Revenue Canada. This program is also financed by short-term borrowing, with maturities ranging from 30 to 90 days. Net accounts receivable at April 30, 1994 and 1993 include amounts due from Revenue Canada of $28.5 million and $95.3 million, respectively. Collections occur substantially in the last month of the fiscal year and the first quarter of the subsequent fiscal year. The Company also maintains a year-round $100 million line of credit to support various financial activities conducted by BFC. The Company has historically generated sufficient funds to provide for the off-season working capital needs of the Company's largest segment which experiences losses for the period May through December, capital investments, and the operating and expansion needs of its subsidiaries, where applicable, while also enabling the Company to maintain a strong dividend policy and provide cash for acquisition requirements. Management believes that the Company will continue to generate sufficient capital internally to finance its investment program and normal working capital requirements. However, the Company will continue to use short-term financing in the United States to finance RAL activity and various other financial activities conducted by BFC and in Canada to finance the Canadian refund discount program. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement addresses the accounting and reporting for certain investments in debt and equity securities by requiring such investments to be classified in held-to-maturity, available-for-sale or trading categories. It is effective for the Company's financial statements for the fiscal year beginning May 1, 1994. The Company intends to categorize all of its marketable securities as available-for-sale. Had the Company adopted this Statement as of April 30, 1994, stockholders' equity would have increased by approximately $5.5 million net of taxes, representing the aggregate excess market value over carrying value for the Company's marketable securities. Net earnings for the fiscal year ended April 30, 1994 would have been unchanged. 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. Other than the possible repurchase of the Company's common stock, there are no material commitments for capital investments as of April 30, 1994. CONSOLIDATED STATEMENTS OF EARNINGS Amounts in thousands, except per share amounts Year Ended April 30 -------------------------------------- 1994 1993 1992 ---------- ---------- -------- Revenues: Service revenues $1,118,566 $ 956,534 $865,914 Royalties 96,766 92,529 90,024 Investment income 15,256 15,038 20,089 Other income 8,089 10,162 10,082 ---------- ---------- -------- 1,238,677 1,074,263 986,109 ---------- ---------- -------- Expenses: Employee compensation and benefits 404,367 369,476 359,745 Occupancy and equipment 242,391 203,350 174,863 Marketing and advertising 60,783 47,118 44,869 Supplies, freight and postage 60,182 53,470 62,362 Other 162,698 124,955 97,483 Purchased research and development 25,072 - - ---------- ---------- -------- 955,493 798,369 739,322 ---------- ---------- -------- Earnings from continuing operations before taxes 283,184 275,894 246,787 Taxes on earnings 119,189 104,877 93,043 NET EARNINGS FROM CONTINUING OPERATIONS 163,995 171,017 153,744 Net earnings from discontinued operations (less applicable taxes of $8,706, $9,688 and $8,964) 9,268 9,688 8,509 Net gain on sale of discontinued operations (less applicable taxes of $16,711) 27,265 - - ---------- ---------- -------- NET EARNINGS $ 200,528 $ 180,705 $162,253 ========== ========== ======== Earnings per share from continuing operations $1.54 $1.59 $1.41 ===== ===== ===== Earnings per share $1.88 $1.68 $1.49 ===== ===== ===== <FN> See notes to consolidated financial statements. </FN> CONSOLIDATED BALANCE SHEETS Amounts in thousands, except share data April 30, April 30, 1994 1993 ---------- ---------- ASSETS CURRENT ASSETS: Cash (including certificates of deposit of $23,519 and $36,074) $ 41,343 $ 43,417 Marketable securities 473,043 291,347 Receivables, less allowance for doubtful accounts of $12,744 and $12,000 165,858 228,691 Prepaid expenses 19,551 26,483 ---------- ---------- Total current assets 699,795 589,938 ---------- ---------- INVESTMENTS AND OTHER ASSETS: Investments in marketable securities 105,705 104,762 Excess of cost over fair value of net tangible assets acquired, less accumulated amortization of $43,429 and $36,249 67,679 125,628 Other 36,301 37,120 ---------- ---------- 209,685 267,510 Property and Equipment, at cost less accumulated depreciation and amortization of $192,481 and $172,444 165,224 148,386 ---------- ---------- $1,074,704 $1,005,834 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ - $ 37,167 Accounts payable, accrued expenses and deposits 160,592 132,321 Accrued