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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
Missouri 44-0607856
(State or other jurisdiction of (I.R.S. Employer Identi-
incorporation or organization) fication Number)
4400 Main Street, Kansas City, Missouri 64111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 1998, was $4,422,545,501.23
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1998: 106,515,380.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to security holders
for the fiscal year ended April 30, 1998, are incorporated herein by reference
in response to Part I, Item 1, and Part II, Items 5 through 7 and Item 8, and
certain specified portions of the registrant's definitive proxy statement filed
within 120 days after April 30, 1998, are incorporated herein by reference in
response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a corporation that was organized in 1955 under the
laws of the State of Missouri (the "Company"). It is the parent corporation in a
two-tier holding company structure following a 1993 corporate restructuring. The
second-tier holding company is H&R Block Group, Inc., a Delaware corporation and
the direct or indirect owner of the operating subsidiaries that provide tax and
financial services to the general public principally in the United States, but
also in Canada, Australia, the United Kingdom and other foreign countries.
Approximately 86% of the consolidated revenues of the Company are generated by
subsidiaries involved in tax return preparation, electronic filing of income tax
returns and other tax-related services. The Company's subsidiaries also purchase
participation interests in refund anticipation loans made by a third-party
lender, originate, purchase, service, sell and securitize mortgages, and offer
personal productivity software and credit card loans.
Developments during fiscal year 1998 within U.S. Tax Operations,
International Tax Operations, Mortgage Operations and Credit Card Operations are
described in the section below entitled "Description of Business."
On January 31, 1998, H&R Block Group, Inc. ("Group") completed the sale
of its 80.1% interest in CompuServe Corporation ("CompuServe") to a subsidiary
of WorldCom, Inc. ("WorldCom"). The sale was structured as a stock-for-stock
transaction in which Group received 30,108,610 shares of WorldCom common stock
in exchange for its 74,200,000 shares of CompuServe common stock. Group
monetized 100% of its WorldCom stock through a block trade on February 2, 1998,
and generated $1,032,699,000 in net proceeds from such monetization. Group's
ownership of CompuServe stock had been reduced from 100% to approximately 80.1%
as a result of CompuServe's initial public offering of its common stock in April
1996. Pursuant to the April 1996 offering, CompuServe sold 18,400,000 shares of
its common stock to the public at $30.00 per share. The Company did not
recognize a gain on the initial public offering. Additional paid-in capital was
increased by the change in the Company's proportionate share of CompuServe's
equity as a result of the initial public offering.
On June 17, 1997, Block Financial Corporation ("BFC"), a direct
subsidiary of Group, purchased all of the stock of Option One Mortgage
Corporation ("Option One") from Fleet Financial Group, Inc. ("Fleet"). Option
One, with a network of more than 5,000 mortgage brokers in 46 states, engages in
the origination, purchase, servicing, securitization and sale of nonconforming
mortgage loans. The cash purchase price was $218.1 million in cash, consisting
of $28.1 million in adjusted stockholder's equity and a premium of $190 million.
In addition, BFC made a cash payment of $456.2 million to Fleet to eliminate
intercompany loans made to Option One to finance Option One's mortgage
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loan business. The $456.2 million payment was recorded as an intercompany loan
from BFC to Option One and was repaid by Option One by the end of June 1997
after Option One sold mortgage loans to a third-party in the ordinary course of
business. The acquisition was accounted for as a purchase and was ultimately
financed with the issuance of $250 million in Senior Notes during the second
quarter of fiscal year 1998.
During the fiscal year ended April 30, 1998, the Company was not
involved in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire or
dispose of any material amount of assets during such year otherwise than in the
ordinary course of business or in connection with the CompuServe and Option One
transactions.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 1998, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned
subsidiaries, has approximately 2,600 regular full-time employees. The highest
number of persons employed by the Company during the fiscal year ended April 30,
1998, including seasonal employees, was approximately 83,500.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This reportable operating segment provides to the general
public in the United States income tax return preparation services, electronic
filing services and other services related to income tax return preparation,
purchases participation interests in refund anticipation loans made to tax
clients by a third-party lending institution, and sells to the general public
tax return preparation software and other personal productivity computer
software.
Tax Operations. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices operated
by H&R Block Tax Services, Inc. and its subsidiaries (collectively, "Tax
Services") or by others to whom Tax Services has granted franchises. Tax
Services and its franchisees (collectively referred to herein as "H&R Block")
provide to the general public income tax return preparation services, electronic
filing services and other services relating to income tax return preparation.
For U.S. returns, H&R Block offers a refund anticipation loan service and an
electronic refund service in conjunction with its electronic filing service. H&R
Block also markets its knowledge of how to prepare income tax returns through
its income tax training schools.
Taxpayers Served. H&R Block served approximately 15,835,000 taxpayers
in the United States during fiscal year 1998, an increase from the 15,625,000
taxpayers served in fiscal year 1997. "Taxpayers served" includes taxpayers for
whom H&R Block prepared income tax returns as well as taxpayers for whom Block
provided only electronic filing services.
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Tax Return Preparation. During the 1998 income tax filing season
(January 2 through April 30), H&R Block offices in the United States prepared
approximately 14,838,000 individual income tax returns, compared to the
preparation of 14,302,000 such returns in fiscal year 1997 and 13,360,000 such
returns in fiscal year 1996. These returns constituted about 13.1% of an IRS
estimate of total individual income tax returns filed during fiscal year 1998.
The following table shows the approximate number of income tax returns prepared
at H&R Block offices during the last five tax filing seasons:
Tax Season Ended April 30
(in thousands)
1994 1995 1996 1997 1998
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Returns Prepared 13,036 12,918 13,360 14,302 14,838
During the tax season, most H&R Block offices are open from 9:00 a.m.
to 9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have been
developed so that a tax return is prepared on a computer in the presence of the
customer, in most instances in less than one hour, on the basis of information
furnished by the customer. Pursuant to the one-stop service offered at
Company-owned offices beginning in 1997, the return is reviewed for accuracy and
presented to the customer for signature and filing during his or her initial
visit to the office.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States. Appealing to taxpayers with more complicated returns, H&R Block Premium
stresses the convenience of appointments, year-round tax service from the same
preparer and private office interviews. The number of H&R Block Premium offices
increased from 581 in fiscal year 1997 to 598 in 1998. In fiscal 1998, the
number of H&R Block Premium clients decreased to approximately 647,000, compared
to approximately 666,000 in 1997. The Company plans to expand the H&R Block
Premium segment of its tax return preparation business.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 1998 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Beneficial National Bank in
amounts based upon the customers' anticipated Federal income tax refunds. Income
tax return information is simultaneously transmitted by H&R Block to the IRS and
the lending bank. Within a few days after the date of filing, a check in the
amount of the loan, less the bank's transaction fee and H&R Block's tax return
preparation fee (and, where applicable, electronic filing fee), is received by
the RAL customer. The IRS then directly deposits the participating customer's
actual Federal income tax refund into a designated account at the bank in order
for the loan to be repaid.
