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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
SIGNIFICANT EVENTS IN FISCAL 1999
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20.9 million loss, or $.21 per share, net of
taxes, on the transaction. The consolidated statements of earnings for all
periods presented reflect the Company's Credit card operations segment as
discontinued operations.
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms. This new Business services segment is
primarily engaged in providing accounting, tax and consulting services to
business clients and tax, estate planning and financial planning services to
individuals. The purchase prices plus additional contingent payments aggregated
$110.1 million. Each acquisition was accounted for as a purchase, and
accordingly, results for each acquisition are included since the date of
acquisition.
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) and $(.92) per basic
share, and $(.13) and $(.91) per diluted share, in 1998 and 1997, respectively.
On June 17, 1997, the Company completed the purchase of Option One Mortgage
Corporation ("Option One"). Option One primarily engages in the origination,
purchase, servicing, securitization and sale of nonconforming mortgage loans.
Based in Irvine, California, Option One has a network of more than 5,000
mortgage brokers in 49 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.
NEW ACCOUNTING STANDARDS
In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
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 changes in
equity during the period, except those resulting from investments by and
distributions to owners, be reported as "comprehensive income" in the financial
statements. The Company's comprehensive income is comprised of net earnings,
foreign currency translation adjustments and the change in the net unrealized
gain or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements.
In the third quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 requires that
mortgage-backed securities or other interests retained after a securitization be
classified based on the intent to sell or hold the investments. The Company has
classified its retained interests as available-for-sale securities, which are
included in investments in marketable securities on the consolidated balance
sheets.
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 does not anticipate that the
implementation of SFAS 133 will have a material impact on the consolidated
financial statements.
1999 COMPARED TO 1998
CONSOLIDATED RESULTS
Revenues increased 29.5% to $1.645 billion compared to $1.270 billion last
year. Net earnings from continuing operations increased 29.4% to $237.8 million
from $183.8 million in the prior year. Basic net earnings per share from
continuing operations increased to $2.38 from $1.75 last year. Diluted net
earnings per share from continuing operations increased to $2.36 compared to
$1.71 in 1998. The net effect of the share repurchase program in 1999 was to
increase earnings per share approximately $.05.
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 20.1% to $1.258 billion from $1.047 billion in the prior
year. Combined tax preparation and electronic filing fees increased $147.5
million, or 17.3%, due to a 4.5% increase in the number of clients served,
higher fees due to complexity and price increases. Fees associated with Refund
Anticipation Loans ("RALs") increased 69.1% over last year to $90.2 million
reflecting a 40.4% increase in the number of RAL participations over last year
due to the increase in the Company's participation percentage to 49.9%
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from 40% in 1998. Royalties increased by $12.0 million, or 11.7%, reflecting
improved results in the number of clients served by franchises as well as
increases in pricing. Software revenues increased $14.2 million, or 74.0%, as a
result of increased market penetration.
Operating earnings increased 24.5% to $314.1 million from $252.2 million in
1998. The pretax margin increased to 25.0% from 24.1% in the prior year. The
improved margin resulted from higher revenues spread over a significant portion
of fixed operating expenses, such as occupancy expenses, a lower bad debt rate
associated with the RAL program and improved results from software sales.
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 8.6% to $74.7 million from $81.8 million in 1998. Pretax
earnings declined 78.9% to $2.5 million from $11.9 million last year, and the
pretax margin decreased to 3.4% from 14.6% in the prior year. The downturn in
both revenues and pretax earnings is due to disappointing results from Canada.
As compared to last year, Canada's revenues declined 9.6% to $58.5 million
and pretax earnings declined 77.6% to $2.4 million. Results were affected by
several factors. The number of customers served in company-owned offices
declined 6.1%, resulting in the revenue decline. The Canadian government's
expanded efforts to provide free assistance to low-income Canadians contributed
to the decrease in clients served. In addition, operating expenses, such as
depreciation, advertising and rent, increased significantly due to continued
office expansion.
A weaker Australian dollar also affected international results when
translated into U.S. currency. In U.S. dollars, Australia's revenues declined
7.4% to $14.5 million and pretax earnings increased 1.7% to $2.3 million.
However, in Australian dollars, pretax earnings increased 33.2% to $4.0 million,
while revenues were up 11.6% to $24.2 million. The increase in Australian dollar
revenues and pretax earnings is due to a 5.2% increase in clients served.
In the United Kingdom, the cost of operating 20 company-owned offices for a
full year compared with a partial year in 1998 resulted in a pretax loss of $2.6
million, up 62.8% from the prior year. The Company is continuing its efforts to
build a customer base in the U.K.
MORTGAGE OPERATIONS
This segment is primarily engaged in the origination, purchase, servicing,
securitization and sale of nonconforming and conforming mortgage loans in the
United States. Mortgage origination services are offered through a network of
mortgage brokers in 49 states and through H&R Block offices in 4 states.
Revenues increased 88.5% over last year to $255.9 million. Pretax earnings
increased 103.7% to $62.7 million from $30.8 million in 1998. The increase in
both revenues and pretax earnings is largely due to Option One, which reported
revenues of $221.6 million and pretax earnings of $63.4 million. Option One
originated $3.6 billion of loans in fiscal 1999, up 74.8% from last year. At
April 30, 1999, Option One's servicing portfolio was 65,300 loans totaling $6.5
billion.
BUSINESS SERVICES
This segment is primarily engaged in providing accounting, tax and consulting
services to business clients and tax, estate planning and financial planning
services to individuals. This segment offers services through regional
accounting firms based in six cities in the United States. A new segment this
year, Business services reported revenues of $47.3 million and pretax earnings
of $7.1 million. During fiscal year 1999, six regional accounting firms and
several smaller market firms were acquired.
INVESTMENT INCOME, NET
Net investment income increased 25.9% to $32.2 million from $25.6 million in
1998, primarily as a result of an increase in the amount of cash available for
investment throughout fiscal 1999.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased to $17.4
million from $10.4 million in the prior year, largely due to increased
charitable contributions, increased wages and employee benefits, and lower
earnings from the Company's captive insurance subsidiary.
INCOME TAX EXPENSE
The effective tax rate in fiscal 1999 of 38.0% remained unchanged from last
year.
1998 COMPARED TO 1997
CONSOLIDATED RESULTS
Revenues increased 19.1% to $1.270 billion compared to $1.066 billion in 1997.
Net earnings from continuing operations increased 24.1% to $183.8 million from
$148.1 million in the prior year. Basic net earnings per share from continuing
operations increased to $1.75 from $1.42 last year. Diluted net earnings per
share from continuing operations increased to $1.71 compared to $1.40 in 1997.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
Revenues increased 8.4% to $1.047 billion from $966.5 million in 1997. 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 were 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 19.9% to $252.2 million from $210.4 million in
1997. The pretax margin was 24.1% 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
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
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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 operations in the United Kingdom and the opening of 32 new
company-owned offices in Australia.
