1
EXHIBIT 13
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS IN FISCAL 1998
On January 31, 1998, the Company completed the sale of its interest in
CompuServe Corporation ("CompuServe") to a subsidiary of WorldCom, Inc.
("WorldCom"). The sale was structured as a stock-for-stock transaction in which
the Company received 30.1 million shares of WorldCom stock in exchange for its
80.1% ownership interest (74.2 million shares) in CompuServe stock. The
transaction was completed with the receipt of $1.033 billion in net proceeds
from the monetization of the WorldCom stock in a block trade on February 2,
1998. The Company recorded a $231.9 million gain, net of taxes, on the
transaction. CompuServe's results have been reflected as discontinued
operations. CompuServe's operations contributed $(.13), $(.92) and $.50 per
basic share, and $(.13), $(.91) and $.49 per diluted share, in 1998, 1997 and
1996, respectively.
On June 17, 1997, the Company completed the purchase of Option One Mortgage
Corporation ("Option One"). Option One engages in the origination, purchase,
servicing, securitization and sale of nonconforming mortgage loans. Based in
Santa Ana, California, Option One has a network of more than 5,000 mortgage
brokers in 46 states. The cash purchase price was $218.1 million. In addition,
the Company made a cash payment of $456.2 million to Option One's parent to
eliminate intercompany loans made to Option One to finance its mortgage
operations. The $456.2 million payment was recorded as an intercompany loan and
was repaid to the Company by the end of June 1997 after Option One sold the
mortgage loans to a third party in the ordinary course of business. The
acquisition was accounted for as a purchase and, accordingly, Option One's
results are included since the date of acquisition.
SIGNIFICANT EVENTS IN FISCAL 1997
The Company's wholly owned subsidiary, Block Financial Corporation ("BFC"), is a
party to a 10-year agreement with Beneficial National Bank which enables it to
purchase a participation interest in Refund Anticipation Loans ("RALs") made to
clients in H&R Block tax offices. RALs are loans expected to be retired by
income tax refunds. During 1998 and 1997, BFC held a participation interest of
40% in RALs made, which generated revenues of $53.3 million and $54.5 million,
respectively, and operating earnings of $6.4 million and $8.1 million,
respectively. Over the term of the agreement, BFC may increase its participation
in the RAL program to nearly 50%.
NEW ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), issued by the Financial Accounting Standards
Board ("FASB") in February 1997, which is effective for periods ending after
December 15, 1997. SFAS 128, which simplifies the standards for computing and
presenting earnings per share, replaces the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported primary earnings
per share. Accordingly, net earnings per share have been restated to conform to
the new standard.
In the third quarter of fiscal 1998, the Company elected the early adoption
of Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires that a company report financial and descriptive information about its
reportable operating segments, defined as those components of an enterprise
about which separate financial information is available and is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance. Management analyzes its business according to differences in types
of services and geographic locations, and the reportable operating segments have
been determined accordingly.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for the
Company's fiscal year ending April 30, 1999. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires that the Company (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company does not anticipate that the
implementation of SFAS 130 will have a material impact on the consolidated
financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), effective for the Company's fiscal year ending April 30, 2001. SFAS 133
requires companies to record derivative instruments as assets or liabilities,
measured at fair value. The recognition of gains or losses resulting from
changes in the values of those derivative instruments is based on the use of
each derivative instrument and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company has not yet determined the effect of SFAS 133 on the consolidated
financial statements.
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1998 COMPARED TO 1997
CONSOLIDATED RESULTS
Revenues increased 19.1% to $1.307 billion compared to $1.097 billion in 1997.
Net earnings from continuing operations increased 21.1% to $174.2 million from
$143.8 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.66 from $1.38 last year. Diluted net earnings per
share from continuing operations increased to $1.62 compared to $1.36 in 1997.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in the United States. Tax-related
service revenue includes fees from company-owned tax offices and royalties from
franchised offices. This segment also purchases participation interests in
refund anticipation loans made by a third party lending institution which are
offered to tax clients, and provides tax preparation and other personal
productivity software to the general public.
Revenues increased 8.4% to $1.047 billion from $966.5 million in the prior
year. Combined tax preparation and electronic filing fees increased $71.2
million, or 9.1%, entirely attributable to price increases. Clients served,
which includes taxpayers for whom the Company prepared income tax returns, as
well as taxpayers for whom only electronic filing services are provided, was
relatively consistent with the prior year. Royalties increased by $4.0 million,
or 4.0%, reflecting improved results in the number of clients served by
franchises as well as increases in pricing. Software revenues increased $5.2
million, or 36.6%, as a result of increased market penetration.
Operating earnings increased 20.4% to $253.3 million from $210.4 million in
1997. The pretax margin was 24.2% compared to 21.8% in the prior year. The
improved margin resulted from cost-control measures implemented throughout the
tax operations business, primarily related to marketing and advertising expense
and employee compensation, in addition to lower bad debt expense in 1998
associated with electronic filing.
INTERNATIONAL TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in Canada, Australia and the United
Kingdom. Tax-related service revenue includes fees from company-owned tax
offices and royalties from franchised offices.
Revenues decreased 6.6% to $81.8 million from $87.5 million in 1997. The
deterioration of the Canadian and Australian dollars relative to the U.S. dollar
contributed significantly to the decline in both revenues and operating
earnings, accounting for 61% of the total revenue decrease. Tax preparation fees
declined $2.2 million, or 4.2%, as a result of a 12.4% decrease in returns
prepared by company-owned offices, partly offset by price increases. Discounted
return fees in Canada also declined 11.8% due to a continued decline in
available provincial tax credits.
Operating earnings decreased 15.9% to $11.9 million from $14.2 million in
1997, and the pretax margin decreased to 14.6% from 16.2% in the prior year. The
decrease is partly due to the revenue decline, as well as a loss of $1.6 million
from the start-up of operations in the United Kingdom and the opening of 32 new
company-owned offices in Australia.
MORTGAGE OPERATIONS
This segment is primarily engaged in the origination, purchase, servicing,
securitization and sale of nonconforming mortgage loans in the United States.
Mortgage origination services are offered through a network of mortgage brokers
in 46 states and through H&R Block tax offices in 15 states.
Revenues of $135.8 million were $126.9 million better than the prior year.
The increase is largely due to the acquisition of Option One in June 1997, which
contributed revenues of $117.4 million this year. Since its acquisition, Option
One has originated $1.853 billion of loans and sold $1.785 billion of mortgage
loans through whole-loan sales. At April 30, 1998, Option One's servicing
portfolio was 42,800 loans totaling $4.315 billion.
Operating earnings increased $29.9 million to $30.8 million. Option One
contributed operating earnings of $34.3 million, including goodwill amortization
of $10.8 million, which was reduced by the start-up costs associated with the
retail mortgage business offered through the Company's tax offices.
CREDIT CARD OPERATIONS
This segment operates in the United States and sponsors credit card loans under
a co-branded agreement and, through an Internet site and an online service
provider, allows cardholders access to account transactions and payment detail
through an online lookup feature.
Revenues increased 18.7% to $37.4 million from $31.5 million in 1997. This
increase is primarily attributable to an increase in the average credit card
receivables balance which totaled $227.8 million for 1998, compared to $200.6
million for 1997.
The pretax loss increased 121.2% to $15.5 million from $7.0 million in
1997. The increased loss is the result of several factors, including the
write-off of deferred subscriber acquisition costs ($2.2 million), and
capitalized software costs ($1.6 million) related to software which was being
developed to provide a variety of online services to cardholders and other
similar customers. Also, the quality of the credit card portfolio deteriorated,
resulting in an increase in bad debts as a percentage of purchase volume from
3.35% in 1997 to 4.70% in 1998.
INVESTMENT INCOME, NET
Net investment income increased 135.5% to $25.6 million from $10.9 million in
1997, primarily as a result of the proceeds from the monetization of WorldCom
stock of $1.033 billion received at the beginning of February 1998.
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UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased $7.3 million
to $11.4 million, largely due to increased charitable contributions, increased
wages and employee benefits, and the start-up costs related to a pilot program
of additional financial services to be offered through the Company's tax
offices. Additionally, the Company favorably adjusted its liability for certain
insurance contingencies in 1997 based on actuarial valuations. Unallocated
interest expense of $13.7 million in 1998 represents the interest on debt
associated with the acquisition of Option One.
INCOME TAX EXPENSE
The effective tax rate was 38.0% for fiscal 1998, compared to 36.1% for 1997,
caused by an increase in state and local income taxes.
1997 COMPARED TO 1996
CONSOLIDATED RESULTS
Revenues increased 25.9% to $1.097 billion compared to $871.5 million in 1996.