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H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service customer's income tax refund is directly
deposited into a bank account at a bank (Tax Services used Mellon Bank, N.A. in
1998) within approximately three weeks after the tax return is electronically
filed, and a check is thereafter issued to the taxpayer in the amount of the
refund, less the bank's transaction fee and H&R Block's tax return preparation
fee (and, where applicable, electronic filing fee).
H&R Block filed approximately 9,423,000 U.S. tax returns electronically
in fiscal 1998, compared to 7,279,000 in fiscal 1997 and 6,298,000 in fiscal
1996. Approximately 2,420,000 refund anticipation loans were processed in fiscal
1998 by H&R Block, compared to 2,573,000 in fiscal 1997 and 2,361,000 in fiscal
1996. Approximately 1,855,000 electronic refunds were processed in fiscal 1998
by H&R Block, compared to 1,871,300 in fiscal 1997 and 1,283,000 in fiscal 1996.
Tax Services eliminated the electronic filing charge associated with non-bank
services in approximately 70% of its offices in fiscal year 1998, thus
encouraging more customers to file their returns electronically.
In 1998, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 35 states and the District of
Columbia (compared to 34 states and the District of Columbia in fiscal 1997) and
plans to continue to expand this program as more states make this filing
alternative available to their taxpayers.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide H&R Block with a source of trained income tax return
preparers. During the 1998 fiscal year, 130,884 students enrolled in H&R Block's
basic and advanced income tax courses in the United States, compared to 111,428
students during fiscal year 1997 and 108,677 students during fiscal year 1996.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block
preparer makes an error in the preparation of a customer's tax return that
results in the assessment of any interest or penalties on additional taxes due,
while H&R Block does not assume the liability for the additional taxes (except
under its "Peace of Mind" Program described below), it guarantees payment of the
interest and penalties.
In addition to H&R Block's standard guarantee to pay penalty and
interest attributable to errors made by an H&R Block preparer, under the "Peace
of Mind" Program, H&R Block agrees to pay additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from such errors or
from revised interpretations of tax laws by the IRS. The Peace of Mind Program
has a per customer cumulative limit of $4,000 ($5,000 at H&R Block Premium
offices) in additional taxes paid with respect to the Federal, state and local
tax returns prepared by H&R Block for the taxable year covered by the Program.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
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In fiscal year 1998, H&R Block also operated 711 offices in department
stores in the United States, including 707 offices in Sears, Roebuck & Co.
stores operated as "Sears Income Tax Service by H&R Block." During the 1998 tax
season, the Sears' facilities constituted approximately eight percent of the tax
office locations of H&R Block. Tax Services is a party to a license agreement
with Sears under which Tax Services will continue to operate in Sears locations
throughout the United States. Such license agreement expires on December 31,
2004. Tax Services believes its relations with Sears to be excellent and that
both parties to the license arrangement view the operations thereunder to date
as satisfactory.
On April 15, 1998, there were 8,780 H&R Block offices in operation in
the United States compared to 8,554 offices in operation on April 15, 1997, and
8,308 offices in operation on April 15, 1996. Of the 8,780 offices, 4,640 were
owned and operated by Tax Services (compared to 4,483 in fiscal year 1997 and
4,031 in fiscal year 1996) and 4,140 were owned and operated by independent
franchisees (compared to 4,071 in fiscal 1997 and 4,277 in fiscal 1996). Of such
franchised offices in fiscal 1998, 2,630 were owned and operated by "satellite"
franchisees of Tax Services (described below), 901 were owned and operated by
"major" franchisees (described below) and 609 were owned and operated by
satellite franchisees of major franchisees.
Two types of franchises have principally been granted by the Company
and its subsidiaries. "Major" franchisees entered into agreements with the
Company (primarily in the Company's early years) covering larger cities and
counties and providing for the payment of franchise royalties based upon a
percentage of gross revenues of their offices. Under the agreements, the Company
granted to each franchisee the right to the use of the name "H&R Block" and
provided a Policy and Procedure Manual and other supervisory services. Tax
Services offers to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major franchisee selects and
trains the employees for his or her office or offices. Since March 1993, HRB
Royalty, Inc., a wholly owned subsidiary of Tax Services, has served as the
franchisor under the major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local advertising, initial training,
and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the satellite
franchises of Tax Services are located in cities with populations of 15,000 or
less. Some major franchisees also grant satellite franchises in their respective
areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue to
do so if future conditions warrant such acquisitions and satisfactory terms can
be negotiated. In fiscal year 1998, Tax Services acquired 117 tax offices in the
United States, including 69 H&R Block franchise offices and 48 offices of other
tax businesses. In a transaction that became effective immediately after the end
of fiscal year 1998, Tax Services acquired a major franchise operation serving a
majority of Alabama and Mississippi and the panhandle of Florida through 111
offices operated by the major franchisee and 68 satellite offices.
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Participation Interests in RALs. Block Financial Corporation is party
to a July 1996 agreement with Beneficial National Bank ("Beneficial") to
purchase a participation interest in refund anticipation loans provided by
Beneficial to H&R Block tax customers. See "Electronic Filing" under "Tax
Operations," above. In the 10-year agreement, BFC agreed to purchase an initial
40% participation interest in such RALs, which interest would be increased to
nearly 50% in specified circumstances. BFC's purchases of the participation
interests are financed through short-term borrowing. BFC bears all of the risks
associated with its interests in the RALs. BFC's total RAL revenue in fiscal
year 1998 was approximately $53.3 million (compared to revenue of $54.5 million
in fiscal 1997), generating approximately $6.4 million in pretax profits
(compared to $8.1 in pretax profits in fiscal year 1997). The decreases in
revenues and pretax profits resulted from decreases in the number of RALs
processed through Beneficial and an increase in the bad debt rate.
Software Products. BFC develops and markets the Kiplinger TaxCut(R) tax
preparation software package, as well as markets the Kiplinger Home Legal
AdvisorSM and Kiplinger Small Business AttorneySM software products. As a result
of the increase in sales of TaxCut's final edition in fiscal year 1998, BFC
believes that its share of retail sales in the income tax return preparation
software market is greater than 30%.
Seasonality of Business. Since most of the customers of Tax Services
file their tax returns during the period from January through April of each
year, substantially all of Tax Services' revenues from income tax return
preparation, related services and franchise royalties are received during this
period. As a result, Tax Services operates at a loss through the first eight or
nine months of its fiscal year. Historically, such losses primarily reflect
payroll of year-round personnel, training of income tax preparers, rental and
furnishing of tax offices, and other costs and expenses relating to preparation
for the following tax season.
