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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: APRIL 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
Missouri 44-0607856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4400 Main Street, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 753-6900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 1999, was $4,508,263,083.
Number of shares of registrant's Common Stock, without par value, outstanding
on June 1, 1999: 97,640,766.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to security
holders for the fiscal year ended April 30, 1999, are incorporated herein by
reference in response to Part I, Item 1, and Part II, Items 5 through 7 and
Item 8, and certain specified portions of the registrant's definitive proxy
statement filed within 120 days after April 30, 1999, are incorporated herein
by reference in response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a corporation that was organized in 1955 under the laws
of the State of Missouri (the "Company"). It is the parent corporation in a
two-tier holding company structure following a 1993 corporate restructuring.
The second-tier holding company is H&R Block Group, Inc., a Delaware
corporation and the direct or indirect owner of the operating subsidiaries that
provide tax and financial services to the general public principally in the
United States, but also in Canada, Australia, the United Kingdom and other
foreign countries. Approximately 81% of the consolidated revenues of the
Company in fiscal year 1999 were generated by subsidiaries involved in tax
return preparation, electronic filing of income tax returns and other
tax-related services. The Company's subsidiaries also originate, purchase,
service, sell and securitize mortgages, offer personal productivity software,
purchase participation interests in refund anticipation loans made by a
third-party lender, offer accounting, tax and consulting services to business
clients and provide financial products and services.
Developments during fiscal year 1999 within U.S. Tax Operations,
International Tax Operations, Mortgage Operations and Business Services are
described in the section below entitled "Description of Business."
Effective September 1, 1998, Mark A. Ernst became Executive Vice President
and Chief Operating Officer of the Company, a newly created position. Mr.
Ernst was formerly a senior vice president for American Express Company. As
the Executive Vice President and Chief Operating Officer, Mr. Ernst's
responsibilities during fiscal year 1999 included oversight of the Company's
U.S. and international tax operations, its software operations, mortgage
operations and the development of new financial products and services.
During the 1999 fiscal year, subsidiaries of the Company acquired the
stock or non-attest assets of six regional accounting firms and several smaller
local accounting firms. Shortly after the 1999 fiscal year end, the Company
acquired the non-attest assets of another regional accounting firm, bringing
the total to seven, and thereafter announced that it had signed an agreement to
acquire substantially all of the non-attest assets of McGladrey & Pullen, LLP
("M&P"), the nation's seventh largest accounting and consulting firm. All of
these transactions are described below in the "Business Services" portion of
the section entitled "Description of Business." The Company also acquired a
conventional mortgage company based near Boston, Massachusetts, and a
subsidiary of the Company acquired a full-service investment firm located in
Kansas City, Missouri. The descriptions of these two acquisitions are
respectively set forth in the "Mortgage Operations" and "Other Business"
portions of the section below entitled "Description of Business."
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On July 21, 1999, the Company announced that it is evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner, and that it remains committed to the retail mortgage
business. There are no assurances that any transaction will take place, and
any transaction will be subject to the approval of the Company's Board of
Directors.
On January 29, 1999, Block Financial Corporation, an indirect subsidiary
of the Company, completed the sale of its WebCard Visa credit card portfolio to
Providian National Bank in San Francisco. The credit card business was listed
as a separate business segment in the Company's Form 10-K for the fiscal year
ended April 30, 1998. The Company recorded a $20.9 million loss, net of taxes,
on the transaction.
During the fiscal year ended April 30, 1999, the Company was not involved
in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire
or dispose of any material amount of assets during such year otherwise than in
the ordinary course of business.
The information contained in this Form 10-K and the exhibits hereto 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 industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "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 satisfaction of all closing conditions set forth in
the agreement to acquire substantially all of the non-attest assets of M&P and
the completion of the M&P transaction; the uncertainty of the entry by the
Company into any agreement regarding any sale, joint venture, or other
strategic action involving Option One; the uncertainty regarding the completion
of any transaction involving Option One; the uncertainty of laws, legislation,
regulations, supervision and licensing by Federal, state and local authorities
and their impact on any proposed or possible transactions and the lines of
business in which the Company's subsidiaries are involved; year 2000 readiness
of the Company and external parties; unforeseen compliance costs; changes in
economic, political or regulatory environments; changes in competition and the
effects of such changes; the inability of the Company's subsidiaries to
successfully expand the national accounting practice, the retail mortgage
business, the H&R Block Financial Center operations, other financial planning
and investment services operations, and the H&R Block Premium segment and other
aspects of the tax business; the inability to implement the Company's
strategies with respect to such expansion and other strategies; termination by
either party of the license agreement between H&R Block Tax Services, Inc. and
Sears, Roebuck & Co.; changes in management and management strategies; the
Company's inability to successfully design, create, modify and operate its
computer systems and networks; litigation involving the Company; 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 and risks 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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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 1999, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company, including its direct and indirect wholly owned subsidiaries,
has approximately 4,200 regular full-time employees. The highest number of
persons employed by the Company during the fiscal year ended April 30, 1999,
including seasonal employees, was approximately 86,500.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This reportable operating segment provides to the general
public in the United States income tax return preparation services, electronic
filing services and other services related to income tax return preparation,
purchases participation interests in refund anticipation loans made to tax
clients by a third-party lending institution, and sells to the general public
tax return preparation software and other personal productivity computer
software.
Tax Operations. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices
operated by H&R Block Tax Services, Inc. and its subsidiaries (collectively,
"Tax Services") or by others to whom Tax Services has granted franchises. Tax
Services and its franchisees (collectively referred to herein as "H&R Block")
provide to the general public income tax return preparation services,
electronic filing services and other services relating to income tax return
preparation. For U.S. returns, H&R Block offers a refund anticipation loan
service and an electronic refund service in conjunction with its electronic
filing service. H&R Block also markets its knowledge of how to prepare income
tax returns through its income tax training schools.
Taxpayers Served. H&R Block served approximately 16,542,000 taxpayers in
the United States during fiscal year 1999, an increase from 15,835,000
taxpayers served in fiscal year 1998 and 15,625,000 taxpayers served in fiscal
1997. "Taxpayers served" includes taxpayers for whom H&R Block prepared income
tax returns as well as taxpayers for whom Block provided only electronic filing
services.
Tax Return Preparation. During the 1999 income tax filing season (January
2 through April 30), H&R Block offices in the United States prepared
approximately 15,761,000 individual income tax returns, compared to the
preparation of 14,838,000 such returns in fiscal year 1998 and 14,302,000 such
returns in fiscal year 1997. These returns constituted about 13.7% of an IRS
estimate of total individual income tax returns filed as of April 30, 1999. The
following table shows the approximate number of income tax returns prepared at
H&R Block offices during the last five tax filing seasons:
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Tax Season Ended April 30
(in thousands)
1995 1996 1997 1998 1999
Returns Prepared 12,918 13,360 14,302 14,838 15,761
During the tax season, most H&R Block offices are open from 9:00 a.m. to
9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have
been developed so that a tax return is prepared on a computer in the presence
of the customer, in most instances in less than one hour, on the basis of
information furnished by the customer. Pursuant to the one-stop service offered
at Company-owned offices, the return is reviewed for accuracy and presented to
the customer for signature and filing during his or her initial visit to the
office.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States. Appealing to taxpayers with more complicated returns, H&R Block
Premium stresses the convenience of appointments, year-round tax service from
the same preparer and private office interviews. The number of H&R Block
Premium offices increased in fiscal year 1999 to 617, as compared to 598 in
fiscal year 1998 and 581 in fiscal 1997. In fiscal 1999, the number of H&R
Block Premium clients increased to approximately 719,000, compared to
approximately 647,000 in fiscal year 1998 and approximately 666,000 in fiscal
year 1997.