salaries, wages and payroll taxes 55,195 53,495 Accrued taxes on earnings 120,425 106,943 ---------- ---------- Total current liabilities 336,212 329,926 Other Noncurrent Liabilities 30,617 25,420 STOCKHOLDERS' EQUITY: Common stock, no par, stated value $.01 per share: authorized 200,000,000 shares 1,089 1,089 Additional paid-in capital 90,552 101,038 Retained earnings 719,724 643,757 ---------- ---------- 811,365 745,884 Less cost of common stock in treasury 103,490 95,396 ---------- ---------- 707,875 650,488 ---------- ---------- $1,074,704 $1,005,834 ========== ========== <FN> See notes to consolidated financial statements. </FN> CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts in thousands Year Ended April 30 ----------------------------------- 1994 1993 1992 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 200,528 $ 180,705 $ 162,253 Adjustments to reconcile net earnings to net cash provided: Depreciation and amortization 57,117 54,698 44,262 Provision for deferred taxes on earnings (2,735) (2,915) (2,778) Gain on sale of subsidiaries (27,265) - (328) Purchased research and development 25,072 - - Other noncurrent liabilities 5,197 4,276 4,392 Changes in assets and liabilities net of effects of purchase and disposition of subsidiaries: Receivables 2,284 43,171 114,455 Prepaid expenses (412) (4,619) 2,798 Net assets of discontinued operations (17,370) - - Accounts payable, accrued expenses and deposits 31,000 56,593 13,250 Accrued salaries, wages and payroll taxes 14,659 (6,672) (1,913) Accrued taxes on earnings (300) 19,278 8,226 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 287,775 344,515 344,617 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (1,522,609) (1,198,102) (860,260) Maturities of marketable securities 1,339,970 1,179,903 800,569 Purchases of property and equipment, net (83,744) (71,921) (55,789) Excess of cost over fair value of net tangible assets acquired, net of cash acquired (46,570) (10,981) (12,224) Proceeds from sale of subsidiaries 188,500 - 14,000 Proceeds from term loan to former subsidiary 30,000 - - Other, net (24,198) (13,241) (4,410) ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (118,651) (114,342) (118,114) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (2,435,254) (1,717,226) (901,698) Proceeds from issuance of notes payable 2,398,087 1,653,061 779,495 Dividends paid (115,451) (103,462) (91,842) Payments to acquire treasury shares (68,899) (94,763) (86,505) Proceeds from stock options exercised 50,319 62,158 55,810 Other, net - - (4,984) ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (171,198) (200,232) (249,724) ---------- ---------- ---------- Net increase (decrease) in cash (2,074) 29,941 (23,221) Cash at beginning of the year 43,417 13,476 36,697 ---------- ---------- ---------- Cash at end of the year $ 41,343 $ 43,417 $ 13,476 ========== ========== ========== Year Ended April 30 ----------------------------------- 1994 1993 1992 ---------- ---------- ---------- (continued) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid $ 131,124 $ 98,202 $ 84,597 Interest paid 4,169 5,933 5,786 <FN> See notes to consolidated financial statements. </FN> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany transactions and balances have been eliminated. MARKETABLE SECURITIES Marketable securities consist of municipal bonds and notes stated at amortized cost, marketable equity securities stated at the lower of aggregate cost or market value, and other investments stated at cost. Aggregate net unrealized loss related to noncurrent marketable equity securities, if applicable, is included in stockholders' equity. The cost of marketable securities sold is determined on the specific identification method and realized gains or losses are reflected in earnings. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This Statement addresses the accounting and reporting for certain investments in debt and equity securities by requiring such investments to be classified in held-to-maturity, available-for-sale, or trading categories. It is effective for the Company's financial statements for the fiscal year beginning May 1, 1994. The Company intends to categorize all of its marketable securities as available-for-sale. Had the Company adopted this Statement as of April 30, 1994, stockholders' equity would have increased by approximately $5.5 million net of taxes, representing the aggregate excess market value over carrying value for the Company's marketable securities. Net earnings for the fiscal year ended April 30, 1994 would have been unchanged. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign branches and subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end of the year. Revenue and expense transactions are translated at the average of exchange rates in effect during the period. Translation gains and losses are recorded directly to stockholders' equity. EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED The excess of cost of purchased subsidiaries, operating offices and franchises over the fair value of net tangible assets acquired is being amortized over periods of up to 40 years on a straight-line basis. DEPRECIATION AND AMORTIZATION Buildings and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the period of the respective lease using the straight-line method. REVENUE RECOGNITION Service revenues are recorded in the period in which the service is performed. The Company records franchise royalties, based upon the contractual percentages of franchise revenues, in the period in which the franchise provides the service. TAXES ON EARNINGS The Company and its subsidiaries file a consolidated Federal income tax return on a calendar year basis. Therefore, the current liability for taxes on earnings recorded in the balance sheet at each year-end consists principally of taxes on earnings for the period January 1 to April 30 of the respective year. Deferred taxes, which are not material, are provided for temporary differences between financial and tax reporting, which consist principally of amortization of accounting method changes (for tax purposes), differences between accrual and cash basis accounting, deferred compensation, and depreciation. Prior to May 1, 1993, taxes on earnings were determined under Accounting Principles Board Opinion Number 11, whereby the income tax provision was calculated using the deferred method. Effective May 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which provides for the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The cumulative effect of the change in method as of May 1, 1993 was not material. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during the respective years (106,769,000 in 1994, 107,644,000 in 1993, and 109,154,000 in 1992). Earnings per share assuming full dilution have not been shown as there would be no material dilution. CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash. DISCLOSURE REGARDING FINANCIAL INSTRUMENTS For purposes of disclosing the estimated fair value of marketable securities, the Company uses quoted market prices obtained primarily from published sources. For all other financial instruments, including certificates of deposit and notes payable, the carrying value is considered to approximate fair value due to the relatively short maturity of the respective instruments. MARKETABLE SECURITIES The cost, market value and carrying value of marketable securities at April 30, 1994 and 1993 are summarized below: 1994 1993 --------------------------------- --------------------------------- Carrying Carrying Cost Market Value Cost Market Value -------- -------- -------- -------- -------- -------- CURRENT: Municipal bonds and notes $239,057 $238,258 $238,092 $151,469 $151,142 $150,981 Other short-term investments 234,952 234,960 234,951 140,366 140,346 140,366 -------- -------- -------- -------- -------- -------- 474,009 473,218 473,043 291,835 291,488 291,347 -------- -------- -------- -------- -------- -------- NONCURRENT: Municipal bonds 94,501 94,014 92,154 94,297 97,039 90,952 Preferred stock 1,511 1,795 1,511 1,921 2,213 1,921 Common stock 7,479 14,766 7,479 7,334 16,247 7,334 Other long-term investments 4,561 3,912 4,561 4,555 4,594 4,555 -------- -------- -------- -------- -------- -------- 108,052 114,487 105,705 108,107 120,093 104,762 -------- -------- -------- -------- -------- -------- $582,061 $587,705 $578,748 $399,942 $411,581 $396,109 ======== ======== ======== ======== ======== ======== The net unrealized gain on long-term equity securities at April 30, 1994 and 1993 of $7,571 and $9,205, respectively, represents all unrealized gains. Net realized gains or losses on investments during 1994, 1993 and 1992 were a gain of $307, a loss of $123, and a gain of $2,034, respectively. PROPERTY AND EQUIPMENT A summary of property and equipment follows: April 30 --------------------- 1994 1993 -------- -------- Land $ 6,060 $ 5,698 Buildings 30,027 33,440 Equipment 293,573 254,445 Leasehold improvements 28,045 27,247 -------- -------- 357,705 320,830 Less accumulated depreciation and amortization 192,481 172,444 -------- -------- $165,224 $148,386 ======== ======== Depreciation and amortization expense for 1994, 1993 and 1992 amount to $52,091, $43,522, and $32,045, respectively. OTHER NONCURRENT LIABILITIES The Company has a deferred compensation plan which permits directors and certain management employees to defer portions of their compensation and earn interest on the deferred amounts. The salaries, together with Company matching of deferred salaries, have been accrued, and the only expenses related to this plan