BFC's income tax return preparation software and RAL participation
businesses are also seasonal, with the substantial portion of the revenues from
these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware corporation
and a wholly owned subsidiary of H&R Block Tax Services, Inc., claims ownership
of the following service marks and trademark registered on the principal
register of the United States Patent and Trademark Office:
H&R Block in Two Distinct Designs
The Income Tax People
Income Tax Saver
Executive (when used in connection with the
preparation of income tax returns for others)
Rapid Refund H&R Block and Design
Accufile
H&R Block Premium
Someone You Can Count On
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
Nation's Largest Tax Service
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Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax Services.
BFC claims ownership of the following trademarks registered on the
principal register of the United States Patent and Trademark Office:
B and Design
Block Financial
Block Financial and Design
Names & Dates
TaxCut
BFC also claims ownership of the following unregistered service marks
and trademarks used in connection with the software business:
Home Legal Advisor
NETWEALTH
Small Business Attorney
Competitive Conditions. The tax return preparation and electronic
filing businesses are highly competitive. There are a substantial number of tax
return preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms, and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that in terms of the number of
offices and tax returns electronically filed in fiscal year 1998, it is the
largest provider of electronic filing services in the United States.
The software business is highly competitive and consists of a large
number of companies. In the software industry, Intuit, Inc. is a dominant
supplier of personal financial software.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among other
things, set forth their signatures and identification numbers on all tax returns
prepared by them, and retain for three years all tax returns prepared. Federal
laws also subject income tax return preparers to accuracy-related penalties in
connection with the preparation of income tax returns. Preparers may be enjoined
from further acting as income tax return preparers if the preparers continuously
and repeatedly engage in specified misconduct. With certain exceptions, the
Internal Revenue Code also prohibits the use or disclosure by income tax return
preparers of certain income tax return information without the prior written
consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on the business of H&R Block. However,
the Company cannot predict what the effect may be of the enactment of new
statutes or adoption of new regulations.
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The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon application, be
accepted into the electronic filing program. Once accepted, electronic filers
must comply with all publications and notices of the IRS applicable to
electronic filing, provide certain information to the taxpayer, comply with
advertising standards for electronic filers, and be subjected to possible
monitoring by the IRS, penalties for disclosure or use of income tax return
preparation and other preparer penalties, and suspension from the electronic
filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is in fact a loan, and not a
substitute for or a quicker way of receiving an income tax refund. The Federal
laws place restrictions on the fees that an electronic filer may charge in
connection with refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect the operations
of H&R Block. However, the Company cannot predict what the effect may be of the
enactment of new statutes or the adoption of new regulations pertaining to
electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit
procedures. The IRS may from time to time change its direct deposit procedures
or may determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss to
BFC in connection with its purchases of interests in RALs. However, the Company
believes that Federal statutes and regulations regulating electronic filing and
RALs have not had and will not have a material adverse effect on the operations
of BFC. However, the Company cannot predict what the effect may be of the
enactment of new Federal or state statutes or the adoption of new regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict what
the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals
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have fallen short of adoption, such issues have received more serious attention
during the past few years than ever before. Historically, changes in tax laws
have increased H&R Block's business. The immediate result of tax law changes has
been an increase in complexity. The transition from the current system to a new,
untested system is likely to take a number of years and, under most serious tax
reform proposals, Americans will still need to file Federal and state tax
returns. The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the business of the
Company's subsidiaries over time is uncertain, and such legislation could have a
material adverse effect on the Company's business, financial position and
results of operations.
INTERNATIONAL TAX OPERATIONS
Generally. This reportable operating segment provides the preparation
of Canadian tax returns in Canada, Australian tax returns in Australia, and U.S.
income tax returns in other countries. With the commencement of tax season in
the United Kingdom in April 1997, a subsidiary of the Company also began
offering tax return preparation services in the United Kingdom. Tax preparation
services are offered by franchisees in eight countries. The electronic filing of
U.S. income tax returns is offered at franchised offices located in Europe, and
the electronic filing of Australian and Canadian income tax returns is offered
at H&R Block offices in Australia and Canada, respectively.
The returns prepared at 1,348 H&R Block offices in countries outside of
the United States constituted 13.8% of the total returns prepared by H&R Block
in the last fiscal year (compared to 15.2% in fiscal year 1997).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,945,000 Canadian regular and discounted
returns filed with Revenue Canada during the 1998 income tax filing season,
compared with 2,156,000 Canadian returns prepared during fiscal year 1997 and
2,223,000 Canadian returns prepared in fiscal 1996. The number of offices
operated by H&R Block in Canada decreased from 1,021 in fiscal year 1997 to 928
in fiscal year 1998. Of the 928 offices in Canada, 467 were owned and operated
by Block Canada and 461 were owned and operated by franchisees. H&R Block
operated 89 offices in department stores in Canada in fiscal year 1998,
including 83 offices in Sears' facilities.
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must follow
in conducting the program are specified by Canadian law. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by H&R Block to the
customer for an amount which is equal to the sum of (1) 85% of that portion of
the anticipated refund which is less than or equal to $300 and (2) 95% of that
portion of the refund in excess of $300. The customer assigns to H&R Block the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to H&R Block and deposited by H&R Block
in its bank account. In accordance with the law, the discount is deemed to
include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowing. The number of
returns discounted under the CashBack program decreased to approximately 532,000
in fiscal year 1998 from 583,000 in fiscal year 1997 and 681,000 in fiscal year
1996.
Block Canada acquired Cashplan Systems Inc., a company providing
check-cashing and other low-end financial services in January 1997. Operating
under the name "CashPlan," this service complements the CashBack service.
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In 1998, Block Canada continued to test the separation of CashBack
offices from regular tax return preparation offices in some parts of Canada.
Operating under the "Financial Stop" name (without H&R Block signage), 147
offices offered the CashBack refund discounting services, as well as the
preparation of simple tax returns and check cashing services.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 406,000 in fiscal year 1998 from 403,000
in fiscal 1997 and 389,000 in fiscal year 1996. The number of offices operated
by H&R Block in Australia in fiscal year 1998 was 334, compared to 302 offices
operated in fiscal year 1997 and 297 offices operated in fiscal 1996. Of the 334
offices, 199 were owned and operated by H&R Block Limited and 135 were
franchised offices. The tax season in Australia begins in July and ends in
October.
United Kingdom Operations. In April 1997, an indirect subsidiary of the
Company purchased The Tax Team Limited, a Horsham-based firm with 12 offices
throughout the United Kingdom. The Tax Team retained its name and opened 16
additional offices in major markets across the United Kingdom during fiscal year
1998.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company.