Electronic Filing. Electronic filing reduces the amount of time required
for a taxpayer to receive a Federal tax refund and provides assurance to the
client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or
her refund deposited by the Treasury Department directly into his or her
account at a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 1999 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Household Bank in amounts
based upon the customers' anticipated Federal income tax refunds. Income tax
return information is simultaneously transmitted by H&R Block to the IRS and
the lending bank. Within a few days after the date of filing, a check in the
amount of the loan, less the bank's transaction fee and H&R Block's tax return
preparation fee (and, where applicable, electronic filing fee), is received by
the RAL customer. The IRS then directly deposits the participating customer's
actual Federal income tax refund into a designated account at the bank in order
for the loan to be repaid.
H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service customer's income tax refund is directly
deposited into a bank account at a bank (Tax Services used Household Bank in
1999) within approximately three weeks after the tax return is electronically
filed, and a check is thereafter issued to the taxpayer in the amount of the
refund, less the bank's transaction fee and H&R Block's tax return preparation
fee (and, where applicable, electronic filing fee).
H&R Block filed approximately 11,139,000 U.S. tax returns electronically
in fiscal 1999, compared to 9,423,000 in fiscal 1998 and 7,279,000 in fiscal
1997. Approximately 2,811,000 refund
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anticipation loans were processed in fiscal 1999 by H&R Block, compared to
2,420,000 in fiscal 1998 and 2,573,000 in fiscal 1997. Approximately 1,916,000
electronic refunds were processed in fiscal 1999 by H&R Block, compared to
1,855,000 in fiscal 1998 and 1,871,300 in fiscal 1997.
In 1999, H&R Block offered a service to transmit state income tax returns
electronically to state tax authorities in 38 states and the District of
Columbia (compared to 35 states and the District of Columbia in fiscal 1998 and
34 states and the District of Columbia in fiscal 1997) and plans to continue to
expand this program as more states make this filing alternative available to
their taxpayers.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide H&R Block with a source of trained income tax
return preparers. During the 1999 fiscal year, 159,216 students enrolled in H&R
Block's basic and advanced income tax courses in the United States, compared to
130,884 students during fiscal year 1998 and 111,428 students during fiscal
year 1997.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block preparer
makes an error in the preparation of a customer's tax return that results in
the assessment of any interest or penalties on additional taxes due, while H&R
Block does not assume the liability for the additional taxes (except under its
"Peace of Mind" Program described below), it guarantees payment of the interest
and penalties.
In addition to H&R Block's standard guarantee to pay penalty and interest
attributable to errors made by an H&R Block preparer, under the "Peace of Mind"
Program, H&R Block agrees to pay additional taxes owed by the customer (for
which liability would not ordinarily accrue) resulting from such errors or from
revised interpretations of tax laws by the IRS. The Peace of Mind Program has
a per customer cumulative limit of $4,000 ($5,000 at H&R Block Premium offices)
in additional taxes paid with respect to the Federal, state and local tax
returns prepared by H&R Block for the taxable year covered by the Program.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number
of offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
In fiscal year 1999, H&R Block also operated 729 offices in department
stores in the United States, including 723 offices in Sears, Roebuck & Co.
stores operated as "Sears Income Tax Service by H&R Block." During the 1999 tax
season, the Sears' facilities constituted approximately eight percent of the
tax office locations of H&R Block. Tax Services is a party to a license
agreement with Sears relating to Tax Service's operation in Sears locations
throughout the United States. Such license agreement expires on December 31,
2004, subject to termination rights of both parties for a limited period of
time after each tax season. Tax Services views the operations under its
relationship with Sears to date as satisfactory and such relationship to be
amicable in general, although it is in negotiations with Sears regarding a
dispute over commissions owed to Sears under such agreement.
On April 15, 1999, there were 8,923 H&R Block offices in operation in the
United States compared to 8,780 offices in operation on April 15, 1998, and
8,554 offices in operation on April 15,
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1997. Of the 8,923 offices, 4,880 were owned and operated by Tax Services
(compared to 4,640 in fiscal year 1998 and 4,483 in fiscal year 1997) and 4,043
were owned and operated by independent franchisees (compared to 4,140 in fiscal
1998 and 4,071 in fiscal 1997). Of such franchised offices in fiscal 1999,
2,698 were operated by "satellite" franchisees of Tax Services (described
below), 796 were operated by "major" franchisees (described below) and 549 were
operated by satellite franchisees of major franchisees.
Two types of franchises have principally been granted by the Company and
its subsidiaries. "Major" franchisees entered into agreements with the Company
(primarily in the Company's early years) covering larger cities and counties
and providing for the payment of franchise royalties based upon a percentage of
gross revenues of their offices. Under the agreements, the Company granted to
each franchisee the right to the use of the name "H&R Block" and provided a
Policy and Procedure Manual and other supervisory services. Tax Services
offers to sell furniture, signs, advertising materials, office equipment and
supplies to major franchisees. Each major franchisee selects and trains the
employees for its office or offices. Since March 1993, HRB Royalty, Inc., a
wholly owned subsidiary of Tax Services, has served as the franchisor under the
major franchise agreements.
In smaller localities, Tax Services has granted what it terms "satellite"
franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local advertising, initial training,
and supervisory services and, consequently, pays Tax Services a higher
percentage of his or her gross tax return preparation and related service
revenues as a franchise royalty than do major franchisees. Many of the
satellite franchises of Tax Services are located in cities with populations of
15,000 or less. Some major franchisees also grant satellite franchises in
their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure
compliance with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue
to do so if future conditions warrant such acquisitions and satisfactory terms
can be negotiated. In fiscal year 1999, Tax Services acquired 69 tax offices
in the United States, including 26 H&R Block franchise offices and 43 offices
of other tax businesses.
Participation Interests in RALs. Block Financial Corporation ("BFC") is
party to a July 1996 agreement with Household Bank ("Household") to purchase a
participation interest in refund anticipation loans provided by Household to
H&R Block tax customers. See "Electronic Filing" under "Tax Operations,"
above. In the 10-year agreement, BFC agreed to purchase an initial 40%
participation interest in such RALs, which interest would be increased to
nearly 50% in specified circumstances. In fiscal 1999, the participation
interest was increased to 49.9% in Company-owned RALs, and BFC began
participating in 25% of major franchise RALs (previously there was no such
participation). BFC's purchases of the participation interests are financed
through short-term borrowing. BFC bears all of the risks associated with its
interests in the RALs. BFC's total RAL revenue in fiscal year 1999 was
approximately $90.2 million (compared to revenue of $53.3 million in fiscal
1998 and $54.5 million in fiscal 1997), generating approximately $19.1 million
in pretax profits (compared to $6.4 million in pretax profits in fiscal year
1998 and $8.1 million in pretax profits in fiscal year 1997). The increase in
revenues and pretax profits resulted from a 40.4% increase in the number of RAL
participations over last year due to the increase in the participation
percentage.
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Software Products. BFC develops and markets the Kiplinger TaxCut(R)
tax preparation software package, as well as markets Kiplinger's Home Legal
Advisor (SM), Kiplinger's Small Business Attorney(R), Kiplinger's NetWealth
(SM), Kiplinger's WILLPower (SM) and Names & Dates(R) software products. As a
result of the increase in sales of TaxCut's final edition in fiscal year 1999,
BFC believes that its share of retail sales in the income tax return
preparation software market is greater than 30%.
Seasonality of Business. Since most of the customers of Tax Services file
their tax returns during the period from January through April of each year,
substantially all of Tax Services' revenues from income tax return preparation,
related services and franchise royalties are received during this period. As a
result, Tax Services operates at a loss through the first eight or nine months
of its fiscal year. Historically, such losses primarily reflect payroll of
year-round personnel, training of income tax preparers, rental and furnishing
of tax offices, and other costs and expenses relating to preparation for the
following tax season.
BFC's income tax return preparation software and RAL participation
businesses are also seasonal, with the substantial portion of the revenues from
these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware corporation
and a wholly owned subsidiary of H&R Block Tax Services, Inc., claims ownership
of the following service marks and trademark registered on the principal
register of the United States Patent and Trademark Office:
H&R Block in Two Distinct Designs
The Income Tax People
Executive (when used in connection with the
preparation of income tax returns for others)
Rapid Refund H&R Block and Design
Accufile
H&R Block Premium
Someone You Can Count On
Block Mortgage
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks: America's Largest Tax Service and
Nation's Largest Tax Service.
