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PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 17, 1997)
[BLOCK FINANCIAL CORPORATION LOGO]
$500,000,000
BLOCK FINANCIAL CORPORATION
8.50% SENIOR NOTES DUE 2007
FULLY AND UNCONDITIONALLY GUARANTEED BY
H&R BLOCK, INC.
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The notes will mature on April 15, 2007. Interest on the notes is payable
on April 15 and October 15 of each year, beginning October 15, 2000. The notes
are not redeemable prior to maturity. There is no sinking fund for the notes.
The notes will be senior obligations of Block Financial Corporation and
will rank equally with all of Block Financial Corporation's other unsecured
senior indebtedness. The notes will be fully and unconditionally guaranteed by
H&R Block, Inc. The guarantee will rank equally with all of H&R Block, Inc.'s
other unsecured senior indebtedness and guarantees.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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PER NOTE TOTAL
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Public Offering Price....................................... 99.160% $495,800,000
Underwriting Discount....................................... .625% $ 3,125,000
Proceeds to Block Financial Corporation (before expenses)... 98.535% $492,675,000
Interest on the notes will accrue from April 18, 2000 to the date of
delivery.
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The underwriters are offering the notes subject to various conditions. The
underwriters expect to deliver the notes on or about April 18, 2000.
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SALOMON SMITH BARNEY CHASE SECURITIES INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
BANC ONE CAPITAL MARKETS, INC.
BLAYLOCK & PARTNERS, L.P.
April 13, 2000
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
AFTER THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
About this Prospectus Supplement............................ S-3
Block Financial Corporation................................. S-3
H&R Block, Inc.............................................. S-6
Recent Developments......................................... S-8
Selected Consolidated Historical Financial and Other Data... S-9
Pro Forma Financial Information............................. S-12
Use of Proceeds............................................. S-19
Ratio of Earnings to Fixed Charges.......................... S-19
Capitalization.............................................. S-20
Description of Notes........................................ S-21
Underwriting................................................ S-23
Legal Matters............................................... S-24
PROSPECTUS
Available Information....................................... 2
Incorporation of Certain Documents by Reference............. 2
Cautionary Statement Regarding Forward-Looking Statements... 3
The Company................................................. 3
The Guarantor............................................... 5
Use of Proceeds............................................. 6
Risk Factors................................................ 6
Ratio of Earnings to Fixed Charges.......................... 10
Description of Debt Securities.............................. 11
Plan of Distribution........................................ 24
Global Clearance, Settlement and Tax Documentation
Procedure................................................. 25
Legal Matters............................................... 30
Experts..................................................... 30
THE PRINCIPAL EXECUTIVE OFFICES OF BLOCK FINANCIAL CORPORATION ARE LOCATED
AT 4400 MAIN STREET, KANSAS CITY, MISSOURI 64111. BLOCK FINANCIAL CORPORATION'S
TELEPHONE NUMBER IS (816) 753-6900.
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ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement offers a series of notes to be issued by Block
Financial Corporation. Block Financial Corporation is also referred to as "Block
Financial", "us" or "we" in this prospectus supplement.
The notes are fully and unconditionally guaranteed by H&R Block, Inc. H&R
Block, Inc. is also referred to as "H&R Block" or the "guarantor" in this
prospectus supplement.
The notes are a series of debt securities as described in the accompanying
prospectus. This prospectus supplement adds, updates and changes information
contained in the prospectus. To understand the terms of the notes we are
offering, you should read both this prospectus supplement and the accompanying
prospectus. You should also read the documents referred to under the heading
"Incorporation of Certain Documents by Reference" in the accompanying
prospectus.
BLOCK FINANCIAL CORPORATION
We are an indirect wholly-owned subsidiary of H&R Block. Our principal
business activities include:
- the offering of investment services to the general public;
- the origination, purchase, servicing, sale and securitization of
conforming and nonconforming residential mortgages;
- the offering of financial products and services, a tax return preparation
program and mortgage services through our website located at
www.hrblock.com;
- the development, publishing, and marketing of software products designed
to assist individuals in managing their personal finances and preparing
tax returns;
- the purchase of participation interests in refund anticipation loans made
by Household Bank to H&R Block tax customers; and
- the offering of equity lines of credit to H&R Block tax preparation
franchisees.
INVESTMENT SERVICES. We offer financial planning, investment advice and
brokerage services through H&R Block Financial Centers and through the
nationwide network of registered representatives of OLDE Discount Corporation
and Birchtree Financial Services, Inc.
On December 1, 1999, we completed the acquisition of the outstanding
capital stock of OLDE Financial Corporation. We paid $850 million in cash plus
net tangible book value cash payments of $48.5 million to the shareholders of
OLDE Financial. We initially funded the purchase price by issuing commercial
paper. We agreed to pay possible future consideration for a period up to five
years after the acquisition based upon the revenues generated from certain
online brokerage services.
OLDE Financial is a financial services holding company. Its principal
subsidiary, OLDE Discount, engages in a discount securities brokerage business
primarily for retail customers through 181 offices located in 34 states and the
District of Columbia. OLDE Discount also engages in market making and specialist
activities in common stocks and is a dealer in corporate and municipal bonds and
U.S. government and U.S. governmental agency securities. OLDE Discount is a
member of the New York Stock Exchange, Inc. and other principal securities
exchanges.
Other products and services offered by OLDE Discount include:
- stock research and recommendations;
- money market funds with sweep provisions for settlement of customer
transactions;
- fixed-income products;
- mutual funds;
- margin accounts;
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- checking privileges;
- option accounts;
- account access/review via the Internet;
- dividend reinvestment plans; and
- individual retirement accounts with no annual fee.
H&R Block Financial Corporation, a subsidiary of OLDE Financial, provides
online brokerage services. It commenced operations in January 2000. OLDE
Discount offers online accounts and provides clearing and execution services.
More information regarding online operations is provided in the "E-Commerce
Initiatives" section below.
We have converted over 70 OLDE Discount offices and have plans to convert
the remaining OLDE Discount offices and some existing H&R Block tax offices into
H&R Block Financial Centers. These locations offer clients the following: tax
preparation, financial products and services and, in most offices, mortgage
services. As of February 29, 2000, OLDE Discount had more than 649,000 customer
accounts and during the month of February 2000 executed more than 323,000
customer trades.
We also offer stocks, bonds, mutual funds and other securities and
insurance products through a network of registered representatives across the
country as a result of our acquisition of Birchtree, a full service investment
firm. Included among Birchtree's registered representatives are employees of H&R
Block's tax subsidiaries. These employees are tax preparers who are also
licensed to sell securities, mutual funds and insurance products.
The securities industry is subject to extensive regulation covering all
aspects of the securities business, including registration of our offices and
personnel, our sales methods, the way we accept and execute customer orders, the
way we handle customer funds and securities, our trading practices, our capital
structure, our record keeping policies and practices, margin lending, execution
and settlement of transactions, the conduct of our directors, officers and
employees, and the way we supervise our employees. The investment services
business is directly affected by economic and political conditions, trends in
business and finance and changes in the conditions of the securities markets in
which our customers trade.
MORTGAGE OPERATIONS. We operate a mortgage origination and funding business
that offers fixed and adjustable-rate mortgages, including purchase money first
mortgages, refinance first mortgages and second mortgages to the public.
We originate, purchase, service, securitize and sell conforming and
nonconforming mortgage loans in the United States. Conforming mortgages are
those that may be offered through government-sponsored loan agencies.
Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies, and typically involve borrowers with
impaired credit who have substantial equity in the property which will be used
to secure the loan. We conduct our mortgage business primarily through our
wholly-owned subsidiaries Option One Mortgage Corporation and H&R Block Mortgage
Corporation (formerly Assurance Mortgage Corporation of America).
On February 1, 2000, Assurance, which we acquired on March 5, 1999, changed
its name to H&R Block Mortgage Corporation. H&R Block Mortgage is a retail
mortgage lender for conventional and government loans and is licensed to conduct
business in 47 states. This subsidiary originates loans by direct solicitation
of borrowers, without involving a broker.
In calendar year 1998, operating under its former ownership and former
name, H&R Block Mortgage closed approximately $1.3 billion in conventional
retail loans. During the nine months ended January 31, 2000, H&R Block Mortgage
originated $445.3 million and sold $462.6 million in mortgage loans. The
majority of these loans were sold through the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation as well as to other
major institutional investors. As of February 29, 2000, H&R Block Mortgage had
35 branch offices in 14 states, primarily in New England, and operated
telemarketing centers in Tampa, Florida and Pleasanton, California.
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Option One, based in Irvine, California, has a network of more than 5,000
mortgage brokers in 48 states. Option One primarily originates and purchases
loans through wholesale channels. Option One originated $3.5 billion in mortgage
loans in fiscal year 1999. From May 1, 1999 through January 31, 2000, Option One
had originated approximately $3.8 billion in mortgage loans. Option One sells
virtually all of its loan production through a combination of securitization and
bulk sales of whole loans to institutional purchasers.
In July 1999, H&R Block announced that it was evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner. On March 27, 2000, H&R Block announced that no expression of
interest in purchasing Option One resulted in an offer considered to be in the
best interests of H&R Block shareholders. H&R Block also announced plans for
off-balance sheet financing arrangements and whole-loan sale commitments
relating to Option One. Option One has received commitments from three banks
totaling $2 billion for external warehouse financing for its subprime mortgage
production over a 12-month period. Option One has also received commitments from
two investment banks to purchase subprime mortgage loans ranging from a minimum
of $2.5 billion to a maximum of $6 billion over a 12-month period.
E-COMMERCE INITIATIVES. We offer online tax preparation, mortgage products
and financial information through our website at www.hrblock.com. In January
2000, we debuted an upgraded website which is organized into three main areas:
Tax, Mortgage and Investment Centers. The Tax Center offers a program that
enables individuals to prepare federal and state income tax returns online and
file the returns electronically, receive tax tips, subscribe to a tax newsletter
and use withholding and refund calculators for tax planning. The website also
offers a program called Electronic Refund Advance (ERA), a unique loan product
that allows users to receive a tax refund advance of up to $5,000 deposited
directly into their bank accounts usually within two days after the IRS accepts
the taxpayer's electronically filed returns. ERA is a loan and the lending
institution, Household Bank, charges a $19.95 fee for each transaction.
Pursuant to a three-year agreement announced in March 2000, we have teamed
with Microsoft Corporation to provide exclusive web- and desktop-based tax
preparation products for its customers who use the MSN(TM) MoneyCentral(TM)
personal finance service and Microsoft(R) Money. We also plan to collaborate
with Microsoft on integration capabilities between Microsoft financial products
and H&R Block's digital tax preparation products. As a result of this alliance,
Microsoft will cease further development of its Microsoft TaxSaver(TM) tax
preparation software.
Our Mortgage Center enables users to apply for mortgages online and track
the status of their applications through the website. We have teamed with
E-LOAN, a leading online lender, to provide a competitive mortgage marketplace
where users can shop with more than 70 loan providers for low rates. The
Mortgage Center also includes interactive calculators to estimate the tax
implications and benefits of home ownership, e-mail notification when the
desired loan rate becomes available, a tool that recommends the best loan types
for a borrower's situation, customized rate quotes and a mortgage comparison
feature.
Our Investment Center provides online brokerage services through H&R Block
Financial. Users can monitor investment portfolios, calculate unrealized profits
and losses and open a variety of investment accounts with access to stocks,
bonds and mutual funds. Trades at H&R Block Financial are executed, cleared and
settled by, and brokerage accounts are maintained by, OLDE Discount.
We have also arranged with InsWeb, a leading Internet insurance
marketplace, to offer through our website free, multiple insurance quotes for
term-life, homeowners and automobile insurance products from leading insurers.
SOFTWARE PRODUCTS. We develop and market the Kiplinger Taxcut(R) tax
preparation software package. We also market Kiplinger's Home Legal Advisor(R),
Kiplinger's Small Business Attorney(R), Kiplinger's NetWealth(R), Kiplinger's
Will Power(R) and Names and Dates(R) software products.
REFUND ANTICIPATION LOANS. We have an agreement with Household Bank to
purchase a participation interest in refund anticipation loans provided by
Household Bank to H&R Block tax customers. In this agreement which expires in
2006, we agreed to purchase a 40% participation interest in such refund
anticipation loans initially, with the option to increase that interest to
nearly 50% in specific circumstances. In
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fiscal 1999, we increased our participation interest in refund anticipation
loans generated by H&R Block tax offices to 49.9%. We also began participating
in 25% of refund anticipation loans generated by tax offices owned by our major
franchisees. We bear all of the credit risk associated with our interests in the
refund anticipation loans. Our total refund anticipation loan revenue in fiscal
1999 was approximately $90.2 million, which generated approximately $19.1
million in pretax profits. For the ten months ended February 29, 2000, our total
refund anticipation loan revenue was approximately $77.4 million, which
generated approximately $26.1 million in pretax profits.
We were named a partner in the IRS's "Debt Indicator" pilot program for the
fiscal 2000 tax season. The Debt Indicator program is designed to increase the
number of electronically filed returns and aid the IRS, H&R Block and other IRS
partners in screening for electronic filing fraud. Under the program, the IRS
advises its partners if a requested refund will be reduced by an offset, such as
back taxes, delinquent student loans or overpayments from federal agencies.
Household Bank uses the Debt Indicator in determining whether to make a refund
anticipation loan. Participation in the program has resulted in reduced refund
anticipation loan pricing in the fiscal 2000 tax season. In exchange for access
to the Debt Indicator, tax preparers agree to help in strengthening anti-fraud
efforts and increasing the number of electronically filed returns.
EQUITY LINES OF CREDIT. We offer to H&R Block tax preparation franchisees
lines of credit with competitive interest rates under a program designed to
better enable the franchisees to refinance existing business debt, expand or
renovate offices or meet off-season cash flow needs. A franchise equity loan is
a revolving line of credit secured by the H&R Block franchise and the underlying
business.
H&R BLOCK, INC.
H&R Block is a diversified corporation with subsidiaries providing a wide
range of financial products and services. H&R Block indirectly owns all of the
shares of H&R Block Tax Services, Inc., a subsidiary involved in the business of
income tax return preparation, electronic filing of income tax returns and the
performance of other tax related services in the United States. H&R Block also
indirectly owns all of the shares of Block Financial. Indirect subsidiaries of
H&R Block operate income tax return preparation and related services businesses
in Canada, Australia, the United Kingdom and Guam, and offer H&R Block
franchises in other parts of the world as a part of the operations of H&R Block
International. Other subsidiaries offer accounting, tax and consulting services
to business clients.
U.S. TAX OPERATIONS. The income tax return preparation and related services
business is the original core business of H&R Block. These services are provided
to the public in the United States through a system of offices operated by H&R
Block Tax Services and other tax operations subsidiaries, which we refer to as
Tax Services, or by others to whom Tax Services has granted franchises. Tax
Services and its franchisees provide H&R Block income tax return preparation
services, electronic filing services, the Peace of Mind Program and the Refund
Rewards Program, both described below, and other services relating to income tax
return preparation. Tax Services also markets its income tax preparation
knowledge through its income tax training schools.
Under the Peace of Mind Program, Tax Services agrees to pay any additional
taxes owed by a customer (for which liability would not ordinarily accrue)
resulting from Tax Service's preparer errors or from revised interpretations of
tax laws by the IRS. This program has a per customer cumulative limit of $4,000
($5,000 at H&R Block Premium Offices). Tax Services also guarantees that it will
pay the interest and the penalties associated with tax preparer errors on
customers' returns that result in assessments of interest or penalties on
additional taxes owed by the customer.
Under the Refund Rewards Program, H&R Block clients can choose to have the
amount of their refunds, less any tax preparation fees, loaded onto a prepaid
buying card. The card can then be used when making purchases with the program's
retail partners, which include General Motors and Sears, to receive special
discounts, to obtain cash at an ATM or to make purchases anywhere MasterCard(TM)
is accepted.
Tax Services and its franchisees served approximately 16,542,000 taxpayers
in the United States during fiscal 1999, an increase from 15,835,000 taxpayers
served in fiscal 1998. For the first two months of the fiscal
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year 2000 tax season, Tax Services and its franchisees served approximately
10,068,000 taxpayers. "Taxpayers served" includes taxpayers for whom Tax
Services and its franchisees prepared income tax returns as well as taxpayers
for whom only electronic filing services were provided.
During the 1999 income tax filing season (January 2 through April 30), H&R
Block offices in the United States prepared approximately 15,761,000 individual
income tax returns, compared to 14,838,000 such returns in fiscal 1998. These
returns constituted approximately 13.7% of an IRS estimate of total individual
income tax returns filed as of April 30, 1999.
Tax Services and its franchisees filed approximately 11,139,000 U.S. tax
returns electronically in fiscal 1999, compared to 9,423,000 in fiscal 1998.
They also processed approximately 2,811,000 refund anticipation loans in fiscal
1999, compared to 2,420,000 in fiscal 1998. Tax Services and its franchisees
processed approximately 1,916,000 electronic refunds in fiscal 1999, compared to
1,855,000 in fiscal 1998. As of February 29, 2000, Tax Services and its
franchisees had filed approximately 8,596,000 tax returns electronically and
processed approximately 4,122,000 refund anticipation loans.
On April 15, 1999, 8,923 H&R Block offices were in operation in the United
States compared to 8,780 offices in operation on April 15, 1998. Of the 8,923
offices, 4,880 were owned and operated by Tax Services (compared to 4,640 in
fiscal 1998) and 4,043 were owned and operated by independent franchisees
(compared to 4,140 in fiscal 1998). As of January 31, 2000, 9,210 H&R Block
offices were in operation in the United States. Of the 9,210 offices, 5,162 were
owned and operated by Tax Services.
In addition to services provided by Tax Services and its franchisees at H&R
Block Financial Centers and branch offices, Block Financial offers online tax
preparation and electronic filing for federal and state tax returns on its
website at www.hrblock.com, as described above under "Block Financial
Corporation -- E-Commerce Initiatives".