MORTGAGE OPERATIONS
Revenues of $135.8 million were $126.9 million better than 1997. 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.
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.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss increased $6.2 million
to $10.4 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. Interest expense
on long-term debt of $13.7 million in 1998 represented primarily the interest on
debt associated with the acquisition of Option One.
INCOME TAX EXPENSE
The effective tax rate was 38.0% for 1998, compared to 36.1% for 1997, caused by
an increase in state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in 1999, with cash and
marketable securities of $420.6 million at year-end, compared to $1.590 billion
at the end of 1998. This decrease resulted primarily from the acquisition of
11.8 million shares of the Company's common stock at an aggregate cost of $492.9
million and a $571.1 million reduction in short term borrowings. Working capital
declined to $533.6 million at April 30, 1999 from $866.4 million last year, but
the working capital ratio increased to 1.96 to 1 this year compared to 1.68 to 1
a year earlier. Stockholders' equity at April 30, 1999 and 1998 was $1.062
billion and $1.342 billion, 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
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund
receivables associated with its mortgage loan and other financial services
programs. During the past three years, the Company has also used short-term
borrowings in January through April to purchase a participation interest ranging
from 40% to 49.9% in certain RALs through its agreement with Household Bank.
These short-term borrowings in the U.S. are supported by a $1.85 billion back-up
credit facility through November 1999, subject to renewal. Outstanding
commercial paper related to loans held for sale and other receivables amounted
to $71.9 million and $643.0 million, respectively, at April 30, 1999 and 1998.
Loans held for sale totaled $636.7 million and $448.1 million at April 30, 1999
and 1998, 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, 1999 and 1998 include amounts due from Revenue Canada of $11.3 million and
$13.9 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 mortgage loans. As part of its risk management strategy
prior to securitization or sale, the Company may choose to hedge its interest
rate risk related to its fixed rate mortgage portfolio by selling short FNMA
mortgage-backed securities and utilizing forward loan sale 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
2000, exclusive of acquisitions, will increase significantly from 1999. The
Company will continue to use short-term financing in the United States to
finance various financial activities conducted by Block Financial Corporation,
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. At April 30, 1999, 17.0 million shares had been repurchased under
these authorizations. The Company intends to continue to purchase its shares on
the open market in accordance with these authorizations, subject to various
factors including the price of the stock, availability of excess cash, the
ability to maintain financial flexibility, securities laws restrictions and
other investment opportunities available.
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, prioritize, evaluate and
mitigate potential Year 2000 related issues. As part of its program, the Company
has identified three key categories of software and systems, including
information technology (IT) systems, non-IT systems (systems with internal
clocks or imbedded microprocessors) and systems of third parties with which it
interacts, for which the
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Company has developed detailed plans to address the Year 2000 issue.
The Company has identified 9 mission critical business functions (e.g. U.S.
tax preparation services, wholesale loan services, etc.) and 28 non-mission
critical business functions (e.g. TaxCut(R) software, Australian tax operations,
etc.). Within each of the business functions, key IT and non-IT systems have
been inventoried and assessed for compliance and detailed plans are in place for
required system modifications or replacements. Currently, remediation projects
are at different phases of completion. One hundred and thirty-six remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 118 are complete and
successfully tested, 4 are in the testing phase and 14 are still in progress. Of
the projects currently in the testing phase, all are scheduled to be completed
by July 31, 1999. The remaining projects are scheduled to be completed by
September 1999.
The Company has initiated communications and surveyed state, Federal and
foreign governments and suppliers with which it interacts to determine their
plans for addressing Year 2000 issues. The Company is relying on their responses
to determine if key third parties will be Year 2000 compliant. One of the
Company's key third parties is the Internal Revenue Service (IRS). In a report
given to the House Committee on Ways and Means on the Year 2000 Conversion
Efforts on February 24, 1999, the Commissioner of the IRS reported the status of
the IRS's Year 2000 effort. He stated: "Nearly all of our (IRS) mission critical
systems were made Y2K compliant and were placed in production for the 1999
Filing Season. Approximately half of these systems have been successfully tested
'end-to-end' with the clocks rolled forward. We (IRS) will continue focusing our
repair efforts on mission critical systems from now until the end of March. From
April through the end of 1999, most of the efforts will be applied to wrapping
up some smaller systems and, most importantly, completing the full-scale
End-to-End Testing." The Company tested its systems with the IRS in May and June
and found no major problems. In addition, the Company continues to communicate
frequently with the IRS regarding its Year 2000 readiness. The Company is also
in the process of completing a survey and inventory of tax franchisees. Some
readiness issues have been identified and the Company is consulting with its
franchisees on their remediation programs to help mitigate their risk.
Assurances from franchisees of Year 2000 readiness are scheduled to be obtained
by September 1999. The Company will continue to monitor its third party
relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred.
Total costs are currently estimated at $3.8 million, with approximately $2.5
million incurred through April 30, 1999. The remaining costs to complete
represent the cost of on-going monitoring of the Company's continued readiness
through the end of the next fiscal year. The costs associated with the
replacement of computer systems, hardware and equipment (currently estimated to
be $13.9 million in total, with $13.6 million incurred through April 30, 1999),
substantially all of which would be capitalized, are not included in the above
estimates. All costs related to the Year 2000 issue are being funded through
internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will
not be Year 2000 compliant and the Company would not be able to process
electronic filings or refund anticipation loans. The Company believes that its
competitors will face the same risks.
The Company has identified and developed contingency plans for Year 2000
interruptions in the event that internal and/or external remediation projects
are not completed on a timely basis or that they fail to meet anticipated needs.
The Company has focused its contingency plans on accounting functions,
communications, distribution channels, facilities, insurance, suppliers,
treasury functions and tax operations (which includes franchises, Federal and
state governments, IRS and electronic filing). In addition, disaster recovery
plans and business resumption plans are being reviewed and modified for
information technology functions. While the Company does not anticipate problems
in any of these areas, the Company believes a comprehensive plan includes
preparation for continuity of its mission critical processes. The contingency
plans were substantially completed in June 1999 and are scheduled to be
completed by September 1999, with on going modifications being made as issues
requiring change, if any, are identified.
The Company's Year 2000 program is an ongoing process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its
business activities, it can not make assurances that its systems, the systems of
the state, Federal and foreign governments, tax franchisees and suppliers will
be Year 2000 compliant and will not interrupt business. While the impact can not
be fully determined, 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.