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax
Services.
BFC claims ownership of the following services marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
Audit Buster Financial Finder
B and Design Names & Dates
Block Financial Small Business Attorney
Block Financial and Design TaxCut
Conductor Web
Conductor and Baton Design WebBank
Conductor and Hand-Held Baton Design WebPay
Conductor Card Review
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BFC also claims ownership of the following unregistered service marks and
trademarks:
CONDUCTOR.COM WebAccount
DittoCard WebBroker
Download Depot WebBuyer
Fast Lane WebCheck
Home Legal Advisor WebChecking
Your Complete Personal Legal Resource WebQuote
Solve Your Everyday Business Problems NetWealth
The Easy Way to Financial Success NetWealth and Design
The Fastest and Easiest Way To Do Your Taxes WILLPower
BFC also claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998, on the principal register of the United States Patent and
Trademark Office.
At the time BFC sold the credit card portfolio in January 1999, it granted
to Providian National Bank a non-exclusive, non-transferable and royalty-free
licenses to use the mark "Conductor and Baton Design" for up to two years, the
patent "SYSTEM FOR ON-LINE FINANCIAL SERVICES USING DISTRIBUTED OBJECTS" for a
period of ten years, and the mark "CONDUCTOR.COM" perpetually.
Competitive Conditions. The tax return preparation and electronic filing
businesses are highly competitive. There are a substantial number of tax return
preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms and many firms not otherwise in
the tax return preparation business are involved in providing electronic filing
and refund anticipation loan services to the public. Commercial tax return
preparers and electronic filers are highly competitive with regard to price,
service and reputation for quality. Tax Services believes that, in terms of
the number of offices and tax returns prepared, it is the largest tax return
preparation firm in the United States. Tax Services also believes that in
terms of the number of offices and tax returns electronically filed in fiscal
year 1999, it is the largest provider of electronic filing services in the
United States.
The software business is highly competitive and consists of a large number
of companies. In the software industry, Intuit, Inc. is a dominant supplier of
personal financial software.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among
other things, set forth their signatures and identification numbers on all tax
returns prepared by them, and retain for three years all tax returns prepared.
Federal laws also subject income tax return preparers to accuracy-related
penalties in connection with the preparation of income tax returns. Preparers
may be enjoined from further acting as income tax return preparers if the
preparers continuously and repeatedly engage in specified misconduct. With
certain exceptions, the Internal Revenue Code also prohibits the use or
disclosure by income tax return preparers of certain income tax return
information without the prior written consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition,
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no present state statutes of this nature have had a material adverse effect on
the business of H&R Block. However, the Company cannot predict what the effect
may be of the enactment of new statutes or adoption of new regulations.
The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses
to participate in the government's electronic filing program for U.S.
individual income tax returns. Individuals and businesses must, upon
application, be accepted into the electronic filing program. Once accepted,
electronic filers must comply with all publications and notices of the IRS
applicable to electronic filing, provide certain information to the taxpayer,
comply with advertising standards for electronic filers, and be subjected to
possible monitoring by the IRS, penalties for disclosure or use of income tax
return preparation and other preparer penalties, and suspension from the
electronic filing program.
The Federal statutes and regulations also regulate an electronic filer's
involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is in fact a loan, and not a
substitute for or a quicker way of receiving an income tax refund. The Federal
laws place restrictions on the fees that an electronic filer may charge in
connection with refund anticipation loans.
States that have adopted electronic filing programs for state income tax
returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect the operations
of H&R Block. However, the Company cannot predict what the effect may be of
the enactment of new statutes or the adoption of new regulations pertaining to
electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit procedures.
The IRS may from time to time change its direct deposit procedures or may
determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss
to BFC in connection with its purchases of interests in RALs. However, the
Company believes that Federal statutes and regulations regulating electronic
filing and RALs have not had and will not have a material adverse effect on the
operations of BFC. However, the Company cannot predict what the effect may be
of the enactment of new Federal or state statutes or the adoption of new
regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict
what the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
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From time to time, and especially in election years, the subjects of tax
reform, tax simplification, the restructuring of the tax system, a flat tax, a
consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals have fallen short
of adoption, such issues have received more serious attention in recent years
than ever before. Historically, changes in tax laws have increased H&R Block's
business. The immediate result of tax law changes has been an increase in
complexity. The transition from the current system to a new, untested system
is likely to take a number of years and, under most serious tax reform
proposals, Americans will still need to file Federal and state tax returns.
The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the business of the
Company's subsidiaries over time is uncertain, and such legislation could have
a material adverse effect on the Company's business, financial position and
results of operations.
INTERNATIONAL TAX OPERATIONS
Generally. This reportable operating segment provides the preparation of
tax returns, electronic filing and related services to the general public in
Canada, Australia and the United Kingdom. Tax preparation of U.S. tax returns
and related services are offered by franchisees in ten countries. The
electronic filing of U.S. income tax returns is offered at franchised offices
located in Europe, and the electronic filing of Australian, Canadian and United
Kingdom income tax returns is offered at H&R Block offices in Australia, Canada
and the United Kingdom, respectively.
The returns prepared at 1,466 H&R Block offices in countries outside of
the United States constituted 12.8% of the total returns prepared by H&R Block
in the last fiscal year (compared to 13.8% in fiscal year 1998 and 15.2% in
fiscal year 1997).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,858,000 Canadian regular and discounted
returns filed with Revenue Canada during the 1999 income tax filing season,
compared with 1,945,000 Canadian returns prepared during fiscal year 1998 and
2,156,000 Canadian returns prepared in fiscal 1997. The number of offices
operated by H&R Block in Canada increased in fiscal year 1999 to 1,032 from 928
in fiscal year 1998 and 1,021 in 1997. Of the 1,032 offices in Canada, 574
were owned and operated by Block Canada and 458 were owned and operated by
franchisees. H&R Block operated 164 offices in department stores in Canada in
fiscal year 1999, including 86 offices in Sears' facilities.
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must
follow in conducting the program are specified by Canadian law. In accordance
with current Canadian regulations, if a customer's tax return indicates that
such customer is entitled to a tax refund, a check is issued by H&R Block to
the customer for an amount which is equal to the sum of (i) 85% of that portion
of the anticipated refund which is less than or equal to $300 and (ii) 95% of
that portion of the refund in excess of $300. The customer assigns to H&R
Block the full amount of the tax refund to be issued by Revenue Canada. The
refund check is then sent by Revenue Canada directly to H&R Block and deposited
by H&R Block in its bank account. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the fee for tax
refund discounting. This program is financed by short-term borrowing. The
number of returns discounted under the CashBack program decreased to
approximately 516,000 in fiscal year 1999 from 532,000 in fiscal year 1998 and
583,000 in fiscal year 1997. Block Canada also provides check-cashing and
other low-end financial services through its subsidiary Cashplan Systems Inc.
Operating under the name "CashPlan," this service complements the CashBack
service.
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In some parts of Canada, CashBack offices have been separated from regular
tax return preparation offices. Operating under the "Financial Stop" name
(without H&R Block signage), 217 offices offered the CashBack refund
discounting services, as well as the preparation of simple tax returns and
check cashing services, as compared to 147 offices in 1998.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 428,000 in fiscal year 1999 from 406,000
in fiscal 1998 and 403,000 in fiscal year 1997. The number of offices operated
by H&R Block in Australia in fiscal year 1999 was 347, compared to 334 offices
operated in fiscal 1998 and 302 offices operated in fiscal 1997. Of the 347
offices, 213 were owned and operated by H&R Block Limited and 134 were
franchised offices. The tax season in Australia begins in July and ends in
October.
United Kingdom Operations. The Tax Team Limited, a Horsham-based firm
acquired by an indirect subsidiary of the Company, provides tax return
preparation services in the United Kingdom. The number of offices operated by
the Tax Team in fiscal year 1999 decreased to 26 from 28 in fiscal year 1998.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company. Conforming mortgages are those that may be offered through government
sponsored loan agencies.