INTERNATIONAL TAX OPERATIONS. H&R Block International provides tax return
preparation, electronic filing and related services to the general public in
Canada, Australia and the United Kingdom. H&R Block International's franchisees
offer preparation of tax returns and related services in ten countries. H&R
Block International franchisees offer the electronic filing of U.S. income tax
returns in Europe, and H&R Block International offers the electronic filing of
Australian, Canadian and United Kingdom income tax returns.
The returns prepared at 1,466 H&R Block International company-owned and
franchised offices constituted 12.8% of the total returns prepared at H&R Block
offices in fiscal 1999 (compared to 13.8% in fiscal 1998).
BUSINESS SERVICES. The Business Services segment provides accounting, tax
and consulting services to business clients, and tax, estate planning and
financial planning services to individuals in the United States through a
network of accounting firms. In addition to providing these services to the
public, the subsidiaries involved in this segment provide management and
administrative services to the public accounting firms from which H&R Block has
acquired the non-attest assets as described below, for which the subsidiaries
are paid a fee. The public accounting firms continue to provide to the public
"attest" services that constitute the practice of public accounting which H&R
Block and its subsidiaries, by regulation, generally cannot provide.
In pursuit of its plan to build a national accounting practice, on August
2, 1999, H&R Block made its largest acquisition in the accounting sector when it
completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP. McGladrey was the nation's seventh largest accounting
and consulting firm with more than 70 offices located primarily in the Eastern,
Midwestern, Northern and Southwestern United States. The purchase price was $240
million in cash payments over four years and the assumption of certain pension
liabilities with a present value of approximately $52.7 million at the time of
the acquisition. Prior to the McGladrey acquisition, HRB Business Services,
Inc., an indirect subsidiary of H&R Block, had acquired regional accounting
firms in Kansas City, Chicago, Indianapolis, Buffalo, Dallas, Baltimore and
Philadelphia.
H&R Block is in the process of integrating its previously acquired regional
accounting firms into RSM McGladrey, Inc. This national accounting firm will
share a single client service philosophy and have more
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than 470 managing directors and nearly 4,000 employees in more than 70 offices
nationwide. RSM McGladrey continues to be a member of RSM International, the
world's tenth largest accounting and consulting organization with 400 offices in
75 countries. McGladrey's attest business (including audits, reviews and other
engagements in which the firm issues written opinions evaluating client
financial statements) remains in a partnership owned by McGladrey partners and
is not affiliated with H&R Block.
RECENT DEVELOPMENTS
SALE OF COMPUSERVE STOCK. In January 1998, H&R Block sold its remaining
80.1% stock ownership in CompuServe Corporation to a subsidiary of WorldCom,
Inc. (a predecessor to MCI WORLDCOM, Inc.). Block received 30.1 million shares
of WorldCom, Inc. stock in exchange for its CompuServe stock, which it sold in a
block trade for $1.033 billion on February 2, 1998.
SALE OF CREDIT CARD PORTFOLIO. On January 29, 1999, Block Financial sold
its Webcard Visa Credit Card portfolio to Providian National Bank. H&R Block
recorded a $20.9 million loss, net of taxes, on the sale.
RECENT ACQUISITIONS OF ACCOUNTING AND BROKERAGE FIRMS. In 1999, H&R Block
made several significant acquisitions which have expanded its ability to provide
financial services to customers. On August 2, 1999, H&R Block acquired the
non-attest assets of McGladrey, the nation's seventh largest accounting and
consulting firm, as described above under "H&R Block, Inc. -- Business
Services". On December 1, 1999, Block Financial acquired the stock of the parent
company of OLDE Discount, a national discount brokerage, as described above
under "Block Financial Corporation -- Investment Services".
PRELIMINARY TAX RETURN PREPARATION RESULTS FOR FISCAL 2000. For the period
January 1 to March 17, 2000, tax return preparation fees at H&R Block-owned
offices was $749.3 million, an increase of 16.5% over the comparable period for
the prior year. For the same period, H&R Block-owned offices also reported a
5.3% increase in customers and a 6.5% increase in volume of tax returns prepared
compared to the comparable period for the prior year. Tax return preparation and
related fees at H&R Block franchise offices grew to $353.8 million for the
period January 1 to February 29, 2000, reflecting a 17.2% increase over the
comparable period in 1999.
MORTGAGE FINANCING COMMITMENTS FOR OPTION ONE. On March 27, 2000, H&R Block
announced that Option One had received commitments from three banks totalling $2
billion in external warehouse financing for its subprime mortgage production,
and commitments from two investment banks to purchase from $2.5 to $6 billion of
subprime mortgage loans, over the following 12 months. More information is
provided above under "Block Financial Corporation -- Mortgage Operations".
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA
Set forth below are consolidated financial and other data of H&R Block and
Block Financial for the periods indicated. H&R Block's and Block Financial's
selected consolidated financial information for the five years in the fiscal
period ended April 30, 1999 have been derived from H&R Block's consolidated
financial statements which are incorporated by reference herein and available as
described under "Incorporation of Certain Documents by Reference" and "Available
Information" in the prospectus. H&R Block's consolidated financial statements
were audited by PricewaterhouseCoopers, LLP, independent certified public
accountants, as of and for the fiscal year ended April 30, 1999, and by Deloitte
& Touche, LLP, independent certified public accountants, for the four years in
the period ended April 30, 1998. This table should be read in conjunction with
H&R Block's consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in H&R
Block's Annual Report on Form 10-K for the fiscal year ended April 30, 1999, and
in H&R Block's Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2000.
The selected financial data for H&R Block and Block Financial as of and for
the nine months ended January 31, 2000 and 1999 are derived from H&R Block's
unaudited consolidated financial statements. In the opinion of management, such
unaudited financial information contains all adjustments, consisting only of
normal, recurring items, necessary to present fairly the financial information
for such periods. The results for the nine months ended January 31, 2000 and
1999 are not necessarily indicative of the results of operations for a full
fiscal year.
SELECTED FINANCIAL DATA
NINE MONTHS ENDED
JANUARY 31,
(UNAUDITED) YEAR ENDED APRIL 30,
----------------------- --------------------------------------------------------------
2000(G) 1999 1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
H&R BLOCK
INCOME STATEMENT DATA(A)
Total revenues............... $ 844,013 $ 447,668 $1,644,665 $1,269,981 $1,066,410 $ 846,987 $ 752,637
Net earnings (loss) from
continuing operations...... (88,886) (60,540) 237,795 183,788 148,132 126,669 98,034
Net earnings (loss) from
discontinued operations.... -- (1,490) (1,490) (23,525) (100,377) 50,499 9,225
Net gain (loss) on sale of
discontinued operations.... -- (19,978) (20,939) 231,867 -- -- --
Net earnings (loss).......... (88,886) (82,008) 215,366 392,130 47,755 177,168 107,259
BALANCE SHEET DATA(B)
Total assets................. $5,921,370 $2,075,499 $1,910,176 $2,904,083 $1,707,058 $1,755,891 $1,097,313
Cash, cash equivalents and
marketable securities...... 576,356 500,991 420,649 1,590,192 539,107 745,693 444,981
Total receivables, net....... 3,633,850 896,363 743,301 793,237 407,441 333,734 260,198
Net assets of discontinued
operations................. -- -- -- -- 522,144 -- --
Property and equipment,
net........................ 219,594 100,597 114,222 77,321 65,065 399,574 227,448
Total current liabilities.... 4,531,472 1,023,256 553,829 1,276,892 669,009 478,247 377,986
Total debt(c)................ 2,511,429 1,055,677 321,664 892,677 269,619 72,651 49,421
Total liabilities............ 4,996,097 1,316,217 848,189 1,562,451 707,961 563,169 411,448
Minority interest............ -- -- -- -- -- 153,129 --
Stockholders' equity......... 925,273 759,282 1,061,987 1,341,632 999,097 1,039,593 685,865
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NINE MONTHS ENDED
JANUARY 31,
(UNAUDITED) YEAR ENDED APRIL 30,
----------------------- --------------------------------------------------------------
2000(G) 1999 1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER SHARE DATA
Per basic share of common
stock:
Net earnings (loss) from
continuing operations.... $ (0.91) $ (0.60) $ 2.38 $ 1.75 $ 1.42 $ 1.22 $ 0.93
Net earnings (loss) from
discontinued
operations............... -- (0.02) (0.01) (0.22) (0.96) 0.48 0.09
Net gain (loss) on sale of
discontinued
operations............... -- (0.20) (0.21) 2.21 -- -- --
Net earnings (loss)........ (0.91) (0.82) 2.16 3.74 0.46 1.70 1.02
Per diluted share of common
stock:
Net earnings (loss) from
continuing operations.... (0.91) (0.60) 2.36 1.71 1.40 1.19 0.93
Net earnings (loss) from
discontinued
operations............... -- (0.02) (0.01) (0.22) (0.95) 0.48 0.08
Net gain (loss) on sale of
discontinued
operations............... -- (0.20) (0.21) 2.16 -- -- --
Net earnings (loss)........ (0.91) (0.82) 2.14 3.65 0.45 1.67 1.01
Cash dividends declared...... 0.80 0.70 0.95 0.80 1.04 1.27 1.22
OTHER DATA
Shares outstanding........... 98,372 97,221 97,629 106,981 104,067 103,417 104,863
BLOCK FINANCIAL CORPORATION
INCOME STATEMENT DATA
Total revenues............... $ 394,716 $ 217,699 $ 386,938 $ 209,334 $ 79,317 $ 12,308 $ 22,223
Earnings (loss) from
operations................. 51,515 35,327 69,419 28,447 7,571 (4,819) (5,715)
Earnings (loss) before income
tax (benefit).............. 51,626 35,357 65,642 28,401 7,571 7,626 (5,715)
Net earnings (loss).......... 34,846 233 19,280 13,719 500 1,325 (4,239)
BALANCE SHEET DATA(D)
Cash and cash equivalents.... $ 147,465 $ 48,724 $ 16,026 $ 30,895 $ 3,425 $ 3,871 $ 2,010
Finance receivables, net..... 3,373,268 659,658 658,882 737,005 380,206 191,210 138,027
Other assets................. 1,233,689 558,536 448,010 311,759 34,657 10,490 25,147
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets............. $4,754,422 $1,266,918 $1,122,918 $1,079,659 $ 418,288 $ 205,571 $ 165,184
========== ========== ========== ========== ========== ========== ==========
Total debt................... $2,340,565 $1,054,364 $ 321,664 $ 892,677 $ 269,619 $ 72,651 $ 49,421
Other liabilities............ 2,211,510 77,032 636,330 57,372 26,867 15,451 21,895
Stockholder's equity......... 202,347 135,522 164,924 129,610 121,802 117,469 93,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholder's equity... $4,754,422 $1,266,918 $1,122,918 $1,079,659 $ 418,288 $ 205,571 $ 165,184
========== ========== ========== ========== ========== ========== ==========
H&R BLOCK -- SEGMENT
INFORMATION(E)
REVENUES:
U.S. tax operations.......... $ 270,649 $ 219,662 $1,258,234 $1,047,324 $ 966,524 $ 759,354 $ 677,797
International tax
operations................. 27,259 22,030 74,714 81,754 87,493 81,822 72,917
Financial services........... 353,376 185,005 259,933 135,788 8,895 91 --
Business services............ 190,165 18,205 47,257 -- -- -- --
Unallocated corporate........ 2,564 2,766 4,527 5,115 3,498 5,720 1,923
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues........... $ 844,013 $ 447,668 $1,644,665 $1,269,981 $1,066,410 $ 846,987 $ 752,637
========== ========== ========== ========== ========== ========== ==========
S-10
11
NINE MONTHS ENDED
JANUARY 31,
(UNAUDITED) YEAR ENDED APRIL 30,
----------------------- --------------------------------------------------------------
2000(G) 1999 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING PROFIT (LOSS):
U.S. tax operations.......... $ (184,160) $ (137,977) $ 314,113 $ 252,247 $ 210,365 $ 173,098 $ 134,753
International tax
operations................. (15,299) (15,742) 2,514 11,922 14,172 11,731 8,996
Financial services........... 83,733 48,043 61,126 29,195 865 91 --
Business services............ (169) (220) 7,089 -- -- -- --
Unallocated corporate........ (12,003) (8,989) (20,697) (14,769) (10,745) (10,499) (15,539)
Interest expense-acquisition
debt....................... (29,952) (13,319) (17,757) (13,731) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(157,850) (128,204) 346,388 264,864 214,657 174,421 128,210
Investment income, net....... 5,125 28,177 32,234 25,597 10,870 8,490 23,703
Intercompany interest(f)..... 7,248 2,415 4,919 5,972 6,556 4,650 1,555
Other, net................... -- -- -- -- -- 12,445 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes
(benefit).............. $ (145,477) $ (97,612) $ 383,541 $ 296,433 $ 232,083 $ 200,006 $ 153,468
========== ========== ========== ========== ========== ========== ==========
IDENTIFIABLE ASSETS
U.S. tax operations.......... $ 771,895 $ 552,875 $ 268,650 $ 200,243 $ 189,007 $ 119,574 $ 121,193
International tax
operations................. 56,937 46,576 55,684 48,362 39,145 27,719 17,818
Financial services........... 4,313,269 849,771 1,038,909 829,454 125,734 11,173 --
Business services............ 508,610 99,166 146,252 -- -- -- --
Computer services............ -- -- -- -- -- 950,671 310,393
Unallocated corporate........ 270,659 527,111 400,681 1,623,612 577,976 478,705 519,510
Discontinued credit card
operations................. -- -- -- 202,412 253,052 168,049 128,399
Net assets of discontinued
operations................. -- -- -- -- 522,144 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total identifiable
assets................. $5,921,370 $2,075,499 $1,910,176 $2,904,083 $1,707,058 $1,755,891 $1,097,313
========== ========== ========== ========== ========== ========== ==========
CAPITAL EXPENDITURES
U.S. tax operations.......... $ 58,141 $ 43,464 $ 63,354 $ 36,495 $ 38,760 $ 34,987 $ 25,061
International tax
operations................. 2,019 3,010 7,709 7,013 4,773 1,906 2,356
Financial services........... 16,363 5,326 8,089 4,747 205 -- --
Business services............ 849 222 1,137 -- -- -- --
Unallocated corporate........ 91 51 80 1,502 279 660 796
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total capital
expenditures........... $ 77,463 $ 52,073 $ 80,369 $ 49,757 $ 44,017 $ 37,553 $ 28,213
========== ========== ========== ========== ========== ========== ==========
- -------------------------
(a) Revenues and net earnings (loss) from continuing operations do not include
operations of CompuServe and Block Financial's credit card operations, both
of which were sold and are classified as discontinued operations. See
"Recent Developments -- Sale of CompuServe Stock" and "Recent
Developments -- Sale of Credit Card Portfolio".
(b) Balance sheet data as of April 30, 1997 has been reclassified to separately
reflect CompuServe as discontinued operations. CompuServe's balance sheet
items at this date are reported as net assets of discontinued operations.
(c) Total debt consists of short-term and long-term debt.
(d) Balance sheet data for Block Financial has been reclassified to reflect the
provision for income taxes for the year ended April 30, 1995.
(e) H&R Block operates in the following segments: (1) U.S. tax
operations -- Primarily engaged in providing tax return preparation, filing,
and related services to the general public in the United States; in
addition, this segment participates in refund anticipation loans made by a
third-party lending institution to tax clients and provides tax preparation
and other personal productivity software; (2) International tax
operations -- Primarily engaged in providing tax return preparation, filing,
and related services to the general public in Canada, Australia and the
United Kingdom; (3) Financial services -- Primarily engaged in the
origination, purchase, servicing, securitization and sale of nonconforming
and conforming mortgage loans, as well as the offering of full-service
investment opportunities to the general public; and (4) Business
services -- Primarily engaged in providing accounting, tax and consulting
services to business clients and tax, estate planning and financial planning
services to individuals.
(f) Represents interest expense charged to financial related businesses for
corporate borrowings to fund their operating activities.
(g) Financial information for the nine months ended January 31, 2000 include the
results of OLDE Financial, acquired on December 1, 1999.
S-11
12
PRO FORMA FINANCIAL INFORMATION
DESCRIPTION OF TRANSACTION. On December 1, 1999, Block Financial completed
its acquisition of the outstanding capital stock of OLDE Financial and its
subsidiaries. The purchase price was $850 million cash plus an estimated net
tangible book value payment of $37.1 million. An additional cash payment of
$11.4 million was made in the fourth quarter of fiscal 2000 based on the
aggregate consolidated net tangible book value at the acquisition date, after a
final independent audit of the balance sheet. The acquisition was accounted for
as a purchase. The pro forma financial information contained herein is based on
the initial estimated purchase price of $887.1 million.
H&R Block entered into a $750 million acquisition facility to support
commercial paper issued to acquire OLDE Financial. The net proceeds of this
offering will be used to reduce the outstanding commercial paper. In these pro
forma consolidated financial statements, it is assumed that the notes have been
issued and the proceeds used for that purpose.
PRO FORMA FINANCIAL STATEMENT ASSUMPTIONS. H&R Block's fiscal year end is
April 30. The pro forma consolidated balance sheet set forth below is as of
October 31, 1999 and assumes that the acquisition of OLDE Financial occurred on
that date. Included in H&R Block's pro forma consolidated balance sheet is
financial information as of September 24, 1999 for OLDE Financial, due to a
difference in fiscal year ends.
The pro forma consolidated statements of earnings set forth below are for
the year ended April 30, 1999 and the six months ended October 31, 1999, and
assume that the acquisition of OLDE Financial occurred on May 1, 1998. Included
in H&R Block's pro forma consolidated statement of earnings for the year ended
April 30, 1999 is financial information for the twelve months ended March 26,
1999 for OLDE Financial, derived by taking audited financial information for the
year ended December 31, 1998, adding the quarter ended March 26, 1999 and
deducting the quarter ended March 27, 1998. Included in H&R Block's pro forma
consolidated statement of earnings for the six months ended October 31, 1999 is
financial information for the six months ended September 24, 1999 for OLDE
Financial. Reclassifications between cash equivalents and marketable securities
and between service revenues and investment income have been made to the
financial statements of OLDE Financial to conform with H&R Block's consolidated
financial statement presentation.