Net earnings from continuing operations increased 14.9% to $143.8 million from
$125.1 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.38 from $1.20 last year. Diluted net earnings per
share from continuing operations increased to $1.36 from $1.18 last year.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
Revenues increased 27.3% to $966.5 million from $759.4 million in the prior
year. Tax preparation fees increased $114.4 million, or 21.6%, as a result of a
7.5% increase in the number of returns prepared by company-owned offices, with
the remainder attributable to price increases and a change in the complexity of
returns prepared which results in higher fees. RAL participation fees
contributed $54.5 million in revenues in 1997. Fees from electronic filing were
up $26.9 million, or 23.7%, due primarily to an increase in the number of U.S.
Federal and state returns filed electronically by 15.7% and 29.2%, respectively.
Royalties increased by $10.7 million, or 12.2%, reflecting improved results
reported by franchises as a result of greater revenues from electronic filing, a
6.3% increase in the number of returns prepared by franchises and increases in
pricing.
Operating earnings increased 21.5% to $210.4 million from $173.1 million in
1996. The pretax margin was 21.8% compared to 22.8% in the prior year. The
margin decline resulted from increased bad debt associated with electronic
filing, marketing expenses targeted at gaining new customers, and costs
connected with the implementation of a new, computerized bookkeeping and
management reporting system, partially offset by earnings of $8.1 million from
RAL participations in 1997.
INTERNATIONAL TAX OPERATIONS
Revenues increased 6.9% to $87.5 million from $81.8 million in 1996. Tax
preparation fees increased $7.5 million, or 16.8%, driven by a 4.3% increase in
the number of returns prepared as well as increases in pricing. Discounted
return fees in Canada decreased $2.6 million, or 10.1%, as a result of the
continued loss of certain provincial tax credits leading to fewer eligible
returns for discounting.
Operating earnings increased 20.8% to $14.2 million from $11.7 million in
1996. The pretax margin was 16.2% in 1997 compared to 14.3% a year earlier,
largely due to a restructuring of employee compensation.
MORTGAGE OPERATIONS
Revenues increased to $8.9 million from $.1 million in 1996. Fiscal 1997 was the
first full year for mortgage operations, and revenues included a gain on the
securitization of mortgage loans of approximately $3.0 million, as well as
interest income on mortgage loans held for sale.
Pretax earnings were $.9 million, compared to $.1 million in 1996.
CREDIT CARD OPERATIONS
Revenues increased 26.7% to $31.5 million from $24.9 million in 1996. The
increase in revenues is largely due to an increase in the average credit card
receivables balance which totaled $200.6 million for 1997, compared to $147.5
million for 1996.
The pretax loss increased 175.5% to $7.0 million from $2.6 million in 1996.
The increased loss is primarily attributable to increased bad debts. Bad debt
expense as a percentage of purchase volume was 3.35% in 1997 compared to 3.17%
in 1996.
INVESTMENT INCOME, NET
Net investment income increased 28.0% to $10.9 million from $8.5 million in
1996. The Company incurred $2.0 million of interest expense on corporate
borrowings in 1996, as compared to $.2 million in 1997.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss decreased 28.4% to $4.2
million compared to $5.8 million in 1996. The improvement was due to an increase
in the cash values of corporate-owned whole-life insurance contracts used to
informally fund deferred compensation plans. The Company also favorably adjusted
its liability for certain insurance contingencies based upon actuarial
valuations.
INCOME TAX EXPENSE
The effective tax rate was 36.1% for fiscal 1997, compared to 36.7% for 1996,
caused by a decrease in state and local income taxes.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in 1998, with cash and
marketable securities of $1.536 billion at year end, compared to $539.1 million
at the end of 1997. This increase resulted from the sale of the Company's
remaining interest in CompuServe in January 1998, which generated $1.033 billion
in net proceeds. Working capital increased by $55.3 million, and the working
capital ratio decreased to 1.7 to 1 at April 30, 1998, compared to 2.2 to 1 a
year earlier. Stockholders' equity at April 30, 1998 and 1997 was $1.342 billion
and $999.1 million, respectively.
The Company maintains lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuates according to the amount of short-term borrowing outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund
receivables associated with its nonconforming mortgage loan, credit card and
other financial services programs. During the past two years, the Company has
also used short-term borrowings in January through April to purchase a
participation interest of 40% in certain RALs through its agreement with
Beneficial National Bank. These short-term borrowings in the U.S. are supported
by a $1.8 billion back-up credit facility through November 1998, subject to
renewal. This facility was reduced to $1.3 billion subsequent to year end
through the end of its term. Outstanding commercial paper related to loans held
for sale and credit card receivables amounted to $643.0 million and $269.6
million, respectively, at April 30, 1998 and 1997. Loans held for sale totaled
$448.1 million and $107.1 million at April 30, 1998 and 1997, respectively, and
credit card receivables amounted to $202.9 million and $247.9 million,
respectively.
In Canada, from January through April each year, the Company uses Canadian
borrowings to purchase refunds due its clients from Revenue Canada. Maturities
of these borrowings range from 30 to 90 days. Net accounts receivable at April
30, 1998 and 1997 include amounts due from Revenue Canada of $13.9 million and
$5.4 million, respectively.
In October 1997, the Company issued $250 million of 6 3/4% Senior Notes,
due 2004. The Senior Notes are not redeemable prior to maturity. The net
proceeds of this transaction were used to repay short-term borrowings which
initially funded the acquisition of Option One.
Utilizing the U.S. commercial paper program described above, the Company
originates and purchases nonconforming mortgage loans. As part of its risk
management strategy prior to securitization or sale, the Company hedges interest
rate risk related to its fixed rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. The Company purchases these
financial instruments from certain broker-dealer counterparties. The Company's
policy is to utilize such financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. As a matter of practice, the Company limits the counterparties to
major banks and financial institutions.
Management does not anticipate that the level of capital expenditures in
1999, exclusive of franchise and other tax businesses acquisitions, will
increase significantly from 1998.
The Company will continue to use short-term financing in the United States
to finance various financial activities conducted by BFC, including the funding
of loan originations by Option One, and in Canada to finance the Canadian refund
discount program.
The Company announced in December 1993 its intention to repurchase from
time to time up to 10 million of its shares on the open market. In July 1996,
the Company announced its intention to repurchase up to 10 million additional
shares on the open market over a two-year period following the separation of
CompuServe. Upon the completion of the CompuServe sale in January 1998, the
Company recommenced the purchase of its shares in accordance with these
authorizations, and 5.2 million shares have been repurchased as of April 30,
1998. The Company intends to continue this share repurchase program, subject to
various factors including the price of the stock, availability of excess cash,
the ability to maintain financial flexibility, and other investment
opportunities available.
The Company has a program to identify, evaluate and implement changes to
its computer systems as necessary to address the Year 2000 issue. As a part of
the program, the Company has initiated communications with state and Federal
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 concerns. The Year 2000 issue affects computer applications
that may not properly recognize and process data for the Year 2000 and beyond
because of the use of two digits rather than four to define an applicable year.
The Company presently is not aware of any material operational or financial Year
2000-related concerns and believes that, with modifications to existing software
and conversions to new software, any Year 2000 concerns can be mitigated. Based
on management's best estimates, the costs associated with the Year 2000
mitigation are not expected to be material to the Company and such costs are
being expensed as incurred. The Company plans to complete the Year 2000
mitigation in 1999. However, the Company cannot make any assurances that its
computer systems, or the computer systems of the state and Federal governments
and suppliers with which it interacts, will be Year 2000 ready on schedule, or
that management's cost estimates will be achieved. The inability of these
systems to be ready could result in significant difficulties in processing and
completing fundamental transactions. In such event, the Company's results of
operations and financial position could be adversely affected in a material
manner.
Except for historical information contained herein, the matters addressed
in this discussion are forward-looking statements that are subject to risks and
uncertainties which could cause actual results to differ materially. Such risks
and uncertainties include, but are not limited to, economic, competitive and
governmental factors affecting the Company's operations, markets, products,
services, prices and various other factors.