The Notes to consolidated financial statements, as well as other
information contained in this Annual Report to Shareholders may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industry and the markets in which the
Company operates and management's assumptions and beliefs relating thereto.
Words such as "will," "expect," "intend," "plan," "wish," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of the completion of the McGladrey transaction; year 2000
readiness of the Company and third parties; the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
authorities and their impact on the lines of business in which the Company's
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the Company's inability to successfully expand its financial
center operations, other financial planning and investment services operations,
retail mortgage operations, and accounting practice; the Company's inability to
successfully design, create, modify and operate its computer systems and
networks; litigation involving the Company; changes in management and management
strategies; and risks described from time to time in reports and registration
statements filed by the Company and its subsidiaries with the Securities and
Exchange Commission. Readers should take these factors into account in
evaluating any such forward-looking statements. The Company undertakes no
obligation to update publicly or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
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CONSOLIDATED STATEMENTS OF EARNINGS
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Amounts in thousands, except per share amounts
Year Ended April 30 1999 1998 1997
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REVENUES:
Service revenues $1,324,494 $1,047,181 $ 921,954
Product sales 174,124 103,717 31,781
Royalties 123,201 111,142 107,508
Other 22,846 7,941 5,167
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1,644,665 1,269,981 1,066,410
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EXPENSES:
Employee compensation and benefits 610,866 483,951 420,060
Occupancy and equipment 232,003 195,192 175,050
Marketing and advertising 90,056 71,594 76,087
Bad debt 71,662 53,736 51,303
Interest 69,338 38,899 608
Supplies, freight and postage 57,157 51,705 44,554
Other 158,509 103,387 77,535
--------------------------------------
1,289,591 998,464 845,197
--------------------------------------
Operating earnings 355,074 271,517 221,213
OTHER INCOME:
Investment income, net 32,234 25,596 10,870
Other, net (3,767) (680) --
--------------------------------------
28,467 24,916 10,870
--------------------------------------
Earnings from continuing operations before income
taxes 383,541 296,433 232,083
Taxes on earnings 145,746 112,645 83,951
--------------------------------------
NET EARNINGS FROM CONTINUING OPERATIONS 237,795 183,788 148,132
Net loss from discontinued operations (less
applicable income tax benefit of ($953), ($13,183)
and ($56,091)) (1,490) (23,525) (100,377)
Net gain (loss) on sale of discontinued operations
(less applicable income taxes (benefit) of
($13,387) and $251,701) (20,939) 231,867 --
--------------------------------------
NET EARNINGS $ 215,366 $ 392,130 $ 47,755
======================================
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $2.38 $1.75 $1.42
Net earnings (loss) from discontinued operations (.22) 1.99 (.96)
--------------------------------------
Net earnings $2.16 $3.74 $ .46
======================================
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $2.36 $1.71 $1.40
Net earnings (loss) from discontinued operations (.22) 1.94 (.95)
--------------------------------------
Net earnings $2.14 $3.65 $ .45
======================================
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See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
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AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
April 30 1999 1998
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ASSETS
Current assets:
Cash and cash equivalents. $ 193,240 $ 900,856
Marketable securities 56,881 400,240
Receivables, less allowance for doubtful accounts of $61,872
and $45,314 743,301 793,237
Prepaid expenses and other current assets 94,000 48,944
------------------------
Total current assets 1,087,422 2,143,277
INVESTMENTS AND OTHER ASSETS:
Investments in marketable securities 170,528 289,096
Excess of cost over fair value of net tangible assets
acquired, less accumulated amortization of $64,414 and
$40,261 405,534 288,580
Other 132,470 105,809
------------------------
708,532 683,485
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $193,549 and $167,065 114,222 77,321
------------------------
$1,910,176 $2,904,083
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 71,939 $ 643,002
Accounts payable, accrued expenses and deposits 168,641 114,875
Accrued salaries, wages and payroll taxes 161,590 96,168
Accrued taxes on earnings 151,659 422,847
------------------------
Total current liabilities 553,829 1,276,892
LONG-TERM DEBT 249,725 249,675
OTHER NONCURRENT LIABILITIES 44,635 35,884
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 -- --
Additional paid-in capital 420,658 432,335
Accumulated other comprehensive income (loss) (23,400) (24,517)
Retained earnings 1,130,909 1,010,547
------------------------
1,529,256 1,419,454
Less cost of common stock in treasury 467,269 77,822
------------------------
1,061,987 1,341,632
------------------------
$1,910,176 $2,904,083
========================
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See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Amounts in Thousands
Year Ended April 30 1999 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 215,366 $ 392,130 $ 47,755
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 74,605 55,787 36,526
Provision for deferred taxes on earnings 1,739 (15,639) 538
Net (gain) loss on sales of subsidiaries 20,939 (231,867) --
Net gain on sales of marketable securities (4,124) (1,720) (454)
Other noncurrent liabilities 4,739 (3,068) 730
Changes in assets and liabilities, net of
acquisitions:
Receivables 183,735 (44,727) (94,452)
Mortgage loans held for sale:
Originations and purchases (4,290,207) (2,330,349) (211,700)
Sales and principal repayments 4,201,187 2,443,725 113,259
Prepaid expenses and other current assets (27,952) (27,618) (15,455)
Net assets of discontinued operations -- 13,665 95,405
Accounts payable, accrued expenses and
deposits 46,029 (82,469) 68,514
Accrued salaries, wages and payroll taxes 55,178 (10,965) 10,932
Accrued taxes on earnings (260,458) 28,118 36,833
-----------------------------------------
Net cash provided by operating activities 220,776 185,003 88,431
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (251,627) (882,378) (75,595)
Maturities of marketable securities 211,239 38,961 517
Sales of marketable securities 522,252 1,321,716 23,852
Purchases of property and equipment, net (78,823) (46,803) (44,277)
Excess of cost over fair value of net tangible
assets acquired, net of cash acquired (123,657) (265,700) (17,249)
Other, net (17,171) (30,812) (16,038)
-----------------------------------------
Net cash provided by (used in) investing
activities 262,213 134,984 (128,790)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (17,276,595) (11,090,798) (5,041,386)
Proceeds from issuance of notes payable 16,593,978 11,008,018 5,238,354
Proceeds from issuance of long-term debt -- 249,675 --
Dividends paid (95,004) (83,635) (107,988)