MORTGAGE OPERATIONS
Generally. The mortgage operations reportable segment is primarily engaged
in the origination, purchase, servicing, securitization and sale of conforming
and nonconforming mortgage loans in the United States. Conforming mortgages are
those that may be offered through government sponsored loan agencies.
Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies, and typically involve borrowers with
impaired credit, who have substantial equity in the property which will be used
to secure the loan. Mortgage origination services were offered in fiscal year
1999 through a network of mortgage brokers in 49 states and through H&R Block
Financial Center offices in 4 states.
Option One Mortgage Corporation. Option One, based in Irvine, California,
has a network of more than 5,000 mortgage brokers in 49 states. Option One
originates and purchases loans through both wholesale and retail channels, and
originated approximately $1.9 billion in mortgage loans in fiscal year 1998
after its acquisition. The average Option One loan during fiscal year 1999 had
a $108,000 principal balance, compared to $99,800 in fiscal 1998, and was
secured by a first lien on a single family residence. During fiscal 1999,
Option One sold or securitized approximately $3.6 billion of mortgage loans, as
compared to $1.8 billion sold in fiscal 1998 after its acquisition. At the end
of fiscal year 1999, Option One's servicing portfolio was 65,300 loans totaling
more than $6.5 billion, compared to 42,800 loans totaling $4.3 billion in
fiscal 1998.
Wholesale originations and purchases represented the substantial majority
of Option One's total loan production. Wholesale loan originations involve a
broker who assists the borrower in completing the loan application, the
gathering of necessary information and identifying a lender that offers a loan
product which is best suited to the borrower's financial needs. Brokers are
free to submit an application to one or more nonconforming lenders, such as
Option One. Upon receipt of an application from a broker,
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Option One's account executives facilitate the processing and underwriting of
the loan. Based upon this review, Option One advises the broker whether the
loan application meets with Option One's underwriting guidelines and product
description by issuing a loan approval or denial, and in some cases issues a
"conditional approval," which requires the submission of additional information
or clarification.
On November 1, 1998, H&R Block Mortgage Company, L.L.C. ("Block Mortgage"),
formerly Block Mortgage Company, L.L.C., merged with and into Option One.
Operating under the name H&R Block Mortgage, this division focuses on retail
origination, and offers mortgage products, including VA, FHA and conventional
mortgages. Retail originations are made pursuant to the direct solicitation of
the borrower and do not involve a broker.
Option One sells virtually all of its loan production through a combination
of securitization and bulk sales of whole loans to institutional purchasers.
Option One completed two securitizations of nonconforming mortgage loans during
fiscal 1999. A $1 billion asset backed security issue closed in January 1999
and a $801.1 million issue closed in April 1999.
On July 21, 1999, the Company announced that it is evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner, and that it remains committed to the retail mortgage
business. There are no assurances that any transaction will take place, and
any transaction will be subject to the approval of the Company's Board of
Directors.
Assurance Mortgage Corporation of America. Acquired on March 5, 1999 by a
subsidiary of the Company, Assurance Mortgage Corporation of America ("AMCA")
is New England's largest independent mortgage broker for conventional and
government loans and is licensed throughout the United States. AMCA closed
approximately $1.3 billion in conventional retail loans in 1998. AMCA sold the
majority of these loans through the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation as well as other major institutional
investors. AMCA operates under its current name. AMCA has 11 retail offices
in Massachusetts, Rhode Island and New Hampshire.
Companion Mortgage Corporation. The sole business activity of Companion
Mortgage Corporation ("Companion"), a wholly owned subsidiary of BFC, consists
of purchasing, investing in, securitizing and selling nonconforming fixed and
adjustable-rate mortgage loans, primarily purchase money loans, refinancings
and home equity borrowings. The purchased loans are originated through retail,
wholesale and correspondent lending programs conducted through National
Consumer Services Corp., L.L.C. (a firm which as of March 31, 1999 is
majority-owned by BFC) or other mortgage loan originators.
In the securitization process, a subsidiary of Companion, Block Mortgage
Finance, Inc., acquires loans from Companion and assigns them to a trust. The
trust issues certificates that are secured by the home equity loans, receives
principal and interest payments on the loans and makes payments on the
asset-backed certificates. Block Mortgage Finance, Inc. applies the net
proceeds from the sale of the certificates primarily to the purchase of
mortgage loans from Companion, and Companion then uses the funds primarily to
repay indebtedness incurred to obtain funds for its acquisition of the loans.
The securities are issued under a $1 billion public registration that became
effective in January 1997.
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Companion and Block Mortgage Finance completed two securitizations of
nonconforming mortgage loans during fiscal year 1999. A $252.7 million
asset-backed security issue closed in July 1998 and a $403.1 million issue
closed in January 1999.
Seasonality of Business. Residential mortgage volume is subject to
seasonal trends, with real estate sales being generally lower in the first
calendar quarter of the calendar year, peaking in the spring and summer
seasons, and then declining again in November and December. Accordingly, the
revenues of the mortgage operations reporting segment are generally higher in
the peak months, but the seasonal trends do not have a material impact on
overall results of the Company.
Service Marks and Trademarks. Option One claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
AppOne
CorOne
Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
The Big 2
Option One claims ownership of the following unregistered service marks
and trademarks:
PartnerPlus
SumOne
Competitive Conditions. Both the conventional and sub-prime sectors of
the residential mortgage loan market are highly competitive. The principal
methods of competition are in service, quality and price. There are a
substantial number of companies competing in the residential loan market,
including mortgage banking companies, commercial banks, savings associations,
credit unions and other financial institutions. No one firm is a dominant
supplier of conforming and nonconforming mortgage loans.
Government Regulation. Applicable state laws generally regulate interest
rates and other charges, require certain disclosure and, unless an exemption is
available, require licensing of the originators of certain mortgage loans. In
addition, most states have other laws, public policies and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices, and practices that may apply to the origination, servicing and
collection of mortgage loans. The mortgage loans purchased or originated by of
the Company are also subject to Federal laws, including, without limitation,
the Federal Truth in Lending Act and Regulation Z promulgated thereunder, the
Equal Credit Opportunity Act and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, the Real Estate Settlement Procedures Act, the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, and certain other laws and
regulations. Certain mortgage loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, which incorporates the Home
Ownership and Equity Protection Act of 1994. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front
fees and charges, can impose specific statutory liabilities upon creditors who
fail to comply with their provisions, and may affect the enforceability of the
related mortgage loans. Under environmental legislation and case law
applicable in certain states, it is possible that liability for
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environmental hazards in respect of real property may be imposed on a holder of
a mortgage note secured by real property.
The Company believes that Federal and state statutes and regulations
governing mortgage lending have not had and will not have a material adverse
effect on the operations of its mortgage subsidiaries. However, the Company
cannot predict what the effect may be of the enactment of new statutes or the
adoption of new regulations.
BUSINESS SERVICES
Generally. Designated as a new reportable operating segment for fiscal
year 1999, the business services segment provides accounting, tax and
consulting services to business clients, and tax, estate planning and financial
planning services to individuals in the Unites States through a network of
accounting firms located in six metropolitan areas as of April 30, 1999.
In addition to providing these services to the public, the subsidiaries
involved in the business services segment provide management and administrative
services to the public accounting firms from which non-attest assets have been
acquired. The subsidiaries receive fees from the public accounting firms,
which continue to provide to the public audit and other services that
constitute the practice of public accounting.
HRB Business Services, Inc. Early in the 1999 fiscal year, the Company
announced its intention to build a national accounting practice through the
acquisition of both regional and local accounting firms. HRB Business
Services, Inc. ("HRBBS"), a subsidiary of H&R Block Group, Inc., was
incorporated to acquire these firms. As of April 30, 1999, HRBBS and its
subsidiaries had acquired the assets or stock of six regional accounting firms,
all of which are among the country's 100 largest accounting firms, as well as
affiliates entities and local accounting firms.