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CONSOLIDATED STATEMENTS OF EARNINGS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Year Ended April 30
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
REVENUES:
Service revenues $ 1,083,985 $ 953,000 $ 748,858
Product sales 103,717 31,781 20,022
Royalties 111,142 107,508 96,356
Other 7,941 5,167 6,297
----------- ----------- -----------
1,306,785 1,097,456 871,533
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 487,956 421,652 366,153
Occupancy and equipment 195,549 175,414 141,610
Marketing and advertising 75,567 78,139 57,105
Bad debt 75,171 65,865 20,261
Interest 52,252 11,641 3,969
Supplies, freight and postage 51,733 44,625 41,462
Other 112,582 85,932 64,451
----------- ----------- -----------
1,050,810 883,268 695,011
----------- ----------- -----------
OPERATING EARNINGS 255,975 214,188 176,522
OTHER INCOME:
Investment income, net 25,596 10,870 8,490
Other, net (680) -- 12,445
----------- ----------- -----------
24,916 10,870 20,935
----------- ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 280,891 225,058 197,457
TAXES ON EARNINGS 106,739 81,281 72,368
----------- ----------- -----------
NET EARNINGS FROM CONTINUING OPERATIONS 174,152 143,777 125,089
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS (LESS APPLICABLE
TAXES (BENEFIT) OF ($7,277), ($53,421) AND $35,757) (13,889) (96,022) 52,079
NET GAIN ON SALE OF DISCONTINUED OPERATIONS (LESS
APPLICABLE INCOME TAXES OF $251,701) 231,867 -- --
----------- ----------- -----------
NET EARNINGS $ 392,130 $ 47,755 $ 177,168
=========== =========== ===========
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 1.66 $ 1.38 $ 1.20
Net earnings (loss) from discontinued operations 2.08 (.92) .50
----------- ----------- -----------
Net earnings $ 3.74 $ .46 $ 1.70
=========== =========== ===========
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 1.62 $ 1.36 $ 1.18
Net earnings (loss) from discontinued operations 2.03 (.91) .49
----------- ----------- -----------
Net earnings $ 3.65 $ .45 $ 1.67
=========== =========== ===========
See notes to consolidated financial statements
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CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
April 30
- ------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 900,856 $ 457,079
Marketable securities 346,158 61,755
Receivables, less allowance for doubtful accounts of $45,314 and $30,144 793,237 407,441
Prepaid expenses and other current assets 103,026 31,671
Net assets of discontinued operations -- 522,144
---------- ----------
Total current assets 2,143,277 1,480,090
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 289,096 20,273
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $40,261 and $23,089 288,580 74,794
Other 105,809 66,836
---------- ----------
683,485 161,903
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $167,065 and $142,894 77,321 65,065
---------- ----------
$2,904,083 $1,707,058
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 643,002 $ 269,619
Accounts payable, accrued expenses and deposits 114,875 164,872
Accrued salaries, wages and payroll taxes 96,168 105,326
Accrued taxes on earnings 422,847 129,192
---------- ----------
Total current liabilities 1,276,892 669,009
LONG-TERM DEBT 249,675 --
OTHER NONCURRENT LIABILITIES 35,884 38,952
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share:
authorized 400,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share: authorized 500,000 shares -- 4
Additional paid-in capital 432,335 502,308
Retained earnings 986,030 684,071
---------- ----------
1,419,454 1,187,472
Less cost of common stock in treasury 77,822 188,375
---------- ----------
1,341,632 999,097
---------- ----------
$2,904,083 $1,707,058
========== ==========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
YEAR ENDED APRIL 30
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 392,130 $ 47,755 $ 177,168
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 55,787 36,526 32,477
Provision for deferred taxes on earnings (15,639) 538 1,183
Gain on sales of subsidiaries (231,867) -- (12,445)
Net gain on sales of marketable securities (1,720) (454) (1,134)
Other noncurrent liabilities (3,068) 730 4,760
Changes in assets and liabilities:
Receivables (44,727) (94,452) (32,457)
Mortgage loans held for sale:
Originations and purchases (2,330,349) (211,700) (8,674)
Sales and principal repayments 2,443,725 113,259 --
Prepaid expenses and other current assets (27,618) (15,455) (259)
Net assets of discontinued operations 13,665 95,405 (55,771)
Accounts payable, accrued expenses and deposits (82,469) 68,514 14,003
Accrued salaries, wages and payroll taxes (10,965) 10,932 35,109
Accrued taxes on earnings 28,118 36,833 (16,156)
----------- ---------- ----------
Net cash provided by operating activities 185,003 88,431 137,804
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (882,378) (75,595) (134,233)
Maturities of marketable securities 38,961 517 304,724
Sales of marketable securities 1,321,716 23,852 155,170
Purchases of property and equipment, net (46,803) (44,277) (36,972)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (265,700) (17,249) (11,139)
Proceeds from sale of subsidiaries -- -- 35,000
Net advances from discontinued operations -- -- 35,004
Other, net (30,812) (16,038) (3,829)
----------- ---------- ----------
Net cash provided by (used in) investing activities 134,984 (128,790) 343,725
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (11,090,798) (5,041,386) (2,252,761)
Proceeds from issuance of notes payable 11,008,018 5,238,354 2,275,991
Proceeds from issuance of long-term debt 249,675 -- --
Dividends paid (83,635) (107,988) (131,263)
Payments to acquire treasury shares (18,351) -- (71,897)
Proceeds from stock options exercised 58,881 3,439 13,172
----------- ---------- ----------
Net cash provided by (used in) financing activities 123,790 92,419 (166,758)
----------- ---------- ----------
Net increase in cash and cash equivalents 443,777 52,060 314,771
Cash and cash equivalents at beginning of the year 457,079 405,019 90,248
----------- ---------- ----------
Cash and cash equivalents at end of the year $ 900,856 $ 457,079 $ 405,019
=========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ 102,396 $ (8,047) $ 73,041
Interest paid 50,302 10,889 5,898
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: The operating subsidiaries of H&R Block, Inc. provide a
variety of services to the general public, principally in the United States, but
also in Canada, Australia and other foreign countries. Approximately 86% of
total revenues are generated from tax return preparation, electronic filing of
tax returns and other tax-related services. Certain of these subsidiaries also
originate, purchase, service, sell and securitize nonconforming mortgages, offer
personal productivity software and credit card loans, and purchase participation
interests in refund anticipation loans made by a third party lending
institution.
Principles of consolidation: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company") and all majority-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated.
Reclassifications: Certain reclassifications have been made to prior year
amounts to conform with the current year presentation.
Management estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Marketable securities: Marketable debt and equity securities are classified
as available-for-sale securities, and are carried at market value, based on
quoted prices, with unrealized gains and losses included in stockholders'
equity.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
Receivables: Receivables consist primarily of credit card loans and
mortgage loans held for sale. Mortgage loans held for sale are carried at the
lower of cost or market value. The allowance for doubtful accounts represents an
amount considered by management to be adequate to cover potential credit losses.
Foreign currency translation: Assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at exchange rates
prevailing at the end of the year. Revenue and expense transactions are
translated at the average of exchange rates in effect during the period.
Translation gains and losses are recorded directly to stockholders' equity.
Excess of cost over fair value of net tangible assets acquired: The excess
of cost of purchased subsidiaries, operating offices and franchises over the
fair value of net tangible assets acquired is being amortized over an average
life of 17 years on a straight-line basis.
At each balance sheet date, a determination is made by management to
ascertain whether intangibles have been impaired based on several criteria,
including, but not limited to, revenue trends, undiscounted operating cash
flows and other operating factors.
In connection with the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviewed the assets and
related goodwill of its personal tax preparation software business for
impairment. As a result, the Company recognized an impairment loss of $8,389,
which is included in other expenses in the consolidated statement of earnings
for the year ended April 30, 1996. The impairment loss represents the amount by
which the carrying value of the tax preparation software business assets,
including goodwill, exceeded the estimated fair value of those assets. The
estimated fair value was determined as the present value of estimated expected
future cash flows using a discount rate appropriate for the risks associated
with the personal software industry.
Depreciation and amortization: Buildings and equipment are depreciated over
the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the period of the respective lease
using the straight-line method.
Notes payable: The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
The weighted average interest rates of notes payable at April 30, 1998 and 1997
were 5.6% and 5.7%, respectively.
Revenue recognition: Service revenues are recorded in the period in which
the service is performed.
Product sales consist primarily of gains on sales of mortgage loans and
software sales. Gains on loan sales are recognized utilizing the specific
identification method at the time of sale. Software sales are recorded at the
time of shipment.
The Company records franchise royalties, based upon the contractual
percentages of franchise revenues, in the period in which the franchise provides
the service.
Advertising expense: The Company expenses advertising costs the first time
the advertising takes place.
Taxes on earnings: The Company and its subsidiaries file a consolidated
Federal income tax return on a calendar year basis. Therefore, the current
liability for taxes on earnings recorded in the balance sheet at each year-end
consists principally of taxes on earnings for the period January 1 to April 30
of the respective year. Deferred taxes, which are not material, are provided for
temporary differences between financial and tax reporting, which consist
principally of accrued expenses, deferred compensation, mark-to-market
adjustments and depreciation.
24
9
The Company has a Tax Sharing Agreement with CompuServe Corporation
("CompuServe"), pursuant to which CompuServe generally is obligated to pay the
Company (or the Company is obligated to pay CompuServe) for CompuServe's
liability (or tax benefits) related to Federal, state, and local income taxes
for any taxable period during which CompuServe was a subsidiary of the Company.
