EX-13 4 c63912ex13.txt PORTION OF ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL OVERVIEW OF REPORTABLE OPERATING SEGMENTS The principal business activity of the Company's operating subsidiaries is providing tax and financial services to the general public. The Company operates in the following reportable segments: U.S. tax operations: This segment primarily consists of the Company's traditional tax business - which served 16.9 million taxpayers in fiscal year 2001, more than any other company. This segment is primarily engaged in providing tax return preparation, filing, and related services in the United States. Tax-related service revenues include fees from company-owned tax offices and royalties from franchised offices. This segment also participates in the refund anticipation loan products offered by a third-party lending institution to tax clients. This segment includes the Company's tax preparation software - Kiplinger TaxCut(R) from H&R Block, other personal productivity software, online tax preparation through a tax preparer (whereby the client fills out an online tax organizer and sends it to a tax preparer for preparation), online do-it-yourself-tax preparation, online professional tax review and online tax advice through the hrblock.com website. International tax operations: This segment is primarily engaged in providing local tax return preparation, filing and related services in Canada, Australia and the United Kingdom. In addition, there are franchise offices in 9 countries that prepare U.S. tax returns for U.S. citizens living abroad. This segment served 2.3 million taxpayers in fiscal 2001. Tax-related service revenues include fees from company-owned tax offices and royalties from franchised offices. Mortgage operations: This segment is primarily engaged in the origination, servicing, and sale of nonconforming and conforming mortgage loans. This segment mainly offers, through a network of mortgage brokers, a flexible product line to borrowers who are creditworthy but do not meet traditional underwriting criteria. Conforming mortgage loan products, as well as the same flexible product line available through brokers, are offered through H&R Block Financial Centers and H&R Block Mortgage Corporation retail offices. Investment services: This segment is primarily engaged in offering full service investment advice through H&R Block Financial Advisors, Inc., a full-service discount securities broker. Financial planning and investment advice are offered through H&R Block Financial Centers, H&R Block Financial Advisors offices and tax offices, and stocks, bonds, mutual funds and other products and securities are offered through a nationwide network of registered representatives, at the same locations. Business services: This segment is primarily engaged in providing accounting, tax and consulting services to business clients and tax, estate planning, financial planning, wealth management and insurance services to individuals. RESULTS OF OPERATIONS NEW ACCOUNTING STANDARDS In the fourth quarter of fiscal 2001, the Company elected the early adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 2000 ("SFAS 133") and Statement of Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 138"). SFAS 133 and 138 establish accounting and reporting standards for derivative and hedging activities, and requires companies to record derivative instruments as assets or liabilities, measured at fair value. The Company has identified derivative instruments related to certain of its commitments to originate residential mortgage loans. The Company originates residential mortgage loans with the intention of selling these loans. These commitments to fund loans are freestanding derivative instruments and do not qualify for hedge accounting treatment and, therefore, the fair value adjustments are recorded in the consolidated statement of earnings. The commitments that qualify as derivative instruments totaled $252.6 million. The transition adjustment for adoption of SFAS 133 and SFAS 138 of $4.4 million, net of taxes, is shown as the cumulative effect of a change in accounting principle in the consolidated statement of earnings for the year ended April 30, 2001. Currently, there are ongoing discussions surrounding the implementation of SFAS 133 by the Financial Accounting Standards Board's Derivative Implementation Group. If the definition of derivative instruments is altered, this change may impact the Company's transition amounts and subsequent reported operating results. In December 1999, the Securities and Exchange Commission ("SEC") issued SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to ONE TO ONE | H&R BLOCK | 2001 21 2 revenue recognition in financial statements. The Company implemented SAB 101 in the fourth quarter of fiscal 2001. The implementation of SAB 101 had no impact on annual revenues and earnings, however, due to the seasonal influences of the business, the implementation resulted in a shift of revenues and earnings between the Company's third and fourth quarters. As a result, the Company has adjusted its third quarter of fiscal year 2001 to lower revenues and net earnings to $656.0 million and $4.5 million, respectively, included in Quarterly Financial Data in the notes to consolidated financial statements. In fiscal year 2001, the Company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 is a replacement of Statement of Financial Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain new disclosures, but carries over most of the SFAS 125 provisions without reconsideration. The adoption of SFAS 140 had no effect on the consolidated financial statements. In July 2000, the Emerging Issues Task Force reached a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"). EITF 99-20 addresses how the holder of beneficial interests should recognize cash flows on the date of the transaction and how interest income is recognized over the life of the interests. EITF 99-20 will be effective for the Company in the first quarter of fiscal year 2002. The Company has not yet determined the effect of EITF 99-20 on the consolidated financial statements. All amounts in the following tables are in thousands. FISCAL 2001 COMPARED TO FISCAL 2000
Year Ended Variance CONSOLIDATED H&R BLOCK, INC. April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ---------------------------------------------------- Revenues $ 3,001,575 $ 2,451,943 $ 549,632 22.4% ---------------------------------------------------- Pretax earnings 473,078 412,266 60,812 14.8% Net earnings $ 281,162 $ 251,895 $ 29,267 11.6% ----------------------------====================================================
Consolidated revenues for the year increased 22.4% to $3.0 billion compared to $2.5 billion in the prior year due primarily to U.S. tax operations, Mortgage operations and Investment services. The increase related to Investments services is due to the inclusion of a full twelve months of operations in fiscal 2001 compared to only five months in fiscal 2000. Pretax earnings of $473.1 million increased 14.8% compared to last year due to better performance within U.S. tax operations and Mortgage operations, which were partially offset by lesser performance within Investment services and higher interest expense on acquisition debt. Net earnings increased 11.6% to $281.2 million, or $3.04 per diluted share, from $251.9 million, or $2.55 per diluted share in fiscal 2000. The Company's fiscal 2001 results include two one-time items -- the implementation of SFAS 133, an additional $.05 per diluted share, and an accrual for settlement of litigation brought against the Company, a reduction of $.11 per diluted share. Excluding the effects of these one-time items, diluted earnings per share was $3.10, a 21.6% increase over fiscal 2000. The effective tax rate increased from 38.9% to 41.5% this year as a result of a full year of non-deductible intangible asset and goodwill amortization resulting from the acquisition of OLDE Financial Corporation ("OLDE"), compared with five months of amortization last year. The Company's performance as measured by earnings before interest (including interest expense on acquisition debt, investment income and interest allocated to operating business units), taxes, depreciation and amortization ("EBITDA") improved $189.2 million to $787.2 million compared to $598.0 million in the prior year. EBITDA is utilized by management to evaluate the performance of its operating segments because many of its segments reflect substantial amortization of acquired intangible assets and goodwill resulting from recent acquisitions. Management believes EBITDA is a good measure of cash flow generation because the Company has not historically been capital intensive and it also removes the effects of purchase accounting. The calculation may not be comparable to the calculation of EBITDA by other companies. In addition, the Company continues to measure its performance based on the calculation of earnings excluding the after-tax impact of amortization of acquired intangible assets and goodwill. The pretax amortization expense of acquired intangible assets and goodwill increased 57.2% in fiscal 2001 to $104.3 million from $66.3 million in fiscal 2000. Net earnings from continuing operations before change in accounting 22 ONE TO ONE | H&R BLOCK | 2001 3 principle, excluding the after-tax impact of this expense, was $362.2 million, or $3.91 per diluted share in 2001, compared to $304.4 million, or $3.08 per diluted share in the prior year, increases of 19.0% and 26.9%, respectively. An analysis of operations by reportable operating segment follows.