Donnelly, Meiners, Jordan Kline, P.C. ("DMJK"), a regional accounting firm
in Kansas City, Missouri, was the first accounting firm acquired by HRBBS in
May 1998. During the 1999 fiscal year, DMJK changed its name to DMJK Business
Services, Inc. and acquired the non-attest assets of three local accounting
firms by means of a merger or stock purchase. In October 1998, FERS Business
Services, Inc. ("FBS"), a subsidiary of HRBBS, acquired the non-attest assets
of Friedman Eisenstein Raemer and Schwartz, LLP ("FERS"), a Chicago accounting
and consulting firm, and Practice Development Institute, Inc., another
subsidiary of HRBBS, acquired the assets of Practice Development Institute,
L.L.C., an affiliated business that publishes marketing newsletters and was
owned by the partners of FERS. FBS acquired the non-attest assets of two other
Chicago-area accounting firms during the 1999 fiscal year.
On November 2, 1998, KSM Business Services, Inc., a subsidiary of HRBBS,
acquired the non-attest assets of a third regional accounting and consulting
firm, Katz, Sapper & Miller, LLP ("KSM"), located in Indianapolis, Indiana, and
later in fiscal 1999 acquired the non-attest assets of two other local
accounting firms. On November 3, 1998, other subsidiaries of HRBBS (FM
Business Services, Inc. and Freed Maxick ABL Services, Inc., respectively)
acquired the non-attest assets of Freed Maxick Sachs & Murphy, PC ("FMSM"), an
accounting, tax and consulting firm in Buffalo, New York, and Freed Maxick ABL
Services, LLC, an asset-based lending services firm that provides nationwide
services to the commercial banking industry. FM Business Services, Inc.
acquired the non-attest assets of an accounting firm in Batavia, New York, in
February 1999.
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In December 1998, WS Business Services, Inc., an HRBBS subsidiary,
acquired the non-attest assets of a fifth regional accounting firm, Wallace
Sanders & Company. Located in Dallas, Texas, this firm specializes in real
estate, health care, service, manufacturing and wholesale industries. On April
16, 1999, CWA Business Services, Inc., an HRBBS subsidiary, acquired the
non-attest assets of a sixth accounting firm, C.W. Amos & Company, LLC, serving
the Baltimore/Washington, D.C. metropolitan area. Included in this acquisition
were the assets of Turner Pension Consulting, LLC, a full service, actuarial,
consulting and administration firm designed to maximize the value of its
clients' retirement plans.
Shortly following the end of the 1999 fiscal year, RP Business Services,
Inc., a subsidiary of HRBBS, acquired the non-attest assets of Rudolph, Palitz
LLP, the seventh regional accounting firm, which is based in Blue Bell,
Pennsylvania. The Company also announced on June 29, 1999, that it was party
to an agreement to acquire substantially all of the non-attest assets of
McGladrey & Pullen, LLP, the nation's seventh largest accounting and consulting
firm, headquartered in Minneapolis, Minnesota. Following the acquisition, the
Company intends to integrate the previously acquired accounting firms within
HRBBS and McGladrey & Pullen into one firm to be known as RSM McGladrey Inc,
with more than 70 offices nationwide. The M&P transaction is expected to be
completed in August 1999.
Seasonality of Business. Revenues for this segment are seasonal in
nature, with peak revenues occurring during January through April.
Service Marks and Trademarks. FBS, a wholly owned subsidiary of HRBBS
claims ownership of the following service marks and trademarks registered on
the principal register of the United States Patent and Trademark Office:
Tonelink
Because Results Come First
FERS Profit Edge
Competitive Conditions. The accounting and consulting business is highly
competitive. There are a substantial number of accounting firms offering
similar services at the nationwide, regional and local levels.
Government Regulation. Many of the same Federal and state regulations
relating to tax preparers and the information concerning tax reform discussed
above in "Government Regulation" section of "U.S. Tax Services" apply to
Business Services as well, except that accountants are not subject to the same
prohibition on the use or disclosure of certain income tax return information
as the Tax Services income tax return preparers are. These accounting firms
are also subject to state and Federal regulations governing accountants,
auditors and financial planners. The Company believes that these state and
Federal regulations do not and will not have a material adverse effect on the
operations of H&R Block, but it cannot predict what the effect of future
regulations may be.
OTHER BUSINESS
Generally. The Company is developing other businesses compatible with its
current operations and strategy.
H&R Block Financial Advisors, Inc. H&R Block Financial Advisors, Inc., a
wholly owned subsidiary of BFC, is a federally registered investment advisor
whose licensed employees offered
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financial planning and investment advice in fiscal year 1999 to the general
public in Arizona, Florida, Indianapolis and Ohio. During the 1999 fiscal
year, H&R Block Financial Advisors participated with Tax Services and Option
One in a four-city test of H&R Block Financial Centers, which offer tax
preparation, financial planning, investment advice and home mortgages under one
roof. The Company has announced plans to expand the Financial Center concept
to an additional 70 locations in fiscal year 2000. The financial services
offered by H&R Block Financial Advisors will be offered to clients throughout
the year.
Birchtree Financial Services, Inc. Acquired by BFC in January 1999,
Birchtree Financial Services, Inc. ("Birchtree") is a full-service investment
firm offering stocks, bonds, mutual funds and other securities and insurance
products through a network of registered representatives across the county.
Included among Birchtree's registered representatives are employees of H&R
Block Financial Advisors, Inc. and Tax Services who are licensed to sell
securities, mutual funds and insurance products. The products offered by the
Birchtree representatives are available to their clients throughout the year.
Franchise Partner, Inc. Franchise Partner, Inc., a subsidiary of BFC,
offers to franchisees of Tax Services lines of credit with reasonable interest
rates under a program designed to better enable the franchisees to refinance
existing business debt, expand or renovate offices or meet off-season cash flow
needs. A franchise equity loan is a revolving line of credit secured by the
franchise and the underlying business.
ITEM 2. PROPERTIES.
The executive offices of both the Company and Tax Services are located at
4400 Main Street, Kansas City, Missouri, in a multi-level building owned by Tax
Services. The building was constructed in 1963 and expanded or redesigned in
1965, 1973, 1981, and 1996. Shortly after the end of the 1999 fiscal year, Tax
Services entered into a 20 year lease for a newly constructed building located
at 4400 East Blue Parkway, Kansas City, Missouri. Most other offices of Tax
Services (except those in department stores) are operated in premises held
under short-term leases providing fixed monthly rentals, usually with renewal
options.
BFC's executive offices are located in leased offices at 4435 Main Street,
Kansas City, Missouri, as well as at the 4400 Main Street location in Kansas
City.
Option One's executive offices are located in leased offices at 3 Ada,
Irvine, California. Option One also leases offices in Pleasanton, California,
and Tampa, Florida, for its retail operations and branch offices throughout the
United States. AMCA is headquartered in leased offices in Burlington,
Massachusetts. AMCA also leases offices throughout Massachusetts, Rhode Island
and New Hampshire.
The accounting firms acquired by HRBBS and its subsidiaries lease office
space in the following metropolitan areas: Kansas City, Missouri; Chicago,
Illinois; Indianapolis, Indiana; Buffalo, New York; Dallas, Texas; Baltimore,
Maryland; Washington, D.C.; and Philadelphia, Pennsylvania. Birchtree
Financial Services, Inc. is headquartered in leased offices in Kansas City,
Missouri.
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ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation ("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 has agreed to indemnify WorldCom and CompuServe against 80.1% of
any losses and expenses incurred by them with respect to these lawsuits. The
defendants are vigorously defending these lawsuits. In the opinion of
management, the ultimate resolution of these suits will not have a material
adverse impact on the Company's consolidated financial position or results of
operations. The lawsuits discussed herein were reported in the Company's Forms
10-Q for the first, second and third quarters of fiscal year 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of the
executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
Name and age Office(s)
- ------------------------- -----------------------------------------------------
Henry W. Bloch (76) Chairman of the Board since August 1989; Chief
Executive Officer from August 1989 through July
1992; Member of the Board of Directors since 1955.