Since the pro forma financial statements are as of April 30 and October 31
and are based on preliminary information related to the purchase, the actual
purchase adjustments will differ from those presented herein. In addition, H&R
Block intends to have a valuation completed for a majority of the assets
acquired. When completed, the acquired assets will be adjusted to fair market
value, creating differences in the purchase price allocation, including the
amounts allocated to real estate, goodwill and other intangible assets, from
those presented herein, and each intangible asset will be assigned an estimated
useful life. These unaudited pro forma financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred had the merger been
consummated on the dates indicated and are not necessarily indicative of the
future operating results or financial position of the combined companies.
The pro forma financial statements assume that: (i) the adjusted
stockholders' equity of OLDE Financial at acquisition was $393.1 million, which
is the adjusted stockholders' equity of OLDE Financial as of September 24, 1999,
(ii) H&R Block financed the acquisition through the issuance of $500 million in
ten-year long-term debt at a fixed rate of 8.25% per annum and $389.386 million
in short-term notes payable at an average variable rate of 5.61% per annum for
the annual period presented and 5.59% per annum for the six-month period
presented, (iii) the carrying value of OLDE Financial's assets and liabilities
approximated fair market value on the date of acquisition, except for exchange
memberships which were adjusted to fair market value, (iv) goodwill and other
intangible assets arising from the transaction will be amortized on a
straight-line basis over 15 years and (v) the one-year non-compete agreement was
expensed over 12 months in the consolidated statement of earnings for the year
ended April 30, 1999.
The information under this heading as well as the information appearing
below has been derived from H&R Block's Current Reports on Form 8-K filed with
the SEC on December 14, 1999 and on Form 8-K/A filed with the SEC on February
14, 2000. It should be read in conjunction with the more complete information
contained in those documents.
S-12
13
H&R BLOCK, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
H&R BLOCK OLDE PRO FORMA
CONSOLIDATED FINANCIAL SUBTOTAL ADJUSTMENTS PRO FORMA
------------ --------- -------- ----------- ---------
CURRENT ASSETS:
Cash and cash equivalents............ $ 168,182 $ 95,924 $ 264,106 $ -- $ 264,106
Marketable securities................ 43,831 50,199 94,030 -- 94,030
Receivables, net..................... 727,738 6,089 733,827 -- 733,827
Receivables from customers, brokers,
dealers and clearing
organizations..................... -- 1,913,615 1,913,615 -- 1,913,615
Prepaid expenses and other current
assets............................ 169,198 9,390 178,588 -- 178,588
---------- ---------- ---------- --------- ----------
Total current assets......... 1,108,949 2,075,217 3,184,166 -- 3,184,166
INVESTMENTS AND OTHER ASSETS:
Investments in marketable
securities........................ 218,103 32,434 250,537 -- 250,537
Excess of cost over fair value of net
tangible assets acquired.......... 659,166 -- 659,166 501,494(1) 1,160,660
Other................................ 151,602 794 152,396 1,402(1) 153,798
---------- ---------- ---------- --------- ----------
1,028,871 33,228 1,062,099 502,896 1,564,995
PROPERTY AND EQUIPMENT, net............ 135,695 51,747 187,442 -- 187,442
---------- ---------- ---------- --------- ----------
Total Assets................. $2,273,515 $2,160,192 $4,433,707 $ 502,896 $4,936,603
========== ========== ========== ========= ==========
CURRENT LIABILITIES:
Notes payable........................ $ 625,666 $ -- $ 625,666 $ 389,386(2) $1,015,052
Accounts payable, accrued expenses
and deposits...................... 108,314 31,916 140,230 -- 140,230
Accounts payable to customers,
brokers and dealers............... -- 1,705,180 1,705,180 -- 1,705,180
Accrued salaries, wages and payroll
taxes............................. 24,708 19,076 43,784 -- 43,784
Accrued taxes on earnings............ 53,162 5,243 58,405 -- 58,405
Current portion of long-term debt.... 56,358 -- 56,358 -- 56,358
---------- ---------- ---------- --------- ----------
Total current liabilities.... 868,208 1,761,415 2,629,623 389,386 3,019,009
LONG-TERM DEBT......................... 352,598 -- 352,598 500,000(2) 852,598
OTHER NONCURRENT LIABILITIES........... 104,051 12,287 116,338 -- 116,338
COMMITMENTS AND CONTINGENCIES.......... -- -- -- -- --
STOCKHOLDERS' EQUITY:
Common stock......................... 1,089 3,052 4,141 (3,052)(1) 1,089
Additional paid-in capital........... 419,411 80 419,491 (80)(1) 419,411
Accumulated other comprehensive
income (loss)..................... (16,313) -- (16,313) -- (16,313)
Retained earnings.................... 997,534 383,358 1,380,892 (383,358)(1) 997,534
---------- ---------- ---------- --------- ----------
1,401,721 386,490 1,788,211 (386,490) 1,401,721
Less cost of common stock in
treasury.......................... 453,063 -- 453,063 -- 453,063
---------- ---------- ---------- --------- ----------
948,658 386,490 1,335,148 (386,490) 948,658
---------- ---------- ---------- --------- ----------
Total Liabilities and
Stockholders' Equity....... $2,273,515 $2,160,192 $4,433,707 $ 502,896 $4,936,603
========== ========== ========== ========= ==========
The accompanying notes are an integral part of this pro forma financial
statement.
S-13
14
H&R BLOCK, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
(1) Adjustments to the balance sheet were made to record the changes in
goodwill and other intangible assets and debt financing resulting from the
purchase of OLDE Financial, as if the transaction had occurred on October 31,
1999.
The computation of the purchase price is as follows:
Payments to shareholders.................................... $ 787,000
Payments to escrow.......................................... 100,000
Non-compete agreement....................................... 100
-----------
CASH PURCHASE PRICE.................................... $ 887,100
===========
Exchange memberships were adjusted to fair market value. The computation of
the amount assigned to goodwill and other intangible assets to be recorded on
the purchase is as follows:
Assets purchased............................................ $ 2,160,192
Less: Liabilities assumed................................... (1,773,702)
Plus: Exchange memberships, marked to market................ 1,402
-----------
Net assets acquired......................................... 387,892
-----------
Cash purchase price......................................... 887,100
Plus: Estimated acquisition expenses........................ 2,286
Less: Net assets acquired................................... (387,892)
-----------
GOODWILL AND OTHER INTANGIBLE ASSETS........................ $ 501,494
===========
(2) H&R Block assumed the use of short-term notes payable and long-term
debt to finance the acquisition. H&R Block's existing commercial paper program
was used to obtain $389,386 of notes payable. The remaining purchase price will
be financed with a $500,000 long-term debt offering.
Cash purchase price......................................... $ 887,100
Plus: Estimated acquisition expenses........................ 2,286
-----------
Total financing needed...................................... $ 889,386
===========
TOTAL LONG-TERM DEBT................................... $ 500,000
===========
TOTAL SHORT-TERM NOTES PAYABLE......................... $ 389,386
===========
S-14
15
H&R BLOCK, INC.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED APRIL 30, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
H&R BLOCK OLDE PRO FORMA
CONSOLIDATED FINANCIAL SUBTOTAL ADJUSTMENTS PRO FORMA
------------ --------- -------- ----------- ---------
REVENUES:
Service revenues...................... $1,324,494 $ 328,401 $1,652,895 $ -- $1,652,895
Product sales......................... 174,124 -- 174,124 -- 174,124
Royalties............................. 123,201 -- 123,201 -- 123,201
Other................................. 22,846 20,224 43,070 -- 43,070
---------- ---------- ---------- -------- ----------
1,644,665 348,625 1,993,290 -- 1,993,290
---------- ---------- ---------- -------- ----------
EXPENSES:
Employee compensation and benefits.... 610,866 136,078 746,944 -- 746,944
Occupancy and equipment............... 232,003 28,838 260,841 -- 260,841
Marketing and advertising............. 90,056 15,742 105,798 -- 105,798
Bad debt.............................. 71,662 180 71,842 -- 71,842
Interest.............................. 69,338 49,577 118,915 63,095(1) 182,010
Supplies, freight and postage......... 57,157 11,441 68,598 -- 68,598
Other................................. 158,509 42,199 200,708 33,533(1) 234,241
---------- ---------- ---------- -------- ----------
1,289,591 284,055 1,573,646 96,628 1,670,274
---------- ---------- ---------- -------- ----------
Operating earnings...................... 355,074 64,570 419,644 (96,628) 323,016
OTHER INCOME:
Investment income, net................ 32,234 14,132 46,366 -- 46,366
Other, net............................ (3,767) -- (3,767) -- (3,767)
---------- ---------- ---------- -------- ----------
28,467 14,132 42,599 -- 42,599
Earnings from continuing operations
before income taxes................... 383,541 78,702 462,243 (96,628) 365,615
Taxes on earnings....................... 145,746 32,084 177,830 (24,014)(2) 153,816
---------- ---------- ---------- -------- ----------
NET EARNINGS FROM CONTINUING
OPERATIONS............................ $ 237,795 $ 46,618 $ 284,413 $(72,614) $ 211,799
========== ========== ========== ======== ==========
BASIC NET EARNINGS PER SHARE FROM
CONTINUING OPERATIONS................. $ 2.38 $ 2.85 $ 2.12
========== ========== ==========
DILUTED NET EARNINGS PER SHARE FROM
CONTINUING OPERATIONS................. $ 2.36 $ 2.82 $ 2.10
========== ========== ==========
Basic weighted average shares
outstanding........................... 99,761 99,761 99,761
========== ========== ==========
Diluted weighted average shares
outstanding........................... 100,821 100,821 100,821
========== ========== ==========
The accompanying notes are an integral part of this pro forma financial
statement.
S-15
16
H&R BLOCK, INC.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
H&R BLOCK OLDE PRO FORMA
CONSOLIDATED FINANCIAL SUBTOTAL ADJUSTMENTS PRO FORMA
------------ --------- -------- ----------- ---------
REVENUES:
Service revenues................ $ 226,202 $ 181,627 $ 407,829 $ -- $ 407,829
Product sales................... 94,241 -- 94,241 -- 94,241
Royalties....................... 4,140 -- 4,140 -- 4,140
Other........................... 6,923 10,991 17,914 -- 17,914
--------- --------- --------- -------- ---------
331,506 192,618 524,124 -- 524,124
--------- --------- --------- -------- ---------
EXPENSES:
Employee compensation and
benefits..................... 193,658 73,058 266,716 -- 266,716
Occupancy and equipment......... 110,599 14,867 125,466 -- 125,466
Marketing and advertising....... 19,855 7,711 27,566 -- 27,566
Interest........................ 34,818 31,130 65,948 31,508(1) 97,456
Supplies, freight and postage... 12,891 6,327 19,218 -- 19,218
Other........................... 96,942 18,502 115,444 16,717(1) 132,161
--------- --------- --------- -------- ---------
468,763 151,595 620,358 48,225 668,583
--------- --------- --------- -------- ---------
Operating earnings................ (137,257) 41,023 (96,234) (48,225) (144,459)
OTHER INCOME:
Investment income, net.......... 5,053 3,938 8,991 -- 8,991
Other, net...................... 250 -- 250 -- 250
--------- --------- --------- -------- ---------
5,303 3,938 9,241 -- 9,241
Earnings (loss) before income tax
benefits........................ (131,954) 44,961 (86,993) (48,225) (135,218)
Income tax expense (benefit)...... (50,143) 17,551 (32,592) (11,973)(2) (44,565)
--------- --------- --------- -------- ---------
NET EARNINGS (LOSS)............... $ (81,811) $ 27,410 $ (54,401) $(36,252) $ (90,653)
========= ========= ========= ======== =========
BASIC NET LOSS PER SHARE.......... $ (0.84) $ (0.56) $ (.93)
========= ========= =========
DILUTED NET LOSS PER SHARE........ $ (0.84) $ (0.56) $ (.93)
========= ========= =========
Basic weighted average shares
outstanding..................... 97,764 97,764 97,764
========= ========= =========
Diluted weighted average shares
outstanding..................... 97,764 97,764 97,764
========= ========= =========
The accompanying notes are an integral part of this pro forma financial
statement.
S-16
17
H&R BLOCK, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED APRIL 30, 1999 AND SIX MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
(1) Adjustments to the statements of earnings were made to reflect the
change in interest expense and amortization of goodwill and other intangible
assets, as if the transaction had occurred on May 1, 1998.
SIX MONTHS
YEAR ENDED ENDED
APRIL 30, 1999 OCT. 31, 1999
-------------- -------------
Interest expense on long-term debt..................... $ 41,250 $ 20,625(a)
Interest expense on short-term notes payable........... 21,845 10,883(b)
Increase in amortization of goodwill and other
intangible assets.................................... 33,433 16,717(c)
Amortization of non-compete agreement for 12 months.... 100 --(d)
-------- --------
ADJUSTMENT TO OTHER OPERATING EXPENSES................. $ 96,628 $ 48,225
======== ========
(a) H&R Block plans to issue 10-year long-term debt totaling $500,000
to fund part of the purchase of OLDE Financial. The computation of the
increased interest expense uses an assumed interest rate of 8.25%, based on
the current interest rate environment incorporating H&R Block's current
investment grade rating and interest rate hedging instruments already
entered into on a portion of the debt. A 1/8% increase in this rate would
result in additional interest expense of $625 for the fiscal year ended
April 30, 1999 and $313 for the six months ended October 31, 1999.
Long-term debt.............................................. $500,000
Assumed annual interest rate................................ 8.25%
--------
Interest expense for fiscal year ended April 30, 1999....... $ 41,250
========
Interest expense for six months ended October 31, 1999...... $ 20,625
========
(b) H&R Block is funding part of the purchase of OLDE Financial with
$389,386 of short-term notes payable, using its existing commercial paper
program. The computation of the increased interest expense uses the actual
daily average interest rate incurred by H&R Block for short-term borrowings
during the period of time presented in the pro forma consolidated
statements of earnings, which is variable based on the market. A 1/8%
increase in this rate would result in additional interest expense of $487
for the fiscal year ended April 30, 1999 and $243 for the six months ended
October 31, 1999.
SIX MONTHS
YEAR ENDED ENDED
APRIL 30, 1999 OCT. 31, 1999
-------------- -------------
Short-term notes payable.............................. $389,386 $389,386
Assumed annual interest rate.......................... 5.61% 5.59%
-------- --------
Annual interest expense............................... $ 21,845 $ 21,767
========
Interest expense for six months....................... $ 10,883
========
S-17
18
H&R BLOCK, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED APRIL 30, 1999 AND SIX MONTHS ENDED OCTOBER 31, 1999
(UNAUDITED, AMOUNTS IN THOUSANDS)
(c) The amount assigned to goodwill and other intangible assets
related to the purchase of OLDE Financial is $501,494. The computation of
amortization on this amount is as follows:
Goodwill and other intangible assets arising from the
purchase of OLDE Financial................................ $501,494
Divided by: Amortization period of 15 years................. 15
--------
Amortization of goodwill and other intangible assets for
fiscal year ended April 30, 1999.......................... $ 33,433
========
Amortization of goodwill and other intangible assets for six
months ended October 31, 1999............................. $ 16,717
========
(d) As part of the closing, a one-year non-compete agreement was
signed with an officer of OLDE Financial. This amount was expensed in the
pro forma consolidated statement of earnings for the fiscal year ended
April 30, 1999.
(2) The tax effect of the adjustments to consolidated earnings was
calculated at H&R Block's statutory federal rate and blended state rate of 38.0%
for the year ended April 30, 1999 and the six months ended October 31, 1999.
SIX MONTHS
YEAR ENDED ENDED
APRIL 30, 1999 OCT. 31, 1999
-------------- -------------
Interest expense on long-term debt.................... $ 41,250 $ 20,625
Interest expense on short-term notes payable.......... 21,845 10,883
Expense for non-compete agreement..................... 100 --
-------- --------
PRO FORMA ADJUSTMENTS EXCLUDING NON-DEDUCTIBLE
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE
ASSETS.............................................. $ 63,195 $ 31,508
======== ========
TAX EFFECT OF PRO FORMA ADJUSTMENTS................... $(24,014) $(11,973)
======== ========
S-18
19
USE OF PROCEEDS
Our net proceeds from this offering, after deducting estimated expenses of
this offering, are expected to be approximately $492.3 million. All of the net
proceeds of the offering will be used to repay outstanding commercial paper
which at April 13, 2000 had a weighted average interest rate of approximately
6.13% and a weighted average maturity of approximately 25.09 days. We issued
this commercial paper in connection with our acquisition of OLDE Financial.
RATIO OF EARNINGS TO FIXED CHARGES
BLOCK FINANCIAL
The following table sets forth the ratio of earnings to fixed charges for
Block Financial for the periods indicated.
FISCAL YEAR ENDED APRIL 30,
NINE MONTHS ENDED ---------------------------------------
JANUARY 31, 2000 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (a)..... 1.6x 1.9x 1.7x 16.2x 126.0x (b)
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (BLOCK FINANCIAL)
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Pretax earnings from continuing operations is shown with the credit card segment
as discontinued operations for all years presented. Fixed charges consist of
interest expense and the interest component of rent expense.
(a) The decrease in the ratio of earnings to fixed charges in 1998 is
primarily attributable to the acquisition of Option One on June 17, 1997.
Without the interest expense incurred on the long-term debt issued to
acquire Option One and the interest expense on related mortgage loan
borrowings, the ratio of earnings to fixed charges would have been 7.7x.
(b) Earnings were insufficient to cover fixed charges for the year
ended April 30, 1995 by $5,715,000.