are the Company match and the interest on the deferred amounts, which are not material to the financial statements. Included in Other Noncurrent Liabilities is $22,854 at the end of 1994 and $22,192 at the end of 1993 to reflect the liability under this plan. The Company purchased whole-life insurance contracts on the related directors and employees to recover distributions made or to be made under the plan, and has recorded the cash surrender value of the policies in Other Assets. If all the assumptions regarding mortality, interest rates, policy dividends, and other factors are realized, the Company will ultimately realize its full investment plus a factor for the use of its money. STOCKHOLDERS' EQUITY Changes in the components of stockholders' equity during the three years ended April 30, 1994 are summarized below: Common stock Additional Treasury stock -------------------- paid-in Retained ----------------------- Shares Amount capital earnings Shares Amount ----------- ------ ------- -------- ---------- --------- Balances at May 1, 1991 107,792,080 $1,078 $90,234 $507,278 (1,305,212) ($ 25,001) Net earnings for the year - - - 162,253 - - Stock options exercised 1,058,619 11 26,795 - 1,430,210 29,004 Unrealized loss on translation - - - (3,312) - - Acquisition of treasury shares - - - - (2,500,000) (86,505) Stock issued for acquisition 122,000 - 3,720 - - - Cash dividends paid - $.851/2 per share - - - (91,842) - - Balances at April 30, 1992 108,972,699 1,089 120,749 574,377 (2,375,002) ( 82,502) Net earnings for the year - - - 180,705 - - Stock options exercised - - (19,711) - 2,387,407 81,869 Unrealized loss on translation - - - (7,863) - - Acquisition of treasury shares - - - - (2,629,868) (94,763) Cash dividends paid - $.97 per share - - - (103,462) - - Balances at April 30, 1993 108,972,699 1,089 101,038 643,757 (2,617,463) (95,396) Net earnings for the year - - - 200,528 - - Stock options exercised - - (10,486) - 1,677,674 60,805 Unrealized loss on translation - - - (9,110) - - Acquisition of treasury shares - - - - (1,883,816) (68,899) Cash dividends paid - $1.09 per share - - - (115,451) - - Balances at April 30, 1994 108,972,699 $1,089 $90,552 $719,724 (2,823,605) ($103,490) STOCK OPTION PLANS The Company has three stock option plans: the 1993 Long-Term Executive Compensation Plan, the 1989 Stock Option Plan for Outside Directors, and a plan for eligible seasonal employees. The 1993 plan was approved by the shareholders in September 1993 to replace the 1984 Long-Term Executive Compensation Plan, which terminated at that time except with respect to outstanding awards thereunder. Under the 1993 and 1989 plans, options may be granted to selected employees and outside directors to purchase the Company's common stock for periods not exceeding ten years at a price that is not less than 100 percent of fair market value on the date of grant. The options are exercisable each year starting one year from the date of grant, or on a cumulative basis at the annual rate of 33 1/3 percent of the total number of optional shares. The plan for eligible seasonal employees, as amended, provided for the granting of options on June 30, 1994, 1993 and 1992 at the market price on the date of the grant. The options are exercisable during September in each of the two years following the calendar year of grant. Changes during the years ended April 30, 1994, 1993 and 1992 under these plans were as follows: 1994 1993 1992 ---------- ---------- ---------- Options outstanding, beginning of year 3,901,373 4,835,777 4,479,702 Options granted 2,410,317 2,327,340 3,121,632 Options exercised (1,677,674) (2,387,407) (2,488,829) Options which expired (1,095,675) (874,337) (276,728) Options outstanding, end of year 3,538,341 3,901,373 4,835,777 Shares exercisable, end of year 2,807,255 2,958,418 3,669,567 Shares reserved for future grants, end of year 18,417,233 12,736,987 14,189,990 Options prices per share: Exercised during the year $5.515-35.75 $5.515-28.75 $1.77-27.50 Outstanding, end of year $5.515-44.00 $5.515-35.375 $5.515-33.75 SHAREHOLDER RIGHTS PLAN On July 14, 1988, the Company's Board of Directors adopted a shareholder rights plan to deter coercive or unfair takeover tactics and to prevent a potential acquiror from gaining control of the Company without offering a fair price to all of the Company's stockholders. The plan was amended by the Board of Directors on May 9, 1990 and on September 11, 1991. Under the plan, a dividend of one right (a "Right") per share was declared and paid on each share of the Company's Common Stock outstanding on July 25, 1988. As to shares issued after such date, rights will automatically attach to them after their issuance. Under the plan, as amended, registered holders of each Right may purchase from the Company one two-hundredths