Payments to acquire treasury shares (492,945) (18,351) --
Proceeds from stock options exercised 79,961 58,881 3,439
-----------------------------------------
Net cash provided by (used in) financing
activities (1,190,605) 123,790 92,419
-----------------------------------------
Net increase (decrease) in cash and cash
equivalents (707,616) 443,777 52,060
Cash and cash equivalents at beginning of the
year 900,856 457,079 405,019
-----------------------------------------
Cash and cash equivalents at end of the year $ 193,240 $ 900,856 $ 457,079
=========================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid (received) $ 394,273 $ 102,396 $ (8,047)
Interest paid 71,431 50,302 10,889
- -----------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
23
8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
AMOUNTS IN THOUSANDS
Convertible
Common Stock Preferred Stock Additional Treasury Stock
---------------- --------------- Paid-in Retained -------------------
Shares Amount Shares Amount Capital Earnings Shares Amount
- --------------------------------------------------------------------------------------------------------------------
Balances at May 1, 1996 108,973 $1,089 405 $ 4 $504,694 $ 762,331 (5,556) $(213,406)
Net earnings for the year -- -- -- -- -- 47,755 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- 2 -- 24 -- 89 3,415
Cancellation of restricted
stock -- -- -- -- -- -- (28) (1,044)
Stock issued for acquisition -- -- -- -- (2,410) -- 590 22,660
Cash dividends paid --
$1.04 per share -- -- -- -- -- (107,988) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1997 108,973 1,089 407 4 502,308 702,098 (4,905) (188,375)
Net earnings for the year -- -- -- -- -- 392,130 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- 32 -- (1,832) -- 1,578 60,882
Conversion of Convertible
Preferred Stock -- -- (436) (4) (68,018) -- 1,744 68,022
Cancellation of Convertible
Preferred Stock -- -- (1) -- (123) (46) -- --
Acquisition of treasury
shares -- -- -- -- -- -- (409) (18,351)
Cash dividends paid --
$.80 per share -- -- -- -- -- (83,635) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1998 108,973 1,089 2 -- 432,335 1,010,547 (1,992) (77,822)
Net earnings for the year -- -- -- -- -- 215,366 -- --
Unrealized loss on
translation -- -- -- -- -- -- -- --
Change in net unrealized gain on
marketable securities -- -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- -- --
Stock options exercised -- -- -- -- (12,042) -- 2,175 90,462
Restricted stock granted -- -- -- -- (81) -- 37 1,544
Stock issued for acquisition -- -- -- -- 807 -- 268 11,053
Conversion of Convertible
Preferred Stock -- -- (2) -- (361) -- 11 439
Acquisition of treasury
shares -- -- -- -- -- -- (11,843) (492,945)
Cash dividends paid --
$.95 per share -- -- -- -- -- (95,004) -- --
----------------------------------------------------------------------------------
Balances at April 30, 1999 108,973 $1,089 -- $ -- $420,658 $1,130,909 (11,344) $(467,269)
==================================================================================
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Total
Income (loss) Equity
- ------------------------------------------------------------
Balances at May 1, 1996 $(15,119) $1,039,593
Net earnings for the year -- --
Unrealized loss on
translation (3,065) --
Change in net unrealized gain on
marketable securities 157 --
Comprehensive income -- 44,847
Stock options exercised -- 3,439
Cancellation of restricted
stock -- (1,044)
Stock issued for acquisition -- 20,250
Cash dividends paid --
$1.04 per share -- (107,988)
------------------------
Balances at April 30, 1997 (18,027) 999,097
Net earnings for the year -- --
Unrealized loss on
translation (5,290) --
Change in net unrealized gain on
marketable securities (1,200) --
Comprehensive income -- 385,640
Stock options exercised -- 59,050
Conversion of Convertible
Preferred Stock -- --
Cancellation of Convertible
Preferred Stock -- (169)
Acquisition of treasury
shares -- (18,351)
Cash dividends paid --
$.80 per share -- (83,635)
------------------------
Balances at April 30, 1998 (24,517) 1,341,632
Net earnings for the year -- --
Unrealized loss on
translation (1,525) --
Change in net unrealized gain on
marketable securities 2,642 --
Comprehensive income -- 216,483
Stock options exercised -- 78,420
Restricted stock granted -- 1,463
Stock issued for acquisition -- 11,860
Conversion of Convertible
Preferred Stock -- 78
Acquisition of treasury
shares -- (492,945)
Cash dividends paid --
$.95 per share -- (95,004)
------------------------
Balances at April 30, 1999 $(23,400) $1,061,987
========================
- ------------------------------------------------------------
See notes to consolidated financial statements.
24
9
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
81% 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 and conforming mortgages, offer personal productivity software,
purchase participation interests in refund anticipation loans made by a
third-party lending institution, and offer accounting, tax and consulting
services to business clients.
Principles of consolidation: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company"), all majority-owned subsidiaries
and companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise. 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.
Residual interests in fiscal 1999 are classified as available-for-sale
securities, and are carried at market value, based on a discounted cash flow
model, with unrealized gains and losses included in stockholders' equity. The
residual interests are amortized over the estimated lives of the loans to which
they relate.
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 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 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 16 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.
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, 1999 and 1998
were 4.9% and 5.6%, 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.
25
10
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 are provided for temporary differences
between financial and tax reporting, which consist principally of accrued
expenses, deferred compensation, allowance for credit losses and deferred gain
on sale of residual interests.
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 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.
Comprehensive income: In the first quarter of fiscal 1999, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). 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 changes in equity during the period, except those
resulting from investments by and distributions to owners, be reported as
"comprehensive income" in the financial statements. The adoption of SFAS 130 had
no effect on the Company's consolidated financial statements.
Mortgage-backed securities: In the third quarter of fiscal 1999, the
Company adopted Statement of Financial Accounting Standards No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134
requires that mortgage-backed securities or other interests retained after a
securitization be classified based on the intent to sell or hold the
investments. The Company has classified its retained interests as
available-for-sale securities, which are included in investments in marketable
securities on the consolidated balance sheets.
New accounting standards: 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 does not
anticipate that the implementation of SFAS 133 will have a material impact on
the consolidated financial statements.