H&R BLOCK
The following table sets forth the ratio of earnings to fixed charges for
H&R Block on a consolidated basis for the periods indicated.
FISCAL YEAR ENDED APRIL 30,
NINE MONTHS ENDED ----------------------------------------
JANUARY 31, 2000 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (a).... (b) 4.7x 5.4x 9.7x 10.2x 8.4x(c)
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (H&R BLOCK)
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Pretax earnings from continuing operations is shown with CompuServe Corporation
and the credit card segment as discontinued operations for all years presented.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) The decrease in the ratio of earnings to fixed charges in 1998 is
primarily attributable to the acquisition of Option One on June 17, 1997.
Without the interest expense incurred on the long-term debt issued to
acquire Option One and the interest expense on related mortgage loan
borrowings, the ratio of earnings to fixed charges would have been 10.0x.
(b) Earnings were insufficient to cover fixed charges for the nine
months ended January 31, 2000 by $145,477,000.
(c) Included in earnings for 1995 was a nonrecurring charge of
$83,508,000 for purchased research and development related to the
acquisition of SPRY, Inc. If such charges had not occurred, the ratio of
earnings to fixed charges would have been 12.5x.
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CAPITALIZATION
The following table sets forth the consolidated capitalization of H&R Block
as of January 31, 2000, and as adjusted to give effect to our sale of the notes
offered hereby and the application of the estimated net proceeds to reduce
outstanding indebtedness. See "Use of Proceeds".
H&R BLOCK, INC.
CONSOLIDATED CAPITALIZATION
AS OF JANUARY 31, 2000
JANUARY 31, 2000
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
Short-term notes payable(a)................................. $2,094,939 $1,602,591
6 3/4% Senior Notes Due 2004................................ 249,763 249,763
8.50% Senior Notes Due 2007................................. -- 500,000
Other debt.................................................. 166,727 166,727
---------- ----------
Total debt............................................. $2,511,429 $2,519,081
========== ==========
SHAREHOLDERS' EQUITY:
Common stock, no par, stated value $0.01 per share;
authorized 400,000,000 shares.......................... $ 1,089 $ 1,089
Convertible preferred stock, no par, stated value $0.01
per share; authorized 500,000 shares................... -- --
Additional paid-in capital................................ 417,311 417,311
Retained earnings......................................... 963,212 963,212
Accumulated other comprehensive income (loss)............. (17,229) (17,229)
Less cost of common stock in treasury..................... (439,110) (439,110)
---------- ----------
Total shareholders' equity............................. $ 925,273 $ 925,273
========== ==========
- -------------------------
(a) Short-term notes payable will be reduced $500,000,000 from the estimated
proceeds of the offering less estimated expenses and the underwriting
discount.
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DESCRIPTION OF NOTES
The 8.50% Notes Due 2007 are to be issued under an indenture dated as of
October 20, 1997. This indenture, entered into among Block Financial, H&R Block
and Bankers Trust Company, will be supplemented to name The Bank of New York as
a separate trustee for the notes. The following summarizes certain provisions of
the notes and the indenture. A copy of the indenture is an exhibit to our
Registration Statement No. 333-33655. This summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the notes and the indenture, including the definitions of
certain terms. Capitalized terms used in this "Description of the Notes" have
the meanings attributed to them in the notes or the indenture unless otherwise
defined in this prospectus supplement or the accompanying prospectus.
The following description of the particular terms of the notes supplements
and, to the extent inconsistent, replaces the description of the general terms
and provisions of the Debt Securities and the indenture set forth in the
accompanying prospectus.
GENERAL
The notes will initially be limited to $500,000,000 aggregate principal
amount and will mature on April 15, 2007. The notes will bear interest at the
rate of 8.50% from April 18, 2000, payable semiannually on April 15 and October
15 of each year, commencing October 15, 2000, to the registered holders at the
close of business on the preceding April 1 or October 1, whether or not a
business day. Interest on the notes will be computed on the basis of a 360-day
year of twelve 30-day months. If any interest payment date is not a business
day, payment will be made on the next business day and no additional interest
will accrue.
RANKING
The notes will be general unsecured obligations and will rank equal in
right of payment, on a pari passu basis, with all our other existing and future
unsecured and unsubordinated senior indebtedness of Block Financial. The notes
will be fully and unconditionally guaranteed on a senior unsecured basis by the
guarantor. The guarantees will rank equal in right of payment, on a pari passu
basis, with all existing and future unsecured and unsubordinated senior
indebtedness and guarantees of the guarantor. See "Description of Debt
Securities -- Guarantees" in the accompanying prospectus.
OPTIONAL REDEMPTION
We may not redeem the notes prior to maturity. Holders will not have the
right to demand repayment of the notes prior to maturity.
SINKING FUND
There will be no sinking fund payments for the notes.
DEFEASANCE
The notes are subject to Block Financial's legal defeasance option and
covenant defeasance option as set forth under "Description of Debt
Securities -- Satisfaction and Discharge of the Indenture; Defeasance" in the
accompanying prospectus.
BOOK-ENTRY, DELIVERY AND FORM
The notes initially will be represented by one or more Global Notes
deposited with The Depository Trust Company, referred to as DTC, and registered
in the name of a nominee of DTC. Except as described in the prospectus, the
notes will be available for purchase in denominations of $1,000 principal
amount, and integral multiples thereof, in book-entry form only. Unless and
until certificated notes are issued under the limited circumstances described in
the prospectus, no beneficial owner of a note shall be entitled to receive a
definitive certificate representing a note. So long as the notes are represented
by the Global Notes, any payments in
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respect of the notes will be made to DTC or its nominee, as the registered owner
of the Global Notes. See "Description of Debt Securities -- Global Securities"
in the accompanying prospectus.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the notes will be made by the underwriters in immediately
available funds. We will make all payments of principal and interest in
immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in same-day funds. The notes will trade in DTC's Same-Day
Funds Settlement System until maturity, and secondary market trading activity in
the notes will therefore be required by DTC to settle in immediately available
funds.
CONCERNING THE TRUSTEE
The Bank of New York is the trustee for the notes under the indenture and
has been appointed by Block Financial as registrar and paying agent with respect
to the notes.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated April 13, 2000 among Block Financial, H&R Block and each of the
underwriters named below, each of the underwriters has severally agreed to
purchase from us, and we have agreed to sell to each underwriter, the principal
amount of notes set forth opposite the name of such underwriter.
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
Salomon Smith Barney Inc. .................................. $200,000,000
Chase Securities Inc. ...................................... 175,000,000
Goldman, Sachs & Co. ....................................... 50,000,000
Morgan Stanley & Co. Incorporated........................... 50,000,000
Banc One Capital Markets, Inc. ............................. 20,000,000
Blaylock & Partners, L.P. .................................. 5,000,000
------------
Total.................................................. $500,000,000
============
The underwriting agreement provides that the obligations of the several
underwriters to purchase the notes are subject to approval of certain legal
matters by counsel and to certain other conditions. The underwriters are
obligated to purchase all of the notes if they purchase any of the notes.
The underwriters propose initially to offer the notes to the public at the
public offering price set forth on the cover page of this prospectus supplement
and to offer some of the notes to certain dealers at the public offering price
less a concession not in excess of .375% of the principal amount of the notes.
The underwriters may allow, and such dealers may reallow, a discount not in
excess of .250% of the principal amount of the notes on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed by the underwriters.
The notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that they intend to make a market in
the notes but the underwriters are not obligated to do so and may discontinue
any market making at any time without notice. No assurance can be given as to
the existence or liquidity of any trading market for the notes.
The underwriting discounts and commissions to be paid to the underwriters
in connection with this offering will be .625% per note, for a total of
$3,125,000. In addition, we estimate that we will incur other offering expenses
of approximately $326,515.
The underwriters or their respective affiliates have performed and may in
the future perform various financial advisory, commercial banking, and
investment banking services for us and our affiliates from time to time.
Pursuant to the underwriting agreement, we have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may engage in over-allotment, syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of notes in excess of the number of notes to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids for or
purchases of notes made for the purpose of preventing or retarding a decline in
the market price of the notes while the offering is in progress. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when Salomon Smith Barney Inc. repurchases notes originally sold by that
syndicate member in covering syndicate short positions. Stabilizing transactions
and syndicate covering transactions may cause the prices of the notes to be
higher than they would otherwise be in the open market in the absence of such
transactions. These transactions, if commenced, may be discontinued at any time.
S-23
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LEGAL MATTERS
The validity of the notes and guarantees offered hereby will be passed upon
for Block Financial and the guarantor by Bryan Cave LLP, Kansas City, Missouri.
Certain matters will be passed upon for the underwriters by Cravath, Swaine &
Moore, New York, New York.
S-24
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PROSPECTUS
BLOCK FINANCIAL CORPORATION
DEBT SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED BY H&R BLOCK, INC.
Block Financial Corporation (the "Company" or "BFC") may offer from time to
time, in one or more series, debentures, notes, bonds or other obligations
("Debt Securities"), which may be senior ("Senior Debt Securities") or
subordinated ("Subordinated Debt Securities") to other indebtedness of the
Company, all having an aggregate initial public offering price not to exceed
$1,000,000,000 or the equivalent thereof in one or more foreign currencies,
foreign currency units or composite currencies, including European Currency
Units. The Debt Securities may be offered in separate series in amounts, at
prices and on terms to be determined at or prior to the time of sale. The Debt
Securities will be direct unsecured obligations of the Company. The payment of
principal, premium, if any, and interest with respect to the Debt Securities
will be fully and unconditionally guaranteed by H&R Block, Inc. (the "Guarantor"
or "Block"), the indirect parent company of BFC.
The specific terms of the Debt Securities with respect to which this
Prospectus is being delivered will be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement"), together with the terms of the
offering and sale of the Debt Securities, the initial offering price and the net
proceeds to the Company from the sale thereof. Each Prospectus Supplement will
include, among other things, the specific designation, aggregate principal
amount, ranking, authorized denomination, maturity, rate or method of
calculation of interest and dates for payment thereof, any index or formula for
determining the amount of any principal, premium, or interest payment, any
exchange, redemption, prepayment or sinking fund provisions, the currency or
currency unit in which principal, premium, or interest is payable, whether the
securities are issuable in registered form or in the form of global securities,
and the designation of the trustee acting under the indenture. Each Prospectus
Supplement will also contain information, where applicable, about material
United States federal income tax considerations relating to, and any listings on
a securities exchange of, the Debt Securities covered by such Prospectus
Supplement.
The Company may sell the Debt Securities directly to purchasers, through
agents designated from time to time or through underwriters or dealers on terms
determined by market conditions at the time of sale. If any agents,
underwriters, or dealers are involved in the sale of the Debt Securities, the
names of such agents, underwriters or dealers and any applicable commissions or
discounts and the net proceeds to the Company from such sale will be set forth
in the applicable Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN ANY DEBT
SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF DEBT SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR, OR ANY
UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF OR THEREOF. THIS
PROSPECTUS AND ANY RELATED PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
The date of this Prospectus is October 17, 1997.
26
AVAILABLE INFORMATION
The Company and the Guarantor have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), for the
registration of the Debt Securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to, or incorporated by reference in, the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company, the Guarantor
and the Debt Securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and financial statements and notes
filed as a part thereof or incorporated by reference therein. Statements made in
this Prospectus and in the accompanying Prospectus Supplement concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to, or
incorporated by reference in, the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Guarantor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith the Guarantor files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Guarantor may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549. The Commission maintains an
Internet Web site at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. In addition, such material filed by the Guarantor may also be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005, and the Pacific Stock Exchange
Incorporated, 301 Pine Street, San Francisco, California 94104, on which
exchanges the Common Stock of the Guarantor is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Guarantor with the Commission pursuant
to the Exchange Act under File No. 1-6089 are incorporated herein by reference
and shall be deemed to be a part hereof:
1. the Guarantor's Annual Report on Form 10-K for the fiscal year
ended April 30, 1997 (as amended on Forms 10-K/A for such fiscal year);
2. the Guarantor's Current Reports on Form 8-K dated July 2, 1997
(as amended on Form 8-K/A filed August 14, 1997), September 7, 1997 and
September 25, 1997;
3. the Guarantor's Quarterly Report on Form 10-Q for the three
months ended July 31, 1997 (as amended on Form 10-Q/A filed October 2,
1997).
All documents filed by the Company or the Guarantor pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Debt Securities made hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such documents. See "Available Information."
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein or in any Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith, as indicated above. The Company will provide
without charge to each person, including any beneficial owner, to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which are incorporated herein by reference
(other than exhibits to such documents unless they are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to Block Financial Corporation, 4435 Main Street, Suite 500, Kansas City,
Missouri 64111, Attention: John R. Cox, telephone (816) 751-6019.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for certain forward-looking statements contained in
this Prospectus, but such safe harbor does not protect any such statements made
by or regarding the Company. Certain statements contained in the sections
entitled "The Company" and "The Guarantor," and certain statements incorporated
by reference from documents filed with the Commission by the Company, are or may
constitute forward-looking statements as defined in the Reform Act. However, the
safe harbor does not apply to forward-looking statements made in connection with
an initial public offering. Since the offering of Debt Securities is an initial
public offering by the Company, the safe harbor would not apply to any such
forward-looking statements concerning the Company. Because such statements are
subject to risks and uncertainties, actual results may differ from those
expressed or implied by such forward-looking statements.
THE COMPANY
BFC is an indirect wholly owned subsidiary of Block. It was organized in
May 1992 for the purpose of developing and providing tax-related and
technology-related financial services. The principal business activities of BFC
include (i) the origination, purchase, servicing, sale and securitization of
nonconforming residential mortgages, (ii) the purchase of participation
interests in refund anticipation loans ("RALs") made by Beneficial National Bank
("Beneficial") to Block tax customers, (iii) the offering of credit cards for
CompuServe Corporation ("CompuServe") and WebBank Corporation, a Utah Industrial
Loan Company and wholly owned subsidiary of BFC, (iv) the development,
publishing, and marketing of software products designed to assist individuals in
managing their personal finances and preparing tax returns, and (v) the offering
of equity lines of credit to Block's tax preparation franchisees. BFC's
principal executive office is located at 4435 Main Street, Suite 500, Kansas
City, Missouri 64111 and its telephone number is (816) 751-6000.
NONCONFORMING MORTGAGES. BFC operates a nonconforming mortgage origination
and funding business in which fixed and adjustable-rate mortgages, including
purchase money first mortgages, refinance first mortgages and second mortgages,
are offered to the public. Nonconforming mortgages are those that may not be
offered through government-sponsored loan agencies.
In a strategic initiative to develop a retail nonconforming mortgage
business, BFC and Block formed H&R Block Mortgage Company, L.L.C. ("Block
Mortgage") in August 1995 to offer nonconforming mortgages at H&R Block tax
offices. Block Mortgage is a limited liability company in which a subsidiary of
Block owns a 99% membership interest and BFC owns a 1% membership interest.
During the 1997 tax season, Block Mortgage offered nonconforming mortgages
through 31 tax offices in Colorado, Indiana, North Carolina and Virginia. Block
Mortgage plans to continue the test of this business in additional tax offices
during fiscal year 1998.
BFC further increased its commitment to the nonconforming mortgage business
with its purchase of Option One Mortgage Corporation ("Option One") from Fleet
Financial Group, Inc. ("Fleet") in June 1997. Option One engages in the
origination, purchase, securitization, sale and servicing of one-to-four family
residential mortgage loans made primarily to sub-prime borrowers who do not
qualify for loans which conform to FNMA and FHLMC guidelines. Option One is
headquartered in Santa Ana, California, and has a network of more than 5,000
mortgage brokers in 46 states. In calendar 1996, Option One originated more than
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$1 billion in mortgage loans. BFC believes that Option One will provide BFC with
experienced associates in the nonconforming mortgage business and assist BFC and
Block in handling mortgage applications, processing loans and underwriting
mortgages originated through Block Mortgage.
BFC paid $218.1 million in cash for Option One, consisting of $28.1 million
in adjusted stockholder's equity and a premium of $190 million. In addition, BFC
made a cash payment of $456 million to Fleet to eliminate intercompany loans
made by Fleet to Option One to finance Option One's mortgage loan business. The
$456 million payment was recorded as an intercompany loan from BFC to Option One
and was repaid by Option One on June 30, 1997, when Option One sold mortgage
loans to a third party in the ordinary course of business.
BFC completed its first securitization of nonconforming mortgage loans on
January 30, 1997, through a $102 million asset-backed security issue.
Substantially all of the mortgages involved in this securitization were
mortgages offered through independent mortgage brokers. On July 30, 1997, BFC
completed its second securitization of nonconforming mortgages through a $215
million asset-backed security issue. This securitization included $134 million
of mortgages offered through independent mortgage brokers, $81 million of
mortgages offered by Option One and $10 million of mortgages offered by Block
Mortgage.
REFUND ANTICIPATION LOANS. In July 1996, BFC announced an agreement with
Beneficial to purchase a participation interest in RALs provided by Beneficial
to Block tax customers. In the 10-year agreement, BFC agreed to purchase an
initial 40% participation interest in such RALs, which interest would be
increased to nearly 50% in specific circumstances. As a result, BFC initially
has the right to receive 40% of the aggregate payments of principal, interest
and other sums due under the RALs, and bears 40% of the credit risk associated
with the RALs. BFC's purchases of participation interests are financed through
short-term borrowings. BFC bears all of the risks associated with its interests
in the RALs. BFC's total RAL revenue in fiscal 1997 was approximately $54.5
million, which generated approximately $8.1 million in pretax profits.
CREDIT CARDS. BFC offers Gold and Classic versions of two types of
co-branded credit cards: CompuServe Visa and WebCard(SM) Visa. The credit cards
are issued under a co-branding agreement between BFC and Columbus Bank and Trust
Company, Columbus, Georgia. Approximately 110,000 CompuServe Visa credit cards
were issued by the end of fiscal 1997, compared to 113,425 credit cards at the
end of fiscal 1996. The number of WebCard(SM) Visa accounts at April 30, 1997,
was 57,223, compared to approximately 6,000 accounts at the end of fiscal 1996.