Year Ended Variance U.S. TAX OPERATIONS April 30 Better (worse) than ---------------------------------------------------------------------------------------------- 2001 2000 $ % ---------------------------------------------------------- Tax preparation and related fees $ 1,254,494 $ 1,128,891 $ 125,603 11.1% Royalties 141,258 128,870 12,388 9.6% RAL participation fees 133,710 89,761 43,949 49.0% Software sales 58,676 39,546 19,130 48.4% Other 65,985 44,017 21,968 49.9% ---------------------------------------------------------- Total revenues 1,654,123 1,431,085 223,038 15.6% ========================================================== Compensation & benefits 612,538 550,287 (62,251) -11.3% Occupancy & equipment 187,328 180,110 (7,218) -4.0% Depreciation & amortization 70,383 66,522 (3,861) -5.8% Cost of software sales 34,286 22,430 (11,856) -52.9% Bad debt expense 55,394 32,541 (22,853) -70.2% Marketing & advertising 92,012 96,922 4,910 5.1% Other 168,668 162,281 (6,387) -3.9% ---------------------------------------------------------- Total expenses 1,220,609 1,111,093 (109,516) -9.9% ---------------------------------------------------------- Pretax earnings $ 433,514 $ 319,992 $ 113,522 35.5% ------------------------------------==========================================================
Revenues increased 15.6% to $1.7 billion for the year ended April 30, 2001. The increase is primarily attributable to higher tax preparation and related fees that are primarily the result of increases in the average fees per client. The increase in the average fees per client in tax offices is due to a planned price increase, a shift in our customer mix to those with more complex returns and the reduction of price discounting at the point of sale. The average fee per client served increased 11.4% to $118.17. The number of clients served in company-owned operations increased 3.8% to 11.7 million due almost entirely to e-commerce clients. In addition, the number of tax returns filed electronically increased 8.7% in company- owned operations, resulting in the electronic filing of 84.4% of all returns processed in company-owned operations. Revenues from participations in Refund Anticipation Loans ("RALs") increased $43.9 million over the prior year. This increase is a result of both increases in the average revenue per RAL of 43.9% and the number of RALs of 2.7%. The Company participates with Household Tax Masters in offering RALs to customers through tax offices (49.9% in company-owned offices and 25% in major franchise offices). Revenue from participation interests is calculated as our percentage participation times the fee that the customer pays for the RAL. The fee that the customer pays for the RAL is set by Household Tax Masters and is based on the dollar amount of the RAL. The increase in pricing is due to adjustments made to offset the increased risk of bad debt resulting from the IRS's heightened review of returns containing earned income tax credits. Also contributing to the increase in revenues were software sales, which increased 48.4% due mainly to a change in our pricing strategy that lowered our retail price per federal unit, but included an additional fee for state products. In addition, royalties increased 9.6% to $141.3 million due to pricing increases and a .2% increase in clients served by franchises. Pretax earnings increased 35.5% to $433.5 million compared to $320.0 million last year. The increase is largely due to the increase in revenues as well as effective expense control. As a result of expense control, the segment's operating margin improved to 26.2% compared to 22.4% in the prior year. EBITDA increased 31.2% to $507.1 million in fiscal 2001. ONE TO ONE | H&R BLOCK | 2001 23 4
Year Ended Variance INTERNATIONAL TAX OPERATIONS April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ---------------------------------------------- Canada $ 57,174 $ 61,102 $ (3,928) -6.4% Australia 17,939 17,573 366 2.1% United Kingdom 1,763 1,595 168 10.5% Overseas franchises 2,692 1,248 1,444 115.7% ---------------------------------------------- Total revenues 79,568 81,518 (1,950) -2.4% ============================================== Canada 4,962 3,291 1,671 50.8% Australia 3,472 3,189 283 8.9% United Kingdom (1,602) (1,958) 356 18.2% Overseas franchises 846 347 499 143.8% ---------------------------------------------- Pretax earnings $ 7,678 $ 4,869 $ 2,809 57.7% ----------------------------------==============================================
International revenues decreased by 2.4% to $79.6 million from $81.5 million last year. The decrease was driven primarily by unfavorable changes in currency exchange rates and management's decision to reduce the non-profitable early discounted return business in Canada. Pretax earnings increased 57.7% to $7.7 million from $4.9 million last year in spite of the unfavorable changes in currency exchange rates. The improved performance in Canada is primarily attributable to business management and effective cost control mainly in marketing, labor and supplies. The Australian results were negatively affected by the unfavorable change in the currency exchange rates as the pretax results improved by 26.6% in Australian currency. These results were driven primarily by a 6.7% increase in the number of returns processed. The United Kingdom pretax loss decreased by 18.2% primarily reflecting ongoing efforts to close non-profitable offices while increasing business volume. The Overseas franchises improvement of 143.8% is attributable to a 51% increase in return volume, primarily in Puerto Rico, as a child tax credit program was introduced this year. International tax operations' EBITDA improved 22.4% to $12.7 million in fiscal year 2001.
Year Ended Variance MORTGAGE OPERATIONS April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ---------------------------------------------- Interest income $ 47,715 $ 92,155 $(44,440) -48.2% Loan servicing income 110,222 62,510 47,712 76.3% Gain on sale of mortgage loans 256,304 199,608 56,696 28.4% Other 1,561 1,156 405 35.0% ---------------------------------------------- Total revenues 415,802 355,429 60,373 17.0% ============================================== Compensation & benefits 128,887 103,049 (25,838) -25.1% Variable servicing & processing 34,620 20,338 (14,282) -70.2% Occupancy & equipment 23,690 15,462 (8,228) -53.2% Interest expense 13,729 56,988 43,259 75.9% Bad debt expense 16,153 8,808 (7,345) -83.4% Amortization of acquisition intangibles 13,577 13,760 183 1.3% Other 46,110 48,450 2,340 4.8% ---------------------------------------------- Total expenses 276,766 266,855 (9,911) -3.7% ---------------------------------------------- Pretax earnings $ 139,036 $ 88,574 $ 50,462 57.0% ----------------------------------==============================================
24 ONE TO ONE | H&R BLOCK | 2001 5 Revenues increased 17.0% to $415.8 million in fiscal 2001 compared with fiscal 2000. The increase is primarily due to an increase in production volume, a favorable secondary market environment and a larger servicing portfolio, which was partially offset by lower interest income. Revenues related to the sale of mortgage loans increased $56.7 million over the prior year resulting from favorable secondary market pricing on mortgage loan sales. During the twelve months ending April 30, 2001 the Company originated $6.5 billion in mortgage loans compared to $5.7 billion last year. The total execution price representing gain on sale of mortgage loans for the fiscal year ended April 30, 2001 was 3.71% compared to 3.73% for the fiscal year ended April 30, 2000. Servicing revenues increased 76.3% over the prior year. The increase is principally attributable to a higher loan servicing portfolio balance, increased servicing operations efficiencies and an increase in the collection of borrower late fees. The average number of loans being serviced increased by 67,112 to an average portfolio balance for the year of $15.9 billion compared to $8.8 billion last year. The increase in revenues was partially offset by the winding down of certain mortgage activities during fiscal year 2001. Pretax earnings increased $50.5 million or 57.0% to $139.0 million for the year ended April 30, 2001. The improved performance is primarily due to the increased revenues. The decrease in both interest income and interest expense is a result of the move to off-balance sheet arrangements for the funding of mortgage loans. Utilizing the off-balance sheet arrangements, the Company essentially no longer incurs short-term borrowings to fund its mortgage loans. Mortgage operations' operating margin increased to 33.4% from 24.9% in the prior year. The move to off-balance sheet arrangements accounted for 520 basis points of the margin improvement. Mortgage operations benefited from cross-sell initiatives in 2001, as 5.4% of all mortgage loans originated came from tax clients. EBITDA for Mortgage operations increased 48.6% to $161.8 million compared to $108.9 million last year.