26
11
NET EARNINGS PER SHARE
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 from continuing operations are as
follows (shares in thousands):
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net earnings from continuing operations $237,795 $183,788 $148,132
================================
Basic weighted average shares 99,761 104,829 103,985
Effect of dilutive securities:
Common and convertible preferred stock options 1,058 1,229 230
Convertible preferred stock 2 1,515 1,625
--------------------------------
Dilutive potential common shares 100,821 107,573 105,840
================================
Net earnings per share from continuing operations:
Basic $2.38 $1.75 $1.42
Diluted 2.36 1.71 1.40
- ---------------------------------------------------------------------------------------------
Diluted net earnings per share excludes the impact of common stock options
of 149,370, 244,071 and 5,651,642 shares for 1999, 1998 and 1997, 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 1999 1998
- ------------------------------------------------------------------------------------
Cash and interest-bearing deposits $110,831 $ 58,765
Municipal bonds 77,500 464,667
Other interest-bearing securities 2,525 4,870
Certificates of deposit 2,384 239,582
Commercial paper -- 132,972
--------------------
$193,240 $900,856
====================
- ------------------------------------------------------------------------------------
MARKETABLE SECURITIES
The amortized cost and market value of marketable securities at April 30,
1999 and 1998 are summarized below:
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
Current:
Asset-backed securities $ 45,038 $ 1 $ 28 $ 45,011 $151,383 $ 18 $ 208 $151,193
Corporate bonds 9,300 -- -- 9,300 -- -- -- --
Municipal bonds and notes 2,564 6 -- 2,570 149,842 -- 18 149,824
Other debt investments -- -- -- -- 45,000 141 -- 45,141
Residual interests-trading -- -- -- -- 54,082 -- -- 54,082
-----------------------------------------------------------------------------------------------
56,902 7 28 56,881 400,307 159 226 400,240
-----------------------------------------------------------------------------------------------
Noncurrent:
Residual interests 90,566 2,326 219 92,673 -- -- -- --
Municipal bonds 72,902 274 88 73,088 181,060 96 1,472 179,684
Common stock 2,419 2,362 14 4,767 2,467 2,118 2 4,583
Corporate bonds -- -- -- -- 68,790 -- 242 68,548
U.S. Government obligations -- -- -- -- 36,509 -- 228 36,281
-----------------------------------------------------------------------------------------------
165,887 4,962 321 170,528 288,826 2,214 1,944 289,096
-----------------------------------------------------------------------------------------------
$222,789 $4,969 $349 $227,409 $689,133 $2,373 $2,170 $689,336
===============================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
27
12
All marketable securities at April 30, 1999 are classified as
available-for-sale. Residual interests at April 30, 1998 were classified as
trading securities. Proceeds from the sales of available-for-sale securities
were $522,252, $1,321,716 and $23,852 during 1999, 1998 and 1997, respectively.
Gross realized gains on those sales during 1999, 1998 and 1997 were $4,711,
$1,826 and $600, respectively; gross realized losses were $587, $106 and
$146, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
1999 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 $ 56,902 $ 56,881
After one year through five years 46,277 46,283
After five years through 10 years 9,297 9,431
After 10 years 17,328 17,374
---------------------
$129,804 $129,969
=====================
- -------------------------------------------------------------------------------------
The Company securitized $2,456,910 in mortgage loans during the year ended
April 30, 1999, resulting in residual interests with an allocated carrying value
of $158,485. In April 1999, the Company securitized $91,355 of these residual
interests in a net interest margin transaction. The remaining residual interests
from the securitizations during 1999 of $39,782 were treated as noncash
investing activities in the consolidated statement of cash flows for the year
ended April 30, 1999.
RECEIVABLES
Receivables consist of the following:
April 30 1999 1998
- -------------------------------------------------------------------------------------
Mortgage loans held for sale $636,687 $448,102
Participation in refund anticipation loans 51,074 39,165
Credit card loans -- 202,852
Other 117,412 148,432
---------------------
805,173 838,551
Allowance for doubtful accounts 61,872 45,314
---------------------
$743,301 $793,237
=====================
- -------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
April 30 1999 1998
- -------------------------------------------------------------------------------------
Land $ 3,060 $ 2,872
Buildings 24,292 21,350
Computers and other equipment 226,388 180,273
Leasehold improvements 54,031 39,891
---------------------
307,771 244,386
Less accumulated depreciation and amortization 193,549 167,065
---------------------
$114,222 $ 77,321
=====================
- ------------------------------------------------------------------------------------
Depreciation and amortization expense for 1999, 1998 and 1997 amounted to
$49,302, $37,197 and $30,341, 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 $256,750 and $254,515 at April 30,
1999 and 1998, respectively.
28
13
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 $33,628 and $29,885 at April 30, 1999 and 1998, respectively, to reflect the
liability under these plans. The Company purchased whole-life insurance
contracts on certain related directors and employees to recover 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.
STOCKHOLDERS' EQUITY
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 1999, 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. In
addition, options to purchase 51,828 shares of Convertible Preferred Stock were
issued as a part of the acquisition and 37,399 shares of Convertible Preferred
Stock were issued in connection with these options. 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 fiscal 1999, the Company issued 6,884 shares of its
Common Stock upon conversion of 1,721 shares of the Convertible Preferred
Stock.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net earnings, foreign
currency translation adjustments and the change in the net unrealized gain or
loss on marketable securities. Included in stockholders' equity at April 30,
1999 and 1998, the net unrealized holding gain on available-for-sale securities
was $2,768 and $126, respectively, and the foreign currency translation
adjustment was $(26,168) and $(24,643), respectively.
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net earnings $215,366 $392,130 $47,755
Unrealized gains on securities (less applicable taxes
(benefit) of $1,619, ($736) and $96):
Unrealized holding gains (losses) arising during period
(less applicable taxes (benefit) of $3,186, ($82) and
$268) 5,199 (134) 439
Less: Reclassification adjustment for gains included in
earnings (less applicable taxes of $1,567, $654 and
$172) (2,557) (1,066) (282)
Foreign currency translation adjustments (1,525) (5,290) (3,065)
-------------------------------
Comprehensive income $216,483 $385,640 $44,847
===============================
- ---------------------------------------------------------------------------------------------
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 plan expired in December 1998, except for options outstanding
thereunder, and was replaced by the Board of Directors with the 1999 Stock
Option Plan for Seasonal Employees (subject to shareholder approval in September
1999). The options are exercisable during September through November in each of
the two years following the calendar year of the grant.