The aggregate portfolio for the credit cards issued by BFC increased from
approximately $165 million at the end of fiscal 1996 to more than $246 million
by the end of fiscal 1997.
While the aggregate number of BFC's credit cards increased during fiscal
1997, bad debt expense associated with such accounts also increased
substantially. The increase in bad debt expense resulted from the increase in
the credit card receivables portfolio and a deterioration in the credit quality
arising from the maturation of the credit card portfolio. Measured as a
percentage of the credit card receivables, the bad debt expense increased 40
basis points, from 5.5% to 5.9% during fiscal 1997. Based on the balance of the
portfolio at April 30, 1997, every 10 basis point increase in the ratio of bad
debt expense to credit card receivables would result in additional expenses of
$248,000.
BFC developed the CONDUCTOR(R) service, a technology that facilitates the
delivery of financial services online through existing commercial online
services, the Internet or directly through leased networks. CONDUCTOR(R)
features a national online electronic credit card statement that provides the
cardholder with access to transaction records and credit availability and the
ability to download transactions from the Internet into a personal financial
software program. A similar service that allows cardholders access online is
offered on CompuServe's information service.
BFC is evaluating the possible sale of its credit card operations,
including its receivables portfolio and the CONDUCTOR(R) service.
SOFTWARE PRODUCTS. BFC's software business develops and markets the
Kiplinger TaxCut(R) tax preparation software package, and markets the Kiplinger
Home Legal Advisor(SM) and Kiplinger Small Business Attorney(SM) software
products. As a result of the increase in sales of the final edition of TaxCut in
fiscal 1997, BFC's share in the income tax return preparation software market is
now approximately 30%.
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EQUITY LINES OF CREDIT. BFC offers to Block's tax preparation franchisees
lines of credit with reasonable interest rates under a program designed to
better enable the franchisees to refinance existing business debt, expand or
renovate offices or meet off-season cash flow needs. A franchise equity loan is
a revolving line of credit secured by the H&R Block franchise and the underlying
business.
THE GUARANTOR
Block is a diversified services corporation that was organized in 1955
under the laws of Missouri. It is the parent corporation in a two-tier holding
company structure following a 1993 corporate restructuring. The second-tier
holding company is H&R Block Group, Inc., which is the direct owner of (i) all
of the shares of H&R Block Tax Services, Inc. ("Tax Services"), a subsidiary
involved in the business of income tax return preparation, electronic filing of
income tax returns and the performance of other tax related services in the
United States, (ii) approximately 80.1% of the shares of CompuServe, a
corporation that offers worldwide online and Internet access services to
consumers and worldwide network access, management and applications, and
Internet services to businesses, and (iii) all of the shares of BFC. Indirect
subsidiaries of H&R Block Group, Inc. operate income tax return preparation and
related services businesses in Canada, Australia, the United Kingdom and Guam,
and offer H&R Block franchises in other parts of the world as a part of the
operations of H&R Block International. Block's principal executive office is
located at 4400 Main Street, Kansas City, Missouri 64111 and its telephone
number is (816) 753-6900. Block's common stock is listed on the New York Stock
Exchange and Pacific Stock Exchange and is quoted under the symbol "HRB."
TAX SERVICES. The income tax return preparation and related services
business is the original core business of Block. These services are provided to
the public through a system of offices operated by Block or by others to whom
Block has granted franchises. Block and its franchisees provide income tax
return preparation services, electronic filing services and other services
relating to income tax return preparation in many parts of the world. For U.S.
returns, Block offers RALs through Beneficial in conjunction with Block's
electronic filing service. Block also markets its income tax preparation
knowledge through its income tax training schools.
Block's tax operations are divided structurally into three areas, each
targeting specific markets and focusing on new products and services and areas
for expansion. Tax Services focuses on tax business operations in the United
States. H&R Block Premium, a division of Tax Services, competes for those
clients who typically have more complex income tax returns and features meetings
by appointment any time of the year, private offices and more experienced tax
return preparers. H&R Block International focuses on strengthening operations in
current foreign markets, such as Canada and Australia, and identifying and
developing new markets.
COMPUSERVE. CompuServe was incorporated in Delaware on February 16, 1996.
CompuServe is the parent corporation in a holding company structure, and holds
all of the outstanding stock of CompuServe Incorporated. CompuServe Incorporated
was founded in 1969 as a computer timesharing service and introduced its first
online service in 1979. Until April 1996, CompuServe was an indirect wholly
owned subsidiary of Block. In April 1996, CompuServe completed an initial public
offering of 18,400,000 shares of its common stock. CompuServe's common stock is
quoted on the Nasdaq quotation system under the symbol "CSRV."
CompuServe is a worldwide leader in the market for computer-based
interactive services and data communications and a pioneer in the development of
consumer online and Internet access services. CompuServe was the first online
service provider to establish a major international presence, and continues to
be one of the largest global online and Internet service providers. CompuServe
operates what its management believes is the most extensive network in the world
dedicated solely to data transmission.
CompuServe Interactive Service(SM) ("CSi"), CompuServe's flagship product,
offers traditional online services and integrated Internet access. Through
SPRYNET(SM), CompuServe also offers a stand-alone Internet-access-only service.
Management believes consumer online services are a preferred access vehicle to
the Internet for the average user due to the ability of online services to focus
and aggregate content and
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provide centralized billing and support. Management also believes CompuServe's
business networking experience and infrastructure position it to be a leader in
the commercialization of the Internet.
On September 7, 1997, the Guarantor entered into an Agreement and Plan of
Merger (the "Merger Agreement") with H&R Block Group, Inc., CompuServe,
WorldCom, Inc., a Georgia corporation ("WorldCom"), and Walnut Acquisition
Company, L.L.C., a Delaware limited liability company which is wholly owned by
WorldCom ("WAC"), pursuant to which WorldCom would acquire CompuServe through a
merger of WAC with and into CompuServe (the "Merger"). At the Effective Time (as
defined in the Merger Agreement) each of the CompuServe Common Shares (as
defined in the Merger Agreement) outstanding as of the Effective Time will be
converted into the right to receive, and there will be paid and issued as
provided in the Merger Agreement in exchange for each of the CompuServe Common
Shares, 0.40625 of a share of WorldCom Common Stock (as defined in the Merger
Agreement), subject to adjustment as provided in the Merger Agreement. Based on
the closing price of WorldCom Common Stock on September 5, 1997, the aggregate
purchase price for CompuServe is approximately $1.2 billion. Consummation of the
Merger is subject to the satisfaction of certain conditions, including, among
others, the expiration or termination of any applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
foreign competition law or similar law, the receipt of other required regulatory
approvals, and the absence of certain material adverse changes. Consummation of
the Merger is also subject to the approval and adoption of the Merger Agreement
by the holders of the requisite number of CompuServe Common Shares. The
Guarantor has agreed to vote all of the shares directly or indirectly owned by
it in favor of the Merger Agreement and the Merger, which number of shares is
sufficient to approve the Merger Agreement and the Merger. The closing of the
Merger is expected to occur as soon as practicable after the satisfaction of all
the conditions set forth in the Merger Agreement.
In fiscal 1997, CompuServe's revenues were $841.9 million, compared to
Block's consolidated revenues from continuing operations of $1.097 billion. As
of July 31, 1997, CompuServe's total assets were $787.2 million and Block's
total assets were $1.876 billion. In fiscal 1997, the net loss of CompuServe was
$96 million and the net earnings of Block excluding CompuServe were $143.8
million.
The Guarantor believes it is likely that the conditions to the consummation
of the Merger will be satisfied and that the Merger will be consummated.
However, there can be no assurance that all conditions will be satisfied. If the
Merger is not consummated for any reason, the Guarantor will continue to pursue
alternatives to complete the separation of CompuServe.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Debt
Securities for general corporate purposes which may include acquisitions,
capital expenditures, working capital requirements, repayment of certain
indebtedness or for other business purposes. The specific use of proceeds of
each sale of Debt Securities will be set forth in each Prospectus Supplement.
RISK FACTORS
Prospective investors should carefully consider the following risk factors
in connection with an investment in any Debt Securities.
COMPANY RISK FACTORS
GENERAL LENDING RISKS
BFC operates financial services businesses which are subject to various
business risks, including, but not limited to, the following: the risk that
borrowers will not satisfy their payment obligations; the risk, in the case of a
nonconforming mortgage loan or a franchisee line of credit loan, that the value
of the property securing such loan will not be sufficient to repay the
borrower's obligation to BFC upon foreclosure after default; the
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risk that changes in interest rates after the origination of a loan and prior to
its sale may narrow the spread between the cost of BFC's funds and the interest
paid by the borrower; the risk, in the case of nonconforming mortgage loans,
that a decrease in interest rates could cause an increase in the rate at which
outstanding loans are prepaid; and the risk, in the case of credit card loans,
of increased bad debt expense as a result of growth and maturation of BFC's loan
portfolio, consistent with current trends in the credit card industry.
Many of the foregoing business risks become more acute in an economic
slowdown or recession, which may be accompanied by decreased demand for credit
and declining real estate and other asset values. Specifically, in the
nonconforming mortgage business, any material decline in real estate values
reduces the ability of borrowers to use home equity to support borrowings and
increases the loan-to-value ratios of loans previously made by BFC, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of a default. Delinquencies, foreclosures, repossessions and losses
generally increase during economic slowdowns or recessions. Certain of BFC's
borrowers may have had past credit problems and in the nonconforming mortgage
market the actual rates of delinquencies, foreclosures, repossessions and
losses, as applicable, could be higher under adverse economic conditions than
those experienced in the mortgage market generally. Any sustained period of
increased delinquencies, foreclosures, repossessions, losses or costs could
adversely affect BFC's ability to sell nonconforming mortgage loans through
securitization or whole loan sales and could increase the cost of selling such
loans, which could adversely affect BFC's financial condition or results of
operations.
ADVERSE IMPACT OF MORTGAGE LOAN PREPAYMENTS FOLLOWING SECURITIZATION
BFC sells nonconforming mortgages in both whole loan sales and
securitizations. Although significantly more mortgages are currently sold
through whole loan sales than through securitization, gains on sales of
mortgages through securitization could become a significant component of BFC's
reported revenues. The amount of such gains is based on estimates made by
management at the time loans are sold about prepayment rates and other matters.
The rate of prepayment of loans may be affected by a variety of economic and
other factors, including prevailing interest rates and the availability of
alternative financing. Decreases in interest rates could cause prepayment rates
to increase. The effects of these factors may vary depending on the particular
type of loan. Estimates of prepayment rates are made based on management's
expectations of future prepayment rates, which are based, in part, on the
historic performance of BFC's loans and other considerations. There can be no
assurance as to the accuracy of management's estimates. If actual prepayments
occur more quickly than was projected at the time loans were sold in a
securitization, the carrying value of the residual and servicing assets may have
to be written down through a charge to earnings in the period of adjustment.
NEED FOR ADDITIONAL FUNDS AND DEPENDENCE ON LOAN SALES TO FINANCE LENDING
ACTIVITIES
BFC has a continuing need for capital to finance its lending operations.
Currently, BFC's principal cash requirements are in connection with loan
originations and purchases, purchases of participations in RALs, repayments of
outstanding commercial paper, and payments of operating expenses and interest.
Loan production is funded principally through the issuance of commercial paper.
BFC's outstanding commercial paper is in turn repaid with the proceeds received
by BFC from selling nonconforming mortgage loans through securitization or whole
loan sales and from collections on credit card receivables and franchisee lines
of credit. While BFC believes that it will be able to refinance or otherwise
repay its outstanding commercial paper in the normal course of its business,
there can be no assurance that BFC will continue to be able to access the
commercial paper markets or that other lenders will be willing to extend lines
of credit to BFC or that funds otherwise generated from operations will be
sufficient to satisfy its obligations. Future financing may involve the issuance
of additional Debt Securities.
BFC relies significantly upon securitizations and whole loan sales to
generate cash proceeds for repayment of outstanding commercial paper.
Accordingly, adverse changes in the securities markets generally, the asset
backed securities and whole loan sale markets, or the credit quality of BFC's
loan portfolio could impair BFC's ability to originate, purchase and sell loans
or other assets on a favorable or timely basis. Any such impairment could have a
material adverse effect upon BFC's business and results of operations. Any
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delay in the sale of a loan or other asset pool would postpone the recognition
of a gain on such loans until their sale. Such delays could cause BFC's earnings
to fluctuate from quarter to quarter.
COMPETITION
The financial services and software businesses in which BFC engages are
highly competitive. BFC faces increasing competition as a purchaser and
originator of nonconforming mortgage loans and as an issuer of credit cards.
Certain large national finance companies, commercial banks, thrifts, credit card
originators and conforming mortgage originators, with greater capitalization and
financial resources than BFC, have adapted their origination programs and
allocated resources to the origination of nonconforming loans. The entrance of
these competitors into BFC's nonconforming mortgage or credit card markets could
have a material adverse effect on BFC's financial condition and results of
operations.
CERTAIN LEGAL RISKS
BFC's operations and origination activities are subject to extensive laws,
regulations, supervision and licensing by federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by BFC, disclosure in connection with loan originations,
credit reporting requirements, servicing requirements, federal and state
taxation, and multiple qualification and licensing requirements for doing
business in various jurisdictions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive.
GOVERNMENT REGULATION OF REFUND ANTICIPATION LOANS
Repayment of RALs generally depends on Internal Revenue Service ("IRS")
direct deposit procedures. A borrower of a RAL directs the IRS to deposit the
borrower's federal income tax refund directly into a special bank account
maintained at the banking institution that made the RAL. The lending institution
then collects the RAL by exercising a right of offset against the bank account.
The IRS may from time to time change its direct deposit procedures or may
determine not to make direct deposits of all or portions of a borrower's federal
income tax refund. Failure by the IRS to make direct deposits of federal income
tax refunds may impair the lender's ability to recover a RAL and result in a
loss.
Changes in government regulations applicable to RALs could adversely affect
the RAL business and thereby limit the ability of BFC to purchase participation
interests in RALs and adversely impact BFC's results of operations.
SEASONALITY OF BUSINESS
A substantial portion of BFC's revenues are received during the period from
January through April of each year since revenues from participations in RALs
and sales of tax return preparation software occur during such period.
GUARANTOR RISK FACTORS
TAX LEGISLATION
From time to time, and especially in election years, the subjects of tax
simplification, restructuring and reform ("tax reform") are discussed in the
American political environment, sometimes leading to proposed legislation to
effectuate one or more tax reform ideas. In the past few years, tax reform ideas
such as a flat tax, a consumption tax and a national sales tax have been
proposed and have received more serious attention than in the past, although
none of these tax reform ideas has materialized into effective legislation.
Historically, changes in tax laws have increased Block's tax return preparation
business because of inherent uncertainties as to the interpretation and
application of new changes and, in many cases, the increased complexity in tax
law caused by such changes. If enacted, the effect of significant tax reform
legislation on Block's business over
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time is uncertain and such legislation could have a material adverse effect on
Block's business and results of operations.
REGULATION OF TAX RETURN PREPARATION, ELECTRONIC FILING AND REFUND ANTICIPATION
LOANS
The federal government regulates the preparation and electronic filing of
income tax returns and an electronic filer's involvement in RALs. States that
have adopted electronic filing programs for state income tax returns have also
enacted laws that regulate electronic filers. In addition, some states and
localities have enacted laws and adopted regulations that regulate RAL
facilitators and/or the advertisement and offering of electronic filing and
RALs. Block cannot predict the affect of the enactment of new statutes or the
adoption of new regulations pertaining to its tax return preparation business.
COMPETITION
The income tax return preparation and electronic filing businesses are
highly competitive. Block considers the individual who prepares his own tax
return to be its primary competition. The enactment of legislative proposals to
reform or simplify the tax system, discussed under "Tax Legislation" above, may
have the effect of increasing the number of self-preparers, which could have a
material adverse effect on Block's business and results of operations. In
addition to self-preparers, there are a substantial number of tax return
preparation firms. Many of these firms, and many firms not involved in the
income tax return preparation business, are involved in providing electronic
filing and RAL services to the public. Commercial tax return preparers and
electronic filers are highly competitive with regard to price, service and
reputation for quality.
SEASONALITY OF BUSINESS
Since most Block customers file their tax returns during the period from
January through April of each year, substantially all of Block's revenues from
income tax return preparation related services and franchise royalties are
received during this period. As a result, Block operates at a loss through the
first nine months of its fiscal year.
SALE OF COMPUSERVE
The sale of Block's interest in CompuServe through a merger with a
subsidiary of WorldCom is subject to conditions the satisfaction of which cannot
be assured. If such transaction is not consummated for any reason, there can be
no assurance that Block will be able to dispose of its interest in CompuServe on
terms as favorable as those offered by WorldCom. See "The
Guarantor -- CompuServe."
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RATIO OF EARNINGS TO FIXED CHARGES
THE COMPANY
The following table sets forth the ratio of earnings to fixed charges for
the Company for the three months ended July 31, 1997 and for each of the five
years ended April 30.
THREE MONTHS
ENDED
JULY 31, 1997 1997 1996 1995 1994 1993
------------- ----- ----- ----- ----- -----
Ratio of Earnings to Fixed
Charges........................... (a) 1.6:1 2.5:1 (b) (c)(d) 6.9:1
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three
months ended July 31, 1997 by $6,330.
(b) Earnings were insufficient to cover fixed charges for the year
ended April 30, 1995 by $5,788.
(c) Earnings were insufficient to cover fixed charges for the year
ended April 30, 1994 by $15,644.
(d) Earnings for the year ended April 30, 1994 included a nonrecurring
charge of $25,072 for purchased research and development related to the
acquisition of MECA Software, Inc. as disclosed in the "Acquisitions" note
to the Guarantor's consolidated financial statements for the year ended
April 30, 1996. If such charges had not occurred, the ratio of earnings to
fixed charges would have been 4.2:1.