Consolidated statements of cash flows: For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Disclosure regarding financial instruments: The carrying values reported in
the balance sheet for cash equivalents, receivables, notes payable, accounts
payable and accrued liabilities approximate fair market value due to the
relatively short-term nature of the respective instruments.
Hedging and forward commitments: As a part of its interest rate risk
management strategy, the Company may choose to hedge its interest rate risk
related to its fixed rate mortgage portfolio by selling short treasury
securities and utilizing forward commitments. The Company classifies these
instruments as hedges of specific loan receivables. The gains and losses derived
from these instruments are deferred and included in the carrying amounts of the
related hedged items and ultimately recognized in earnings.
Stock plans: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), allows companies to
continue under the approach set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the provisions of SFAS 123 based on the estimated fair value
of employee stock options. Companies electing to retain the approach under APB
25 are required to disclose pro forma net earnings and net earnings per share in
the notes to the financial statements, as if they had adopted the fair value
accounting method under SFAS 123. The Company has elected to retain its current
accounting approach under APB 25.
Segments: In the third quarter of fiscal 1998, the Company elected the
early adoption of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires that a company report financial and descriptive
information about its reportable operating segments, defined as those components
of an enterprise about which separate financial information is available and is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance. Management analyzes its business according to differences
in types of services and geographic locations, and the reportable operating
segments have been determined accordingly.
New accounting standards: In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for the Company's fiscal year
ending April 30, 1999. SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that the Company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company does not anticipate that the implementation of SFAS 130 will have a
material impact on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), effective for the Company's fiscal year
ending April 30, 2001. SFAS 133 requires companies to record derivative
instruments as assets or liabilities, measured at fair value. The recognition of
gains or losses resulting from changes in the values of those derivative
instruments is based on the use of each derivative instrument and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company has not yet determined the
effect of SFAS 133 on the consolidated financial statements.
NET EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), issued by the Financial Accounting Standards
Board in February 1997, which is effective for periods ending after December 15,
1997. SFAS 128, which simplifies the standards for computing and presenting
earnings per share, replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported primary earnings per share. Accordingly, net
earnings per share for all periods presented have been restated to conform to
the new standard.
25
10
Basic net earnings per share is computed using the weighted average number
of common shares outstanding. The dilutive effect of potential common shares
outstanding are included in diluted net earnings per share. The computations of
basic and diluted net earnings per share are as follows (shares in thousands):
Year Ended April 30
------------------------------------------
1998 1997 1996
------------------------------------------
Net earnings from continuing operations $174,152 $143,777 $ 125,089
======== ======== =========
Basic weighted average shares 104,829 103,985 103,926
Effect of dilutive securities:
Common and convertible preferred stock options 1,229 230 525
Convertible preferred stock 1,515 1,625 1,608
-------- -------- ---------
Dilutive potential common shares 107,573 105,840 106,059
======== ======== =========
Net earnings per share from continuing operations:
Basic $1.66 $1.38 $1.20
Diluted 1.62 1.36 1.18
Diluted net earnings per share excludes the impact of common stock options
of 244,071, 5,651,642 and 4,024,027 shares for 1998, 1997 and 1996,
respectively, because the options' exercise prices were greater than the
average market price of the common shares and therefore, the effect would be
antidilutive.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
April 30
-------------------------
1998 1997
---------- ----------
Municipal bonds $ 464,667 $ 14,000
Certificates of deposit 239,582 99,747
Commercial paper 132,972 195,015
Cash and interest-bearing deposits 58,765 58,671
U.S. Government obligations -- 62,586
Other interest-bearing securities 4,870 27,060
---------- ----------
$ 900,856 $ 457,079
========== ==========
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30, 1998
and 1997 are summarized below:
------------------------------------------ ------------------------------------------
1998 1997
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------ ------------------------------------------
Current:
Municipal bonds and notes $ 149,842 $ -- $ 18 $149,824 $ 6,167 $ 17 $ 12 $ 6,172
Asset-backed securities 151,383 18 208 151,193 -- -- -- --
U.S. Government obligations -- -- -- -- 15,047 8 9 15,046
Other debt investments 45,000 141 -- 45,141 40,406 131 -- 40,537
--------- ------ ------ -------- --------- ------ ------ -------
346,225 159 226 346,158 61,620 156 21 61,755
--------- ------ ------ -------- --------- ------ ------ -------
Noncurrent:
Municipal bonds 181,060 96 1,472 179,684 15,039 325 135 15,229
Corporate bonds 68,790 -- 242 68,548 -- -- -- --
U.S. Government obligations 36,509 -- 228 36,281 -- -- -- --
Preferred stock -- -- -- -- 647 299 -- 946
Common stock 2,467 2,118 2 4,583 2,625 1,476 3 4,098
--------- ------ ------ -------- --------- ------ ------ -------
288,826 2,214 1,944 289,096 18,311 2,100 138 20,273
--------- ------ ------ -------- --------- ------ ------ -------
$ 635,051 $2,373 $2,170 $635,254 $ 79,931 $2,256 $ 159 $82,028
========= ====== ====== ======== ========= ====== ====== =======
All marketable securities at April 30, 1998 are classified as
available-for-sale. Proceeds from the sales of available-for-sale securities
were $1,321,716, $23,852 and $155,170 during 1998, 1997 and 1996, respectively.
Gross realized gains on those sales during 1998, 1997 and 1996 were $1,826, $600
and $1,520, respectively; gross realized losses were $106, $146 and $386,
respectively. At April 30, 1998 and 1997, the net unrealized holding gain on
available-for-sale securities included in stockholders' equity in the
consolidated balance sheet was $126 and $1,326, respectively.
26
11
Contractual maturities of available-for-sale debt securities at April 30,
1998 are presented below. Since expected maturities differ from contractual
maturities due to the issuers' rights to prepay certain obligations or the
seller's rights to call certain obligations, the first call date, put date or
auction date for municipal bonds and notes is considered the contractual
maturity date.
AMORTIZED MARKET
COST VALUE
-------------------------------
Within one year $ 346,225 $ 346,158
After one year through five years 278,104 276,162
After five years through 10 years 8,255 8,351
--------- ---------
$ 632,584 $ 630,671
========= =========
RECEIVABLES
Receivables consist of the following:
April 30
-------------------------------
1998 1997
-------------------------------
Mortgage loans held for sale $ 448,102 $ 107,115
Credit card loans 202,852 247,889
Other 187,597 82,581
--------- ----------
838,551 437,585
Allowance for doubtful accounts 45,314 30,144
--------- ----------
$ 793,237 $ 407,441
========= ==========
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30
-------------------------------
1998 1997
-------------------------------
Land $ 2,872 $ 2,568
Buildings 21,350 19,812
Computer and other equipment 180,273 154,268
Leasehold improvements 39,891 31,311
--------- ----------
244,386 207,959
Less accumulated depreciation and amortization 167,065 142,894
--------- ----------
$ 77,321 $ 65,065
========= ==========
Depreciation and amortization expense for 1998, 1997 and 1996 amounted to
$37,674, $30,727 and $21,006, respectively.
LONG-TERM DEBT
On October 21, 1997, the Company issued $250,000 of 6 3/4% Senior Notes under a
shelf registration statement. The Senior Notes are due November 1, 2004, and are
not redeemable prior to maturity. The net proceeds of this transaction were used
to repay short-term borrowings which initially funded the acquisition of Option
One Mortgage Corporation ("Option One"). Based upon borrowing rates currently
available to the Company for indebtness with similar terms, the fair value of
the long-term debt was approximately $254,515 at April 30, 1998.
OTHER NONCURRENT LIABILITIES
The Company has deferred compensation plans which permit directors and certain
employees to defer portions of their compensation and accrue earnings on the
deferred amounts. The compensation, together with Company matching of deferred
amounts, has been accrued, and the only expenses related to these plans are the
Company match and the earnings on the deferred amounts, which are not material
to the financial statements. Included in other noncurrent liabilities is $29,885
and $32,990 at April 30, 1998 and 1997, respectively, to reflect the liability
under these plans. The Company purchased whole-life insurance contracts on
certain related directors and employees to recover a majority of distributions
made or to be made under the plans and has recorded the cash surrender value of
the policies in other assets. If all the assumptions regarding mortality,
earnings, policy dividends and other factors are realized, the Company will
ultimately realize its investment plus a factor for the use of its money.