MORTGAGE OPERATIONS
Generally. The mortgage operations reportable segment is primarily
engaged in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans in the United States. Nonconforming mortgages are
those that may not be offered through government-sponsored loan agencies.
Mortgage origination services were offered in fiscal year 1998 through a network
of mortgage brokers in 46 states and through H&R Block tax offices in 15 states.
Option One Mortgage Corporation. The Company's commitment to the
nonconforming mortgage business was exemplified during fiscal year 1998 by the
June 1997 purchase from Fleet Financial Group, Inc. of Option One Mortgage
Corporation, a firm engaged in all of the aspects of the nonconforming mortgage
loan business noted above. See the discussion of such acquisition under "General
Development of Business," above. Option One, based in Santa Ana, California, has
a network of more than 5,000 mortgage brokers in 46 states and originated
approximately $1.9 billion in mortgage loans in fiscal year 1998 after its
acquisition. Between the date of its acquisition and April 30, 1998, Option One
sold approximately $1.8 billion of mortgage loans through whole-loan sales. At
the end of fiscal year 1998, Option One's servicing portfolio was 42,800 loans
totaling more than $4.3 billion.
Option One was organized in October 1992 as a wholly owned subsidiary
of Plaza Home Mortgage Corporation ("Plaza") and began operations in February
1993. It became a wholly owned subsidiary of Fleet National Bank ("FNB"), which
was a subsidiary of Fleet Financial Group, Inc., when Plaza was purchased by FNB
in March 1995.
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Option One predominantly originates first mortgage loans to borrowers
with sub-prime credit characteristics who have built up substantial equity in
their homes. These borrowers use the loans primarily for debt consolidation
purposes. The average Option One loan during fiscal year 1998 had a $99,800
principal balance and was secured by a first lien on a single family residence.
In the nonconforming loan business, a borrower will complete a loan
application with a loan broker and the broker will distribute the application to
one or more nonconforming lenders such as Option One. These lenders are
generally selected by the broker based upon level of fees received, response
time and approval experience with similar borrowers. Upon receipt of a deal
satisfactory to the broker, the borrower is required to pay a non-refundable fee
for an appraisal and for processing the application. This fee goes to the
lender. At closing, the borrower will receive the loan proceeds net of other
fees such as broker origination fees and document preparation fees. The broker
will close the loan using the broker's funds or funds loaned to the broker by
the nonconforming lender under a "warehouse line." When the statutory rescission
period expires, the broker sells the loan to the lender at a prearranged
premium.
Option One historically has packaged and sold substantially all of its
loans on a whole-loan basis into the secondary market with servicing retained by
Option One.
During fiscal year 1998, Option One opened retail branches in
Pleasanton, California, and Tampa, Florida. Such branches offered mortgages to
customers by means of direct mail solicitations and telemarketing.
Option One provides the Company with experienced associates in the
nonconforming mortgage lending business. Option One will assist H&R Block
Mortgage Company, L.L.C. in handling mortgage applications, loan processing and
underwriting of mortgages generated through H&R Block Mortgage Company's retail
operations, discussed below.
H&R Block Mortgage Company. H&R Block Mortgage Company, L.L.C. ("Block
Mortgage"), formerly Block Mortgage Company, L.L.C., is a limited liability
company in which H&R Block Tax Services, Inc. owns a 99% membership interest and
BFC owns a 1% membership interest. After testing the sale of sub-prime second
mortgage products in 31 H&R Block tax offices in four states during fiscal year
1997, Block Mortgage expanded the test during fiscal year 1998 by offering more
mortgage products, including VA, FHA and conventional mortgages, and by offering
mortgage products at H&R Block offices in 32 cities and 15 states. H&R Block
Premium offices were used for this expanded test. Block Mortgage funded 536
mortgage loans totaling $25.5 million during fiscal year 1998.
Following the end of fiscal year 1998, plans were made to combine the
retail operations of Option One and Block Mortgage to create greater teamwork,
efficiency, productivity and profitability.
Companion Mortgage Corporation. The sole business activity of Companion
Mortgage Corporation ("Companion"), a wholly owned subsidiary of BFC, consists
of purchasing, investing in, securitizing and selling nonconforming fixed and
adjustable-rate mortgage loans, primarily purchase money loans, refinancings and
home equity borrowings. The purchased loans are originated through retail,
wholesale and correspondent lending programs conducted through National Consumer
Services Corp., L.L.C. (a firm in which Block Mortgage purchased in fiscal year
1998 a 40% interest pursuant to a warrant), Block Mortgage or other mortgage
loan originators.
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In the securitization process, a subsidiary of Companion, Block
Mortgage Finance, Inc., acquires loans from Companion and assigns them to a
trust. The trust issues certificates that are secured by the home equity loans,
receives principal and interest payments on the loans and makes payments on the
asset-backed certificates. Block Mortgage Finance, Inc. applies the net proceeds
from the sale of the certificates primarily to the purchase of mortgage loans
from Companion, and Companion then uses the funds primarily to repay
indebtedness incurred to obtain funds for its acquisition of the loans. The
securities are issued under a $1 billion public registration that became
effective in January 1997.
Companion and Block Mortgage Finance completed their second and third
securitizations of nonconforming mortgage loans during fiscal year 1998. A $215
million asset-backed security issue closed on July 29, 1997 and a $184 million
issue closed on January 27, 1998.
Service Marks and Trademarks. Block Mortgage claims ownership of the
service mark "BLOCK MORTGAGE" registered on the principal register of the United
States Patent and Trademark Office.
Option One claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
AppOne
CorOne
Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
The Big 2
Option One claims ownership of the following unregistered service marks
and trademarks:
PartnerPlus
SumOne
Competitive Conditions. The residential mortgage loan market is the
largest consumer finance market in the United States. The sub-prime loan sector
of the mortgage industry has grown at a faster rate than the overall market and
is highly competitive. Despite the rapid growth and size of this market, it is a
relatively fragmented industry. No firm is a dominant supplier of nonconforming
mortgage loans.
In the sub-prime lending business, service is the most important
consideration to most customers. Price is a secondary consideration. The typical
sub-prime customer, whether the broker through a correspondent program or the
mortgagor through a retail branch, is motivated to select a particular lender
out of a belief that the lender can close the loan.
The market for sub-prime lending exists in part due to the inability
and unwillingness of some banks and thrifts to hold these loans. Without these
institutions, a significant opportunity existed for specialty companies.
However, many banks and thrifts have realized the value sub-prime lending can
hold and are now entering the market.