Year Ended Variance INVESTMENT SERVICES April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ------------------------------------------- Commission & fee income $ 241,494 $ 177,370 $ 64,124 36.2% Margin interest income 201,793 79,416 122,377 154.1% Other 29,138 11,590 17,548 151.4% ------------------------------------------- Total revenues 472,425 268,376 204,049 76.0% =========================================== Compensation & benefits 161,560 87,590 (73,970) -84.5% Interest expense 106,303 41,563 (64,740) -155.8% Occupancy & equipment 30,048 12,551 (17,497) -139.4% Depreciation & amortization 19,166 6,058 (13,108) -216.4% Commission, floor brokerage & fees 10,103 15,553 5,450 35.0% Amortization of acquisition intangibles 47,531 19,605 (27,926) -142.4% Other 85,025 44,230 (40,795) -92.2% ------------------------------------------- Total expenses 459,736 227,150 (232,586) -102.4% ------------------------------------------- Pretax earnings $ 12,689 $ 41,226 $ (28,537) -69.2% -------------------------------------===========================================
Investment services revenues for the year increased 76.0% to $472.4 million from $268.4 million. The increase is attributable primarily to the acquisition of OLDE, the parent company of H&R Block Financial Advisors, Inc. ("HRBFA," formerly OLDE Discount Corporation) on December 1, 1999, and reflects a full twelve months of revenues for the acquired companies in fiscal year 2001 as compared with only five months of revenues in fiscal year 2000. Pretax earnings for this segment decreased by 69.2% to $12.7 million from $41.2 million earned last year. The decrease in pretax earnings is primarily attributable to lower trading volume, an increase in the amortization of acquired intangible assets and a litigation settlement. In the former case, there were twelve months of acquired intangible asset amortization in fiscal year 2001, whereas in fiscal 2000 there were only five months. In the latter case, the Company agreed to settle a class action lawsuit filed against OLDE. The Company denies liability with respect to these claims, but has determined to settle the matter to avoid the costs, expenses, and distractions of further litigation. Under the preliminarily approved settlement, which is subject to final court approval, HRBFA will distribute $21 million to a fund to be used to pay claims of class members, attorneys' fees and the administrative expenses relating to the settlement. The Company accrued $16.8 million related to this settlement in fiscal 2001. ONE TO ONE | H&R BLOCK | 2001 25 6 In April 2001 in an effort to improve profitability due to weak market conditions, Investment services reduced its number of associates by 6%, which resulted in a one-time charge of $1.6 million related to severance costs. Severance charges for the full fiscal year totaled $2.7 million. Trading Volume. In line with the market's general decline, the Company's average trading volumes have fallen by more than 46% as measured by average trades per day. HRBFA's trading volume has been historically linked with the overall performance of the market indices, especially the Nasdaq. Margin Lending. Impacted by market performance, volatility and investor uncertainty, margin balances had fallen dramatically from $2.8 billion at the end of fiscal 2000 to $1.3 billion at the end of fiscal 2001. This trend is consistent with the rest of the industry and reflects the selling that occurred as the market dropped. However, average margin balances for the five months of fiscal 2000 compared to the twelve months of fiscal year 2001 were similar, $2.5 billion compared with $2.4 billion. Net interest margin, the blended rate of interest earned on outstanding margin balances less the cost of all sources funding margin loans, improved from 2.5% to 2.9% as reliance on higher-cost funding sources decreased. Principal Trading. Decimalization replaced fractional trading for listed equities on January 29 and for Nasdaq equities on April 9. The impact of decimalization has reduced the dealer spread between bid and ask prices, reducing revenue opportunities. Overall principal trading revenue, including fixed income trading and unit investment trusts, increased $16.8 million to $63.3 million in fiscal 2001 from the previous fiscal year. Continuing efforts to become an advisory-based relationship provider, a number of key initiatives occurred despite the difficult financial and market environment. The Company expanded its product line to include annuities and expanded online capabilities. Under development are cash management capabilities and fee-based services. The Express IRA product was launched in six tax services regions, introducing new technology, sales activities, service functions and training across the tax services and HRBFA organizations. Another key cross-organization initiative was the creation and testing of the TPFA (Tax Preparer Financial Advisor) program. In its pilot year, TPFAs, through tax season, cross-sold 3,000 accounts. In addition, tax client referrals to HRBFA resulted in approximately 15,000 new accounts. Finally, as of May 2001, 55,068 client tax returns were cross-sold to tax services from HRBFA. The Investment services segment has yet to experience significant revenues from these initiatives. Expenses for the development of cross-sell marketing systems also impacted the decline in pretax earnings. Investment services' EBITDA increased 16.7% to $78.1 million over the prior year.
Year Ended Variance BUSINESS SERVICES April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ---------------------------------------------- Accounting, consulting & tax $ 319,750 $ 268,568 $ 51,182 19.1% Product sales 20,960 16,533 4,427 26.8% Management fee income 11,467 17,341 (5,874) -33.9% Other 21,643 8,425 13,218 156.9% ---------------------------------------------- Total revenues 373,820 310,867 62,953 20.3% ============================================== Compensation & benefits 240,660 182,592 (58,068) -31.8% Occupancy & equipment 24,792 28,444 3,652 12.8% Amortization of acquisition intangibles 31,577 22,786 (8,791) -38.6% Other 59,746 59,934 188 0.3% ---------------------------------------------- Total expenses 356,775 293,756 (63,019) -21.5% ---------------------------------------------- Pretax earnings $ 17,045 $ 17,111 $ (66) -0.4% ----------------------------------==============================================
Business services revenues of $373.8 million increased 20.3% from $310.9 million in the prior year. The increase in revenues over the prior year is attributable to: (a) the inclusion of RSM McGladrey for twelve months as compared to nine months for the previous year ($43.8 million); (b) growth in services including extended tax consulting services and insurance alliance revenues ($44.7 million) and (c) services from newly acquired firms, net of the lost revenue from sold offices. The increases in these areas were offset by a decrease in revenue from technology consulting fees associated with year 2000 engagements, the decision to close certain unprofitable technology consulting practices, and the change in organizational structure that affected attest revenues discussed in the next paragraph. 26 ONE TO ONE | H&R BLOCK | 2001 7 As of April 30, 2001, the operations of five of the original regional accounting firms acquired had been merged into RSM McGladrey, the national accounting firm that acquired substantially all of the non-attest assets of McGladrey & Pullen, LLP on August 2, 1999. Prior to the mergers, for certain of the regional accounting firms, the Company was required, in accordance with Emerging Issues Task Force No. 97-2 - "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements," to consolidate revenues and expenses from the non-attest business that the Company owned and the attest business of firms located in Kansas City, Chicago, Baltimore and Philadelphia that the Company did not own, but for whom it performed management services. Revenues are no longer consolidated as a result of the change in organizational structure. Pretax earnings were approximately equivalent to the prior year. This is primarily due to a $3.5 million loss from RSM McGladrey during the first quarter of fiscal 2001 that was not experienced in the prior year due to the timing of the acquisition. This loss was offset by earnings from newly acquired firms and net growth from the core business. EBITDA increased 20.9% to $55.8 million from $46.2 million in fiscal 2000.
Year Ended Variance UNALLOCATED CORPORATE April 30 Better (worse) than -------------------------------------------------------------------------------- 2001 2000 $ % ------------------------------------------ Total revenues $ 5,837 $ 4,668 $ 1,169 25.0% ========================================== Compensation & benefits 14,376 6,114 (8,262) -135.1% Interest expense 11,660 3,137 (8,523) -271.7% Marketing & advertising 5,237 693 (4,544) -655.7% Other 12,091 17,200 5,109 29.7% ------------------------------------------ Total expenses 43,364 27,144 (16,220) -59.8% ------------------------------------------ Pretax loss $(37,527) $(22,476) $ (15,051) -67.0% ========================================== Interest expense on acquisition debt $ 98,759 $ 56,118 $ (42,641) -76.0% --------------------------------------==========================================
The unallocated corporate pretax loss for the year increased 67.0% to $37.5 million from $22.5 million in the comparable period last year. The increase is primarily a result of higher employee costs and interest expense related to borrowings for funding of operations, including share repurchases. Interest expense on acquisition debt increased $42.6 million in fiscal 2001 compared to the prior year. The increase is primarily attributable to a full year of financing costs associated with the acquisition of OLDE in December 1999 compared with only five months last year. FISCAL 2000 COMPARED TO FISCAL 1999 SIGNIFICANT EVENTS IN FISCAL 2000 On December 1, 1999, the Company completed the purchase of all the issued and outstanding shares of capital stock of OLDE, parent of H&R Block Financial Advisors, Inc. (formerly OLDE Discount Corporation) a leading discount broker in the United States. HRBFA offers brokerage and other financial services through a nationwide network of approximately 1,400 registered representatives located in 105 OLDE offices and, since the acquisition, in 93 H&R Block Financial Centers. The purchase price was $850 million in cash plus net tangible book value payments of $48.5 million. The purchase agreement also provides for possible future contingent consideration, payable for up to five years after the acquisition based upon revenues generated from certain online brokerage services and such consideration will be treated as purchase price when paid. The transaction was accounted for as a purchase, and accordingly, OLDE's results are included since the date of acquisition. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP. McGladrey & Pullen, LLP was the nation's seventh largest accounting and consulting firm with more than 70 offices located primarily in the Eastern, Midwestern, Northern and Southwestern United States. This acquisition significantly increased the size of the ONE TO ONE | H&R BLOCK | 2001 27 8 Business services segment, new in 1999. The purchase price was $240 million in cash payments over four years and the assumption of certain pension liabilities with a present value of $52.7 million. The purchase agreement also provides for possible future contingent consideration based on a calculation of earnings in years two, three and four after the acquisition and such consideration will be treated as purchase price when paid. In addition, the Company made cash payments of $65.5 million for outstanding accounts receivable and work-in-process that have been repaid to the Company. The acquisition was accounted for as a purchase, and accordingly, results are included since the date of acquisition.
Year Ended Variance CONSOLIDATED H&R BLOCK, INC. April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ---------------------------------------------- Revenues $ 2,451,943 $ 1,644,665 $ 807,278 49.1% ============================================== Pretax earnings 412,266 383,541 28,725 7.5% Net earnings $ 251,895 $ 215,366 $ 36,529 17.0% ----------------------------------==============================================
Revenues increased 49.1% to $2.5 billion compared to $1.6 billion in fiscal 1999. Net earnings from continuing operations increased 5.9% to $251.9 million from $237.8 million in the prior year. Basic net earnings per share from continuing operations increased to $2.57 from $2.38 in 1999. Diluted net earnings per share from continuing operations increased to $2.55 from $2.36. EBITDA increased 36.3% to $598.0 million from $438.8 million in fiscal 1999. The pretax amortization expense of acquired intangible assets increased 172.2% in fiscal 2000 to $66.3 million from $24.4 million in fiscal 1999. Excluding the after-tax impact of this expense, net earnings from continuing operations were $304.4 million, or $3.08 per diluted share in fiscal 2000, compared to $254.2 million, or $2.52 per diluted share the prior year, increases of 19.7% and 22.2%, respectively. The effective tax rate for fiscal 2000 increased to 38.9% from 38.0% in fiscal 1999. The increase is primarily due to non-deductible amortization of goodwill and other intangible assets related to the OLDE acquisition. An analysis of operations by reportable operating segment follows.