27
12
STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity during the three years ended
April 30, 1998 are summarized below:
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
---------------------------------------- PAID-IN RETAINED ------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
---------------------------------------------------------------------------------------
Balances at May 1, 1995 108,972,699 $1,089 401,768 $ 4 $140,578 $700,423 (4,109,662) $(156,229)
Net earnings for the year -- -- -- -- -- 177,168 -- --
Stock options exercised -- -- 3,031 -- (1,501) -- 340,395 12,957
Restricted stock granted -- -- -- -- (47) -- 46,370 1,763
Unrealized loss on translation -- -- -- -- -- (50) -- --
Acquisition of treasury shares -- -- -- -- -- -- (1,833,200) (71,897)
Sale of stock by subsidiary -- -- -- -- 365,664 -- -- --
Change in net unrealized gain
on marketable securities -- -- -- -- -- 934 -- --
Cash dividends paid --
$1.27 1/4 per share -- -- -- -- -- (131,263) -- --
----------- ------ ------- ------ -------- -------- --------- ---------
Balances at April 30, 1996 108,972,699 1,089 404,799 4 504,694 747,212 (5,556,097) (213,406)
Net earnings for the year -- -- -- -- -- 47,755 -- --
Stock options exercised -- -- 2,280 -- 24 -- 88,945 3,415
Cancellation of restricted stock -- -- -- -- -- -- (28,217) (1,044)
Unrealized loss on translation -- -- -- -- -- (3,065) -- --
Repurchase of Convertible
Preferred Stock -- -- (391) -- -- -- -- --
Stock issued for acquisition -- -- -- -- (2,410) -- 589,948 22,660
Change in net unrealized gain
on marketable securities -- -- -- -- -- 157 -- --
Cash dividend paid --
$1.04 per share -- -- -- -- -- (107,988) -- --
----------- ------ ------- ------ -------- -------- --------- ---------
Balances at April 30, 1997 108,972,699 1,089 406,688 4 502,308 684,071 (4,905,421) (188,375)
Net earnings for the year -- -- -- -- -- 392,130 -- --
Stock options exercised -- -- 32,088 -- (1,832) -- 1,578,340 60,882
Unrealized loss on translation -- -- -- -- -- (5,290) -- --
Conversion of Convertible
Preferred Stock -- -- (435,972) (4) (68,018) -- 1,743,888 68,022
Cancellation of Convertible
Preferred Stock -- -- (910) -- (123) (46) -- --
Acquisition of treasury shares -- -- -- -- -- -- (408,850) (18,351)
Change in net unrealized gain
on marketable securities -- -- -- -- -- (1,200) -- --
Cash dividends paid --
$.80 per share -- -- -- -- -- (83,635) -- --
----------- ------ ------- ------ -------- -------- --------- ---------
Balances at April 30, 1998 108,972,699 $1,089 1,894 $ -- $432,335 $986,030 (1,992,043) $ (77,822)
=========== ====== ======= ====== ======== ======== ========= =========
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1998, the Company had 5,560,833 shares of
authorized but unissued Preferred Stock. Of the unissued shares, 600,000 shares
have been designated as Participating Preferred Stock in connection with the
Company's shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a
series of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. In April 1995, 401,768 shares of Convertible
Preferred Stock were issued in connection with an acquisition. Each share of
Convertible Preferred Stock became convertible on April 5, 1998 into four shares
of Common Stock of the Company, subject to adjustment upon certain events. The
holders of the Convertible Preferred Stock are not entitled to receive dividends
paid in cash, property or securities and, in the event of any dissolution,
liquidation or winding-up of the Company, will share ratably with the holders of
Common Stock then outstanding in the assets of the Company after any
distribution or payments are made to the holders of Participating Preferred
Stock or the holders of any other class or series of stock of the Company with
preference over the Common Stock. In April 1998, the Company issued 1,743,888
shares of its common stock upon conversion of 435,972 shares of the Convertible
Preferred Stock.
28
13
STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors and a plan
for eligible seasonal employees. The 1993 plan was approved by the shareholders
in September 1993 to replace the 1984 Long-Term Executive Compensation Plan,
which terminated at that time except with respect to outstanding awards
thereunder. Under the 1993 and 1989 plans, options may be granted to selected
employees and outside directors to purchase the Company's Common Stock for
periods not exceeding 10 years at a price that is not less than 100% of fair
market value on the date of the grant. A majority of the options are exercisable
each year either starting one year after the date of the grant or on a
cumulative basis at the annual rate of 33 1/3% of the total number of option
shares.
The plan for eligible seasonal employees, as amended, provided for the
grant of options on June 30, 1998, 1997 and 1996 at the market price on the date
of the grant. The options are exercisable during September in each of the two
years following the calendar year of the grant.
Changes during the years ended April 30, 1998, 1997 and 1996 under these
plans were as follows:
---------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
Options outstanding, beginning of year 6,217,699 $35.78 6,413,928 $37.93 4,865,814 $35.73
Options granted 3,784,925 32.28 3,124,588 32.34 3,545,692 40.35
Options exercised (1,608,233) 33.63 (90,045) 20.08 (362,849) 29.02
Options which expired (3,283,999) 37.58 (3,230,772) 37.16 (1,634,729) 38.63
Options outstanding, end of year 5,110,392 32.71 6,217,699 35.78 6,413,928 37.93
Shares exercisable, end of year 3,428,615 32.87 4,506,372 36.00 4,029,301 37.56
Shares reserved for future grants, end of year 13,159,852 13,660,778 13,554,594
A summary of stock options outstanding and exercisable at April 30, 1998
follows:
Outstanding Exercisable
--------------------------------------------------- -----------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at April 30 Contractual Life Exercise Price at April 30 Exercise Price
--------------------------------------------------- -----------------------------
$6.9525 - 16.25 10,280 2 years $14.71 10,280 $14.71
$17.4375 - 28.75 397,731 7 years 26.70 230,564 26.03
$30.6875 - 39.875 4,458,310 9 years 32.82 3,027,390 33.02
$40 - 44.375 244,071 8 years 41.12 160,381 41.10
----------- -----------
5,110,392 3,428,615
=========== ===========
In connection with a previous acquisition, outstanding options to purchase the
acquired company's common stock under an employee stock option plan were
converted on April 4, 1995 into options to purchase 51,828 shares of the
Company's Convertible Preferred Stock. During 1998, 1997 and 1996, options to
purchase Convertible Preferred Stock of 32,088, 2,280 and 3,031, respectively,
were exercised, and 899, 11,163 and 2,052, respectively, were terminated. At
April 30, 1998, the options for the remaining 315 shares expired.
29
14
The Company applies APB 25 in accounting for its stock option plans, under
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the stock option plans been determined in accordance with
the fair value accounting method prescribed under SFAS 123, the Company's net
earnings and net earnings per share on a pro forma basis would have been as
follows:
Year Ended April 30
--------------------------------
1998 1997 1996
--------------------------------
Net earnings:
As reported $392,130 $47,755 $177,168
Pro forma 379,985 34,891 168,232
Basic net earnings per share:
As reported $3.74 $.46 $1.70
Pro forma 3.62 .34 1.62
Diluted net earnings per share:
As reported $3.65 $.45 $1.67
Pro forma 3.55 .33 1.59
The SFAS 123 fair value method of accounting is not required to be applied
to options granted prior to May 1, 1995, and therefore, the pro forma
compensation cost may not be representative of that to be expected in future
years.
For the purposes of computing the pro forma effects of stock option grants
under the fair value accounting method, the fair value of each stock option
grant was estimated on the date of the grant using the Black-Scholes option
pricing model. The weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $5.91, $6.14 and $8.46, respectively. The following
weighted-average assumptions were used for grants during the following periods:
Year Ended April 30
--------------------------------
1998 1997 1996
--------------------------------
Risk-free interest rate 6.21% 6.28% 5.89%
Expected life 3 years 3 years 3 years
Expected volatility 31.99% 34.08% 35.32%
Dividend yield 2.48% 2.42% 1.99%
SHAREHOLDER RIGHTS PLAN
On July 14, 1988, the Company's Board of Directors adopted a shareholder rights
plan to deter coercive or unfair takeover tactics and to prevent a potential
acquirer from gaining control of the Company without offering a fair price to
all of the Company's stockholders. The plan was amended by the Board of
Directors on May 9, 1990, September 11, 1991, May 10, 1995, and March 25, 1998.
Under the plan, a dividend of one right (a "Right") per share was declared and
paid on each share of the Company's Common Stock outstanding on July 25, 1988.
As to shares issued after such date, Rights automatically attach to them after
their issuance.
Under the plan, as amended, a Right becomes exercisable when a person or
group of persons acquires beneficial ownership of 15% or more of the outstanding
shares of the Company's Common Stock without the prior written approval of the
Company's Board of Directors (an "Unapproved Stock Acquisition"), and at the
close of business on the tenth business day following the commencement of, or
the public announcement of an intent to commence, a tender offer that would
result in an Unapproved Stock Acquisition. When exercisable, the registered
holder of each Right may purchase from the Company one two-hundredths of a share
of a new class of the Company's Participating Preferred Stock, without par
value, at a price of $60.00, subject to adjustment. The registered holder of
each Right then also has the right (the "Subscription Right") to purchase for
the exercise price of the Right, in lieu of shares of Participating Preferred
Stock, a number of shares of the Company's Common Stock having a market value
equal to twice the exercise price of the Right. Following an Unapproved Stock
Acquisition, if the Company is involved in a merger, or 50% or more of the
Company's assets or earning power are sold, the registered holder of each right
has the right (the "Merger Right") to purchase for the exercise price of the
Right a number of shares of the common stock of the surviving or purchasing
company having a market value equal to twice the exercise price of the Right.