of a share of a new class of the Company's Participating Preferred Stock, without par value, at a price of $60.00, subject to adjustment, when the Rights become exercisable. They become exercisable when a person or group of persons acquires 10% or more of the outstanding shares of the Company's Common Stock without the prior written approval of the Company's Board of Directors (an "Unapproved Stock Acquisition"), and after ten business days following the commencement of a tender offer that would result in an Unapproved Stock Acquisition. If a person or group of persons makes an Unapproved Stock Acquisition, the registered holder of each Right then also has the right to purchase for the exercise price of the Right a number of shares of the Company's Common Stock having a market value equal to twice the exercise price of the Right. Following an Unapproved Stock Acquisition, if the Company is involved in a merger, or 50% or more of the Company's assets or earning power are sold, the registered holder of each Right has the right to purchase for the exercise price of the Right a number of shares of the common stock of the acquiring company having a market value equal to twice the exercise price of the Right. After an Unapproved Stock Acquisition, but before any person or group of persons acquires 50% or more of the outstanding shares of the Company's Common Stock, the Board of Directors may exchange all or part of the then outstanding and exercisable Rights for Common Stock at an exchange ratio of one share of Common Stock per Right. Upon any such exchange, the right of any holder to exercise a Right terminates. The Company may redeem the Rights at a price of $.005 per Right at any time prior to an Unapproved Stock Acquisition (and after such time in certain circumstances). The Rights expire on July 25, 1998, unless extended by the Board of Directors. Until a Right is exercised, the holder thereof, as such, has no rights as a stockholder of the Company, including the right to vote or to receive dividends. The issuance of the Rights alone has no dilutive effect and does not affect reported earnings per share. OTHER EXPENSES Included in other expenses are the following: Year Ended April 30 --------------------------------------- 1994 1993 1992 ------- ------- ------- Royalties $39,827 $25,326 $18,006 Bad debts 24,977 16,312 11,314 Travel and entertainment 15,039 10,420 9,931 Taxes and licenses 13,285 11,033 9,722 Amortization of goodwill 5,026 3,115 4,952 Interest 3,798 6,580 5,276 Legal and professional 14,445 9,486 4,425 Loss on sale of subsidiary - - 2,324 TAXES ON EARNINGS The components of earnings from continuing operations before taxes on earnings upon which Federal and foreign income taxes have been provided are as follows: Year Ended April 30 ------------------------------ 1994 1993 1992 -------- -------- -------- United States $276,329 $261,981 $231,566 Foreign 6,855 13,913 15,221 -------- -------- -------- $283,184 $275,894 $246,787 ======== ======== ======== Deferred income tax provisions (benefits) reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The current and deferred components of the provision for income taxes from continuing operations is comprised of the following: Year Ended April 30 ----------------------------------------- 1994 1993 1992 -------- -------- -------- Currently payable: Federal $ 96,807 $ 80,915 $70,474 State 22,091 20,736 18,734 Foreign 3,026 6,141 6,613 -------- -------- ------- 121,924 107,792 95,821 -------- -------- ------- Deferred: Capitalized research and development 172 991 (1,473) Deferred compensation (2,319) (1,892) (964) Depreciation (335) (1,565) (298) Inter-company profit upon sale of fixed assets (257) (539) (31) Other 4 90 (12) (2,735) (2,915) (2,778) -------- -------- ------- $119,189 $104,877 $93,043 ======== ======== ======= Provision is not made for possible income taxes payable upon distribution of unremitted earnings of foreign subsidiaries. Such unremitted earnings aggregated $71,282 at December 31, 1993. Management believes that the cost to repatriate these earnings would not be material. The following table reconciles the U.S. Federal income tax rate to the Company's effective tax rate: Year Ended April 30 ------------------------------------- 1994 1993 1992 ----- ----- ----- Statutory rate 35.0% 34.0% 34.0% Increases (reductions) in income taxes resulting from: State income taxes, net of Federal income tax benefit 5.1% 5.0% 5.0% Foreign taxes, net of Federal income tax benefit .2% .5% .6% Purchased research and development 3.1% - - Nontaxable Federal income (.9%) (1.1%) (1.9%) Other (.4%) (.4%) - Effective rate 42.1% 38.0% 37.7% ACQUISITIONS On November 24, 1993, the Company acquired MECA Software, Inc. for $45,384 in cash. The transaction was accounted for as a purchase