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