After an Unapproved Stock Acquisition, but before any person or group of
persons acquires 50% or more of the outstanding shares of the Company's Common
Stock, the Board of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of one share of
Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of
any holder to exercise a Right terminates. Upon the occurrence of any of the
events giving rise to the exercisability of the Subscription Right or the Merger
Right or the ability of the Board of Directors to effect the Exchange, the
Rights held by the acquiring person or group become void as they relate to the
Subscription Right, the Merger Right or the Exchange.
30
15
The Company may redeem the Rights at a price of $.005 per Right at any time
prior to an Unapproved Stock Acquisition (and after such time in certain
circumstances). The Rights expire on July 25, 1998, unless extended by the Board
of Directors. Until a Right is exercised, the holder thereof, as such, has no
rights as a stockholder of the Company, including the right to vote or to
receive dividends. The issuance of the Rights alone has no dilutive effect and
does not affect reported net earnings per share.
On March 25, 1998, the Company's Board of Directors adopted a new
shareholder rights plan which will become effective upon the earliest of the
termination or expiration of the existing plan or the date upon which the
existing plan is determined to have become ineffective, regardless of the reason
therefor. Under the new plan, a dividend of one Right per share was declared and
will be paid on each share of the Company's Common Stock outstanding on the
effective date of the new plan. Rights will automatically attach to shares
issued after such date.
Under the new plan, a Right will become exercisable in the event of an
Unapproved Stock Acquisition, and at the close of business on the tenth business
day following the commencement of, or the public announcement of an intent to
commence, a tender offer that would result in an Unapproved Stock Acquisition.
When exercisable, the registered holder of each Right under the new plan may
purchase from the Company one one-hundredth of a share of a class of the
Company's Participating Preferred Stock, without par value, at a price of
$215.00, subject to adjustment. The registered holder of each Right then also
will have a subscription right identical to the Subscription Right provided for
in the existing plan. Following an Unapproved Stock Acquisition, if the Company
is involved in a merger, or 50% or more of the Company's assets or earning power
are sold, the registered holder of each Right under the new plan will have a
merger right identical to the Merger Right provided for in the existing plan.
Under the new plan, the Board of Directors may effect an exchange in
circumstances and in a manner identical to the exchange provided for in the
existing plan. Upon the occurrence of any of the events giving rise to the
exercisability of the subscription right or the merger right or the ability of
the Board of Directors to effect the exchange, the Rights held by the acquiring
person or group under the new plan will become void as they relate to the
subscription right, the merger right or the exchange.
The Company may redeem the Rights under the new plan at a price of $.00125
per Right at any time prior to the earlier of (i) an Unapproved Stock
Acquisition, or (ii) the expiration of the rights. The Rights under the new plan
will expire on March 25, 2008, unless extended by the Board of Directors. Until
a Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including the right to vote or to receive dividends.
The issuance of the Rights alone will have no dilutive effect and will not
affect reported net earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
Year Ended April 30
----------------------------------------
1998 1997 1996
----------------------------------------
Purchased services $ 17,971 $ 14,504 $ 10,866
Amortization of goodwill 17,352 5,531 11,471
Travel and entertainment 11,648 9,773 7,370
Taxes and licenses 11,396 10,475 8,788
Refund anticipation loan servicing fees 7,889 9,838 --
Legal and professional 6,382 6,105 6,360
Loan servicing 5,851 -- --
TAXES ON EARNINGS
The components of earnings from continuing operations before income taxes upon
which Federal and foreign income taxes have been provided are as follows:
Year Ended April 30
----------------------------------------
1998 1997 1996
----------------------------------------
United States $269,558 $ 214,469 $188,749
Foreign 11,333 10,589 8,708
-------- --------- --------
$280,891 $ 225,058 $197,457
======== ========= ========
31
16
Deferred income tax provisions (benefits) reflect the impact of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. The current and deferred
components of taxes on earnings from continuing operations is comprised of the
following:
Year Ended April 30
----------------------------------
1998 1997 1996
----------------------------------
Currently payable:
Federal $103,099 $67,992 $59,234
State 13,796 7,710 7,891
Foreign 5,483 5,041 4,060
-------- ------- -------
122,378 80,743 71,185
-------- ------- -------
Deferred:
Accrued expenses (5,271) 1,215 --
Mark-to-market adjustments (3,312) (143) --
Allowance for credit losses (2,699) (1,382) --
Residual interest income (2,167) -- --
Deferred loan fees 1,921 -- --
Depreciation (1,501) 2,821 374
Accrued income (1,306) (112) 1,887
Deferred compensation (1,206) (1,877) (1,068)
Other (98) 16 (10)
-------- ------- -------
(15,639) 538 1,183
-------- ------- -------
$106,739 $81,281 $72,368
======== ======= =======
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $64,208 at December 31, 1997. Management believes the cost to
repatriate these earnings would not be material.
The following table reconciles the U.S. Federal income tax rate to the
Company's effective tax rate:
Year Ended April 30
----------------------------------
1998 1997 1996
----------------------------------
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in income taxes resulting from:
State income taxes, net of Federal income tax benefit 2.8% 2.2% 2.6%
Foreign income taxes, net of Federal income tax benefit .5% .6% .5%
Nontaxable Federal income (.1%) (.5%) (.8%)
Other (.2%) (1.2%) (.6%)
----- ----- -----
Effective rate 38.0% 36.1% 36.7%
===== ===== =====
ACQUISITIONS
On June 17, 1997, the Company acquired Option One, a company engaged in the
origination, purchase, servicing, securitization and sale of nonconforming
mortgage loans. The cash purchase price was $218,083, consisting of $28,083 in
adjusted stockholder's equity and a premium of $190,000. In addition, the
Company made cash payments of $456,163 to Option One's former parent to
eliminate intercompany loans made to Option One to finance its mortgage loan
operations. The $456,163 payment was recorded as an intercompany loan and was
repaid to the Company by the end of June 1997 after Option One sold the mortgage
loans to a third party in the ordinary course of business. The acquisition was
accounted for as a purchase and, accordingly, Option One's results are included
since the date of acquisition. The fair value of tangible assets acquired,
including cash, and liabilities assumed was $683,777 and $463,877, respectively.
Liabilities assumed were treated as a noncash investing activity in the
consolidated statement of cash flows for the year ended April 30, 1998. The
excess of cost over fair value of net tangible assets acquired was $183,077 and
is being amortized on a straight-line basis over 15 years. The acquisition was
ultimately financed with the issuance of $250,000 in Senior Notes during the
second quarter of fiscal 1998.
32
17
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Option One as if the acquisition had occurred
on May 1, 1997 and 1996, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the acquisition
debt and the related income tax effects. The pro forma information is presented
for information purposes only and is not necessarily indicative of what would
have occurred if the acquisition had been made as of those dates. In addition,
the pro forma information is not intended to be a projection of future results.
Year Ended April 30
--------------------------------
1998 1997
--------------------------------
Revenues $1,314,071 $1,192,790
Net earnings from continuing operations 170,135 144,527
Net earnings 388,113 48,505
Basic net earnings per share $3.70 $ .47
Diluted net earnings per share 3.61 .46
During fiscal 1998, 1997 and 1996, the Company made other acquisitions
which were accounted for as purchases. Their operations, which are not material,
are included in the consolidated statements of earnings.
SALE OF SUBSIDIARIES
On January 31, 1998, the Company completed the sale of its 80.1% interest in
CompuServe to a subsidiary of WorldCom, Inc. ("WorldCom"). The Company recorded
a $231,867 gain, net of taxes, on the transaction. The sale was structured as a
stock-for-stock transaction in which the Company received 30,108,610 shares of
WorldCom stock in exchange for its 80.1% ownership interest (74,200,000 shares)
in CompuServe stock. The Company completed the transaction through its receipt
of $1,032,699 in net proceeds from the monetization of 100% of its WorldCom
stock in a block trade on February 2, 1998. As a part of the CompuServe
transaction, the Company has agreed to indemnify WorldCom and CompuServe against
80.1% of any losses and expenses incurred by them with respect to litigation and
claims brought against CompuServe, any of its current or former officers,
directors, employees, agents or underwriters relating to CompuServe's initial
public offering in April 1996. The shares of WorldCom stock received in the
stock-for-stock transaction were treated as a noncash investing activity in the
consolidated statement of cash flows for the year ended April 30, 1998. The
consolidated financial statements reflect CompuServe as discontinued operations.