and, accordingly, the consolidated statements of earnings includes MECA's results since the date of acquisition. The purchase price has been allocated to assets acquired and liabilities assumed based on their fair value at the date of acquisition. The excess of the purchase price over the fair value of the net tangible assets acquired was $55,978, of which $25,072 was allocated to purchased research and development, $4,900 was allocated to various other intangibles including technology, software and trademarks, and the remainder was allocated to goodwill. Goodwill and other intangibles will be amortized on a straight-line basis over their estimated useful lives of 3 to 15 years. The consolidated statements of earnings includes a charge for the purchased research and development which is not deductible for income tax purposes. The fair value of assets acquired, including intangibles, was $62,004; liabilities assumed were $16,620. Liabilities assumed in connection with the acquisition were non-cash items excluded from the consolidated statements of cash flows. Pro forma results assuming MECA had been acquired as of the beginning of the periods presented would not be materially different from reported results. During fiscal 1994, 1993 and 1992, the Company made other acquisitions which were accounted for as purchases. Their operations, which are not material, are included in the consolidated statements of earnings. SALE OF SUBSIDIARIES On January 27, 1994, the Company completed the sale of its interest in its wholly-owned subsidiary, Interim Services Inc., through an initial public offering of 10,000,000 shares at $20 per share. The net proceeds from the sale and the receipt from the retirement of a term loan to Interim amounted to $218,500. The Company recorded a net gain on the sale of the stock of $27,265. Interim's results are reflected as discontinued operations, and all amounts for prior periods have been similarly reported. The net sales of Interim for fiscal years 1994, 1993 and 1992 were $399,573, $451,067 and $384,589, respectively. On April 17, 1992, the Company sold substantially all of the operating assets of MicroSolutions, Inc. for $3,100. MicroSolutions was an operating division of CompuServe and the largest component of its Systems Integration Group. The pretax loss on the sale of $2,324 is included in other expenses. On November 7, 1991, the Company sold substantially all of the operating assets of its wholly-owned subsidiary, Access Technology, Inc., for $14,000 in cash. The operating results of Access, which were included in the computer services segment, are reflected in the consolidated statements of earnings through date of disposition, and the gain on the sale of $2,652 is included in other income. COMMITMENTS Substantially all of the Company's operations are conducted in leased premises. Most of the operating leases are for a one-year period with renewal options of one to three years and provide for fixed monthly rentals. Lease commitments at April 30, 1994, for fiscal 1995, 1996, 1997, 1998 and 1999 aggregated $54,124, $44,341, $29,126, $16,115, and $5,839, respectively, with no significant commitments extending beyond that period of time. The Company's rent expense for the years 1994, 1993 and 1992 aggregated $63,655, $59,016 and $56,406, respectively. The Company maintains a year-round $100 million line of credit to support various financial activities conducted by Block Financial Corporation. QUARTERLY FINANCIAL DATA (UNAUDITED) Fiscal 1994 Quarter Ended Fiscal 1993 Quarter Ended ------------------------------------------ ---------------------------------------- April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31, 1994 1994 1993 1993 1993 1993 1992 1992 -------- -------- -------- -------- -------- -------- -------- -------- Revenues $774,716 $229,441 $131,206 $103,314 $698,861 $190,747 $102,223 $82,432 Continuing operations: Earnings (loss) before provision for income taxes (benefits) 316,881 (11,455) (7,867) (14,375) 296,327 8,045 (12,024) (16,454) Provision for income taxes (benefits) 122,536 6,479 (3,694) (6,132) 114,578 2,350 (5,197) (6,854) Net earnings (loss) 194,345 (17,934) (4,173) (8,243) 181,749 5,695 (6,827) (9,600) Discontinued operations: Net earnings - 3,225 3,241 2,802 1,491 2,888 2,820 2,489 Net gain on sale - 27,265 - - - - - - Net earnings (loss) 194,345 12,556 (932) (5,441) 183,240 8,583 (4,007) (7,111) Earnings (loss) per share from continuing operations 1.83 (.17) (.04) (.08) 1.69 .05 (.06) (.09) Earnings (loss) per share 1.82 .12 (.01) (.05) 1.71 .08 (.04) (.07) SEGMENT INFORMATION The principal business activity of the Company is providing services to the general public and business community. It operates in the following industry segments: TAX SERVICES This segment is engaged in providing tax