THE GUARANTOR
The following table sets forth the ratio of earnings to fixed charges for
the Guarantor on a consolidated basis for the three months ended July 31, 1997
and for each of the five years ended April 30, which ratios are based on the
historical consolidated financial statements of the Guarantor.
THREE MONTHS
ENDED
JULY 31, 1997 1997 1996 1995 1994 1993
------------- ----- ----- ----- ----- -----
Ratio of Earnings to Fixed
Charges........................... (a) 4.8:1 5.9:1 5.0:1 5.5:1(b) 6.2:1
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three
months ended July 31, 1997 by $55,509.
(b) Earnings for the year ended April 30, 1994 included a nonrecurring
charge of $25,072 for purchased research and development related to the
acquisition of MECA Software, Inc. as disclosed in the "Acquisitions" note
to the Guarantor's consolidated financial statements for the year ended
April 30, 1996. If such charges had not occurred, the ratio of earnings to
fixed charges would have been 6.6:1.
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DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities and
Guarantees sets forth certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
of the Debt Securities offered by any Prospectus Supplement and the extent, if
any, to which such general provisions may apply to the Debt Securities so
offered will be described in the Prospectus Supplement relating to such Debt
Securities. Accordingly, for a description of the terms of a particular issue of
Debt Securities and Guarantees, reference must be made to both the Prospectus
Supplement relating thereto and to the following description.
The Debt Securities will be general obligations of the Company and may be
Senior Debt Securities or Subordinated Debt Securities. Senior Debt Securities
will rank equally with all other unsubordinated and unsecured indebtedness of
the Company. The Subordinated Debt Securities will be subordinate in right of
payment to "Senior Indebtedness" (as defined below) of the Company to the extent
set forth in the Prospectus Supplement relating thereto. See "Description of
Debt Securities -- Subordination" below. The Guarantor will irrevocably and
unconditionally guarantee payments of principal, interest and premium, if any,
on the Debt Securities. Debt Securities and Guarantees will be issued under an
indenture (the "Indenture") to be entered into between the Company, the
Guarantor and Bankers Trust Company (the "Trustee"). A copy of the form of
Indenture has been filed as an exhibit to the Registration Statement filed with
the Commission. The following discussion of certain provisions of the Indenture
is a summary only and does not purport to be a complete description of the terms
and provisions of the Indenture. Accordingly, the following discussion is
qualified in its entirety by reference to the provisions of the Indenture,
including the definition therein of terms used below with their initial letters
capitalized.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder. The Debt Securities may be issued in
one or more series as may be authorized from time to time by the Company.
Reference is made to the applicable Prospectus Supplement for the following
terms of the Debt Securities of the series with respect to which such Prospectus
Supplement is being delivered:
(a) The title of Debt Securities of the series;
(b) Any limit on the aggregate principal amount of the Debt Securities
of the series that may be authenticated and delivered under the Indenture;
(c) The date or dates on which the principal and premium, if any, with
respect to the Debt Securities of the series are payable;
(d) The rate or rates (which may be fixed or variable) at which the
Debt Securities of the series shall bear interest (if any) or the method of
determining such rate or rates, the date or dates from which such interest
shall accrue, the interest payment dates on which such interest shall be
payable or the method by which such date will be determined, the record
dates for the determination of Holders thereof to whom such interest is
payable (in the case of Registered Securities), and the basis upon which
interest will be calculated if other than that of a 360-day year of twelve
30-day months;
(e) The Place or Places of Payment, if any, in addition to or instead
of the corporate trust office of the Trustee where the principal, premium,
if any, and interest with respect to Debt Securities of the series shall be
payable;
(f) The price or prices at which, the period or periods within which,
and the terms and conditions upon which Debt Securities of the series may
be redeemed, in whole or in part, at the option of the Company or
otherwise;
(g) The obligation, if any, of the Company to redeem, purchase, or
repay Debt Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof and the price or
prices at which, the period or periods within which, and the terms and
conditions upon which
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Debt Securities of the series shall be redeemed, purchased, or repaid, in
whole or in part, pursuant to such obligations;
(h) The terms, if any, upon which the Debt Securities of the series
may be convertible into or exchanged for other Debt Securities of the
Company and the terms and conditions upon which such conversion or exchange
shall be effected, including the initial conversion or exchange price or
rate, the conversion or exchange period and any other provision in addition
to or in lieu of those described herein;
(i) If other than denominations of $1,000 or any integral multiple
thereof, the denominations in which Debt Securities of the series shall be
issuable;
(j) If the amount of principal, premium, if any, or interest with
respect to the Debt Securities of the series may be determined with
reference to an index or pursuant to a formula, the manner in which such
amounts will be determined;
(k) If the principal amount payable at the stated maturity of Debt
Securities of the series will not be determinable as of any one or more
dates prior to such stated maturity, the amount that will be deemed to be
such principal amount as of any such date for any purpose, including the
principal amount thereof that will be due and payable upon any maturity
other than the stated maturity or that will be deemed to be outstanding as
of any such date (or, in such case, the manner in which such deemed
principal amount is to be determined), and if necessary, the manner of
determining the equivalent thereof in United States currency;
(l) Any changes or additions to the provisions of the Indenture
dealing with defeasance, including the addition of additional covenants
that may be subject to the Company's covenant defeasance option;
(m) The coin or currency or currencies or units of two or more
currencies in which payment of the principal and premium, if any, and
interest with respect to Debt Securities of the series shall be payable;
(n) If other than the principal amount thereof, the portion of the
principal amount of Debt Securities of the series which shall be payable
upon declaration of acceleration or provable in bankruptcy;
(o) The terms, if any, of the transfer, mortgage, pledge or assignment
as security for the Debt Securities of the series of any properties,
assets, moneys, proceeds, securities or other collateral, including whether
certain provisions of the Trust Indenture Act are applicable and any
corresponding changes to provisions of the Indenture as currently in
effect;
(p) Any addition to or change in the Events of Default with respect to
the Debt Securities of the series and any change in the right of the
Trustee or the holders to declare the principal of and interest on, such
Debt Securities due and payable;
(q) If the Debt Securities of the series shall be issued in whole or
in part in the form of a Global Security, the terms and conditions, if any,
upon which such Global Security may be exchanged in whole or in part for
other individual Debt Securities in definitive registered form and the
Depositary for such Global Security;
(r) Any trustees, authenticating or paying agents, transfer agents or
registrars;
(s) The applicability of, and any addition to or change in the
covenants and definitions currently set forth in the Indenture or in the
terms relating to permitted consolidations, mergers, or sales of assets,
including conditioning any merger, conveyance, transfer or lease permitted
by the Indenture upon the satisfaction of an Indebtedness coverage standard
by the Company and Successor Company;
(t) The terms, if any, of any Guarantee (other than the Guarantee of
the Guarantor) of the payment of principal of, and premium, if any, and
interest on, Debt Securities of the series and any corresponding changes to
the provisions of the Indenture as currently in effect;
(u) The subordination, if any, of the Debt Securities of the series
pursuant to the Indenture and any changes or additions to the provisions of
the Indenture relating to subordination;
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(v) With regard to Debt Securities of the series that do not bear
interest, the dates for certain required reports to the Trustee; and
(w) Any other terms of the Debt Securities of the series (which terms
shall not be prohibited by the Indenture).
The Prospectus Supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the series of Debt Securities to which such Prospectus Supplement relates,
including those applicable to (a) Debt Securities with respect to which payments
of principal, premium, or interest are determined with reference to an index or
formula (including changes in prices of particular securities, currencies, or
commodities), (b) Debt Securities with respect to which principal, premium, or
interest is payable in a foreign or composite currency, (c) Debt Securities that
are issued at a discount below their stated principal amount, bearing no
interest or interest at a rate that at the time of issuance is below market
rates ("Original Issue Discount Debt Securities"), and (d) variable rate Debt
Securities that are exchangeable for fixed rate Debt Securities.
Payments of interest on Debt Securities shall be made at the corporate
trust office of the Trustee or at the option of the Company by check mailed to
the registered holders thereof or, if so provided in the applicable Prospectus
Supplement, at the option of a Holder by wire transfer to an account designated
by such Holder.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities may be transferred or exchanged at the office of the Trustee at which
its corporate trust business is principally administered in the United States or
at the office of the Trustee or the Trustee's agent in the Borough of Manhattan,
the City and State of New York, at which its corporate agency business is
conducted, subject to the limitations provided in the Indenture, without the
payment of any service charge, other than any tax or governmental charge payable
in connection therewith.
GUARANTEES
The Guarantor will irrevocably and unconditionally guarantee to each holder
of a Debt Security the due and punctual payment of the principal of, and any
premium and interest on, such Debt Security, when and as the same shall become
due and payable, whether at maturity, upon acceleration, by call for redemption
or otherwise. The Guarantor has (a) agreed that its obligations under the
Guarantees in the event of an Event of Default will be as if it were principal
obligor and not merely surety, and will be enforceable irrespective of any
invalidity, irregularity or unenforceability of any series of the Debt
Securities or the Indenture or any supplement thereto and (b) waived its right
to require the Trustee or the Holders to pursue or exhaust its legal or
equitable remedies against the Company prior to exercising its rights under the
Guarantees.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more fully registered global securities (a "Global Security")
that will be deposited with a depositary (the "Depositary"), or with a nominee
for a Depositary identified in the Prospectus Supplement relating to such
series. In such case, one or more Global Securities will be issued in a
denomination or aggregate denomination equal to the portion of the aggregate
principal amount of outstanding registered Debt Securities of the series to be
represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in definitive registered form,
a Global Security may not be transferred except as a whole by the Depositary for
such Global Security to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor of such Depositary or a nominee of
such successor.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement relating to such series. The
Company anticipates that the following provisions will apply to all depositary
arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by
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such Global Security to the accounts of persons that have accounts with such
Depositary ("participants"). The amounts to be credited shall be designated by
any underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interest through participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depositary for such Global Security (with respect to interests of
participants) or by participants or persons that hold through participants (with
respect to interests of persons other than participants). So long as the
Depositary for a Global Security, or its nominee, is the registered owner of
such Global Security, such Depositary or such nominee, as the case may be, will
be considered the sole owner or Holder of the Debt Securities represented by
such Global Security for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in a Global Security will not be entitled
to have the Debt Securities represented by such Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
such Debt Securities in definitive form and will not be considered the owners or
Holders thereof under the Indenture.
Principal, premium, if any, and interest payments on Debt Securities
represented by a Global Security registered in the name of a Depositary or its
nominee will be made to such Depositary or its nominee, as the case may be, as
the registered owner of such Global Security. None of the Company, the Trustee
or any paying agent for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in such Global Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, or
interest, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of the Depositary. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with the securities held for the accounts of customers registered in "street
name", and will be the responsibility of such participants.
If the Depositary for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by the Company within ninety days, the Company will
issue such Debt Securities in definitive form in exchange for such Global
Security. In addition, the Company may at any time and in its sole discretion
determine not to have any of the Debt Securities of a series represented by one
or more Global Securities and, in such event, will issue Debt Securities of such
series in definitive form in exchange for the Global Security or Securities
representing such Debt Securities.
SUBORDINATION
Debt Securities may be subordinated ("Subordinated Debt Securities") to
senior debt to the extent set forth in the Prospectus Supplement relating
thereto.
Subordinated Debt Securities will be subordinate in right of payment, to
the extent and in the manner set forth in the Indenture and the Prospectus
Supplement relating to such Subordinated Debt Securities, to the prior payment
of all Indebtedness of the Company that is designated as "Senior Indebtedness"
(as defined in the Indenture) with respect to such Subordinated Debt Securities.
Senior Indebtedness, with respect to any series of Subordinated Debt Securities,
will consist of (a) any and all amounts payable under or with respect to the
Company's Indebtedness to banks and (b) any other Indebtedness of the Company
that is designated in a resolution of the Company's Board of Directors or the
supplemental Indenture establishing such series as Senior Indebtedness with
respect to such series.
Upon any payment or distribution of assets of the Company to creditors or
upon a total or partial liquidation or dissolution of the Company or in a
bankruptcy, receivership, or similar proceeding relating to the Company or its
property, holders of Senior Indebtedness shall be entitled to receive payment in
full in cash of the Senior Indebtedness before holders of Subordinated Debt
Securities shall be entitled to receive any
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payment of principal, premium, or interest with respect to the Subordinated Debt
Securities, and until the Senior Indebtedness is paid in full, any distribution
to which holders of Subordinated Debt Securities would otherwise be entitled
shall be made to the Holders of Senior Indebtedness (except that such Holders
may receive shares of stock and any debt securities that are subordinated to
Senior Indebtedness to at least the same extent as the Subordinated Debt
Securities).
The Company may not make any payments or principal, premium, or interest
with respect to Subordinated Debt Securities, make any deposit for the purpose
of defeasance of such Subordinated Debt Securities, or repurchase, redeem, or
otherwise retire (except, in the case of Subordinated Debt Securities that
provide for a mandatory sinking fund, by the delivery of Subordinated Debt
Securities by the Company to the Trustee in satisfaction of the Company's
sinking fund obligation) any Subordinated Debt Securities if (a) any principal,
premium, if any, or interest with respect to Senior Indebtedness is not paid
within any applicable grace period (including at maturity) or (b) any other
default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, the default has been cured or waived and such acceleration has been
rescinded, such Senior Indebtedness has been paid in full in cash, or the
Company and the Trustee receive written notice approving such payment from the
representatives of each issue of "Designated Senior Indebtedness" (which will
include the Bank Indebtedness and any other specified issue of Senior
Indebtedness. During the continuance of any default (other than a default
described in clause (a) or (b) above) with respect to any Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Subordinated Debt Securities for a period (the "Payment Blockage
Period") commencing on the receipt by the Company and the Trustee of written
notice of such default from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period (a
"Blockage Notice"). The Payment Blockage Period may be terminated before its
expiration by written notice to the Trustee and the Company from the person who
gave the Blockage Notice, by repayment in full in cash of the Senior
Indebtedness with respect to which the Blockage Notice was given, or because the
default giving rise to the Payment Blockage Period is no longer continuing.
Unless the holders of such Senior Indebtedness shall have accelerated the
maturity thereof, the Company may resume payments on the Subordinated Debt
Securities after the expiration of the Payment Blockage Period. Not more than
one Blockage Notice may be given in any period of 360 consecutive days unless
the first Blockage Notice within such 360-day period is given by or on behalf of
holders of Designated Senior Indebtedness other than the Bank Indebtedness, in
which case the representative of the Bank Indebtedness may give another Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any period of 360 consecutive days. After all Senior
Indebtedness is paid in full and until the Subordinated Debt Securities are paid
in full, Holders of the Subordinated Debt Securities shall be subrogated to the
rights of Holders of Senior Indebtedness to receive distributions applicable to
Senior Indebtedness.
All payments by the Guarantor pursuant to any Guarantees of Subordinated
Debt Securities will be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness of the Guarantor.
By reason of such subordination, in the event of insolvency, creditors of
the Company or the Guarantor who are Holders of Senior Indebtedness, as well as
certain general creditors of the Company or the Guarantor, may recover more,
ratably, than the Holders of the Subordinated Debt Securities.
EVENTS OF DEFAULT AND REMEDIES
The following events are defined in the Indenture as "Events of Default"
with respect to a series of Debt Securities:
(a) Default in the payment of any installment of interest on any Debt
Securities of that series as and when the same shall become due and payable
(whether or not, in the case of Subordinated Debt Securities, such payment
shall be prohibited by reason of the subordination provision described
above) and continuance of such default for a period of 30 days;
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(b) Default in the payment of principal or premium with respect to any
Debt Securities of that series as and when the same become due and payable,
whether at maturity, upon redemption, by declaration, upon required
repurchase, or otherwise (whether or not, in the case of Subordinated Debt
Securities, such payment shall be prohibited by reason of the subordination
provision described above);
(c) Default in the payment of any sinking fund payment with respect to
any Debt Securities of that series as and when the same shall become due
and payable;
(d) Failure on the part of the Company or the Guarantor to comply with
the provisions of the Indenture relating to consolidations, mergers and
sales of assets;
(e) Failure on the part of the Company or the Guarantor duly to
observe or perform any other of the covenants or agreements on the part of
the Company or the Guarantor in the Debt Securities of that series, in any
resolution of the Board of Directors of the Company authorizing the
issuance of that series of Debt Securities, in the Indenture with respect
to such series, or in any supplemental Indenture with respect to such
series (other than a covenant or agreement a default in the performance of
which is otherwise specifically dealt with) continuing for a period of 60
days after the date on which written notice specifying such failure and
requiring the Company or the Guarantor to remedy the same shall have been
given to the Company or the Guarantor by the Trustee or to the Company or
the Guarantor and the Trustee by the holders of at least 25% in aggregate
principal amount of the Debt Securities of that series at the time
outstanding;
(f) Indebtedness of the Guarantor or any Subsidiary of the Guarantor
is not paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default, the total amount
of such indebtedness unpaid or accelerated exceeds $100 million or the
United States dollar equivalent thereof at the time, and such default
remains uncured or such acceleration is not rescinded for 10 days after the
date on which written notice specifying such failure and requiring the
Guarantor to remedy the same shall have been given to the Guarantor by the
Trustee or to the Guarantor and the Trustee by the Holders of at least 25%
in aggregate principal amount of the Debt Securities of that series at the
time outstanding;
(g) The Company or the Guarantor or any of its Restricted Subsidiaries
shall (1) voluntarily commence any proceeding or file any petition seeking
relief under the United States Bankruptcy Code or other federal or state
bankruptcy, insolvency, or similar law, (2) consent to the institution of,
or fail to controvert within the time and in the manner prescribed by law,
any such proceeding or the filing of any such petition, (3) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator,
or similar official for the Company or the Guarantor or any such Restricted
Subsidiary or for a substantial part of its property, (4) file an answer
admitting the material allegations of a petition filed against it in any
such proceeding, (5) make a general assignment for the benefit of
creditors, (6) admit in writing its inability or fail generally to pay its
debts as they become due, (7) take corporate action for the purpose of
effecting any of the foregoing, or (8) take any comparable action under any
foreign laws relating to insolvency;
(h) The entry of an order or decree by a court having competent
jurisdiction for (1) relief with respect to the Company or the Guarantor or
any of its Restricted Subsidiaries or a substantial part of any of their
property under the United States Bankruptcy Code or any other federal or
state bankruptcy, insolvency, or similar law, (2) the appointment of a
receiver, trustee, custodian, sequestrator, or similar official for the
Company or the Guarantor or any such Restricted Subsidiary or for a
substantial part of any of their property (except any decree or order
appointing such official of any Restricted Subsidiary pursuant to a plan
under which the assets and operations of such Restricted Subsidiary are
transferred to or combined with another Restricted Subsidiary of the
Guarantor or to the Guarantor), or (3) the winding-up or liquidation of the
Company or the Guarantor or any such Restricted Subsidiary (except any
decree or order approving or ordering the winding-up or liquidation of the
affairs of a Restricted Subsidiary pursuant to a plan under which the
assets and operations of such Restricted Subsidiary are transferred to or
combined with another Restricted Subsidiary or Subsidiaries of the
Guarantor or to the Guarantor), and such order or decree shall continue
unstayed and in effect for 60 consecutive days, or any
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similar relief is granted under any foreign laws and the order or decree
stays in effect for 60 consecutive days; or
(i) Any other Event of Default provided under the terms of the Debt
Securities of that series.