Year Ended Variance U.S. TAX OPERATIONS April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ---------------------------------------------- Tax preparation and related fees $ 1,128,891 $ 989,350 $ 139,541 14.1% Royalties 128,870 114,902 13,968 12.2% RAL participation fees 89,761 90,070 (309) -0.3% Software sales 39,546 33,486 6,060 18.1% Other 44,017 30,461 13,556 44.5% ---------------------------------------------- Total revenues 1,431,085 1,258,269 172,816 13.7% ============================================== Compensation & benefits 550,287 472,443 (77,844) -16.5% Occupancy & equipment 180,110 154,082 (26,028) -16.9% Depreciation & amortization 66,522 49,381 (17,141) -34.7% Cost of software sales 22,430 17,266 (5,164) -29.9% Bad debt expense 32,541 56,116 23,575 42.0% Marketing & advertising 96,922 71,512 (25,410) -35.5% Other 162,281 123,356 (38,925) -31.6% ---------------------------------------------- Total expenses 1,111,093 944,156 (166,937) -17.7% ---------------------------------------------- Pretax earnings $ 319,992 $ 314,113 $ 5,879 1.9% ----------------------------------==============================================
28 ONE TO ONE | H&R BLOCK | 2001 9 Revenues increased 13.7% to $1.4 billion from $1.3 billion in fiscal 1999. Combined tax preparation and related fees generated from clients visiting a tax office increased $139.5 million, or 14.1%, due to pricing increases and a 2.2% increase in clients served in company-owned offices. Fees associated with participation interests in RALs decreased 0.3% to $89.8 million due to lower pricing as a result of the Internal Revenue Service re-instatement of the Debt Indicator Program and a pilot program offering RALs with no bank charge in certain geographical areas. These two factors decreased the average revenue per RAL by 22.8%. Royalty revenues increased 12.2% to $128.9 million due to pricing increases and a 2.6% increase in clients served by franchises. Revenues from software sales increased $6.1 million, or 18.1%, due to an increase in electronic filing fees generated through the clients' use of the Company's tax preparation software as well as an increase in the number of software units sold. Operating earnings increased 1.9% to $320.0 million from $314.1 million in 1999. The pretax margin decreased to 22.4% from 25.0% in 1999, due to higher spending related to new initiatives and overstaffing in tax offices in April due to anticipated client demand that did not occur. New initiatives included the start-up of e-commerce services, the offer of RALs with no bank charge, and the new prepaid spending card program, Refund Rewards(TM). EBITDA was $386.5 million for fiscal 2000, up from $363.5 million in 1999.
Year Ended Variance INTERNATIONAL TAX OPERATIONS April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ---------------------------------------------- Canada $ 61,102 $ 58,504 $ 2,598 4.4% Australia 17,573 14,540 3,033 20.9% United Kingdom 1,595 692 903 130.5% Overseas franchises 1,248 978 270 27.6% ---------------------------------------------- Total revenues 81,518 74,714 6,804 9.1% ============================================== Canada 3,291 2,450 841 34.3% Australia 3,189 2,267 922 40.7% United Kingdom (1,958) (2,559) 601 23.5% Overseas franchises 347 356 (9) -2.5% ---------------------------------------------- Pretax earnings $ 4,869 $ 2,514 $ 2,355 93.7% ----------------------------------==============================================
Revenues increased 9.1% to $81.5 million from $74.7 million in 1999. Pretax earnings increased 93.7% to $4.9 million from $2.5 million in 1999, and the pretax margin increased to 6.0% from 3.4% in 1999. The increase in pretax earnings is due to better results in Australia and Canada. EBITDA was $10.4 million, up from $8.3 million in the prior year. Australia's revenues increased 20.9% to $17.6 million from $14.5 million. Pretax earnings increased 40.7% to $3.2 million from $2.3 million. These results reflect the strong Australian dollar. The increases are due to a 12.7% increase in volume in company-owned offices, along with an increase in the pretax margin to 18.1% from 15.6% in 1999. Canada's revenues increased 4.4% to $61.1 million from $58.5 million in 1999. Pretax earnings increased 34.3% to $3.3 million from $2.5 million. The number of regular returns prepared in company-owned offices decreased 8.2%, while the number of cash back returns prepared increased 7.6%. The improvement in pretax earnings is primarily due to the lowering of certain expenses from closing less profitable offices and improved expense control. Revenues in the United Kingdom increased 130.5% to $1.6 million from $692 thousand in fiscal 1999. Pretax losses decreased 23.5% to $2.0 million from $2.6 million in 1999. The improved results were primarily due to a March 1999 acquisition and increased revenue in existing tax offices, leveraged over certain fixed costs. ONE TO ONE | H&R BLOCK | 2001 29 10
Year Ended Variance MORTGAGE OPERATIONS April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ------------------------------------------- Interest income $ 92,155 $ 85,160 $ 6,995 8.2% Loan servicing income 62,510 38,681 23,829 61.6% Gain on sale of mortgage loans 199,608 130,337 69,271 53.2% Other 1,156 1,766 (610) -34.5% ------------------------------------------- Total revenues 355,429 255,944 99,485 38.9% =========================================== Compensation & benefits 103,049 64,354 (38,695) -60.1% Variable servicing & processing 20,338 14,400 (5,938) -41.2% Occupancy & equipment 15,462 10,053 (5,409) -53.8% Interest expense 56,988 52,018 (4,970) -9.6% Bad debt expense 8,808 13,171 4,363 33.1% Amortization of acquisition intangibles 13,760 12,574 (1,186) -9.4% Other 48,450 26,625 (21,825) -82.0% ------------------------------------------- Total expenses 266,855 193,195 (73,660) -38.1% ------------------------------------------- Pretax earnings $ 88,574 $ 62,749 $ 25,825 41.2% -------------------------------------===========================================
Revenues increased 38.9% to $355.4 million from $255.9 million in 1999. Pretax earnings increased 41.2% to $88.6 million from $62.7 million. Option One reported revenues of $322.0 million, up 45.3% from $221.6 million in the prior year. Pretax earnings increased 49.9% to $95.0 million from $63.4 million in 1999. Option One originated $5.7 billion of loans in fiscal 2000, up 58.0% from $3.6 billion in 1999, and sold or securitized $6.1 billion of loans, up 73.7% from $3.5 billion in 1999. At April 30, 2000, Option One's servicing portfolio was 114,300 loans totaling $11.3 billion, up from 65,300 loans totaling $6.5 billion at April 30, 1999. The increase in loans serviced, originated and sold drove Option One's revenue increase. Although certain expenses increased as Option One pursued growth plans, the increase in revenues and contribution margins exceeded the higher expenses and led to the increase in pretax earnings. EBITDA increased to $108.9 million from $78.5 million in 1999.
Year Ended Variance INVESTMENT SERVICES April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ------------------------------------------- Commission & fee income $ 177,370 $ 3,859 $ 173,511 - Margin interest income 79,416 - 79,416 - Other 11,590 130 11,460 - ------------------------------------------- Total revenues 268,376 3,989 264,387 - =========================================== Compensation & benefits 87,590 973 (86,617) - Interest expense 41,563 - (41,563) - Occupancy & equipment 12,551 195 (12,356) - Depreciation & amortization 6,058 149 (5,909) - Commission, floor brokerage & fees 15,553 3,106 (12,447) -400.7% Amortization of acquisition intangibles 19,605 55 (19,550) - Other 44,230 1,134 (43,096) - ------------------------------------------- Total expenses 227,150 5,612 (221,538) - ------------------------------------------- Pretax earnings (loss) $ 41,226 $ (1,623) $ 42,849 - -------------------------------------===========================================
Revenues increased $264.4 million to $268.4 million from $4.0 million in 1999. Pretax earnings increased $42.8 million to $41.2 million from a loss of $1.6 million last year. The increase in revenues and pretax earnings is due to the first-time inclusion of OLDE's financial results for five months in fiscal 2000. EBITDA increased to $66.9 million from a negative $1.4 million in 1999. 30 ONE TO ONE | H&R BLOCK | 2001 11 Since the acquisition date, OLDE contributed revenues of $253.9 million and pretax earnings of $66.8 million, driven by high market trading volume yielding over 1.8 million trades. At April 30, 2000, OLDE had 658,000 active accounts and managed client assets of $44 billion.