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Government Regulation.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure and, unless an exemption is available,
require licensing of the originators of certain mortgage loans. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, and
practices that may apply to the origination, servicing and collection of
mortgage loans. The mortgage loans purchased or originated by of the Company are
also subject to Federal laws, including, without limitation, the Federal Truth
in Lending Act and Regulation Z promulgated thereunder, the Equal Credit
Opportunity Act and Regulation B promulgated thereunder, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act, the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended, and certain other laws and
regulations. Certain mortgage loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, which incorporates the Home
Ownership and Equity Protection Act of 1994. These provisions impose additional
disclosure and other requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high up-front fees and charges,
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions, and may affect the enforceability of the related mortgage
loans. Under environmental legislation and case law applicable in certain
states, it is possible that liability for environmental hazards in respect of
real property may be imposed on a holder of a mortgage note secured by real
property.
The Company believes that Federal and state statutes and regulations
governing mortgage lending have not had and will not have a material adverse
effect on the operations of its mortgage subsidiaries. However, the Company
cannot predict what the effect may be of the enactment of new statutes or the
adoption of new regulations.
CREDIT CARD OPERATIONS
Generally. BFC's credit cards (which, at April 30, 1998, consisted of
the CompuServe Visa and WebCard(R) Visa cards) are currently issued under a
co-branding agreement between BFC and Columbus Bank and Trust Company, Columbus,
Georgia. Approximately 135,000 BFC credit cards were issued at the end of fiscal
year 1998, compared to 167,000 accounts at the end of fiscal year 1997 and
119,000 accounts at the end of fiscal 1996. The aggregate portfolio for the
credit cards issued by BFC was approximately $201.4 million at the end of fiscal
year 1998 compared to $246 million at the end of fiscal year 1997 and $165
million at the end of fiscal year 1996.
BFC commenced the conversion of the CompuServe Visa credit cards to
WebCard Visa cards following the end of fiscal year 1998 and plans to sell the
portfolio solely under the WebCard name.
Service Marks, Trademarks and Patent. BFC claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
CONDUCTOR Web
CONDUCTOR and Baton Design WebBank
CONDUCTOR and Hand-Held Baton Design WebCard
CONDUCTOR CARD REVIEW WebPay
FINANCIAL FINDER
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In addition, BFC claims ownership of the following unregistered service
marks and trademarks:
Audit Buster WebAccount
CONDUCTOR.COM WebBroker
DittoCard WebBuyer
Download Depot WebCheck
Fast Lane WebChecking
NetGuard WebQuote
BFC claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998 on the principal register of the United States Patent and
Trademark Office.
OTHER BUSINESS
Generally. The Company is developing other businesses compatible with
its current operations and strategy.
HRB Investments, Inc. During the 1998 fiscal year, HRB Investments,
Inc., a wholly owned subsidiary of BFC, test-marketed financial planning
services in four cities. Independent licensed securities brokers offered
retirement planning, financial planning and financial products, such as
annuities, mutual funds and insurance products, at select H&R Block Premium
offices. These financial services will be offered to clients throughout the
year.
HRB Business Services, Inc. HRB Business Services, Inc., a subsidiary
of H&R Block Group, Inc., plans to build a national accounting practice through
its acquisition of both regional and local accounting firms. Following the end
of the fiscal year 1998, HRB Business Services, Inc. acquired Donnelly, Meiners,
Jordan Kline, P.C., a regional accounting firm in Kansas City, Missouri,
offering accounting and auditing services, tax planning and reporting services,
profitability improvement and strategic planning, business valuation, litigation
support and fraud investigation, public finance verification services to its
business clients, and individual tax, estate planning and financial planning
services.
Franchise Partner, Inc. Franchise Partner, Inc., a subsidiary of BFC,
offers to franchisees of Tax Services lines of credit with reasonable interest
rates under a program designed to better enable the franchisees to refinance
existing business debt, expand or renovate offices or meet off-season cash flow
needs. A franchise equity loan is a revolving line of credit secured by the
franchise and the underlying business.
ITEM 2. PROPERTIES.
The executive offices of both the Company and Tax Services are located
at 4400 Main Street, Kansas City, Missouri, in a multi-level building owned by
Tax Services. The building was constructed in 1963 and expanded or redesigned in
1965, 1973, 1981, and 1996. Most other offices of Tax Services (except those in
department stores) are operated in premises held under short-term leases
providing fixed monthly rentals, usually with renewal options.
BFC's executive offices are located in leased offices at 4435 Main
Street, Kansas City, Missouri.
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Option One's executive offices are located in leased offices at 2020
East First Street, Santa Ana, California and 3 Ada, Irvine, California. Option
One also leases offices in Pleasanton, California, and Tampa, Florida, for its
retail operations and branch offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation, certain current and former officers and
directors of CompuServe and the Company have been named as defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio. All
suits allege similar violations of the Securities Act of 1933 based on
assertions of omissions and misstatements of fact in connection with
CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the lead
underwriters of CompuServe's initial public offering as additional defendants
and as representatives of a defendant class consisting of all underwriters who
participating in such offering. The Federal suits have been consolidated, the
defendants have filed a motion to dismiss the consolidated suits, and the court
has stayed all proceedings pending the outcome of the state court suits. The
four state court lawsuits also allege violations of various state statutes and
common law negligent misrepresentation in addition to the 1993 Act claims. The
state court lawsuits have been consolidated for discovery purposes and
defendants have filed a motion for summary judgment covering all four state
lawsuits. As a part of the sale of its interest in CompuServe, the Company has
agreed to indemnify WorldCom and CompuServe against 80.1% of any losses and
expenses incurred by them with respect to these lawsuits. The defendants are
vigorously defending these lawsuits. In the opinion of management, the ultimate
resolution of these suits will not have a material adverse impact on the
Company's consolidated financial position or future results of operations. The
lawsuits discussed herein were reported in the Company's Forms 10-Q for the
first, second and third quarters of fiscal year 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
Name and age Office(s)
------------ ---------
Henry W. Bloch (75) Chairman of the Board since
August 1992; Chairman of
the Board and Chief
Executive Officer from
August 1989 through July
1992; Member of the Board
of Directors since 1955.
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Name and age Office(s)
------------ ---------
Frank L. Salizzoni (60) President and Chief
Executive Officer since
June 1996; Member of the
Board of Directors since
1988. See Note 1.
Ozzie Wenich (55) Senior Vice President and
Chief Financial Officer
since June 1997; Treasurer
from June 1997 until
December 1997; President,
H&R Block International,
from June 1996 until May
1998; Vice President,
Finance and Treasurer from
October 1994 through May
1996; Vice President,
Corporate Controller and
Treasurer from March 1994
until October 1994; Vice
President and Corporate
Controller from September
1985 until March 1994.
Thomas L. Zimmerman (48) President, H&R Block Tax
Services, Inc., since June
1996; Executive Vice
President, Field
Operations, H&R Block Tax
Services, Inc. from May
1994 through May 1996;
Senior Vice President,
Central Tax Services, H&R
Block Tax Services, Inc.,
from April 1993 through
April 1994.