Frank L. Salizzoni (61) President and Chief Executive Officer since June
1996; Member of the Board of Directors since 1988.
See Note 1.
Mark A. Ernst (41) Executive Vice President and Chief Operating Officer
since September 1998. See Note 2.
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Name and age Office(s)
- ------------------------- -----------------------------------------------------
David F. Byers (37) Senior Vice President and Chief Marketing Officer
since June 1999. See Note 3.
James D. Rose (48) Senior Vice President and Chief Information Officer
since July 1999; Vice President and Chief
Information Officer from June 1997 through June
1999. See Note 4.
Ozzie Wenich (56) Senior Vice President and Chief Financial Officer
since June 1997; Treasurer from June 1997 until
December 1997; President, H&R Block International,
from June 1996 until May 1998; Vice President,
Finance and Treasurer from October 1994 through May
1996; Vice President, Corporate Controller and
Treasurer from March 1994 until October 1994.
Robert E. Dubrish (47) President and Chief Executive Officer, Option One
Mortgage Corporation, since March 1996; Executive
Vice President and Chief Operating Officer, Option
One Mortgage Corporation, from December 1992 until
March 1996. See Note 5.
Terrence E. Putney (45) President, HRB Business Services, Inc., since May
1998. See Note 6.
Thomas L. Zimmerman (49) President, H&R Block Tax Services, Inc., since June
1996; Executive Vice President, Field Operations,
H&R Block Tax Services, Inc. from May 1994 through
May 1996.
Cheryl L. Givens (33) Vice President and Corporate Controller since July
1998; Assistant Vice President and Assistant
Controller from October 1996 until July 1998;
Assistant Vice President and Corporate Controller
from June 1996 until October 1996; Corporate
Accounting Manager from May 1994 until May 1996.
James H. Ingraham (45) Vice President, General Counsel since July 1999;
Secretary since June 1990; Vice President, Legal
from October 1996 through June 1999; Assistant Vice
President, Corporate Legal and Human Resources from
December 1995 until October 1996; Assistant Vice
President, Legal from May 1994 until December 1995.
Linda M. McDougall (46) Vice President, Communications since July 1999;
Assistant Vice President, Communications from
November 1995 through June 1999. See Note 7.
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Name and age Office(s)
- ------------------------- -----------------------------------------------------
Brian N. Schell (33) Vice President and Treasurer since December 1997;
Director of Investor Relations since November 1996;
Assistant Treasurer from November 1996 until
December 1997; Director of Corporate Development
from May 1995 until December 1997; Assistant Vice
President, Corporate Development and Planning, Block
Financial Corporation, from December 1994 until
April 1995. See Note 8.
Douglas D. Waltman (38) Vice President, Human Resources, since April 1998;
Assistant Vice President, Director of Education, H&R
Block Tax Services, Inc., from September 1996 until
April 1998. See Note 9.
Robert A. Weinberger (55) Vice President, Government Relations, since March
1996. See Note 10.
Bernard M. Wilson (37) Vice President and General Manager, Financial
Services Group since November 1998. See Note 11.
Bret G. Wilson (40) Vice President, Corporate Development, since
December 1997; Vice President, Mortgage Operations,
Block Financial Corporation, since March 1997; Vice
President, Corporate Counsel and Secretary, Block
Financial Corporation, from June 1994 until March
1997. See Note 12.
Robert D. Wilson (40) Vice President, Business Development since July
1999; Vice President, Tax Services Marketing, H&R
Block Tax Services, Inc., from September 1998
through June 1999; Assistant Vice President,
Marketing, H&R Block Tax Services, Inc., from
February 1996 until September 1998. See Note 13.
Note 1: Mr. Salizzoni was President and Chief Operating Officer of USAir
Group, Inc. and USAir, Inc. from March 1994 until April 1996. He
served as Chairman of the Board of CompuServe Corporation from
October 1996 until January 1998.
Note 2: Mr. Ernst served as Senior Vice President, Third Party and
International Distribution for American Express Company, Minneapolis,
Minnesota, from July 1997 until June 1998; Senior Vice President,
WorkPlace Financial Services, American Express Company, from November
1995 until July 1997 and Vice President, Retail Services Group,
American Express Company, from December 1993 until November 1995.
Note 3: Mr. Byers was employed by Foote, Cone and Belding, an advertising
agency in San Francisco, California, from June 1987 until May 1999,
most recently serving as the Senior Vice President and Director of
Business Development.
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Note 4: Mr. Rose served as Vice President, Chief Information Officer, Integon
Insurance Corporation, Winston-Salem, North Carolina, from May 1996
until June 1997, and as Director of Information Systems, National
Association of Insurance Commissioners, Kansas City, Missouri, from
November 1987 until May 1996.
Note 5: Block Financial Corporation acquired Option One Mortgage Corporation
on June 17, 1997, at which time Mr. Dubrish became an employee of a
subsidiary of the Company.
Note 6: The Company acquired Donnelly Meiners Jordan Kline, P.C. on May 15,
1998, at which time Mr. Putney became an employee of a subsidiary of
the Company. Prior to May 15, 1998, Mr. Putney had been a
shareholder of Donnelly Meiners Jordan Kline, P.C. since June 1987.
Note 7: Ms. McDougall was the District Manager, Creative Services for AT&T
Corp., Basking Ridge, New Jersey, from September 1993 until October
1995.
Note 8: Mr. Schell was Special Assistant to the Chief Operating Officer,
Federal Deposit Insurance Corporation, Washington, D.C., from May
1994 until December 1995.
Note 9: Mr. Waltman was Manager, Training and Development for Westlake Ace
Hardware, Inc., Kansas City, Missouri, from May 1993 until September
1996.
Note 10: Mr. Weinberger was Director, Washington Affairs, Unilever United
States, Inc., from February 1991 until April 1995.
Note 11: Mr. Bernard Wilson was Senior Vice President of Financial Services
for GMAC Mortgage Corporation, Philadelphia, Pennsylvania, from
September 1998 until October 1998 and Vice President of International
Operations, American Express Financial Advisors, Minneapolis,
Minnesota, from March 1987 until September 1998.
Note 12: Mr. Bret Wilson was an attorney with Smith, Gill, Fisher & Butts,
P.C., Kansas City, Missouri, from June 1989 until May 1994.
Note 13: Mr. Robert Wilson was Senior Product Manager for Thompson*Minwax from
September 1993 until February 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in part in the
Company's annual report to security holders for the fiscal year ended April 30,
1999, under the heading "Common Stock Data," and is hereby incorporated by
reference. The Company's Common Stock is traded principally on the New York
Stock Exchange. The Company's Common Stock is also traded on the Pacific Stock
Exchange. On June 10, 1999, there were 34,179 stockholders of the Company. In
connection with the acquisition by the Company of Assurance Mortgage Corporation
of America ("Assurance") on March 5, 1999, the Company issued on that date an
aggregate of 268,325 shares of its Common Stock, without par value, to four
individual shareholders of Assurance. As a transaction relating to the sale of a
business and not involving any public offering, such issuance was exempt from
registration under section 4(2) of the Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1999,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 1999,
under the heading "Management's Discussion and Analysis of Results of
Operations and Financial Condition," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
o interest rates on debt, cash equivalents, marketable
securities, mortgage loan origination commitments, and investments
in mortgage loans for resale or securitization
o foreign exchange rates, generating translation gains and
losses
Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have no market risk sensitive instruments
entered into for "trading purposes," as such term is defined by generally
accepted accounting principles. Information contained herein relates only to
instruments entered into for purposes other than trading.
INTEREST RATES
The debt portfolio, rate-sensitive assets and related interest rate risk
are managed centrally by the office of the Chief Financial Officer of the
Company by taking into consideration investment opportunities and risks, tax
consequences and the financing strategies approved by the Finance Committee of
the Company's Board of Directors.