Revenues from CompuServe for the years ended April 30, 1998, 1997 and 1996 were
$628,245, $841,887 and $793,165, respectively.
On April 19, 1996, CompuServe effected an initial public offering of
18,400,000 shares of its common stock at $30.00 per share, which reduced the
Company's ownership in CompuServe to just over 80%. The Company did not
recognize a gain on this transaction. 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, from which the net proceeds to CompuServe
were $518,819.
On May 1, 1995, the Company sold its wholly owned subsidiary, MECA
Software, Inc., exclusive of its rights to publish TaxCut, for $35,000 cash. The
sale resulted in a pretax gain of $12,445, which is included in other income for
the year ended April 30, 1996.
COMMITMENTS AND CONTINGENCIES
Substantially all of the operations of the Company's subsidiaries are conducted
in leased premises. Most of the operating leases are for a one-year period with
renewal options of one to three years and provide for fixed monthly rentals.
Lease commitments at April 30, 1998, for fiscal 1999, 2000, 2001, 2002 and 2003
aggregated $47,186, $37,857, $24,957, $13,138 and $6,617, respectively, with no
significant commitments extending beyond that period of time. The Company's rent
expense for the years 1998, 1997 and 1996 aggregated $84,912, $78,141 and
$65,521, respectively.
The Company has commitments to its credit card holders to the extent of the
unused credit limits on credit card loans. These commitments amounted to
$779,195 and $923,348 at April 30, 1998 and 1997, respectively. The Company does
not require collateral to secure credit card loan agreements. Commitments on
credit card loans are cancelable by the Company at any time and do not
necessarily represent future cash requirements.
The Company is obligated to purchase, from a 40%-owned affiliate, 60% of
the mortgage loan volume which meets certain criteria as established by the
Company. The Company purchased $298,405 and $122,535 of such loans during the
years ended April 30, 1998 and 1997, respectively, which may not be indicative
of future obligations. The Company also extends warehouse financing of $100,000
to this affiliate to facilitate the accumulation of mortgage loans, of which
$68,434 and $8,199 was drawn at April 30, 1998 and 1997, respectively.
33
18
The Company has commitments to fund mortgage loans to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The
commitments to fund loans amounted to $199,487 at April 30, 1998. External
market forces impact the probability of commitments being exercised, and
therefore, total commitments outstanding do not necessarily represent future
cash requirements.
At April 30, 1998, the Company maintained a $1,800,000 backup credit
facility to support various financial activities conducted by its subsidiaries
through the commercial paper program. The annual commitment fee required to
support the availability of this facility is eight basis points per annum on the
unused portion of the facility. Among other provisions, the credit agreement
limits the Company's indebtedness.
The Company is responsible for servicing mortgage loans for others of
$2,924,683, subservicing loans of $1,389,851, and the master servicing of
$418,161 previously securitized mortgage loans held in trust at April 30, 1998.
The mortgage loans held in trust are serviced by a related party. Fiduciary bank
accounts that are maintained on behalf of investors and for impounded
collections were $67,650 at April 30, 1998. These bank accounts are not assets
of the Company and are not reflected in the accompanying consolidated financial
statements.
CompuServe, 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 also 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 participated 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 of negligent misrepresentation in
addition to the 1933 Act claims. The state 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.
FINANCIAL INSTRUMENTS
The Company sells short treasury securities under an open repurchase agreement
that can be adjusted at any time by either party. The position on certain or all
of the fixed rate mortgages is closed when the Company enters into a forward
commitment to sell those mortgages. Deferred gains on the treasury securities
hedging instrument amounted to $127 at April 30, 1998. The contract value and
market value of this hedging instrument as of April 30, 1998 was $39,992 and
$40,111, respectively. The contract value and market value of the forward
commitment as of April 30, 1998 was $210,000 and $210,714, respectively.
The Company purchases these instruments from certain broker-dealer
counterparties. In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty. It is the Company's policy to review, as
necessary, the credit standing of each counterparty.
The Company is exposed to on-balance sheet credit risk related to its
receivables. Mortgage loans made to subprime borrowers present a higher level of
risk of default than conforming loans. These loans also involve additional
liquidity risk due to a more limited secondary market than conforming loans.
While the Company believes that the underwriting procedures and appraisal
processes it employs enable it to mitigate these risks, no assurance can be
given that such procedures or processes will be adequate protection against
these risks. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has committed to buy or fund and
commitments made to credit card holders to meet their financing needs.
34
19
QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1998 QUARTER ENDED FISCAL 1997 QUARTER ENDED
-----------------------------------------------------------------------------------------------
APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31,
1998 1998 1997 1997 1997 1997 1996 1996
-----------------------------------------------------------------------------------------------
Revenues $ 975,900 $ 208,683 $ 82,992 39,210 $ 880,597 $ 155,137 $ 41,107 $ 20,615
========== ========== ========== ========= ========= ========== ========== =========
Continuing operations:
Earnings (loss) before
income taxes (benefits) $ 414,384 $ (28,155) $ (49,829) $ (55,509) $ 337,847 $ (22,418) $ (44,484) $ (45,887)
Taxes (benefits) on earnings 157,466 (10,699) (19,380) (20,648) 124,028 (8,496) (16,860) (17,391)
---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
Net earnings (loss) 256,918 (17,456) (30,449) (34,861) 213,819 (13,922) (27,624) (28,496)
Net earnings (loss) from
discontinued operations -- 167 (10,782) (3,274) (14,384) (11,404) (46,504) (23,730)
Net gain on sale of
discontinued operations -- 231,867 -- -- -- -- -- --
---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
Net earnings (loss) $ 256,918 $ 214,578 $ (41,231) $ (38,135) $ 199,435 $ (25,326) $ (74,128) $ (52,226)
========== ========== ========== ========= ========== ========== ========== =========
Basic net earnings per share:
Net earnings (loss) from
continuing operations $ 2.43 $ (.17) $ (.29) $ (.33) $ 2.05 $ (.13) $ (.27) $ (.27)
========== ========== ========== ========= ========== ========== ========== =========
Net earnings (loss) $ 2.43 $ 2.04 $ (.39) $ (.37) $ 1.91 $ (.24) $ (.71) $ (.50)
========== ========== ========== ========= ========== ========== ========== =========
Diluted net earnings per share:
Net earnings (loss) from
continuing operations $ 2.37 $ (.17) $ (.29) $ (.33) $ 2.03 $ (.13) $ (.27) $ (.27)
========== ========== ========== ========= ========== ========== ========== =========
Net earnings (loss) $ 2.37 $ 2.04 $ (.39) $ (.37) $ 1.90 $ (.24) $ (.71) $ (.50)
========== ========== ========== ========= ========== ========== ========== =========
The accumulation of four quarters in fiscal 1998 for basic net earnings
per share from continuing operations, basic net earnings per share and diluted
net earnings per share from continuing operations is less than the related per
share amounts for the year ended April 30, 1998 due to the timing of the
exercise of stock options and the conversion of the Convertible Preferred
Stock.
Revenues for the first quarter of fiscal 1998 of $39,210 differs from
the amount reported on Form 10-Q for the three months ended July 31, 1997 by
$4,757 due to certain reclassifications made to conform with the current year
presentation.
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Block Financial Corporation, an indirect,
wholly owned subsidiary of the Company, is presented below.
April 30
-------------------------
1998 1997
-------------------------
Condensed balance sheets:
Cash and cash equivalents $ 30,895 $ 3,425
Finance receivables, net 737,005 380,206
Other assets 311,759 34,657
---------- --------
Total assets $1,079,659 $418,288
========== ========
Commercial paper $ 643,002 $269,619
Long-term debt 249,675 --
Other liabilities 57,372 26,867
Stockholder's equity 129,610 121,802
---------- --------
Total liabilities and stockholder's equity $1,079,659 $418,288
========== ========
Year Ended April 30
---------------------------------------------
1998 1997 1996
---------------------------------------------
Condensed statements of operations:
Revenues $246,787 $ 110,777 $ 36,854
Earnings (loss) from operations 12,859 7,053 (7,368)
Earnings before income taxes 12,859 7,053 5,077
Net earnings (loss) 7,813 4,337 (255)
35
20
SEGMENT INFORMATION
The principal business activity of the Company's operating subsidiaries is
providing tax and financial services to the general public. Management has
determined the reportable segments identified below according to differences in
types of services, geographic locations, and how operational decisions are made.