Robert E. Dubrish (46) President and Chief
Executive Officer, Option
One Mortgage Corporation,
since March 1996; Executive
Vice President and Chief
Operating Officer, Option
One Mortgage Corporation,
from December 1992 until
March 1996. See Note 2.
James H. Ingraham (44) Vice President, Legal since
October 1996; Secretary
since June 1990; Assistant
Vice President, Corporate
Legal and Human Resources
from December 1995 until
October 1996; Assistant
Vice President, Legal from
May 1994 until December
1995; Assistant Vice
President, Corporate
Counsel and Secretary, H&R
Block Tax Services, Inc.,
from April 1993 until May
1994.
Patrick D. Petrie (39) Vice President and
Corporate Controller since
October 1996; Vice
President, Service
Operations and Treasurer,
H&R Block Tax Services,
Inc., from June 1996 until
October 1996; Assistant
Vice President, Treasurer
and Controller, H&R Block
Tax Services, Inc., from
July 1993 through May 1996;
Assistant Vice President
and Controller, H&R Block
Tax Services, Inc., from
April 1993 until July 1993.
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Name and age Office(s)
------------ ---------
Kristine K. Rodgers (32) Vice President, Business
Development, since December
1997; Vice President,
Online Services, Block
Financial Corporation,
since September 1995; Vice
President, Marketing, Block
Financial Corporation, May
1995 until September 1995;
Assistant Vice President,
Block Financial
Corporation, from January
24, 1994 until May 1995.
See Note 3.
James D. Rose (47) Vice President and Chief
Information Officer since
June 1997. See Note 4.
Brian N. Schell (32) Vice President and
Treasurer since December
1997; Director of Investor
Relations since November
1996; Assistant Treasurer
from November 1996 until
December 1997; Director of
Corporate Development from
May 1995 until December
1997; Assistant Vice
President, Corporate
Development and Planning,
Block Financial
Corporation, from December
1994 until April 1995. See
Note 5.
Douglas D. Waltman (36) Vice President, Human
Resources, since April
1998; Assistant Vice
President, Director of
Education, H&R Block Tax
Services, Inc., from
September 1996 until April
1998. See Note 6.
Robert A. Weinberger (54) Vice President, Government
Relations, since March
1996. See Note 7.
Bret G. Wilson (39) Vice President, Corporate
Development, since December
1997; Vice President,
Mortgage Operations, Block
Financial Corporation,
since March 1997; Vice
President, Corporate
Counsel and Secretary,
Block Financial
Corporation, from June 1994
until March 1997. See Note
8.
Note 1: Mr. Salizzoni was President and Chief Operating Officer of
USAir Group, Inc. and USAir, Inc. from March 1994 until April
1996 and Executive Vice President - Finance, USAir, Inc. from
1990 until March 1994. He served as Chairman of the Board of
CompuServe Corporation from October 1996 until January 1998.
Note 2: Block Financial Corporation acquired Option One Mortgage
Corporation on June 17, 1997, at which time Mr. Dubrish
became an employee of a subsidiary of the Company.
Note 3: Ms. Rodgers served as Marketing Manager, Reynolds & Reynolds,
Dayton, Ohio, from August 1993 until January 14, 1994, and as
Research Supervisor, Proctor & Gamble, Cincinnati, Ohio, from
June 1991 until August 1993.
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Note 4: Mr. Rose served as Vice President, Chief Information Officer,
Integon Insurance Corporation, Winston-Salem, North Carolina,
from May 1996 until June 1997, and as Director of Information
Systems, National Association of Insurance Commissioners,
Kansas City, Missouri, from November 1987 until May 1996.
Note 5: Mr. Schell was Special Assistant to the Chief Operating
Officer, Federal Deposit Insurance Corporation, Washington,
D.C., from May 1994 until December 1995, and Special Assistant
to the Director, Division of Resolutions, Federal Deposit
Insurance Corporation, Washington, D.C., from May 1993 until
April 1994.
Note 6: Mr. Waltman was Manager, Training and Development for Westlake
Ace Hardware, Inc., Kansas City, Missouri, from May 1993 until
September 1996.
Note 7: Mr. Weinberger was Director, Washington Affairs, Unilever
United States, Inc., from February 1991 until April 1995.
Note 8: Mr. Wilson was an attorney with Smith, Gill, Fisher & Butts,
P.C., Kansas City, Missouri, from June 1989 until May 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Common Stock Data," and is hereby incorporated by reference.
The Company's Common Stock is traded principally on the New York Stock Exchange.
The Company's Common Stock is also traded on the Pacific Stock Exchange. On June
10, 1998, there were 35,216 stockholders of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1998,
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
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- interest rates on debt, cash equivalents, marketable securities,
mortgage loan origination commitments, investments in mortgage
loans for resale or securitization, and credit card loans
- foreign exchange rates, generating translation gains and losses
Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have no market risk sensitive
instruments entered into for "trading purposes," as such term is defined by
generally accepted accounting principles. Information contained herein relates
only to instruments entered into for purposes other than trading.
INTEREST RATES
The debt portfolio, rate-sensitive assets and related interest rate
risk are managed centrally by the office of the Chief Financial Officer of the
Company by taking into consideration investment opportunities and risks, tax
consequences and the financing strategies approved by the Finance Committee of
the Company's Board of Directors.
The investment portfolios of the Company and its subsidiaries at April
30, 1998, primarily consisted of cash equivalents and short-term marketable
securities. Consequently, the amortized cost approximates market value. Almost
19% of the Company's total cash and marketable securities portfolio is
classified as long-term, with nearly all maturities within a one-to-five year
range. Amortized cost of these securities also approximates market value. All
investments are generally held until maturity. Assuming all cash equivalents and
marketable securities held at year-end were variable rate investments, a 60
basis point change in interest (an approximate 10% decline in interest rates)
would negatively impact consolidated pretax earnings by less than $4 million, or
about one percent.
Under its risk management strategy, the Company hedges its interest
rate risk related to its fixed-rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. Treasury securities are sold short
under an open repurchase agreement that can be adjusted at any time by either
party. The position on certain or all of the fixed rate mortgages is closed when
the Company enters into a forward commitment to sell those mortgages. It is the
Company's policy to utilize these financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. They are purchased from certain broker-dealer counterparties. If the
counterparties do not fulfill their obligations, the Company may be exposed to
risk. As the risk of default depends on the creditworthiness of the
counterparty, the Company's policy requires that such transactions may be
entered into only with counterparties that are rated A or better (or an
equivalent rating) by recognized rating agencies. As a matter of practice, the
Company has limited the counterparties to major banks and financial institutions
meeting such standards. All interest rate contracts conform to the standard
International Swaps and Derivatives Association, Inc. documentation.