29
14
Changes during the years ended April 30, 1999, 1998 and 1997 under these
plans were as follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
Options outstanding,
beginning of year 5,110,392 $32.71 6,217,699 $35.78 6,413,928 $37.93
Options granted 4,127,742 42.20 3,784,925 32.28 3,124,588 32.34
Options exercised (2,196,673) 32.67 (1,608,233) 33.63 (90,045) 20.08
Options which expired (1,314,967) 39.40 (3,283,999) 37.58 (3,230,772) 37.16
Options outstanding, end
of year 5,726,494 38.03 5,110,392 32.71 6,217,699 35.78
Shares exercisable, end
of year 3,505,737 37.62 3,428,615 32.87 4,506,372 36.00
Shares reserved for
future grants, end of
year 2,966,135 13,159,852 13,660,778
- ----------------------------------------------------------------------------------------------------
A summary of stock options outstanding and exercisable at April 30, 1999
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
- --------------------------------------------------------------------------------------------------------------
$13.2813 -- 16.25 4,720 1 year $14.96 4,720 $14.96
$17.4375 -- 28.75 348,160 6 years 26.86 264,827 26.61
$30.6875 -- 39.875 2,011,968 6 years 33.05 1,301,986 33.39
$40.125 -- 47.375 3,330,646 6 years 42.12 1,934,204 42.04
$50.375 -- 51.6875 31,000 10 years 50.63 -- --
---------------------------------------------------------------------------------
5,726,494 3,505,737
=================================================================================
- --------------------------------------------------------------------------------------------------------------
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 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net earnings:
As reported $215,366 $392,130 $47,755
Pro forma 202,421 379,985 34,891
Basic net earnings per share:
As reported $2.16 $3.74 $.46
Pro forma 2.03 3.62 .34
Diluted net earnings per share:
As reported $2.14 $3.65 $.45
Pro forma 2.01 3.55 .33
- ---------------------------------------------------------------------------------------------
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 1999, 1998 and 1997 was $5.84, $5.91 and $6.14, respectively. The
following weighted-average assumptions were used for grants during the following
periods:
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Risk-free interest rate 5.41% 6.21% 6.28%
Expected life 3 years 3 years 3 years
Expected volatility 21.86% 31.99% 34.08%
Dividend yield 2.36% 2.48% 2.42%
- ---------------------------------------------------------------------------------------------
30
15
SHAREHOLDER RIGHTS PLAN
On July 25, 1998, the rights under the July 1988 shareholder rights plan,
as amended, expired and the rights under a shareholder rights plan adopted by
the Company's Board of Directors on March 25, 1998 became effective. Like the
1988 plan, the 1998 plan was adopted 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. Under the
1998 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,
1998. Rights automatically attach to shares issued after such date.
Under the 1998 plan, 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. The Company may, prior to any
Unapproved Stock Acquisition, amend the plan to lower such 15% threshold to not
less than the greater of (1) any percentage greater than the largest percentage
of beneficial ownership by any person or group of persons then known by the
Company, and (2) 10% (in which case the acquisition of such lower percentage of
beneficial ownership then constitutes an Unapproved Stock Acquisition and the
Rights become exercisable). When exercisable, the registered holder of each
Right 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
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 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 1998 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 1999 1998 1997
- --------------------------------------------------------------------------------------------
Amortization of intangibles $24,378 $17,336 $5,514
Purchased services 19,110 10,460 7,484
Travel and entertainment 15,094 11,548 9,642
Refund anticipation loan servicing fees 15,028 7,889 9,838
Taxes and licenses 14,531 11,392 10,467
Legal and professional 13,164 5,890 5,700
Loan servicing 11,158 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 1999 1998 1997
- --------------------------------------------------------------------------------------------
United States $381,443 $285,100 $221,494
Foreign 2,098 11,333 10,589
-----------------------------
$383,541 $296,433 $232,083
=============================
- --------------------------------------------------------------------------------------------
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 are comprised of the
following:
Year Ended April 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Currently payable:
Federal $123,035 $107,595 $ 69,725
State 16,128 14,402 7,965
Foreign 1,553 5,483 5,041
--------------------------------
140,716 127,480 82,731
================================
Deferred:
Federal 5,114 (12,047) 1,153
State 670 (1,613) 132
Foreign (754) (1,175) (65)
--------------------------------
5,030 (14,835) 1,220
--------------------------------
$145,746 $112,645 $ 83,951
================================
- ---------------------------------------------------------------------------------------------
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $60,647 at December 31, 1998. 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 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Increases (reductions) in income taxes resulting from:
State income taxes, net of Federal income tax benefit 2.9% 2.8% 2.2%
Foreign income taxes, net of Federal income tax benefit 0.2% 0.5% 0.6%
Nontaxable Federal income (0.7%) (0.1%) (0.5%)
Other 0.6% (0.2%) (1.2%)
--------------------------------
Effective rate 38.0% 38.0% 36.1%
================================
- ---------------------------------------------------------------------------------------------
A summary of deferred taxes follows:
April 30 1999 1998
- ------------------------------------------------------------------------------------
Gross deferred tax assets:
Accrued expenses $(17,999) $ (9,809)
Allowance for credit losses (12,144) (4,081)
Mark-to-market adjustments (2,909) (3,454)
--------------------
Current (33,052) (17,344)
--------------------
Deferred compensation (14,577) (12,047)
Depreciation (5,222) (2,633)
Residual interest income -- (2,167)
--------------------
Noncurrent (19,799) (16,847)
--------------------
Gross deferred tax liabilities:
Accrued income 630 695
Deferred loan fees -- 1,921
Other -- 70
--------------------
Current 630 2,686
--------------------
Deferred gain on sale of residual interests 12,103 --
Residual interest income 6,359 --
Mortgage servicing rights 4,910 944
Depreciation 597 570
--------------------
Noncurrent 23,969 1,514
--------------------
Net deferred tax assets $(28,252) $(29,991)
====================
- ------------------------------------------------------------------------------------
32
17
ACQUISITIONS
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms. The purchase prices plus additional contingent
payments aggregated $110,133. Each acquisition was accounted for as a purchase
and, accordingly, results for each acquisition are included since the date of
acquisition. The excess of cost over fair value of net tangible assets acquired
was $99,857 and is being amortized on a straight-line basis over 15 years.
On March 5, 1999, the Company acquired Assurance Mortgage Corporation of
America, a company engaged in the origination and sale of conventional mortgage
loans. The Company issued 268,325 shares of its Common Stock from treasury, with
a value of $11,860, for the purchase. The acquisition was accounted for as a
purchase and, accordingly, its results are included since the date of
acquisition. The issuance of Common Stock was treated as a noncash investing
activity in the consolidated statement of cash flows for the year ended April
30, 1999. The excess of cost over fair value of net tangible assets acquired was
$21,710 and is being amortized on a straight-line basis over 15 years.
On June 17, 1997, the Company acquired Option One, a company primarily
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.
During fiscal 1999, 1998 and 1997, 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 since the date of
acquisition.
SALE OF SUBSIDIARIES
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20,939 loss, net of taxes, on the
transaction. The consolidated statements of earnings reflect the Company's
Credit Card operations segment as discontinued operations.
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 discontinued operations for the years ended April 30, 1999,
1998, and 1997 were $24,143, $665,649 and $873,400, respectively.
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, 1999, for fiscal 2000, 2001, 2002, 2003
and 2004 aggregated $96,995, $77,209, $54,624, $25,655 and $14,136,
respectively, with no significant commitments extending beyond that period of
time. The Company's rent expense for the years 1999, 1998 and 1997 aggregated
$99,654, $84,743 and $77,994, respectively.