An Event of Default with respect to one series of Debt Securities is not
necessarily an Event of Default for another series.
If an Event of Default occurs and is continuing with respect to any series
of Debt Securities, unless the principal and interest with respect to all the
Debt Securities of such series shall have already become due and payable, either
the Trustee or the holders of not less than 25% in aggregate principal amount of
the Debt Securities of such series then outstanding may declare the principal of
(or, if Original Issue Discount Debt Securities, such portion of the principal
amount as may be specified in such series) and interest on all the Debt
Securities of such series due and payable immediately.
If an Event of Default occurs and is continuing, the Trustee shall be
entitled and empowered to institute any action or proceeding for the collection
of the sums so due and unpaid or to enforce the performance of any provision of
the Debt Securities of the affected series or the Indenture, to prosecute any
such action or proceeding to judgment or final decree, and to enforce any such
judgment or final decree against the Company or any other obligor on the Debt
Securities of such series. In addition, if there shall be pending proceedings
for the bankruptcy or reorganization of the Company or any other obligor on the
Debt Securities, or if a receiver, trustee, or similar official shall have been
appointed for its property, the Trustee shall be entitled and empowered to file
and prove a claim for the whole amount of principal, premium and interest (or,
in the case of Original Issue Discount Debt Securities, such portion of the
principal amount as may be specified in the terms of such series) owing and
unpaid with respect to the Debt Securities. No Holder of any Debt Securities of
any series shall have any right to institute any action or proceeding upon or
under or with respect to the Indenture, for the appointment of a receiver or
trustee, or for any other remedy, unless (a) such Holder previously shall have
given to the Trustee written notice of an Event of Default with respect to Debt
Securities of that series and of the continuance thereof, (b) the Holders of not
less than 25% in aggregate principal amount of the outstanding Debt Securities
of that series shall have made written request to the Trustee to institute such
action or proceeding with respect to such Event of Default and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses, and liabilities to be incurred therein or thereby, and (c) the
Trustee, for 60 days after its receipt of such notice, request, and offer of
indemnity shall have failed to institute such action or proceeding and no
direction inconsistent with such written request shall have been given to the
Trustee pursuant to the provisions of the Indenture.
Prior to the acceleration of the maturity of the Debt Securities of any
series, the Holders of a majority in aggregate principal amount of the Debt
Securities of that series at the time outstanding may, on behalf of the Holders
of all Debt Securities of that series, waive any past default or Event of
Default and its consequences for that series, except (a) a default in the
payment of the principal, premium, or interest with respect to such Debt
Securities or (b) a default with respect to a provision of the Indenture that
cannot be amended without the consent of each Holder affected thereby. In case
of any such waiver, such default shall cease to exist, any Event of Default
arising therefrom shall be deemed to have been cured for all purposes, and the
Company, the Trustee and the Holders of the Debt Securities of that series shall
be restored to their former positions and rights under the Indenture.
The Trustee shall, within 90 days after the occurrence of a default known
to it with respect to a series of Debt Securities, give to the Holders of the
Debt Securities of such series notice of all uncured defaults with respect to
such series known to it, unless such defaults shall have been cured or waived
before the giving of such notice; provided, however, that except in the case of
default in the payment of principal, premium, or interest with respect to the
Debt Securities of such series or in the making of any sinking fund payment with
respect to the Debt Securities of such series, the Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interest of the Holders of such Debt Securities.
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MODIFICATION OF THE INDENTURE
The Company, the Guarantor and the Trustee may enter into supplemental
indentures without the consent of the Holders of Debt Securities issued under
the Indenture for one or more of the following purposes:
(a) To evidence the succession of another person to the Company or the
Guarantor pursuant to the provisions of the Indenture relating to
consolidations, mergers, and sales of assets and the assumption by such
successor of the covenants, agreements, and obligations of the Company or
the Guarantor in the Indenture and in the Debt Securities;
(b) To surrender any right or power conferred upon the Company or the
Guarantor by the Indenture, to add to the covenants of the Company or the
Guarantor such further covenants, restrictions, conditions, or provisions
for the protection of the Holders of all or any series of Debt Securities
as the Board of Directors of the Company or the Guarantor shall consider to
be for the protection of the Holders of such Debt Securities, and to make
the occurrence, or the occurrence and continuance of a default in any of
such additional covenants, restrictions, conditions, or provisions, a
default or an Event of Default under the Indenture (provided, however, that
with respect to any such additional covenant, restriction, condition, or
provision, such supplemental indenture may provide for a period of grace
after default, which may be shorter or longer than that allowed in the case
of other defaults, may provide for an immediate enforcement upon such
default, may limit the remedies available to the Trustee upon such default,
or may limit the right of Holders of a majority in aggregate principal
amount of any or all series of Debt Securities to waive such default);
(c) To cure any ambiguity or to correct or supplement any provision
contained in the Indenture, in any supplemental indenture, or in any Debt
Securities that may be defective or inconsistent with any other provision
contained therein, to convey, transfer, assign, mortgage, or pledge any
property to or with the Trustee, or to make such other provisions in regard
to matters or questions arising under the Indenture as shall not adversely
affect the interests of any Holders of Debt Securities of any series;
(d) To modify or amend the Indenture in such a manner as to permit the
qualification of the Indenture or any supplemental Indenture under the
Trust Indenture Act as then in effect;
(e) To add or change any of the provisions of the Indenture to change
or eliminate any restriction on the payment of principal or premium with
respect to Debt Securities so long as any such action does not adversely
affect the interest of the Holders of Debt Securities in any material
respect or permit or facilitate the issuance of Debt Securities of any
series in uncertificated form;
(f) To comply with the provisions of the Indenture relating to
consolidations, mergers, and sales of assets;
(g) In the case of Subordinated Debt Securities, to make any change in
the provisions of the Indenture relating to subordination that would limit
or terminate the benefits available to any Holder of Senior Indebtedness
under such provisions (but only if such Holder of Senior Indebtedness
consents to such change);
(h) To add additional Guarantees with respect to the Debt Securities
or to secure the Debt Securities;
(i) To make any change that does not adversely affect the rights of
any Holder;
(j) To add to, change, or eliminate any of the provisions of the
Indenture with respect to one or more series of Debt Securities, so long as
any such addition, change, or elimination not otherwise permitted under the
Indenture shall (1) neither apply to any Debt Securities of any series
created prior to the execution of such supplemental Indenture and entitled
to the benefit of such provision nor modify the rights of the Holders of
any such Debt Security with respect to such provision or (2) become
effective only when there is no such Debt Security outstanding;
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(k) To evidence and provide for the acceptance of appointment by a
successor or separate Trustee with respect to the Debt Securities of one or
more series and add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the
Indenture by more than one Trustee; and
(l) To establish the form or terms of Debt Securities of any series,
as described under "Description of Debt Securities -- General" above.
With the consent of the Holders of a majority in aggregate principal amount
of the outstanding Debt Securities of each series affected thereby, the Company,
the Guarantor and the Trustee may from time to time and at any time enter into a
supplemental Indenture for the purpose of adding any provisions to, changing in
any manner, or eliminating any of the provisions of the Indenture or of any
supplemental Indenture or modifying in any manner the rights of the Holder of
the Debt Securities of such series; provided, however, that without the consent
of the Holders of each Debt Security so affected, no such supplemental Indenture
shall (a) reduce the percentage in principal amount of Debt Securities of any
series whose Holders must consent to an amendment, (b) reduce the rate of or
extend the time for payment of interest on any Debt Security, (c) reduce the
principal of or extend the stated maturity of any Debt Security, (d) reduce the
premium payable upon the redemption of any Debt Security or change the time at
which any Debt Security may or shall be redeemed, (e) make any Debt Security
payable in a currency other than that stated in the Debt Security, (f) in the
case of any Subordinated Debt Security, make any change in the provisions of the
Indenture relating to subordination that adversely affects the rights of any
Holder under such provisions, (g) release any security that may have been
granted with respect to the Debt Securities, or (h) make any change in the
provisions of the Indenture relating to waivers of defaults or amendments that
require unanimous consent.
CERTAIN COVENANTS
LIMITATION ON LIENS. The Guarantor may not, and may not permit any of its
Subsidiaries to, directly or indirectly, create or permit to exist any Lien on
any Principal Property, whether owned on the date of issuance of the Debt
Securities or thereafter acquired, securing any obligation unless the Guarantor
contemporaneously secures the Debt Securities equally and ratably with (or prior
to) such obligation. The preceding sentence will not require the Guarantor to
secure the Debt Securities if the Lien consists of the following: (i) Permitted
Liens; or (ii) Liens securing Indebtedness if, after giving pro forma effect to
the Incurrence of such Indebtedness (and the receipt and application of the
proceeds thereof) or the securing of outstanding Indebtedness, all Indebtedness
of the Guarantor and its Subsidiaries secured by Liens on Principal Property
(other than Permitted Liens), at the time of determination does not exceed 10%
of the total consolidated stockholders' equity of the Guarantor as shown on the
audited consolidated balance sheet contained in the latest annual report to
stockholders of the Guarantor.
OWNERSHIP OF THE COMPANY. The Indenture contains a covenant that, so long
as any of the Debt Securities are outstanding and subject to certain rights
described below under "Consolidation or Merger," the Guarantor will continue to
own, directly or indirectly, all of the outstanding voting shares of the
Company.
CERTAIN DEFINITIONS. The following definitions, among others, are used in
the Indenture. Many of the definitions of terms used in the Indenture have been
negotiated specifically for the purposes of inclusion in the Indenture and may
not be consistent with the manner in which such terms are defined in other
contexts. Prospective purchasers of Debt Securities are encouraged to read each
of the following definitions carefully and to consider such definitions in the
context in which they are used in the Indenture. Capitalized terms used herein
but not defined have the meanings assigned thereto in the Indenture.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP; and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
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"Currency Exchange Protection Agreement" means, in respect of any Person,
any foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"Disqualified Stock" of a Person means Redeemable Stock of such Person as
to which the maturity, mandatory redemption, conversion or exchange or
redemption at the option of the holder thereof occurs, or may occur, on or prior
to the first anniversary of the Stated Maturity of the Debt Securities.
"GAAP" means generally accepted accounting principles in the United States
as in effect as of the date on which the Debt Securities of the applicable
series are issued, including those set forth in the opinions and pronouncements
of the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
based on GAAP contained in this Indenture shall be computed in conformity with
GAAP consistently applied.
"Government Contract Lien" means any Lien required by any contract,
statute, regulation or order in order to permit the Company or any of its
Subsidiaries to perform any contract or subcontract made by it with or at the
request of the United States or any State thereof or any department, agency or
instrumentality of either or to secure partial, progress, advance or other
payments by the Company or any of its Subsidiaries to the United States or any
State thereof or any department agency or instrumentality of either pursuant to
the provisions of any contract, statute, regulation or order.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Protection Agreement, Currency Exchange Protection
Agreement or Commodity Price Protection Agreement or other similar agreement.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of Indebtedness of such Person for borrowed money;
(ii) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables);
(v) all obligations of such Person in respect of letters of credit,
banker's acceptances or other similar instruments or credit transactions
(including reimbursement obligations with respect thereto), other than
obligations with respect to letters of credit securing obligations (other
than obligations described in (i) through (iv) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing
is reimbursed no later than the third business day following receipt by
such Person of a demand for reimbursement following payment on the letter
of credit;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (but
excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Persons; and
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Disqualified Stock or Preferred Stock that does not have
a fixed redemption, repayment or repurchase price shall be calculated in
accordance with the terms of such Stock as if such Stock were redeemed, repaid
or
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repurchased on any date on which Indebtedness shall be required to be determined
pursuant to this Indenture; provided, however, that if such Stock is not then
permitted to be redeemed, repaid or repurchased, the redemption, repayment or
repurchase price shall be the book value of such Stock as reflected in the most
recent financial statements of such Person. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Interest Rate Protection Agreement" means, in respect of any Person, any
interest rate swap agreement, interest rate option agreement, interest rate cap
agreement, interest rate collar agreement, interest rate floor agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in interest rates.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Amount of Rent" as to any lease for any period means the aggregate
amount of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water rates and similar charges. In the case of any lease
that is terminable by the lessee upon the payment of a penalty, such net amount
shall also include the amount of such penalty, but no rent shall be considered
as payable under such lease subsequent to the first date upon which it may be so
terminated.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws, social security laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or bonds to
secure performance, surety or appeal bonds to which such Person is a party or
which are otherwise required of such Person, or deposits as security for
contested taxes or import duties or for the payment of rent or other obligations
of like nature, in each case incurred in the ordinary course of business; (b)
Liens imposed by law, such as carriers', warehousemen's, laborers',
materialmen's, landlords', vendors', workmen's, operators', factors and
mechanics liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings; (c) Liens for taxes, assessments and other
governmental charges or levies not yet delinquent or which are being contested
in good faith by appropriate proceedings; (d) survey exceptions, encumbrances,
easements or reservations of or with respect to, or rights of others for or with
respect to, licenses, rights-of-way, sewers, electric and other utility lines
and usages, telegraph and telephone lines, pipelines, surface use, operation of
equipment, permits, servitudes and other similar matters, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (e) Liens existing on
or provided for under the terms of agreements existing on the Issue Date
(including, without limitation, under the Credit Agreement); (f) Liens on
property at the time the Company or any of its Subsidiaries acquired the
property or the entity owning such property, including any acquisition by means
of a merger or consolidation with or into the Guarantor; provided, however, that
any such Lien may not extend to any other property owned by the Guarantor or any
of its Subsidiaries; (g) Liens on any Principal Property, or any shares of stock
or Indebtedness of any Subsidiary, acquired (including by way of merger or
consolidation) after the date of the Indenture by the Company or any Subsidiary
which are created contemporaneously with such acquisition, or within 24 months
thereafter, to secure or provide for the payment or financing of any part of the
purchase price thereof; (h) Liens on any property of CompuServe Corporation or
any of its Subsidiaries, including any shares of stock or Indebtedness of any
such Subsidiaries; (i) Liens arising in connection with the securitization of
any mortgage loans owned by the Company or any of its Subsidiaries; (j) Liens
arising in connection with the sale of any credit card receivables owned by the
Company or any of its Subsidiaries; (k) Liens securing a Hedging Obligation so
long as such Hedging Obligation is of the type customarily entered into for the
purpose of limiting risk; (l) Purchase Money Liens; (m) Liens securing only
Indebtedness of a Subsidiary of the Guarantor to the
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Guarantor or one or more wholly owned Subsidiaries of the Guarantor; (n) Liens
on any property to secure Indebtedness Incurred in connection with the
construction, installation or financing of pollution control or abatement
facilities or other forms of industrial revenue bond financing or Indebtedness
issued or Guaranteed by the United States, any state or any department, agency
or instrumentality thereof; (o) Government Contract Liens; (p) Liens securing
Indebtedness of joint ventures in which the Guarantor or a Subsidiary has an
interest to the extent such Liens are on property or assets of, such joint
ventures; (q) Liens resulting from the deposit of funds or evidences of
Indebtedness in trust for the purpose of defeasing Indebtedness of the Guarantor
or any of its Subsidiaries; (r) legal or equitable encumbrances deemed to exist
by reason of negative pledges or the existence of any litigation or other legal
proceeding and any related lis pendens filing (excluding any attachment prior to
judgment lien or attachment lien in aid of execution on a judgment); (s) any
attachment Lien being contested in good faith and by proceedings promptly
initiated and diligently conducted, unless the attachment giving rise thereto
will not, within 60 days after the entry thereof, have been discharged or fully
bonded or will not have been discharged within 60 days after the termination of
any such bond; (t) any judgment Lien, unless the judgment it secures will not,
within 60 days after the entry thereof, have been discharged or execution
thereof stayed pending appeal, or will not have been discharged within 60 days
after the expiration of any such stay; (u) Liens to banks arising from the
issuance of letters of credit issued by such banks ("issuing banks") on the
following: (i) any and all shipping documents, warehouse receipts, policies or
certificates of insurance and other document accompanying or relative to drafts
drawn under any credit, and any draft drawn thereunder (whether or not such
documents, goods or other property be released to or upon the order of the
Guarantor or any Subsidiary under a security agreement or trust or bailee
receipt or otherwise), and the proceeds of each and all of the foregoing; (ii)
the balance of every deposit account, now or at the time hereafter existing, of
the Guarantor or any Subsidiary with the issuing banks, and any other claims of
the Guarantor or any Subsidiary against the issuing banks; and all property
claims and demands and all rights and interests therein of the Guarantor or any
Subsidiary and all evidences thereof and all proceeds thereof which have been or
at any time will be delivered to or otherwise come into any issuing bank's
possession, custody or control, or into the possession, custody or control of
any bailee for the issuing bank or of any of its agents or correspondents for
the account of the issuing bank, for any purpose, whether or not the express
purpose of being used by the issuing bank as collateral security or for the
safekeeping or for any other of different purpose, the issuing bank being deemed
to have possession or control of all of such property actually in transit to or
from or set apart for the issuing bank, any bailee for the issuing bank or any
of its correspondents acting in its behalf, it being understood that the receipt
at any time by the issuing bank, or any of its bailees, agents or
correspondents, of other security, of whatever nature, including cash, will not
be deemed a waiver of any of the issuing bank's rights or power hereunder; (iii)
all property shipped under or pursuant to or in connection with any credit or
drafts drawn thereunder or in any way related thereto, and all proceeds thereof;
(iv) all additions to and substitutions for any of the property enumerated above
in this subsection; (v) rights of a common owner of any interest in property
held by such Person; (w) any defects, irregularities or deficiencies in title to
easements, rights-of-way or other properties which do not in the aggregate
materially adversely affect the value of such properties or materially impair
their use in the operation of the business of such Person; and (x) Liens to
secure any refinancing, refunding, extension, renewal or replacement (or
successive refinancings, refundings, extensions, renewals or replacements), as a
whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (e) through (p); provided, however, that (i) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements on such property) and (ii) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (e) through (l) at the time the original
Lien became a Permitted Lien under this Indenture and (B) an amount necessary to
pay any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement.