Geographical information is presented within the segment data below. All foreign
countries in which subsidiaries of the Company operate, which are individually
immaterial, are included in International Tax Operations. Included below is the
financial information on each segment that is used by management to evaluate the
segment's results. The Company operates in the following reportable segments:
U.S. Tax Operations: This segment is primarily engaged in providing tax
return preparation, filing, and related services to the general public in the
United States. Tax-related service revenue includes fees from company-owned tax
offices and royalties from franchised offices. This segment also purchases
participation interests in refund anticipation loans made by a third party
lending institution which are offered to tax clients, and provides tax
preparation and other personal productivity software to the general public.
Revenues of this segment are seasonal in nature.
International Tax Operations: This segment is primarily engaged in
providing tax return preparation, filing, and related services to the general
public in Canada, Australia and the United Kingdom. In addition, International
Tax Operations has franchise offices in eight countries. Tax-related service
revenue includes fees from company-owned tax offices and royalties from
franchised offices. Revenues of this segment are seasonal in nature.
Mortgage Operations: This segment is primarily engaged in the origination,
purchase, servicing, securitization and sale of nonconforming mortgage loans in
the United States. Mortgage origination services are offered through a network
of mortgage brokers in 46 states and through H&R Block tax offices in 15 states.
Credit Card Operations: This segment operates in the United States and
sponsors credit card loans under a co-branded agreement and, through an Internet
site and an online service provider, allows cardholders access to account
transactions and payment detail through an online lookup feature.
Identifiable Assets: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated with
each reportable segment. The remaining assets are classified as corporate assets
and consist primarily of cash, marketable securities and corporate equipment.
36
21
Information concerning the Company's operations by reportable segment for the
years ended April 30, 1998, 1997 and 1996 is as follows:
-----------------------------------------
1998 1997 1996
-----------------------------------------
REVENUES:
U.S. tax operations $ 1,047,324 $ 966,524 $ 759,354
International tax operations 81,754 87,493 81,822
Mortgage operations 135,778 8,895 91
Credit card operations 37,404 31,513 24,876
Unallocated corporate 5,125 3,498 5,720
Intersegment sales (600) (467) (330)
----------- ----------- -----------
Total revenues $ 1,306,785 $ 1,097,456 $ 871,533
=========== =========== ===========
EARNINGS FROM CONTINUING OPERATIONS:
U.S. tax operations $ 253,278 $ 210,365 $ 173,098
International tax operations 11,922 14,172 11,731
Mortgage operations 30,811 865 91
Credit card operations (15,542) (7,025) (2,550)
Unallocated corporate (11,444) (4,189) (5,848)
Investment income, net 25,597 10,870 8,490
Acquisition interest expense (13,731) -- --
Other, net -- -- 12,445
----------- ----------- -----------
Earnings from continuing operations before income taxes $ 280,891 $ 225,058 $ 197,457
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
U.S. tax operations $ 37,313 $ 31,981 $ 28,804
International tax operations 4,541 3,594 3,168
Mortgage operations 12,690 56 --
Credit card operations 815 505 244
Unallocated corporate 428 390 261
----------- ----------- -----------
Total depreciation and amortization $ 55,787 $ 36,526 $ 32,477
=========== =========== ===========
IDENTIFIABLE ASSETS:
U.S. tax operations $ 200,243 $ 189,007 $ 119,653
International tax operations 48,362 39,145 27,529
Mortgage operations 829,396 125,734 11,173
Credit card operations 202,412 253,052 168,049
Unallocated corporate 1,623,670 577,976 473,647
Net assets of discontinued operations -- 522,144 617,510
----------- ----------- -----------
Total assets $ 2,904,083 $ 1,707,058 $ 1,417,561
=========== =========== ===========
CAPITAL EXPENDITURES:
U.S. tax operations $ 36,495 $ 38,760 $ 34,987
International tax operations 7,013 4,773 1,906
Mortgage operations 4,736 205 --
Credit card operations 224 736 463
Unallocated corporate 1,513 279 660
----------- ----------- -----------
Total capital expenditures $ 49,981 $ 44,753 $ 38,016
=========== =========== ===========
37
22
MANAGEMENT'S REPORT
The financial information in this Annual Report, including the consolidated
financial statements, has been prepared by the management of H&R Block, Inc.
Management believes the information presented in the Annual Report is consistent
with the financial statements, the financial statements are prepared in
accordance with generally accepted accounting principles, and the financial
statements do not contain material misstatements due to fraud or error. Where
appropriate, the financial statements reflect management's best estimates and
judgments.
Management also is responsible for maintaining a system of internal
accounting controls with the objectives of providing reasonable assurance that
the Company's assets are safeguarded against material loss from unauthorized use
or disposition, and that authorized transactions are properly recorded to permit
the preparation of accurate financial data. However, limitations exist in any
system of internal controls based on a recognition that the cost of the system
should not exceed its benefits. The Company believes its system of accounting
controls, of which its internal auditing function is an integral part,
accomplishes the stated objectives.
Deloitte & Touche LLP, independent accountants, audit H&R Block's
consolidated financial statements and issue an opinion thereon. Their audits are
made in accordance with generally accepted auditing standards and include an
objective, independent review of the system of internal controls to the extent
necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, composed of outside
directors, meets periodically with management, the independent accountants and
the internal auditor to review matters relating to the Company's annual
financial statements, internal audit activities, internal accounting controls
and non-audit services provided by the independent accountants. The independent
accountants and the internal auditor have full access to the Audit Committee and
meet with it, both with and without management present, to discuss the scope and
results of their audits including internal controls, audit and financial
matters.
/s/ Frank L. Salizzoni
Frank L. Salizzoni
President and Chief Executive Officer
/s/ Ozzie Wenich
Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of H&R Block, Inc.
and subsidiaries as of April 30, 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 that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of H&R Block, Inc., and
subsidiaries as of April 30, 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
38
23
COMMON STOCK DATA
Stock Price Cash Dividend
-----------------------
High Low Paid per Share
-------- ------ --------------
1997 Fiscal Year:
Quarter ended 7/31/96 36 3/8 23 5/8 .32
Quarter ended 10/31/96 30 1/8 23 5/8 .32
Quarter ended 1/31/97 32 3/4 24 3/4 .20
Quarter ended 4/30/97 33 28 5/8 .20
1998 Fiscal Year:
Quarter ended 7/31/97 38 1/2 30 5/8 .20
Quarter ended 10/31/97 42 1/4 33 3/4 .20
Quarter ended 1/31/98 45 3/4 37 3/8 .20
Quarter ended 4/30/98 49 1/16 42 7/8 .20
Traded on the New York Stock Exchange; Ticker Symbol: HRB
40
24
Selected Financial Data
In thousands, except per share amounts and number of shareholders
Year Ended April 30
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
FOR THE YEAR:
Total revenues $1,306,785 $1,097,456 $ 871,533 $ 766,323 $ 806,721
Net earnings from continuing operations (1) $ 174,152 $ 143,777 $ 125,089 $ 97,989 $ 103,052
Net earnings (1) $ 392,130 $ 47,755 $ 177,168 $ 107,259 $ 200,528
AT YEAR END:
Total assets $2,904,083 $1,707,058 $1,755,891 $1,097,313 $1,093,245
Cash, cash equivalents and marketable securities $1,536,110 $ 539,107 $ 745,693 $ 444,981 $ 620,091
Long-term debt $ 249,675 -- -- -- --
Stockholders' equity $1,341,632 $ 999,097 $1,039,593 $ 685,865 $ 707,875
Shares outstanding 106,981 104,067 103,417 104,863 106,149
Number of shareholders 31,177 33,517 35,634 38,053 35,514
MEASUREMENTS:
Per basic share of common stock:
Net earnings from continuing operations (1) $ 1.66 $ 1.38 $ 1.20 $ .93 $ .97
Net earnings (1) $ 3.74 $ .46 $ 1.70 $ 1.02 $ 1.89
Per diluted share of common stock:
Net earnings from continuing operations (1) $ 1.62 $ 1.36 $ 1.18 $ .92 $ .97
Net earnings (1) $ 3.65 $ .45 $ 1.67 $ 1.01 $ 1.88
Other per share data:
Cash dividends declared $ .80 $ 1.04 $ 1.27 1/4 $ 1.21 3/4 $ 1.09
Net tangible book value $ 9.84 $ 8.88 $ 9.46 $ 5.79 $ 6.03
Return on total revenues (2) 13.3% 13.1% 14.4% 12.8% 15.9%
Return on beginning stockholders' equity 39.2% 4.6% 25.8% 15.2% 30.8%
(1) Fiscal 1994 includes a charge to earnings from continuing operations of
$25,072 ($.24 per basic and diluted share) for purchased research and
development in connection with the acquisition of MECA Software, Inc. Fiscal
1995 includes a charge to earnings from discontinued operations of $83,508
($.79 per basic share and $.78 per diluted share) for purchased research and
development in connection with a previous acquisition.
(2) Before charge for purchased research and development.