The investment portfolios of the Company and its subsidiaries at April 30,
1999, primarily consisted of cash equivalents and short-term marketable
securities. Consequently, the amortized cost approximates market value.
Almost 41% of the Company's total cash and marketable securities portfolio is
classified as long-term, with nearly all maturities within a one-to-five year
range, compared to 19% in fiscal 1998. Amortized cost of these securities also
approximates market value. All investments are generally held until maturity.
Assuming all cash equivalents and marketable securities held at year-end were
variable rate investments, a 50 basis point change in interest (an approximate
10% decline in interest rates) would negatively impact consolidated pretax
earnings by approximately $2 million, or about one-half percent. In fiscal
1998, a 60 basis point change in interest (an
22
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approximate 10% decline in interest rates) would have negatively impacted 1998
consolidated pretax earnings by less than $4 million, or about one percent.
Under its risk management strategy, the Company may hedge its interest
rate risk related to its fixed-rate mortgage portfolio by selling short FNMA
mortgage-backed securities and utilizing forward commitments. FNMA
mortgage-backed securities are sold short 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. It is the Company's policy to utilize these financial instruments
only for the purpose of offsetting or reducing the risk of loss associated with
a defined or quantified exposure. They are purchased from certain broker-dealer
counterparties. If the counterparties do not fulfill their obligations, the
Company may be exposed to risk. As the risk of default depends on the
creditworthiness of the counterparty, the Company's policy requires that such
transactions may be entered into only with counterparties that are rated A or
better (or an equivalent rating) by recognized rating agencies. As a matter of
practice, the Company has limited the counterparties to major banks and
financial institutions meeting such standards. All interest rate contracts
conform to the standard International Swaps and Derivatives Association, Inc.
documentation.
The Company's variable rate mortgage portfolios are generally short-term
in nature, as it is the Company's policy to sell or securitize these loans
quarterly, and such portfolios are carried at the lower of cost or market.
Because the Company funds these short-term assets with short-term, variable
rate debt, the Company is not significantly exposed to interest rate risk in
this area. As a result, any change in interest rates would not materially
impact the Company's consolidated pretax earnings.
The Company's long-term debt consists of fixed-rate senior notes;
therefore, a change in interest rates would have no impact on consolidated
pretax earnings.
FOREIGN EXCHANGE RATES
The operation of the Company's subsidiaries in international markets
provides exposure to volatile movements in currency exchange rates. The
currencies involved are the Canadian dollar, the Australian dollar and the
British pound. International Tax Operations constituted approximately 1% of the
Company's fiscal year 1999 consolidated pretax earnings, compared to 4% in
fiscal 1998. As currency exchange rates change, translation of the financial
results of International Tax Operations into U.S. dollars does not presently
materially affect, and has not historically materially affected, the
consolidated financial results of the Company, although such changes do affect
the year-to-year comparability of the operating results of the international
businesses.
The Company does not hedge translation risks because (1) cash flows from
international operations are generally reinvested locally and (2) the minimal
exposure to material volatility to reported earnings does not justify the cost.
The Company estimates that a 10% change in foreign exchange rates by
itself would impact reported pretax earnings from continuing operations by
approximately $200,000. Such impact represents approximately 8% of the pretax
earnings of International Tax Operations for fiscal year 1999 and approximately
.05% of the Company's consolidated pretax earnings for such year. In fiscal
1998, a 10% change in exchange rates would have impacted fiscal 1998 pretax
earnings by approximately one million dollars, or less than one-half percent.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a)1 is
contained in the Company's annual report to security holders for the fiscal
year ended April 30, 1999, and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 20, 1998, the Company dismissed the accounting firm of Deloitte &
Touche LLP and appointed PricewaterhouseCoopers LLP as its independent auditor
for the fiscal year ending April 30, 1999. Such appointment was ratified by
the shareholders at their 1998 annual meeting. The reports prepared by
Deloitte & Touche LLP on the Company's financial statements for fiscal year
1998 did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change the Company's independent auditors was made
by the Board of Directors of the Company at the recommendation of its Audit
Committee following a request for proposals. During the Company's 1998 fiscal
year, and any subsequent interim period prior to July 20, 1998, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which disagreements, if not resolved to the satisfaction of Deloitte & Touche
LLP, would have caused it to make reference to the subject matter of the
disagreements in its reports. Also, there were no reportable events of the
nature described in Regulation S-K, Item 304(a)(1)(v) during either of the
Company's two fiscal years prior to fiscal year 1999 and during fiscal year
1999 prior to July 20, 1998.
During the 1998 fiscal year, and any subsequent interim period prior to
July 20, 1998, neither the Company, nor anyone acting on behalf of the Company,
consulted PricewaterhouseCoopers LLP regarding: (i) the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the registrant's
financial statements, or (ii) any matter that was either the subject of a
disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than
120 days after April 30, 1999, in the section titled "Election of Directors" and
in Item 4a of Part I of this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than
120 days after April 30, 1999, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
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25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1999, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 1999, in the section titled "Election of Directors," and
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of H&R Block,
Inc., and subsidiaries are incorporated by reference from the
Company's annual report to security holders for the fiscal
year ended April 30, 1999:
Page
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Stockholders' Equity 24
Notes to Consolidated Financial Statements 25
Quarterly Financial Data 35
Independent Auditors' Report 38
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement
Schedule for PricewaterhouseCoopers LLP, Certified Public
Accountants
Independent Auditors' Consent and Report on Schedule for
Deloitte & Touche LLP, Certified Public Accountants
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the
information is not material or the information is set forth
in the financial statements or notes thereto.
25
26
3. Exhibits
3(a) Restated Articles of Incorporation of H&R Block,
Inc., as amended, filed as Exhibit 3(b) to the Company's
quarterly report on Form 10-Q for the quarter ended October
31, 1996, are incorporated herein by reference.
3(b) Amended and Restated Bylaws of H&R Block, Inc.,
as amended, filed as Exhibit 3.1 to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1999,
are incorporated herein by reference.
4(a) Indenture dated as of October 20, 1997, among H&R
Block, Inc., Block Financial Corporation and Bankers Trust
Company, as Trustee, filed as Exhibit 4(a) to the Company's
quarterly report on Form 10-Q for the quarter ended October
31, 1997, is incorporated herein by reference.
4(b) Form of 6 3/4% Senior Note due 2004 of Block
Financial Corporation, filed on October 23, 1997 as Exhibit
2.2 to the Company's current report on Form 8-K, is
incorporated herein by reference.
4(c) Copy of Rights Agreement dated March 25, 1998
between H&R Block, Inc. and ChaseMellon Shareholder Services,
L.L.C., filed on July 22, 1998 as Exhibit 1 to the Company's
Registration Statement on Form 8-A, is incorporated herein by
reference.
4(d) Form of Certificate of Designation, Preferences
and Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(e) to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1995, is
incorporated by reference.
4(e) Form of Certificate of Amendment of Certificate
of Designation, Preferences and Rights of Participating
Preferred Stock of H&R Block, Inc., filed as Exhibit 4(j) to
the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1998 is incorporated by reference.
4(f) Form of Certificate of Designation, Preferences
and Rights of Delayed Convertible Preferred Stock of H&R
Block, Inc., filed as Exhibit 4(f) to the Company's annual
report on Form 10-K for the fiscal year ended April 30, 1995,
is incorporated by reference.
10(a) Agreement and Plan of Merger, dated as of
September 7, 1997, by and among H&R Block, Inc., H&R Block
Group, Inc., CompuServe Corporation, WorldCom, Inc., and
Walnut Acquisition Company, L.L.C., filed on September 7, 1997
as Exhibit 2.1 to the Company's current report on Form 8-K,
is incorporated herein by reference.
10(b) Stockholders Agreement, dated as of September 7,
1997, by and among H&R Block, Inc., H&R Block Group, Inc. and
WorldCom, Inc., filed on September 7, 1997 as Exhibit 10.1 to
the Company's current report on Form 8-K, is incorporated
herein by reference.