return preparation, filing and related services to the general public on a fee basis. Revenues are seasonal in nature and represent fees of company-owned offices and royalties from franchised offices. COMPUTER SERVICES This segment is engaged in providing computer information and networking services to corporations and individual computer owners via a proprietary data network and host servers located in Columbus and Dublin, Ohio. It is the world's largest provider of on-line services and operates the only major on-line service with worldwide membership and network reach. FINANCIAL SERVICES This segment provides and invests primarily in financial products for existing customers and franchises. Through the purchases of interests in a trust to which certain Refund Anticipation Loans (RALs) made by Mellon Bank (DE) National Association are sold, this segment purchases a 50% interest in RALs subject to its agreement with Mellon. It also provides services to strengthen the Tax Services franchise network. These services include loans to franchises and insurance programs. During 1994 it sponsored 45,000 credit cards to existing Tax Services and CompuServe customers under two co-branding agreements. In addition, this segment includes those operations of MECA Software, Inc. which provide personal finance software to the general public. OTHER This segment includes those operations of MECA Software, Inc. which provide personal tax software to the general public. IDENTIFIABLE ASSETS Identifiable assets are those assets, including the excess of cost over fair value of net tangible assets acquired, associated with each segment of the Company's operations. The remaining assets are classified as corporate assets and consist primarily of cash, marketable securities and corporate equipment. Identifiable assets at April 30, 1993 and 1992 do not include the assets of discontinued operations of $188,008 and $168,974, respectively, which are included in the consolidated balance sheets for the corresponding years. Information concerning the Company's operations by industry segment for the years ended April 30, 1994, 1993 and 1992, is as follows: 1994 1993 1992 ---------- ---------- -------- REVENUES: Tax services $ 755,526 $ 733,449 $698,308 Computer services 429,885 315,399 280,852 Financial services 42,270 25,422 - Other 8,739 - - ---------- ---------- -------- Total operating revenues 1,236,420 1,074,270 979,160 Investment income 15,256 15,038 20,089 Corporate 186 759 771 Intersegment sales (13,185) (15,804) (13,911) ---------- ---------- -------- TOTAL REVENUES $1,238,677 $1,074,263 $986,109 ========== ========== ======== OPERATING PROFIT: Tax services $ 198,719 $ 191,288 $183,770 Computer services 102,317 74,039 55,380 Financial services 8,711 10,122 - Other 1 - - ---------- ---------- -------- Total operating profit 309,748 275,449 239,150 Investment income 15,256 15,038 20,089 Purchased research and development (25,072) - - Unallocated corporate and administrative expenses (16,748) (14,593) (12,452) ---------- ---------- -------- EARNINGS FROM CONTINUING OPERATIONS BEFORE TAXES $ 283,184 $ 275,894 $246,787 ========== ========== ======== DEPRECIATION AND AMORTIZATION: Tax services $ 24,899 $ 24,858 $ 20,373 Computer services 29,876 21,437 16,308 Financial services 1,147 - - Other 1,130 - - Corporate 65 342 316 ---------- ---------- -------- TOTAL DEPRECIATION AND AMORTIZATION $ 57,117 $ 46,637 $ 36,997 ========== ========== ======== IDENTIFIABLE ASSETS: Tax services $ 104,585 $ 176,727 $266,081 Computer services 208,469 148,814 127,055 Financial services 118,356 - - Other 16,315 19,682 - Corporate 626,979 472,603 400,554 ---------- ---------- -------- TOTAL ASSETS $1,074,704 $ 817,826 $793,690 ========== ========== ======== 1994 1993 1992 ---------- ---------- -------- (continued) CAPITAL EXPENDITURES: Tax services $ 11,411 $ 25,994 $ 29,374 Computer services 73,359 40,903 22,028 Financial services 354 - - Other 261 19 - Corporate 126 289 201 ---------- ---------- -------- TOTAL CAPITAL EXPENDITURES $ 85,511 $ 67,205 $ 51,603 ========== ========== ======== <FN> Prior year amounts have been reclassified to conform to the 1994 presentation. </FN> INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders H&R Block, Inc. Kansas City, Missouri We have audited the accompanying consolidated balance sheets of H&R Block, Inc. and subsidiaries as of April 30, 1994 and 1993, and the related consolidated statements of earnings and cash flows for each of the three years in the period ended April 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of H&R Block, Inc. and subsidiaries as of April 30, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1994 in conformity with generally accepted accounting principles. /s/Deloitte & Touche Kansas City, Missouri June 21, 1994