Prior to March 31, 1999, the Company was obligated to purchase 60% of the
mortgage loan volume which met certain criteria as established by the Company
from a 40%-owned affiliate. The Company obtained majority-ownership of this
affiliate on March 31, 1999. From May 1, 1998 to March 31, 1999 the Company had
purchased $312,173 of such loans and all loan purchases after March 31, 1999
will be eliminated in consolidation. The Company also extended warehouse
financing to this affiliate to facilitate the accumulation of mortgage loans, of
which $68,434 was drawn at April 30, 1998.
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 $416,323 and $199,487 at April 30, 1999
and 1998, respectively. 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, 1999, the Company maintained a $1,850,000 backup credit
facility to support various financial activities conducted by its subsidiaries
through a 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
$4,864,137, subservicing loans of $1,300,374, and the master servicing of
$873,673 previously securitized mortgage loans held in trust at April 30, 1999.
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 $126,385 at April 30, 1999. 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 were consolidated, the defendants filed a motion to dismiss the
consolidated suits, the district court stayed all proceedings pending the
outcome of the state court suits, and the United States Court of Appeals for the
Sixth Circuit affirmed such stay. 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 were
consolidated for discovery purposes and defendants filed a motion for summary
judgment covering all four state lawsuits. As a part of the sale of its interest
in CompuServe, the Company 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 results of
operations.
FINANCIAL INSTRUMENTS
The Company sells short FNMA mortgage-backed securities to certain
broker-dealer counterparties. The position on certain or all of the fixed rate
mortgages is closed, on standard PSA settlement dates, when the Company enters
into a forward commitment to sell those mortgages or decides to securitize the
mortgages. The effectiveness of the hedge is measured by a historical and
probable future high correlation of changes in the fair value of the hedging
instruments with changes in the value of the hedged item. If correlation ceases
to exist, hedge accounting is terminated and the gains or losses are recorded in
revenues. Deferred gains on the FNMA securities hedging instrument amounted to
$156 at April 30, 1999. The contract value and market value of this hedging
instrument as of April 30, 1999 were $82,692 and $82,469, respectively.
The contract value and market value of the forward commitment as
of April 30, 1999 were $60,883 and $61,135, 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 fund.
34
19
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1999 1999 1998 1998 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
Revenues $1,196,997 $291,482 $ 85,613 $ 70,573 $967,591 $198,776 $ 73,584 $ 30,030
Continuing operations:
Earnings (loss) before income
taxes (benefits) $ 481,153 $ (4,588) $(50,249) $(42,775) $417,962 $(23,931) $(45,071) $(52,527)
Taxes (benefits) on
earnings 182,818 (1,743) (19,094) (16,235) 158,826 (9,094) (17,572) (19,515)
----------------------------------------------------------------------------------------
Net earnings (loss) 298,335 (2,845) (31,155) (26,540) 259,136 (14,837) (27,499) (33,012)
Net loss from discontinued
operations -- (273) (18) (1,199) (2,218) (2,452) (13,732) (5,123)
Net gain (loss) on sale of
discontinued operations (961) (19,978) -- -- -- 231,867 -- --
----------------------------------------------------------------------------------------
Net earnings (loss) $ 297,374 $(23,096) $(31,173) $(27,739) $256,918 $214,578 $(41,231) $(38,135)
========================================================================================
Basic net earnings per share:
Net earnings (loss) from
continuing operations $3.06 $(.03) $(.31) $(.25) $2.45 $(.14) $(.26) $(.32)
========================================================================================
Net earnings (loss) $3.05 $(.24) $(.31) $(.26) $2.43 $2.04 $(.39) $(.37)
========================================================================================
Diluted net earnings per
share:
Net earnings (loss) from
continuing operations $3.03 $(.03) $(.31) $(.25) $2.39 $(.14) $(.26) $(.32)
========================================================================================
Net earnings (loss) $3.02 $(.24) $(.31) $(.26) $2.37 $2.04 $(.39) $(.37)
========================================================================================
- ------------------------------------------------------------------------------------------------------------------------
The accumulation of four quarters in fiscal 1999 and 1998 for net earnings
per share does not equal the related per share amounts for the years ended April
30, 1999 and 1998 due to the repurchase of treasury shares, the timing of the
exercise of stock options, the conversion of Convertible Preferred Stock, and
the antidilutive effect of stock options in the first three quarters.
Revenues, earnings (loss) before income taxes (benefits), taxes (benefits)
on earnings, net earnings and net earnings (loss) from discontinued operations
for the first and second quarters of fiscal 1999 and for all quarters of fiscal
1998 differs from the amount reported on Form 10-Qs for the respective periods
due to reclassification of the credit card segment as discontinued operations.
SUBSEQUENT EVENTS (UNAUDITED)
On June 29, 1999, the Company announced it had signed an Asset Purchase
Agreement ("Purchase Agreement") under which it would acquire substantially all
of the non-attest assets of McGladrey & Pullen LLP ("M&P"), the nation's seventh
largest accounting and consulting firm. Under the terms of the Purchase
Agreement, a newly formed subsidiary of the Company ("Subsidiary") will purchase
a majority of M&P's non-attest assets for $240,000 in cash payments over four
years, the payment of certain pension liabilities with a present value of
approximately $50,000, and additional contingent payments based on future
performance. The Purchase Agreement provides for the Subsidiary to enter into an
administrative services agreement with M&P (which will continue as a separate,
independent partnership to perform attest services for its clients) to provide
support services on a fee basis and to enter into separate employment agreements
with certain partners and principals of M&P to perform non-attest services for
the Subsidiary. The Purchase Agreement further provides for the Company to
guarantee the payment of the purchase price and the pension liabilities.
The Company intends to fund the acquisition from internally generated funds.
The acquisition, which is subject to applicable regulatory approvals and
compliance and other normal closing conditions, is expected to be
completed in August 1999 and will be accounted for as a purchase. Upon closing,
the Subsidiary will be included in the Company's Business services segment.
M&P reported revenues of $328,000 for the year ended April 30, 1999.
Assuming the acquisition had taken place on May 1, 1998, the Company would have
reported revenues from non-attest services of $201,100 and pretax earnings
before goodwill amortization of $32,000.
35
20
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
April 30 1999 1998
- ----------------------------------------------------------------------------------------
Condensed balance sheets:
Cash and cash equivalents $ 16,026 $ 30,895
Finance receivables, net 658,882 737,005
Other assets 448,010 311,759
------------------------
Total assets $1,122,918 $1,079,659
========================
Notes payable $ 71,939 $ 643,002
Long-term debt 249,725 249,675
Other liabilities 636,330 57,372
Stockholder's equity 164,924 129,610
------------------------
Total liabilities and stockholder's equity $1,122,918 $1,079,659
========================
- ----------------------------------------------------------------------------------------
Year Ended April 30 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Condensed statements of operations:
Revenues $ 386,938 $ 209,334 $ 79,317
Earnings from operations 69,419 28,447 7,571
Earnings before income taxes 65,642 28,401 7,571
Net earnings 19,280 13,719 500
- ------------------------------------------------------------------------------------------------------
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 10 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 and conforming
mortgage loans in the United States. Mortgage origination services are offered
through a network of mortgage brokers in 49 states and through H&R Block offices
in 4 states.