The Company's variable rate mortgage portfolios are generally
short-term in nature, as it is the Company's policy to sell or securitize these
loans quarterly, and such portfolios are carried at the lower of cost or market.
Credit card loans are also short-term in nature and carry variable interest
rates. Because the Company funds these short-term assets with short-term,
variable rate debt, the Company is
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not significantly exposed to interest rate risk in this area. As a result, any
change in interest rates would not materially impact the Company's consolidated
pretax earnings.
The Company's long-term debt consists of fixed-rate senior notes;
therefore, a change in interest rates would have no impact on consolidated
pretax earnings.
FOREIGN EXCHANGE RATES
The operation of the Company's subsidiaries in international markets
provides exposure to volatile movements in currency exchange rates. The
currencies involved are the Canadian dollar, the Australian dollar and the
British pound. International Tax Operations constituted approximately 4% of the
Company's fiscal year 1998 consolidated pretax earnings. As currency exchange
rates change, translation of the financial results of International Tax
Operations into U.S. dollars does not presently materially affect, and has not
historically materially affected, the consolidated financial results of the
Company, although such changes do affect the year-to-year comparability of the
operating results of the international businesses.
The Company does not hedge translation risks because (1) cash flows
from international operations are generally reinvested locally and (2) the
minimal exposure to material volatility to reported earnings does not justify
the cost.
The Company estimates that a 10% change in foreign exchange rates by
itself would impact reported pretax earnings from continuing operations by
approximately one million dollars. Such impact represents nearly 10% of the
pretax earnings of International Tax Operations for fiscal year 1998 and less
than one-half percent of the Company's consolidated pretax earnings for such
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a)1 is
contained in the Company's annual report to security holders for the fiscal year
ended April 30, 1998, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 20, 1998, H&R Block, Inc. (the "Company") dismissed the
accounting firm of Deloitte & Touche LLP as its independent auditors. Deloitte &
Touche LLP and its predecessors audited the accounts of the Company from 1965
through fiscal year 1998. The reports prepared by Deloitte & Touche LLP on the
Company's financial statements for either of the last two fiscal years did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change the Company's independent auditors was made by the Board of Directors
of the Company at the recommendation of its Audit Committee following a request
for proposals. During the Company's two most recent fiscal years, and any
subsequent interim period prior to July 20, 1998, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused it to make reference to the subject matter of the
disagreements in its reports. Also, there were no reportable events of the
nature described in Regulation S-K, Item 304(a)(1)(v) during either of the
Company's two most recent fiscal years and any subsequent interim period prior
to July 20, 1998.
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On July 20, 1998, the Board of Directors of the Company appointed
PricewaterhouseCoopers LLP as the Company's independent auditors for the year
ending April 30, 1999, following a request for proposals made by the Company to
five accounting firms at the direction of the Audit Committee of the Board. The
Board of Directors directed the Company's management to submit the ratification
of such appointment to a vote of the shareholders of the Company at the annual
meeting of shareholders scheduled for September 9, 1998. During the two most
recent fiscal years, and any subsequent interim period prior to such
appointment, neither the Company, nor anyone acting on behalf of the Company,
consulted PricewaterhouseCoopers LLP regarding: (i) the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the registrant's
financial statements, or (ii) any matter that was either the subject of a
disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors" and in
Item 4a of Part I of this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1998, in the section titled "Election of Directors," and is
incorporated herein by reference.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of
H&R Block, Inc., and subsidiaries are incorporated by
reference from the Company's annual report to
security holders for the fiscal year ended April 30,
1998:
Page
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Quarterly Financial Data 35
Independent Auditors' Report 38
2. Financial Statement Schedules
Independent Auditors' Report
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not
applicable, the information is not material or the
information is set forth in the financial statements
or notes thereto.
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block,
Inc., as amended, filed as Exhibit 3(b) to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1996, are incorporated
herein by reference.
3(b) Bylaws of H&R Block, Inc., as amended, filed as
Exhibit 3(b) to the Company's annual report on Form
10-K for the fiscal year ended April 30, 1995, are
incorporated herein by reference.
4(a) Indenture dated as of October 20, 1997, among H&R
Block, Inc., Block Financial Corporation and Bankers
Trust Company, as Trustee, filed as Exhibit 4(a) to
the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
4(b) Form of 6 3/4% Senior Note due 2004 of Block
Financial Corporation, filed on October 23, 1997 as
Exhibit 2.2 to the Company's current report on Form
8-K, is incorporated herein by reference.
4(c) Conformed copy of Rights Agreement dated as of July
14, 1988 between H&R Block, Inc., and Centerre Trust
Company of St. Louis, filed on August 9, 1993
23
24
as Exhibit 4(c) to the Company's Registration
Statement on Form S-8 (File No. 33-67170), is
incorporated herein by reference.
4(d) Copy of Amendment to Rights Agreement dated as of May
9, 1990 between H&R Block, Inc. and Boatmen's Trust
Company, filed as Exhibit 4(b) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
4(e) Copy of Second Amendment to Rights Agreement dated
September 11, 1991 between H&R Block, Inc. and
Boatmen's Trust Company, filed as Exhibit 4(c) to the
Company's annual report on Form 10-K for the fiscal
year ended April 30, 1995, is incorporated by
reference.
4(f) Copy of Third Amendment to Rights Agreement dated May
10, 1995 between H&R Block, Inc. and Boatmen's Trust
Company, filed as Exhibit 4(d) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
4(g) Copy of Fourth Amendment to Rights Agreement dated
March 25, 1998 between H&R Block, Inc. and
ChaseMellon Shareholder Services, L.L.C., filed on
May 1, 1998 as Exhibit 5 to Form 8-A/A, is
incorporated herein by reference.
4(h) Copy of Rights Agreement dated March 25, 1998 between
H&R Block, Inc. and ChaseMellon Shareholder Services,
L.L.C., filed on July 22, 1998 as Exhibit 1 to the
Company's Registration Statement on Form 8-A, is
incorporated herein by reference.
4(i) Form of Certificate of Designation, Preferences and
Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(e) to the Company's annual
report on Form 10-K for the fiscal year ended April
30, 1995, is incorporated by reference.
4(j) Form of Certificate of Amendment of Certificate of
Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc.
4(k) Form of Certificate of Designation, Preferences and
Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
10(a) Agreement and Plan of Merger, dated as of September
7, 1997, by and among H&R Block, Inc., H&R Block
Group, Inc., CompuServe Corporation, WorldCom, Inc.,
and Walnut Acquisition Company, L.L.C., filed on
September 7, 1997 as Exhibit 2.1 to the Company's
current report on Form 8-K, is incorporated herein by
reference.
24
25
10(b) Stockholders Agreement, dated as of September 7,
1997, by and among H&R Block, Inc., H&R Block Group,
Inc. and WorldCom, Inc., filed on September 7, 1997
as Exhibit 10.1 to the Company's current report on
Form 8-K, is incorporated herein by reference.