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Principal Property" means, as of any date of determination, any property
or assets owned by the Company or any Subsidiary other than any property which,
in the good faith opinion of the Board of Directors
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of the Company, is not of material importance to the business conducted by the
Company and its Subsidiaries taken as a whole.
"Purchase Money Lien" means a Lien on property securing Indebtedness
Incurred by the Guarantor or any of its Subsidiaries to provide funds for all or
any portion of the cost of acquiring, constructing, altering, expanding,
improving or repairing such property or assets used in connection with such
property.
"Redeemable Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
of for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness (other than Preferred
Stock) or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Neither the Guarantor nor the Company may consolidate with or merge with or
into any person, or convey, transfer, or lease all or substantially all of its
assets, unless the following conditions have been satisfied:
(a) Either (1) the Guarantor shall be the continuing person in the
case of a merger or (2) the resulting, surviving, or transferee person, if
other than the Guarantor (the "Successor Company"), shall be a corporation
organized and existing under the laws of the United States, any State, or
the District of Columbia and shall expressly assume all of the obligations
of the Company and the Guarantor under the Debt Securities and the
Indenture;
(b) Immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the Successor Company or any
subsidiary of the Guarantor as a result of such transaction as having been
incurred by the Successor Company or such subsidiary at the time of such
transaction), no Default or Event of Default would occur or be continuing;
and
(c) The Guarantor shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger, or transfer complies with the Indenture.
A disposition by the Guarantor of its ownership interest in CompuServe
Corporation shall not be deemed a transfer or conveyance of substantially all of
the Company's assets.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Indenture shall generally cease to be of any further effect with
respect to a series of Debt Securities if (a) the Company has delivered to the
Trustee for cancellation all Debt Securities of such series (with certain
limited exceptions) or (b) all Debt Securities of such series not theretofore
delivered to the Trustee for cancellation shall have become due and payable, or
are by their terms to become due and payable within one year or are to be called
for redemption within one year, and the Company shall have deposited with the
Trustee as trust funds the entire amount in the currency in which the Debt
Securities are denominated sufficient to pay at maturity or upon redemption all
such Debt Securities (and if, in either case, the Company shall also pay or
cause to be paid all other sums payable under the Indenture by the Company).
In addition, the Company shall have a "legal defeasance option" (pursuant
to which it may terminate, with respect to the Debt Securities of the particular
series, all of its obligations under such Debt Securities and the Indenture with
respect to such Debt Securities) and "covenant defeasance option" (pursuant to
which it may terminate, with respect to the Debt Securities of a particular
series, its obligations with respect to such Debt Securities under certain
specified covenants contained in the Indenture). If the Company exercises its
legal defeasance option with respect to a series of Debt Securities, payment of
such Debt Securities may not
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be accelerated because of an Event of Default If the Company exercises its
covenant defeasance option with respect to a series of Debt Securities, payment
of such Debt Securities may not be accelerated because of an Event of Default
related to the specified covenants.
The Company may exercise its legal defeasance option or its covenant
defeasance option with respect to the Debt Securities of a series only if (a)
the Company irrevocably deposits in trust with the Trustee cash or U.S.
Government Obligations (as defined in the Indenture) for the payment of
principal, premium, and interest with respect to such Debt Securities to
maturity or redemption, as the case may be, (b) the Company delivers to the
Trustee a certificate from a nationally recognized firm of independent
accountants expressing their opinion that the payment of principal and interest
when due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times and
in such amounts as will be sufficient to pay the principal, premium, and
interest when due with respect to all the Debt Securities of such series to
maturity or redemption, as the case may be, (c) 91 days after the deposit is
made and during the 91-day period no default described in clause (g) or (h)
under "Description of Debt Securities Events of Default and Remedies" above with
respect to the Company or the Guarantor occurs that is continuing at the end of
such period, (d) no Default has occurred and is continuing on the date of such
deposit and after giving effect thereto, (e) the deposit does not constitute a
default under any other agreement binding on the Company or the Guarantor, and,
in the case of Subordinated Debt Securities, is not prohibited by the provisions
of the Indenture relating to subordination, (f) the Company delivers to the
Trustee an opinion of counsel to the effect that the trust resulting from the
deposit does not constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940, (g) the Company shall have delivered
to the Trustee an opinion of counsel addressing certain federal income tax
matters relating to the defeasance, and (h) the Company delivers to the Trustee
an officer's certificate and an opinion of counsel, each stating that all
conditions precedent to the defeasance and discharge of the Debt Securities of
such series as contemplated by the Indenture have been complied with.
The Trustee shall hold in trust cash or U.S. Government Obligations
deposited with it as described above and shall apply the deposited cash and the
proceeds from deposited U.S. Government Obligations to the payment of principal,
premium, and interest with respect to the Debt Securities of the defeased
series. In the case of Subordinated Debt Securities, the money and U.S.
Government Obligations so held in trust will not be subject to the subordination
provisions of the Indenture.
THE TRUSTEE
The Company may maintain banking and other commercial relationships with
the Trustee and its affiliates in the ordinary course of business and the
Trustee may own Debt Securities.
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities in or outside the United States
through underwriters, through or to dealers, directly to one or more purchasers,
or through agents. Each Prospectus Supplement with respect to the Debt
Securities offered hereby will set forth the terms of the offering of applicable
Debt Securities, including the name or names of any underwriters, dealers or
agents, the purchase price of the Debt Securities and the proceeds to the
Company from such sale, any delayed delivery arrangements, any underwriting
discounts and other items constituting underwriters' compensation, the initial
public offering price, any discounts or concessions allowed or re-allowed or
paid to dealers and any securities exchanges on which the Debt Securities may be
listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Debt
Securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of Debt Securities will be named in the
Prospectus Supplement relating to such offering, and if an underwriting
syndicate is used, the managing underwriter or underwriters will be set
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forth on the cover of such Prospectus Supplement. Unless otherwise set forth in
the Prospectus Supplement relating thereto, the obligations of the underwriters
or agents to purchase the Debt Securities will be subject to conditions
precedent and the underwriters will be obligated to purchase all the Debt
Securities if any are purchased. The initial public offering price and any
discounts or concessions allowed or re-allowed or paid to dealers may be changed
from time to time.
If dealers are used in the sale of Debt Securities with respect to which
this Prospectus is delivered, the Company will sell such Debt Securities to the
dealers as principals. The dealers may then resell such Debt Securities to the
public at varying prices to be determined by such dealers at the time of resale.
The names of the dealers and the terms of the transaction will be set forth in
the Prospectus Supplement relating thereto.
Debt Securities may be sold directly by the Company or through agents
designated by the Company from time to time at fixed prices, which may be
changed, or at varying prices determined at the time of sale. Any agent involved
in the offer or sale of the Debt Securities with respect to which this
Prospectus is delivered will be named, and any commissions payable by the
Company to such agent will be set forth in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of the Debt Securities, underwriters or agents
may receive compensation from the Company or from purchasers of Debt Securities
for whom they may act as agents in the form of discounts, concessions, or
commissions. Underwriters, agents and dealers participating in the distribution
of the Debt Securities may be deemed to be underwriters, and any discounts or
commissions received by them from the Company and any profit on the resale of
the Debt Securities by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers from certain types of
institutions to purchase Debt Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
Such contracts will be subject only to those conditions set forth in such
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
Agents, dealers, and underwriters may be entitled under agreements entered
into with the Company and Block to indemnification by the Company and Block
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments that such agents, dealers, or
underwriters may be required to make with respect thereto. Agents, dealers, and
underwriters may be customers of, engage in transactions with, or perform
services for the Company and Block in the ordinary course of business.
The Debt Securities may or may not be listed on a national securities
exchange. No assurances can be given that there will be a market for the Debt
Securities.
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURE
When so provided in the Prospectus Supplement, investors in the Global
Securities representing any of the Securities issued hereunder may hold a
beneficial interest in such Global Securities through DTC, CEDEL or Euroclear
(as defined below) or through participants. The Global Securities may be traded
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle as set forth in the
applicable Prospectus Supplement.
Cedel S.A. ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its participants,
among other things, services for safekeeping, administration, clearance and
settlement of
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internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
CEDEL participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations and may include the
underwriters. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the "Euroclear Operator" or
"Euroclear"), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries and may include the underwriters. Indirect access to
the Euroclear System is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear Operator is the Belgian branch of Morgan Guaranty Trust
Company of New York ("Morgan") which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Federal Reserve Board and
the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Principal, premium, if any, and interest payments with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations as described below. The CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the relevant Indenture on behalf of a CEDEL
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to its depositary's ability to effect such actions on
its behalf through the depositary.
INITIAL SETTLEMENT
All Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in the depository. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
depositories, Citibank and Morgan, which in turn will hold such positions in
accounts as participants of DTC.
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Global Securities held through DTC will follow the settlement practices
described above. Investor securities custody accounts will be credited with
their holdings against payment on the settlement date. Global Securities held
through CEDEL or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures described above. See
"Description of Debt Securities--Book-Entry Debt Securities."
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL participants and/or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When
beneficial interests in the Global Securities are to be transferred from the
account of a DTC participant to the account of a CEDEL participant or a
Euroclear participant, the purchaser will send instructions to CEDEL or
Euroclear through a participant at least one business day prior to settlement.
CEDEL or Euroclear will instruct Citibank or Morgan, respectively, as the case
may be, to receive a beneficial interest in the Global Securities against
payment. Unless otherwise set forth in the Prospectus Supplement, payment will
include interest accrued on the beneficial interest in the Global Securities so
transferred from and including the last coupon payment date to and excluding the
settlement date, on the basis on which interest is calculated on the Debt
Securities. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by Citibank or Morgan to the DTC participant's account
against delivery of the beneficial interest in the Global Securities. After
settlement has been completed, the beneficial interest in the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL or Euroclear participant's
account. The securities credit will appear the next day (European time) and the
cash debit will be back-valued to, and the interest on the beneficial interest
in Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (that is, the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL, or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, participants can elect not to preposition funds and allow that credit line
to be drawn upon to finance settlement. Under this procedure, CEDEL participants
or Euroclear participants purchasing beneficial interest in Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the beneficial interests in the Global Securities were credited to their
accounts. However, interest on the beneficial interests in the Global Securities
would accrue from the value date. Therefore, in many cases the investment income
on the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each participant's particular cost of funds.
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Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending a beneficial interest
in Global Securities to Citibank or Morgan for the benefit of CEDEL participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL and Euroclear participants may employ
their customary procedures to transactions in which the beneficial interest in
the Global Securities is to be transferred by the respective clearing system,
through Citibank or Morgan, to a DTC participant. The seller will send
instructions to CEDEL or Euroclear through a participant at least one business
day prior to settlement. In these cases, CEDEL or Euroclear will instruct
Citibank or Morgan, as appropriate, to deliver the beneficial interest in the
Global Securities to the DTC participant's account against payment. Payment will
include interest accrued on the beneficial interests in the Global Securities
from and including the last coupon payment date to and excluding the settlement
date on the basis on which interest is calculated on the Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL or Euroclear participant the
following day, and receipt of the cash proceeds in the CEDEL or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(that is, the trade fails), receipt of the cash proceeds in the CEDEL or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
beneficial interests in Global Securities from DTC participants for credit to
CEDEL participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(2) borrowing beneficial interests in the Global Securities in the
U.S. from a DTC participant no later than one day prior to settlement,
which would give beneficial interests in the Global Securities sufficient
time to be reflected in the appropriate CEDEL or Euroclear account in order
to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the CEDEL participant
or Euroclear participant.
Although the DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of beneficial interests in Global
Securities among participants of the DTC, CEDEL and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities, directly or
indirectly, through CEDEL or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification
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requirements, and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Non-U.S. persons that are
beneficial owners (other than a beneficial owner that owns actually or
constructively 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote or a controlled foreign
corporation that is related to the Company through stock ownership) can
obtain a complete exemption from the withholding tax by filing a properly
completed Form W-8 (Certificate of Foreign Status).
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, that is a beneficial owner and for which the interest income
is effectively connected with its conduct of a trade or business in the
United States, can obtain an exemption from the withholding tax by filing a
properly completed Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. persons that are beneficial owners that are
entitled to the benefits of an income tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing a properly completed Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner or the beneficial
owner's agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing a properly completed
Form W-9 (Request for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING, PROCEDURE
The beneficial owner of the Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate form to the
entity through whom it directly holds the Global Security. For example, if the
beneficial owner is listed directly on the books of Euroclear or CEDEL as the
holder of the Debt Security, the IRS Form must be provided to Euroclear or
CEDEL, as the case may be. Each person through which a Debt Security is held
must submit, on behalf of the beneficial owner, the IRS Form (or in certain
cases a copy thereof) under applicable procedures to the person through which it
holds the Debt Security, until the IRS Form is received by the U.S. person who
would otherwise be required to withhold U.S. federal income tax from interest on
the Debt Security. For example, in the case of Debt Securities held through
Euroclear or CEDEL, the IRS Form (or a copy thereof) must be received by the
U.S. depositary of such clearing agency. Applicable procedures include, if a
beneficial owner of the Debt Security provides an IRS Form W-8 to a securities
clearing organization, bank or other financial institution (a "financial
institution") that holds the Debt Security in the ordinary course of its trade
or business on the owner's behalf, that such financial institution certify to
the person otherwise required to withhold U.S. federal income tax from such
interest, under penalties of perjury, that such statement has been received from
the beneficial owner by it or by a financial institution between it and the
beneficial owner and that it furnish the payor with a copy thereof.
As used in this section on tax documentation requirements, the term "U.S.
person" means (i) a citizen or resident of the United States, (ii) a corporation
or partnership organized in or under the laws of the United States or any State
thereof or (iii) an estate or trust the income of which is includable in gross
income for U.S. tax purposes, regardless of its source.
This summary does not deal with all aspects of U.S. income tax and
withholding that may be relevant to foreign beneficial owners of the Global
Securities, including special categories of foreign investors who may not be
eligible for exemptions from U.S. withholding tax. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of beneficial interests in the Global Securities. Any additional
requirements, if applicable, will be set forth in the Prospectus Supplement.
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LEGAL MATTERS
Certain legal matters in connection with the Debt Securities and the
Guarantee will be passed upon for the Company and for the Guarantor by Bryan
Cave LLP, Kansas City, Missouri. Certain matters will be passed upon for any
underwriters or agents by a firm named in the Prospectus Supplement relating to
a particular issue of Debt Securities.
EXPERTS
The consolidated financial statements and financial statement schedule
incorporated in this Prospectus by reference from the Guarantor's Annual Report
on Form 10-K/A for the year ended April 30, 1997, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, which are
incorporated by reference, and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Option One Mortgage Corporation as of December
31, 1996 and 1995 and for the year ended December 31, 1996 and for the period
March 3, 1995 to December 31, 1995 (Successor period) and from January 1, 1995
to March 2, 1995 (Predecessor period) have been incorporated by reference herein
from the Guarantor's Current Report on Form 8-K/A dated July 2, 1997 (filed on
August 14, 1997) in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of
Option One Mortgage Corporation as of December 31, 1996 and 1995 and for the
year ended December 31, 1996 and for the period March 3, 1995 to December 31,
1995 (Successor period) and from January 1, 1995 to March 2, 1995 (Predecessor
period) contains an explanatory paragraph that states that effective March 3,
1995, Fleet National Bank, Rhode Island acquired all of the outstanding stock of
Option One Mortgage Corporation in a business combination accounted for as a
purchase. As a result of the acquisition, the financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
Effective September 27, 1995, Fleet National Bank, Rhode Island transferred its
investment in the Company to one of its wholly owned subsidiaries, Fleet Holding
Corporation.
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$500,000,000
BLOCK FINANCIAL CORPORATION
8.50% SENIOR NOTES DUE 2007
FULLY AND UNCONDITIONALLY GUARANTEED BY
H&R BLOCK, INC.
[BLOCK FINANCIAL CORPORATION LOGO]
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PROSPECTUS SUPPLEMENT
APRIL 13, 2000
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SALOMON SMITH BARNEY
CHASE SECURITIES INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
BANC ONE CAPITAL MARKETS, INC.
BLAYLOCK & PARTNERS, L.P.
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