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27
10(c) Standstill Agreement, dated as of September 7,
1997, by and among H&R Block, Inc., H&R Block Group, Inc. and
WorldCom, Inc., filed on September 7, 1997 as Exhibit 10.2 to
the Company's current report on Form 8-K, is incorporated
herein by reference.
10(d) The Company's 1993 Long-Term Executive
Compensation Plan, as amended, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the quarter ended
October 31, 1997, is incorporated herein by reference.
10(e) The H&R Block Deferred Compensation Plan for
Directors, as amended, filed as Exhibit 10 to the Company's
quarterly report on Form 10-Q for the quarter ended July 31,
1994, is incorporated herein by reference.
10(f) Amendment No. 2 to H&R Block Deferred
Compensation Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the quarter ended
January 31, 1997, is incorporated herein by reference.
10(g) Amendment No. 3 to H&R Block Deferred
Compensation Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the quarter ended
July 31, 1997, is incorporated herein by reference.
10(h) Amendment No. 4 to H&R Block Deferred
Compensation Plan for Directors, filed as Exhibit 10(d) to the
Company's quarterly report on Form 10-Q for the quarter ended
July 31, 1997, is incorporated herein by reference.
10(i) Amendment No. 5 to H&R Block Deferred
Compensation Plan for Directors, filed as Exhibit 10(c) to the
Company's quarterly report on Form 10-Q for the quarter ended
January 31, 1998, is incorporated herein by reference.
10(j) The H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.1 to
H&R Block's quarterly report on Form 10-Q for the quarter
ended January 31, 1999, is incorporated herein by reference.
10(k) Amendment No. 1 to the H&R Block Deferred
Compensation Plan for Executives, as Amended and Restated,
filed as Exhibit 10.2.to the Company's quarterly report on
Form 10-Q for the quarter ended January 31, 1999, is
incorporated herein by reference.
10(l) The H&R Block Short-Term Incentive Plan, filed
as Exhibit 10(a) to the Company's quarterly report on Form
10-Q for the quarter ended October 31, 1996, is incorporated
herein by reference.
10(m) The Amendment and Termination of the H&R Block,
Inc. Retirement Plan for Non-Employee Directors, filed as
Exhibit 10.1 to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1998, is incorporated herein by
reference.
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10(n) The Company's 1989 Stock Option Plan for Outside
Directors, as amended, filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1998, is incorporated herein by
reference.
10(o) The H&R Block Stock Plan for Non-Employee
Directors, filed as Exhibit 10(e) to the Company's
quarterly report on Form 10-Q for the quarter ended
October 31, 1997, is incorporated herein by reference.
10(p) Employment Agreement dated October 11, 1996,
between the Company and Frank L. Salizzoni, filed as
Exhibit 10(b) to the Company's quarterly report on
Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10(q) Employment Agreement dated July 16, 1998,
between the Company and Mark A. Ernst, filed as
Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1998, is
incorporated herein by reference.
13 That portion of the annual report to security
holders for the fiscal year ended April 30, 1999 which is
expressly incorporated by reference in this filing.
Portions of such annual report to security holders not
expressly incorporated by this reference in this filing
are not deemed "filed" with the Commission.
16 Letter regarding change in Certifying Accountants
dated July 27, 1998 from Deloitte & Touche LLP addressed
to the Securities and Exchange Commission, filed on
July 27, 1998 as Exhibit 16.1 to the Company's current
report on Form 8-K, is incorporated herein by reference.
The statements contained in Item 4 of the Company's
Form 8-K dated July 27, 1998 to which Deloitte & Touche
LLP concurred in such letter are also contained in
Item 9 of the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1998.
21 Subsidiaries of the Company.
23(a) The consent of PricewaterhouseCoopers LLP, Certified
Public Accountants.
23(b) The consent of Deloitte & Touche LLP, Certified Public
Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 8, 1999,
reporting as "Other Events" the asset purchase agreement entered
into by the registrant providing for the registrant's purchase of
substantially all of the non-attest assets of McGladrey & Pullen,
LLP, and the registrant's issuance of a press release announcing
the same. The asset purchase agreement was included as Exhibit
10.1 and the press release was included as Exhibit 99.1 to the Form
8-K. No financial statements were filed as a part of the Form 8-K.
Except for the Form 8-K filed on July 8, 1999, the Company did not
file any reports on Form 8-K during the fourth quarter of the year
ended April 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
July 28, 1999 By /s/ Frank L. Salizzoni
Frank L. Salizzoni, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title
/s/ Frank L. Salizzoni President, Chief Executive Officer and
----------------------
Frank L. Salizzoni Director (principal executive officer)
/s/ G. Kenneth Baum Director
----------------------
G. Kenneth Baum
/s/ Henry W. Bloch Director
---------------------
Henry W. Bloch
/s/ Robert E. Davis Director
---------------------
Robert E. Davis
/s/ Donna R. Ecton Director
---------------------
Donna R. Ecton
/s/ Henry F. Frigon Director
---------------------
Henry F. Frigon
/s/ Roger W. Hale Director
---------------------
Roger W. Hale
/s/ Marvin L. Rich Director
---------------------
Marvin L. Rich
/s/ Louis W. Smith Director
---------------------
Louis W. Smith
/s/ Morton I. Sosland Director
---------------------
Morton I. Sosland
(Signed as to each on July 28, 1999)
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Signature Title
/s/ Ozzie Wenich Senior Vice President and Chief Financial
--------------------
Ozzie Wenich Officer (principal financial officer)
/s/ Cheryl L. Givens Vice President and Corporate Controller
--------------------
Cheryl L. Givens (principal accounting officer)
(Signed as to each on July 28, 1999)
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
H&R Block, Inc.
Our audit of the consolidated financial statements referred to in our report
dated June 15, 1999 appearing in the Annual Report to Shareholders of H&R
Block, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the information as of and for the year ended April 30, 1999 presented
in the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information as of and for the year ended April 30, 1999
set forth therein when read in conjunction with the related consolidated
financial statements. The information included in the financial statement
schedule as of and for the years ended April 30, 1998 and 1997 was 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 to the consolidated financial statements on the sale of subsidiaries)
expressed an unqualified opinion on that information.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
June 15, 1999
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INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement
No. 33-33889 of H&R Block, Inc. and subsidiaries (relating to shares of Common
Stock issuable under the 1989 Stock Option Plan for Outside Directors) on Form
S-8, Registration Statement No. 33-54989 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1993 Long-Term Executive
Compensation Plan) on Form S-8, Registration Statement No. 33-64147 of H&R
Block, Inc. and subsidiaries (relating to shares of Delayed Convertible
Preferred Stock issuable under the Spry, Inc. 1995 Stock Option Plan) on Form
S-8, Registration Statement No. 333-62515 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issuable under the Third Stock Option Plan
for Seasonal Employees) on Form S-8, and Registration Statement No. 333-42143
of H&R Block, Inc. and subsidiaries (relating to shares of Common Stock issued
under the H&R Block Stock Plan for Non-Employee Directors) on Form S-8 of our
report dated 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),
appearing in this Annual Report on Form 10-K of H&R Block, Inc. and
subsidiaries for the year ended April 30, 1999.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the 1997 and 1998 financial statement
schedule of H&R Block, Inc. and subsidiaries, listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such 1997 and 1998 financial statement schedule when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Deloitte & Touche LLP
Kansas City, Missouri
July 28, 1999
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H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1999, 1998 AND 1997
Additions
--------------------------
Charged
Balance to Costs Charged Balance
Beginning and to at End
Description of Period Expenses Other Deductions of Period
---------------------- ---------- ---------- ---------- ---------- ----------
Allowance for Doubtful
Accounts-deducted from
accounts receivable in
the balance sheet
1999 $45,314,000 $71,662,000 $ - $55,104,000 $61,872,000
=========== =========== =========== =========== ===========
1998 $30,144,000 $75,171,000 $ - $60,001,000 $45,314,000
=========== =========== =========== =========== ===========
1997 $ 4,419,000 $65,865,000 $ - $40,140,000 $30,144,000
=========== =========== =========== =========== ===========