Year Ended Variance BUSINESS SERVICES April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ---------------------------------------------- Accounting, consulting & tax $ 268,568 $ 43,369 $ 225,199 519.3% Product sales 16,533 3,703 12,830 346.5% Management fee income 17,341 183 17,158 - Other 8,425 86 8,339 - ---------------------------------------------- Total revenues 310,867 47,341 263,526 556.7% ============================================== Compensation & benefits 182,592 29,903 (152,689) -510.6% Occupancy & equipment 28,444 2,815 (25,629) -910.4% Amortization of acquisition intangibles 22,786 2,845 (19,941) -700.9% Other 59,934 4,657 (55,277) - ---------------------------------------------- Total expenses 293,756 40,220 (253,536) -630.4% ---------------------------------------------- Pretax earnings $ 17,111 $ 7,121 $ 9,990 140.3% ----------------------------------==============================================
Revenues increased to $310.9 million from $47.3 million in 1999. Pretax earnings increased 140.3% to $17.1 million from $7.1 million last year. The increase in both revenues and pretax earnings is largely due to the first-time inclusion of RSM McGladrey financial results for nine months in fiscal 2000, and the inclusion for the entire year in fiscal 2000 of the results from six regional accounting firms acquired at various times during fiscal 1999. EBITDA increased to $46.2 million from $10.5 million last year.
Year Ended Variance UNALLOCATED CORPORATE April 30 Better (worse) than -------------------------------------------------------------------------------- 2000 1999 $ % ---------------------------------------------- Total revenues $ 4,668 $ 4,408 $ 260 5.9% ============================================= Compensation & benefits 6,114 9,672 3,558 36.8% Interest expense 3,137 1,381 (1,756) -127.2% Marketing & advertising 693 432 (261) -60.4% Other 17,200 13,652 (3,548) -26.0% --------------------------------------------- Total expenses 27,144 25,137 (2,007) -8.0% --------------------------------------------- Pretax loss $ (22,476) $ (20,729) $ (1,747) -8.4% ============================================= Interest expense on acquisition debt $ 56,118 $ 17,757 $ (38,361) -216.0% ----------------------------------=============================================
The unallocated corporate pretax loss increased to $22.5 million from $20.7 million in 1999. Interest expense on debt incurred for business acquisitions increased 216.0% to $56.1 million from $17.8 million in 1999. The increase is due to borrowings associated with RSM McGladrey and OLDE acquisitions during fiscal 2000. Net investment income decreased 74.2% to $8.3 million from $32.2 million in the prior year. The decrease is a result of less cash available for investment due to business acquisitions and share repurchases throughout fiscal 2000. ONE TO ONE | H&R BLOCK | 2001 31 12 LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities, excluding trading securities, were $550.2 million at April 30, 2001, compared to $636.2 million at April 30, 2000. Working capital decreased to $282.8 million at April 30, 2001 from $346.1 million at April 30, 2000. The working capital ratio at April 30, 2001 is 1.14 to 1, compared to 1.10 to 1 at April 30, 2000. The increase in the working capital ratio is primarily attributable to the decrease in short-term borrowings. The Company incurs short-term borrowings throughout the year primarily to fund receivables associated with its Business services, mortgage loans held for sale, and participation in RALs, and to fund seasonal working capital needs. These short-term borrowings in the U.S. are supported by a $1.86 billion back-up credit facility through October 2001, subject to annual renewal. In Canada, from January through April each year, the Company uses Canadian borrowings to purchase refunds due its clients from Revenue Canada. Maturities of these borrowings range from 30 to 90 days. Net accounts receivable at April 30, 2001 and 2000 include amounts due from Revenue Canada of $11.8 million and $17.1 million, respectively. In April 2000, the Company first entered into third party off-balance sheet arrangements and whole-loan sale arrangements for Option One. These arrangements, modified in April 2001, allow the Company to originate mortgage loans and then sell the loans to a qualified special purpose entity without having to use the Company's short-term borrowings to fund the loans. The arrangements, which are not guaranteed by H&R Block, freed up excess cash and short-term borrowing capacity ($633.8 million at April 30, 2001), improved liquidity and flexibility, and reduced balance sheet risk, while providing stability and access to liquidity in the secondary market for mortgage loans. The Company has commitments to fund mortgage loans of $1.5 billion at April 30, 2001 as long as there is no violation of any conditions established in the contracts. External market forces impact the probability of commitments being exercised, and therefore, total commitments outstanding do not necessarily represent future cash requirements. If the commitments are exercised they will be funded using the Company's off-balance sheet arrangements. At April 30, 2001, the Company had no short-term borrowings, a decrease from $283.8 million at April 30, 2000. The Company's capital expenditures, dividend payments, share repurchase program, Business services acquisition payments and normal operating activities, including RALs, during the year were funded through both internally-generated funds and short-term borrowings. For the twelve months ended April 30, 2001 and 2000, interest expense was $242.6 million and $155.0 million, respectively. The increase in interest expense is due to the inclusion of operating interest expense associated with the borrowing activities of OLDE for a full year ($106.3 million) compared to only five months in the prior year and acquisition interest expense of $70.7 million related to the OLDE acquisition in December 1999. These increases were partially offset by lower interest expense from Mortgage operations because the Company sells the majority of its mortgage loans on the same day they are funded and essentially no longer incurs short-term borrowings to fund its mortgage loans. In April 2000, the Company issued $500 million of 8 1/2 % Senior Notes, due 2007. The Senior Notes are not redeemable prior to maturity. The net proceeds of this transaction were used to repay a portion of the initial short-term borrowings for the OLDE acquisition. In October 1997, the Company issued $250 million of 6 3/4% Senior Notes, due 2004. The Senior Notes are not redeemable prior to maturity. The net proceeds of this transaction were used to repay short-term borrowings which initially funded the acquisition of Option One. Long-term debt at April 30, 2001 was comprised of the $750 million of Senior Notes described above, future payments related to the acquisitions of RSM McGladrey and other accounting firms, capital lease obligations and mortgage notes. The current portion of long-term debt was $51.8 million, down from $68.0 million last year, due to payments made during fiscal 2001 with the remaining amount representing payments to be made during fiscal 2002 for accounting firm acquisitions, capital lease obligations and mortgage notes. Long-term debt decreased to $871.0 million from $872.4 million at April 30, 2000 due to obligations moving to current and fewer accounting firm acquisitions during the year. Stockholders' equity at April 30, 2001 and 2000 was $1.2 billion. The Company's debt to total equity ratio at April 30, 2001 was 44%, compared with 50% last year. Management anticipates a higher level of capital expenditures in 2002, exclusive of acquisitions, than in fiscal 2001. Capital expenditures are expected to increase to support the execution of the Company's strategy. The Company will continue to use short-term financing in the United States to finance various financial activities conducted by Block Financial Corporation and in Canada to finance the Canadian refund discount program. 32 ONE TO ONE | H&R BLOCK | 2001 13 In March 2000, the Company's Board of Directors approved a plan to repurchase up to 12 million shares of its common stock. At April 30, 2001, 7.2 million shares had been repurchased under this plan, with 6.8 million shares purchased during fiscal 2001. The Company plans to continue to purchase its shares on the open market in accordance with this authorization, subject to various factors including the price of the stock, the ability to maintain progress toward a financial and capital structure that will support a mid single A rating (Moody's - A2; Standard & Poors - A; and Fitch - A), the availability of excess cash, the ability to maintain liquidity and financial flexibility, securities laws restrictions and other investment opportunities available. OTHER ISSUES On June 20, 2001, the Company's Board of Directors declared a two-for-one split of its Common Stock in the form of a 100% stock distribution effective August 1, 2001, to shareholders of record as of the close of business on July 10, 2001. Unaudited proforma net earnings per share data is presented in the notes to consolidated financial statements. The Notes to Consolidated Financial Statements, as well as other information contained in this Annual Report to Shareholders may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based upon current information, expectations, estimates and projections regarding the Company, the 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 laws, legislation, regulations, supervision and licensing by Federal, state and local authorities and their impact on any lines of business in which the Company's subsidiaries are involved; unforeseen compliance costs; changes in economic, political or regulatory environments; changes in competition and the effects of such changes; the inability to implement the Company's strategies; changes in management and management strategies; the Company's inability to successfully design, create, modify and operate its computer systems and networks; new accounting standards; litigation involving the Company; the uncertainties of the extent of share repurchases and their effect on earnings per share; and risks described from time to time in reports and registration statements filed by the Company and its subsidiaries with the Securities and Exchange Commission. Readers should take these factors into account in evaluating any such forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ONE TO ONE | H&R BLOCK | 2001 33 14 CONSOLIDATED STATEMENTS OF EARNINGS Amounts in thousands, except per share amounts