Business services: This segment is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. This segment offers
services through regional accounting firms based in six cities in the United
States. Revenues of this segment are seasonal in nature.
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, 1999, 1998 and 1997 is as follows:
1999 1998 1997
- -----------------------------------------------------------------------------------------------
REVENUES:
U.S. tax operations $1,258,234 $1,047,324 $ 966,524
International tax operations 74,714 81,754 87,493
Mortgage operations 255,944 135,778 8,895
Business services 47,257 -- --
Unallocated corporate 8,516 5,125 3,498
--------------------------------------
Total revenues $1,644,665 $1,269,981 $1,066,410
======================================
EARNINGS FROM CONTINUING OPERATIONS:
U.S. tax operations $ 314,113 $ 252,247 $ 210,365
International tax operations 2,514 11,922 14,172
Mortgage operations 62,749 30,811 865
Business services 7,089 -- --
Unallocated corporate (17,401) (10,413) (4,189)
Investment income, net 32,234 25,597 10,870
Interest expense on long-term debt (17,757) (13,731) --
--------------------------------------
Earnings from continuing operations before income
taxes $ 383,541 $ 296,433 $ 232,083
======================================
DEPRECIATION AND AMORTIZATION:
U.S. tax operations $ 49,380 $ 37,313 $ 31,981
International tax operations 5,741 4,541 3,594
Mortgage operations 15,764 12,690 56
Business services 3,340 -- --
Unallocated corporate 380 428 390
--------------------------------------
Total depreciation and amortization $ 74,605 $ 54,972 $ 36,021
======================================
IDENTIFIABLE ASSETS:
U.S. tax operations $ 268,650 $ 200,243 $ 189,007
International tax operations 55,684 48,362 39,145
Mortgage operations 1,033,261 829,396 125,734
Business services 146,252 -- --
Unallocated corporate 406,329 1,623,670 577,976
Discontinued credit card operations -- 202,412 253,052
Net assets of discontinued operations -- -- 522,144
--------------------------------------
Total assets $1,910,176 $2,904,083 $1,707,058
======================================
CAPITAL EXPENDITURES:
U.S. tax operations $ 63,354 $ 36,495 $ 38,760
International tax operations 7,709 7,013 4,773
Mortgage operations 7,478 4,736 205
Business services 1,137 -- --
Unallocated corporate 691 1,513 279
--------------------------------------
Total capital expenditures $ 80,369 $ 49,757 $ 44,017
======================================
- -----------------------------------------------------------------------------------------------
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.
PricewaterhouseCoopers LLP, independent accountants, audited H&R Block's
1999 consolidated financial statements and issued an opinion thereon. Their
audit was made in accordance with generally accepted auditing standards and
includes 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
Ozzie Wenich
Senior Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
H&R Block, Inc.
In our opinion, the accompanying consolidated balance sheet as of April 30,
1999 and the related consolidated statements of earnings, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of H&R Block, Inc. and its subsidiaries (the "Company") at April 30,
1999, and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of the Company as of April 30, 1998 and for each
of the two years in the period then ended were audited by other independent
accountants whose report dated June 16, 1998 and July 12, 1999 (as to the
effects of the discontinued credit card operations described in the note on the
sale of subsidiaries) expressed an unqualified opinion on those statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
June 15, 1999
38
23
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
H&R Block, Inc.
Kansas City, Missouri
We have audited the consolidated financial statements of H&R Block, Inc. and
subsidiaries as of April 30, 1998, and the related consolidated statements of
earnings and cash flows for each of the two years in the period ended April 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of H&R Block, Inc., and subsidiaries
as of April 30, 1998, and the results of their operations and their cash flows
for each of the two 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
(July 12, 1999 as to the effects of the discontinued credit card
operations described in the note on the sale of subsidiaries)
24
COMMON STOCK DATA
- --------------------------------------------------------------------------------
Stock Price Cash Dividend
-------------- --------------
High Low Paid per Share
- ------------------------------------------------------------------------------------------------
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
1999 FISCAL YEAR:
Quarter ended 7/31/98 45 5/8 41 5/16 .20
Quarter ended 10/31/98 47 1/8 35 5/16 .25
Quarter ended 1/31/99 48 1/4 40 3/8 .25
Quarter ended 4/30/99 51 3/4 40 1/4 .25
- ------------------------------------------------------------------------------------------------
Traded on the New York Stock Exchange Ticker Symbol: HRB
25
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
Amounts in thousands, except per share amounts and number of shareholders
Year Ended April 30 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
FOR THE YEAR:
Total revenues $1,644,665 $1,269,981 $1,066,410 $ 846,987 $ 752,637
Net earnings from continuing
operations(1) $ 237,795 $ 183,788 $ 148,132 $ 126,669 $ 98,034
Net earnings(1) $ 215,366 $ 392,130 $ 47,755 $ 177,168 $ 107,259
AT YEAR END:
Total assets $1,910,176 $2,904,083 $1,707,058 $1,755,891 $1,097,313
Cash, cash equivalents and
marketable securities $ 420,649 $1,590,192 $ 539,107 $ 745,693 $ 444,981
Long-term debt $ 249,725 $ 249,675 -- -- --
Stockholders' equity $1,061,987 $1,341,632 $ 999,097 $1,039,593 $ 685,865
Shares outstanding 97,629 106,981 104,067 103,417 104,863
Number of shareholders 34,624 31,177 33,517 35,634 38,053
MEASUREMENTS:
Per basic share of common stock:
Net earnings from continuing
operations(1) $ 2.38 $ 1.75 $ 1.42 $ 1.22 $ .93
Net earnings(1) $ 2.16 $ 3.74 $ .46 $ 1.70 $ 1.02
Per diluted share of common
stock:
Net earnings from continuing
operations(1) $ 2.36 $ 1.71 $ 1.40 $ 1.19 $ .93
Net earnings(1) $ 2.14 $ 3.65 $ .45 $ 1.67 $ 1.01
Other per share data:
Cash dividends declared $ .95 $ .80 $ 1.04 $ 1.27 1/4 $ 1.21 3/4
Net tangible book value $ 6.72 $ 9.84 $ 8.88 $ 9.46 $ 5.79
Return on total revenues(2) 14.5% 14.5% 13.9% 15.0% 13.0%
Return on beginning
stockholders' equity 16.1% 39.2% 4.6% 25.8% 15.2%
- -------------------------------------------------------------------------------------------------
(1) 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.
1