10(c) Standstill Agreement, dated as of September 7, 1997,
by and among H&R Block, Inc., H&R Block Group, Inc.
and WorldCom, Inc., filed on September 7, 1997 as
Exhibit 10.2 to the Company's current report on Form
8-K, is incorporated herein by reference.
10(d) Stock Purchase Agreement dated April 14, 1997, among
Fleet Financial Group, Inc., Fleet Holding Corp., H&R
Block, Inc. and Block Financial Corporation, filed on
July 2, 1997 as Exhibit 2.1 to the Company's current
report on Form 8-K, is incorporated herein by
reference.
10(e) The Company's 1993 Long-Term Executive Compensation
Plan, as amended, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
10(f) The H&R Block Long-Term Performance Program, as
amended, filed as Exhibit 10(c) to the Company's
annual report on Form 10-K for the fiscal year ended
April 30, 1994, is incorporated herein by reference.
10(g) The H&R Block Deferred Compensation Plan for
Directors, as amended, filed as Exhibit 10 to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1994, is incorporated herein
by reference.
10(h) Amendment No. 2 to H&R Block Deferred Compensation
Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the
quarter ended January 31, 1997, is incorporated
herein by reference.
10(i) Amendment No. 3 to H&R Block Deferred Compensation
Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1997, is incorporated herein
by reference.
10(j) Amendment No. 4 to H&R Block Deferred Compensation
Plan for Directors, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1997, is incorporated herein
by reference.
10(k) Amendment No. 5 to H&R Block Deferred Compensation
Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the
quarter ended January 31, 1998, is incorporated
herein by reference.
10(l) The H&R Block Deferred Compensation Plan for
Executives, as amended (Amendments 1 through 5),
filed as Exhibit 10(e) to the Company's annual report
on Form 10-K for the fiscal year ended April 30,
1994, is incorporated herein by reference.
25
26
10(m) Amendment No. 6 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(b) to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1995, is incorporated herein
by reference.
10(n) Amendment No. 7 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the
quarter ended January 31, 1997, is incorporated
herein by reference.
10(o) Amendment No. 8 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(b) to the
Company's quarterly report on Form 10-Q for the
quarter ended July 31, 1997, is incorporated herein
by reference.
10(p) Amendment No. 9 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(f) to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated
herein by reference.
10(q) Amendment No. 10 to H&R Block Deferred Compensation
Plan for Executives, filed as Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the
quarter ended January 31, 1998, is incorporated
herein by reference.
10(r) The H&R Block Supplemental Deferred Compensation Plan
for Executives, filed as Exhibit 10(f) to the
Company's annual report on Form 10-K for the fiscal
year ended April 30, 1994, is incorporated herein by
reference.
10(s) Amendment No. 1 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(a) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1994, is
incorporated herein by reference.
10(t) Amendment No. 2 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1995, is incorporated
herein by reference.
10(u) Amendment No. 3 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(b) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1997, is
incorporated herein by reference.
10(v) Amendment No. 4 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(e) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated
herein by reference.
10(w) Amendment No. 5 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(g) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1997, is
incorporated herein by reference.
26
27
10(x) Amendment No. 6 to H&R Block Supplemental Deferred
Compensation Plan for Executives, filed as Exhibit
10(b) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1998, is
incorporated herein by reference.
10(y) The H&R Block Short-Term Incentive Plan, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10(z) The Amendment and Termination of the H&R Block, Inc.
Retirement Plan for Non-Employee Directors, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1997, is
incorporated herein by reference.
10(aa) The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 10(o) to the
Company's annual report on Form 10-K for the fiscal
year ended April 30, 1997, is incorporated herein by
reference.
10(bb) The H&R Block Stock Plan for Non-Employee Directors,
filed as Exhibit 10(e) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31,
1997, is incorporated herein by reference.
10(cc) Employment Agreement dated October 11, 1996, between
the Company and Frank L. Salizzoni, filed as Exhibit
10(b) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1996, is
incorporated herein by reference.
13 That portion of the annual report to security holders
for the fiscal year ended April 30, 1998 which is
expressly incorporated by reference in this filing.
Portions of such annual report to security holders
not expressly incorporated by this reference in this
filing are not deemed "filed" with the Commission.
16 Letter regarding change in Certifying Accountants
dated July 27, 1998 from Deloitte & Touche LLP
addressed to the Securities and Exchange Commission,
filed on July 27, 1998 as Exhibit 16.1 to the
Company's current report on Form 8-K, is
incorporated herein by reference. The Statements
contained in Item 4 of the Company's Form 8-K dated
July 27, 1998 to which Deloitte & Touche LLP
concurred in such letter are also contained in Item
9 of the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1998.
21 Subsidiaries of the Company.
23 The consent of Deloitte & Touche LLP, Certified
Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
fourth quarter of the year ended April 30, 1998.
27
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
June 17, 1998 By /s/ Frank L. Salizzoni
----------------------
Frank L. Salizzoni, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title
/s/ Frank L. Salizzoni President, Chief Executive Officer and
- ------------------------------ Director (principal executive officer)
Frank L. Salizzoni
/s/ G. Kenneth Baum Director
- ------------------------------
G. Kenneth Baum
/s/ Henry W. Bloch Director
- ------------------------------
Henry W. Bloch
/s/ Robert E. Davis Director
- ------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
- ------------------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
- ------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- ------------------------------
Roger W. Hale
/s/ Marvin L. Rich Director
- ------------------------------
Marvin L. Rich
/s/ Morton I. Sosland Director
- ------------------------------
Morton I. Sosland
/s/ Ozzie Wenich Senior Vice President and Chief Financial
- ------------------------------ Officer (principal financial officer)
Ozzie Wenich
/s/ Patrick D. Petrie Vice President and
- ------------------------------ Corporate Controller
Patrick D. Petrie
(Signed as to each on June 17, 1998)
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the consolidated financial statements of H&R Block, Inc. and
subsidiaries as of April 30, 1998 and 1997, and the related consolidated
statements of earnings and cash flows for each of the three years in the period
ended April 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of H&R Block, Inc., and subsidiaries
as of April 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 16, 1998
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30
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
Additions
----------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
---------------------- --------- -------- ----- ---------- ---------
Allowance for Doubtful
Accounts-deducted from
accounts receivable in
the balance sheet
1998 $30,144,000 $75,171,000 $ - $60,001,000 $45,314,000
=========== =========== ======== =========== ===========
1997 $ 4,419,000 $65,865,000 $ - $40,140,000 $30,144,000
=========== =========== ======== =========== ===========
1996 $ 7,274,000 $31,766,000 $ - $31,192,000 $ 7,848,000
=========== =========== ======== =========== ===========