Year Ended April 30 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------- REVENUES: Service revenues $ 2,441,448 $ 2,021,162 $ 1,335,177 Product sales 368,844 267,336 176,508 Royalties 149,683 138,903 124,323 Other 41,600 24,542 8,657 ------------------------------------------- 3,001,575 2,451,943 1,644,665 ------------------------------------------- EXPENSES: Employee compensation and benefits 1,192,294 963,536 610,866 Occupancy and equipment 283,181 253,171 182,701 Interest 242,551 155,027 69,338 Depreciation and amortization 205,608 147,218 74,605 Marketing and advertising 143,559 140,683 90,056 Supplies, freight and postage 70,440 64,599 57,157 Bad debt 84,422 51,719 71,662 Other 314,454 273,902 133,206 ------------------------------------------- 2,536,509 2,049,855 1,289,591 ------------------------------------------- Operating earnings 465,066 402,088 355,074 OTHER INCOME: Investment income, net 5,977 9,840 32,234 Other, net 2,035 338 (3,767) ------------------------------------------- 8,012 10,178 28,467 ------------------------------------------- Earnings from continuing operations before income taxes 473,078 412,266 383,541 Taxes on earnings 196,330 160,371 145,746 ------------------------------------------- NET EARNINGS FROM CONTINUING OPERATIONS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 276,748 251,895 237,795 Net loss from discontinued operations (less applicable income tax benefit of $953) - - (1,490) Net loss on sale of discontinued operations (less applicable income tax benefit of $13,387) - - (20,939) Cumulative effect of change in accounting principle for derivatives and hedging activities (less applicable income taxes of $2,717) 4,414 - - ------------------------------------------- NET EARNINGS $ 281,162 $ 251,895 $ 215,366 =========================================== BASIC NET EARNINGS PER SHARE: Net earnings from continuing operations $ 3.01 $ 2.57 $ 2.38 Net loss from discontinued operations - - (.22) Cumulative effect of change in accounting principle .05 - - ------------------------------------------- Net earnings $ 3.06 $ 2.57 $ 2.16 =========================================== DILUTED NET EARNINGS PER SHARE: Net earnings from continuing operations $ 2.99 $ 2.55 $ 2.36 Net loss from discontinued operations - - (.22) Cumulative effect of change in accounting principle .05 - - ------------------------------------------- Net earnings $ 3.04 $ 2.55 $ 2.14 ----------------------------------------------------------------------------===========================================
See notes to consolidated financial statements. 34 ONE TO ONE | H&R BLOCK | 2001 15 CONSOLIDATED BALANCE SHEETS Amounts in thousands, except share data
April 30 2001 2000 ------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 271,813 $ 379,901 Marketable securities - available-for-sale 8,266 16,966 Marketable securities - trading 46,158 45,403 Receivables from customers, brokers, dealers and clearing organizations, less allowance for doubtful accounts of $1,692 and $759 1,310,804 2,857,379 Receivables, less allowance for doubtful accounts of $47,125 and $49,602 373,223 434,722 Prepaid expenses and other current assets 260,942 145,741 ---------------------------- Total current assets 2,271,206 3,880,112 INVESTMENTS AND OTHER ASSETS: Investments in available-for-sale marketable securities 270,159 239,297 Excess of cost over fair value of net tangible assets acquired, less accumulated amortization of $231,697 and $130,305 1,051,826 1,095,074 Other 239,586 198,887 ---------------------------- 1,561,571 1,533,258 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization of $324,287 and $225,967 288,847 299,499 ---------------------------- $ 4,121,624 $ 5,712,869 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ - $ 283,797 Accounts payable to customers, brokers and dealers 1,058,000 2,570,200 Accounts payable, accrued expenses and deposits 361,210 222,362 Accrued salaries, wages and payroll taxes 221,830 173,333 Accrued taxes on earnings 295,599 216,298 Current portion of long-term debt 51,763 67,978 ---------------------------- Total current liabilities 1,988,402 3,533,968 LONG-TERM DEBT 870,974 872,396 OTHER NONCURRENT LIABILITIES 88,507 87,916 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, stated value $.01 per share, authorized 400,000,000 shares 1,089 1,089 Convertible preferred stock, no par, stated value $.01 per share, authorized 500,000 shares - - Additional paid-in capital 419,957 420,594 Accumulated other comprehensive income (loss) (42,767) (26,241) Retained earnings 1,450,112 1,277,324 ---------------------------- 1,828,391 1,672,766 Less cost of common stock in treasury 654,650 454,177 ---------------------------- 1,173,741 1,218,589 ---------------------------- $ 4,121,624 $ 5,712,869 ---------------------------------------------------------------------------------============================
See notes to consolidated financial statements. ONE TO ONE | H&R BLOCK | 2001 35 16 CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts in thousands
Year Ended April 30 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 281,162 $ 251,895 $ 215,366 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 205,608 147,218 74,605 Provision for bad debt 84,422 51,719 71,662 Accretion of acquisition liabilities 11,863 10,641 - Provision for deferred taxes on earnings (38,870) (29,286) 1,739 Net (gain) loss on sales of operating units (2,040) 14,501 20,939 Cumulative effect of change in accounting principle (4,414) - - Net gain on sales of available-for-sale securities (17,744) (11,697) (4,124) Changes in assets and liabilities, net of acquisitions: Receivables from customers, brokers, dealers and clearing organizations 1,544,640 (893,435) - Receivables (484,836) (409,690) 112,073 Mortgage loans held for sale: Originations and purchases (7,254,552) (5,967,895) (4,290,207) Sales and principal repayments 7,336,659 6,442,094 4,201,187 Marketable securities - trading (755) 6,899 - Prepaid expenses and other current assets (88,515) (52,551) (27,952) Accounts payable to customers, brokers and dealers (1,512,200) 868,012 - Accounts payable, accrued expenses and deposits 138,499 3,732 46,029 Accrued salaries, wages and payroll taxes 48,901 13,683 55,178 Accrued taxes on earnings 66,465 68,316 (260,458) Other, net (18,778) (23,578) 23,237 ------------------------------------------------ Net cash provided by operating activities 295,515 490,578 239,274 ------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (10,636) (14,281) (251,627) Maturities of available-for-sale securities 21,524 68,261 219,400 Sales of available-for-sale securities 356,192 211,836 522,252 Purchases of property and equipment, net (90,033) (141,856) (89,782) Payments made for business acquisitions, net of cash acquired (21,143) (971,802) (123,657) Proceeds from sale of subsidiary 23,200 - - Other, net (20,497) (6,505) (25,643) ------------------------------------------------ Net cash provided by (used in) investing activities 258,607 (854,347) 250,943 ------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (18,219,741) (50,800,661) (17,276,595) Proceeds from issuance of notes payable 17,935,944 51,012,519 16,593,978 Proceeds from issuance of long-term debt - 495,800 - Payments on acquisition debt (68,743) (4,730) - Dividends paid (108,374) (105,480) (95,004) Payments to acquire treasury shares (222,895) (50,654) (492,945) Proceeds from stock options exercised 19,550 36,958 73,481 Other, net 2,049 (33,322) (748) ------------------------------------------------ Net cash provided by (used in) financing activities (662,210) 550,430 (1,197,833) ------------------------------------------------ Net increase (decrease) in cash and cash equivalents (108,088) 186,661 (707,616) Cash and cash equivalents at beginning of the year 379,901 193,240 900,856 ------------------------------------------------ Cash and cash equivalents at end of the year $ 271,813 $ 379,901 $ 193,240 ================================================ SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 150,784 $ 122,447 $ 394,273 Interest paid 230,448 141,577 71,431 -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 36 ONE TO ONE | H&R BLOCK | 2001 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Amounts in thousands
Convertible Common Stock Preferred Stock Additional ------------------------ -------------------- Paid-in Retained Shares Amount Shares Amount Capital Earnings ------------------------------------------------------------------------------------------------------------------------- Balances at May 1, 1998 108,973 $ 1,089 2 $ - $ 432,335 $ 1,010,547 Net earnings for the year - - - - - 215,366 Unrealized loss on translation - - - - - - Change in net unrealized gain on marketable securities - - - - - - Comprehensive income - - - - - - Stock options exercised - - - - (12,042) - Restricted stock granted - - - - (81) - Stock issued for acquisition - - - - 807 - Conversion of Convertible Preferred Stock - - (2) - (361) - Acquisition of treasury shares - - - - - - Cash dividends paid - $.95 per share - - - - - (95,004) ----------------------------------------------------------------------------------- Balances at April 30, 1999 108,973 1,089 - - 420,658 1,130,909 Net earnings for the year - - - - - 251,895 Unrealized loss on translation - - - - - - Change in net unrealized gain on marketable securities - - - - - - Comprehensive income - - - - - - Stock options exercised - - - - (1,567) - Restricted stock granted - - - - 200 - Stock issued for acquisition - - - - 1,306 - Conversion of Convertible Preferred Stock - - - - (3) - Acquisition of treasury shares - - - - - - Cash dividends paid - $1.075 per share - - - - - (105,480) ----------------------------------------------------------------------------------- Balances at April 30, 2000 108,973 1,089 - - 420,594 1,277,324 Net earnings for the year - - - - - 281,162 Unrealized loss on translation - - - - - - Change in net unrealized gain on marketable securities - - - - - - Comprehensive income - - - - - - Stock options exercised - - - - (68) - Restricted stock granted - - - - (382) - Stock issued for ESPP - - - - (187) - Acquisition of treasury shares - - - - - - Cash dividends paid - $1.175 per share - - - - - (108,374) ----------------------------------------------------------------------------------- Balances at April 30, 2001 108,973 $ 1,089 - $ - $ 419,957 $ 1,450,112 --------------------------------------=================================================================================== Accumulated Treasury Stock Other -------------------------- Comprehensive Total Shares Amount Income (loss) Equity ------------------------------------------------------------------------------------------------- Balances at May 1, 1998 (1,992) $ (77,822) $ (24,517) $ 1,341,632 Net earnings for the year - - - - Unrealized loss on translation - - (1,525) - Change in net unrealized gain on marketable securities - - 2,642 - Comprehensive income - - - 216,483 Stock options exercised 2,175 90,462 - 78,420 Restricted stock granted 37 1,544 - 1,463 Stock issued for acquisition 268 11,053 - 11,860 Conversion of Convertible Preferred Stock 11 439 - 78 Acquisition of treasury shares (11,843) (492,945) - (492,945) Cash dividends paid - $.95 per share - - - (95,004) ------------------------------------------------------------ Balances at April 30, 1999 (11,344) (467,269) (23,400) 1,061,987 Net earnings for the year - - - - Unrealized loss on translation - - (2,647) - Change in net unrealized gain on marketable securities - - (194) - Comprehensive income - - - 249,054 Stock options exercised 1,023 42,268 - 40,701 Restricted stock granted 43 1,781 - 1,981 Stock issued for acquisition 475 19,694 - 21,000 Conversion of Convertible Preferred Stock 1 3 - - Acquisition of treasury shares (1,136) (50,654) - (50,654) Cash dividends paid - $1.075 per share - - - (105,480) ------------------------------------------------------------ Balances at April 30, 2000 (10,938) (454,177) (26,241) 1,218,589 Net earnings for the year - - - - Unrealized loss on translation - - (11,864) - Change in net unrealized gain on marketable securities - - (4,662) - Comprehensive income - - - 264,636 Stock options exercised 501 19,121 - 19,053 Restricted stock granted 57 2,252 - 1,870 Stock issued for ESPP 28 1,049 - 862 Acquisition of treasury shares (6,816) (222,895) - (222,895) Cash dividends paid - $1.175 per share - - - (108,374) ------------------------------------------------------------ Balances at April 30, 2001 (17,168) $ (654,650) $ (42,767) $ 1,173,741 -------------------------------------============================================================
See notes to consolidated financial statements. ONE TO ONE | H&R BLOCK | 2001 37 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in thousands, except share data SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: The operating subsidiaries of H&R Block, Inc. provide a variety of services to the general public, principally in the United States, but also in Canada, Australia and other foreign countries. Approximately $1,733,700, or 58% of total revenues for the year ended April 30, 2001 were generated from tax return preparation, electronic filing of tax returns and other tax-related services. Certain of these subsidiaries also originate, service, and sell nonconforming and conforming mortgages, offer investment services through broker-dealers, offer personal productivity software, participate in refund anticipation loan products offered by a third-party lending institution, and offer accounting, tax and consulting services to business clients. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of H&R Block, Inc. (the "Company"), all majority-owned subsidiaries and companies that are directly or indirectly controlled by the Company through majority ownership or otherwise. All material intercompany transactions and balances have been eliminated. Some of the Company's subsidiaries operate in regulated industries, and their underlying accounting records reflect the policies and requirements of these industries. RECLASSIFICATIONS: Certain reclassifications have been made to prior year amounts to conform with the current year presentation. MANAGEMENT ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand and due from banks and securities purchased under agreements to resell. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company's broker-dealers purchase securities under agreements to resell and account for them as collateralized financings. The securities are carried at the amounts at which the securities will be subsequently resold, as specified in the respective agreements. Collateral relating to investments in repurchase agreements is held by independent custodian banks. The securities are revalued daily and collateral added whenever necessary to bring market value of the underlying collateral equal to or greater than the repurchase specified in the contracts. MARKETABLE SECURITIES - AVAILABLE-FOR-SALE: Certain marketable debt and equity securities are classified as available-for-sale, based on management's intentions, and are carried at market value, based on quoted prices, with unrealized gains and losses included in other comprehensive income. Certain residual interests in securitizations of real estate mortgage investment conduits ("REMICs") and in net interest margin ("NIM") transactions are recorded as a result of the Company's securitization of mortgage loans through various special-purpose trust vehicles. These residual interests are classified as available-for-sale securities, and are carried at market value, based on discounted cash flow models, with unrealized gains and losses included in other comprehensive income. The residual interests are amortized over the estimated life of the related loan's cash flows. If losses are determined to be other-than-temporary, the residual is written down to fair value with the realized loss included in the consolidated statements of earnings. The cost of marketable securities sold is determined on the specific identification method and realized gains and losses are reflected in earnings. MARKETABLE SECURITIES - TRADING: Certain marketable debt and equity securities are classified as trading, and are held by the Company's broker-dealers. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" is not applicable to broker-dealers. These securities are carried at market value, based on quoted prices, with unrealized gains and losses included in earnings. Certain residual interests in securitizations of REMICs are classified as trading, based on management's intentions and criteria as established by the Company, and are carried at market value, based on discounted cash flow models, with unrealized gains and losses included in earnings. RECEIVABLES FROM CUSTOMERS, BROKERS, DEALERS AND CLEARING ORGANIZATIONS AND ACCOUNTS PAYABLE TO CUSTOMERS, BROKERS AND DEALERS: Customer receivables and payables consist primarily of amounts due on margin and cash transactions. These receivables are collateralized by customers' securities held, which are not reflected in the accompanying consolidated financial statements. Receivables from brokers are generally collected within 30 days and are collateralized by securities in physical possession of, or on deposit 38 ONE TO ONE | H&R BLOCK | 2001 19 with the Company or receivables from customers or other brokers. The allowance for doubtful accounts represents an amount considered by management to be adequate to cover potential losses. RECEIVABLES: Receivables consist primarily of business services accounts receivable and mortgage loans held for sale. Mortgage loans held for sale are carried at the lower of cost or market value. The allowance for doubtful accounts represents an amount considered by management to be adequate to cover potential losses. FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end of the year. Revenue and expense transactions are translated at the average of exchange rates in effect during the period. Translation gains and losses are recorded in other comprehensive income. EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED: The excess of cost of purchased subsidiaries, operating offices and franchises over the fair value of net tangible assets acquired is being amortized over a weighted average life of 14 years on a straight-line basis. At each balance sheet date, the Company assesses long-lived assets, including intangibles, for impairment by comparing the carrying value to future undiscounted cash flows. To the extent that there is impairment, analysis is performed based on several criteria, including, but not limited to, revenue trends, discounted operating cash flows and other operating factors to determine the impairment amount. In addition, a determination is made by management to ascertain whether goodwill has been impaired. Analysis is performed on an operating business unit basis using the fair value method. If the review indicates that goodwill is not recoverable, the Company would recognize an impairment loss. Under these methods, no material impairment adjustments to goodwill, other intangibles or other long-lived assets were made during fiscal year 2001, 2000, or 1999. MORTGAGE SERVICING RIGHTS: Mortgage servicing rights ("MSRs") are retained in the sale or securitization of mortgage loans and are recorded based on the present value of estimated future cash flows related to servicing loans. The MSRs are amortized to earnings in proportion to, and over the period of, estimated net future servicing income. MSRs are periodically reviewed for impairment. Impairment is assessed based on the fair value of each risk stratum. The Company stratifies MSRs using the following risk characteristics: loan sale date (which approximates date of origination); and loan type (6-month adjustable, 2 to 3-year adjustable and 30-year fixed). Fair values take into account the historical prepayment activity of the related loans and management's estimates of the remaining future cash flows to be generated by the underlying mortgage loans. When MSRs are reviewed, management makes an estimate of the future prepayment rates and other key variables of the underlying mortgage loans, and if actual performance proves to be worse than the estimate, impairment of MSRs could occur. At April 30, 2001 and 2000, impairment did not exist in any stratum. PROPERTY AND EQUIPMENT: Buildings and equipment are stated at cost and are depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are stated at cost and are amortized over the lesser of the term of the respective lease or the estimated useful life, using the straight-line method. Estimated useful lives are 15 to 40 years for buildings, 3 to 5 years for computers and other equipment and up to 8 years for leasehold improvements. The Company capitalizes certain costs associated with software developed or obtained for internal use. These costs are amortized over 36 months using the straight-line method. NOTES PAYABLE: The Company uses short-term borrowings to finance temporary liquidity needs and various financial activities conducted by its subsidiaries. There were no notes payable outstanding at April 30, 2001. The weighted average interest rate of notes payable at April 30, 2000 was 6.2%. REVENUE RECOGNITION: Service revenues consist primarily of fees for preparation of tax returns, participations in refund anticipation loans, consulting services, brokerage commissions and interest earned on customer accounts and mortgage loans. Generally, service revenues are recorded in the period in which service is performed. Commissions revenue is recognized on a trade-date basis. Revenues for services rendered in connection with the Company's Business services segment are recognized on a time and materials basis. Product sales consist primarily of gains on sales of mortgage loans. Gains on loan sales are recognized in accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," utilizing the financial-components approach which focuses on control of assets and liabilities being transferred. The Company records franchise royalties, based upon the contractual percentages of franchise revenues, in the period in which the franchise provides the service. ONE TO ONE | H&R BLOCK | 2001 39 20 ADVERTISING EXPENSE: The Company expenses advertising costs the first time the advertising takes place. TAXES ON EARNINGS: The Company and its subsidiaries file a consolidated Federal income tax return on a calendar year basis. Therefore, the current liability for taxes on earnings recorded in the balance sheet at each year-end consists principally of taxes on earnings for the period January 1 to April 30 of the respective year. Deferred taxes are provided for temporary differences between financial and tax reporting, which consist principally of residual interests, accrued expenses, deferred compensation, mortgage servicing rights and allowances for credit losses. The Company has a Tax Sharing Agreement with its former subsidiary, CompuServe Corporation ("CompuServe"), pursuant to which CompuServe generally is obligated to pay the Company (or the Company is obligated to pay CompuServe) for CompuServe's liability (or tax benefits) related to Federal, state, and local income taxes for any taxable period during which CompuServe was a subsidiary of the Company. DISCLOSURE REGARDING CERTAIN FINANCIAL INSTRUMENTS: The carrying values reported in the balance sheet for cash equivalents, all receivables, notes payable, all accounts payable, accrued liabilities and the current portion of long-term debt approximate fair market value due to the relatively short-term nature of the respective instruments. STOCK COMPENSATION PLANS: The Company accounts for its stock compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). NEW ACCOUNTING STANDARDS: In the fourth quarter of fiscal 2001, the Company elected the early adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 2000 ("SFAS 133") and Statement of Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 138"). SFAS 133 and 138 establish accounting and reporting standards for derivative and hedging activities, and requires companies to record derivative instruments as assets or liabilities, measured at fair value. The recognition of gains or losses resulting from changes in the values of those derivative instruments is based on the use of each derivative instrument and whether it qualifies for hedge accounting. The Company has identified derivative instruments related to certain of its commitments to originate residential mortgage loans. The Company had no embedded derivative instruments requiring separate accounting treatment. The Company originates residential mortgage loans with the intention of selling these loans. These commitments to fund loans are freestanding derivative instruments and do not qualify for hedge accounting treatment and, therefore, the fair value adjustments are recorded in the consolidated statement of earnings. The commitments that qualify as derivative instruments totaled $252,593. The transition adjustment for adoption of SFAS 133 and SFAS 138 of $4,414, net of taxes, is shown as the cumulative effect of a change in accounting principle in the consolidated statement of earnings for the year ended April 30, 2001. Proforma effects are not disclosed as the change affects only the current period. Currently, there are ongoing discussions surrounding the implementation and interpretation of SFAS 133 by the Financial Accounting Standards Board's Derivative Implementation Group. If the definition of derivative instruments is altered, this change may impact the Company's transition adjustment amounts and subsequent reported operating results. In December 1999, the Securities and Exchange Commission ("SEC") issued SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company implemented SAB 101 in the fourth quarter of fiscal 2001. The implementation of SAB 101 has no impact on annual revenues and earnings, however, due to the seasonal influences of the business, the implementation resulted in a shift of revenues and earnings between the Company's third and fourth quarters. As a result, the Company has adjusted its third quarter of fiscal year 2001. Except for the Quarterly Financial Data, the Company has not presented pro forma results. In fiscal year 2001, the Company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. SFAS 140 is a replacement of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain 40 ONE TO ONE | H&R BLOCK | 2001 21 new disclosures, but carries over most of the SFAS 125 provisions without reconsideration. The adoption of SFAS 140 had no effect on the consolidated financial statements. In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"), and subsequently clarified its consensus in September 2000, November 2000 and January 2001. EITF 99-20 addresses how the holder of beneficial interests should recognize cash flows on the date of the transaction and how interest income is recognized over the life of the interests. EITF 99-20 will be effective for the Company in the first quarter of fiscal year 2002. The Company has not yet determined the effect of EITF 99-20 on the consolidated financial statements. NET EARNINGS PER SHARE Basic net earnings per share is computed using the weighted average number of common shares outstanding. The dilutive effect of potential common shares outstanding is included in diluted net earnings per share. The computations of basic and diluted net earnings per share from continuing operations are as follows (shares in thousands):
Year Ended April 30 2001 2000 1999 -------------------------------------------------------------------------------------------- Net earnings from continuing operations before change in accounting principle $276,748 $251,895 $237,795 ---------------------------------- Basic weighted average shares 91,947 98,033 99,761 Effect of dilutive securities: Common and convertible preferred stock options 620 895 1,058 Convertible preferred stock 1 1 2 ---------------------------------- Dilutive potential common shares 92,568 98,929 100,821 ================================== Net earnings per share from continuing operations: Basic $ 3.01 $ 2.57 $ 2.38 Diluted 2.99 2.55 2.36 --------------------------------------------------------------------------------------------
Diluted net earnings per share excludes the impact of weighted average shares issuable upon the exercise of stock options of 6,953,301, 3,039,195 and 149,370 shares for 2001, 2000 and 1999, respectively, because the options' exercise prices were greater than the average market price of the common shares and therefore, the effect would be antidilutive. CASH AND CASH EQUIVALENTS Cash and cash equivalents is comprised of the following:
April 30 2001 2000 ------------------------------------------------------------------------------- Cash and interest-bearing deposits $218,876 $162,363 Other interest-bearing securities 42,007 183,144 Securities purchased under agreements to resell 9,000 32,000 Certificates of deposit 1,930 2,394 --------------------- $271,813 $379,901 ----------------------------------------------------------=====================
ONE TO ONE | H&R BLOCK | 2001 41 22 MARKETABLE SECURITIES - AVAILABLE-FOR-SALE The amortized cost and market value of marketable securities classified as available-for-sale at April 30, 2001 and 2000 are summarized below:
2001 2000 --------------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------------------------------------------------------------- Current: Municipal bonds and notes $ 8,260 $ 6 $ - $ 8,266 $ 17,021 $ - $ 55 $ 16,966 ------------------------------------------------------------------------------------------------- 8,260 6 - 8,266 17,021 - 55 16,966 ------------------------------------------------------------------------------------------------- Noncurrent: Residual interests 243,840 7,571 12,811 238,600 182,629 4,486 1,169 185,946 Municipal bonds 26,654 352 58 26,948 49,566 2 645 48,923 Common stock 4,946 500 835 4,611 4,025 571 168 4,428 ------------------------------------------------------------------------------------------------- 275,440 8,423 13,704 270,159 236,220 5,059 1,982 239,297 ------------------------------------------------------------------------------------------------- $ 283,700 $ 8,429 $ 13,704 $ 278,425 $ 253,241 $ 5,059 $ 2,037 $ 256,263 --------------------------------=================================================================================================
Proceeds from the sales of available-for-sale securities were $356,192, $211,836 and $522,252 during 2001, 2000 and 1999, respectively. Gross realized gains on those sales during 2001, 2000 and 1999 were $17,936, $12,177 and $4,711, respectively; gross realized losses were $192, $480 and $587, respectively. Contractual maturities of available-for-sale debt securities at April 30, 2001 are presented below. Since expected maturities differ from contractual maturities due to the issuers' rights to prepay certain obligations or the seller's rights to call certain obligations, the first call date, put date or auction date for municipal bonds and notes is considered the contractual maturity date.
Amortized Market Cost Value ------------------------------------------------------------------------------ Within one year $ 8,260 $ 8,266 After one year through five years 15,294 15,404 After five years through 10 years 11,360 11,544 ---------------------- $ 34,914 $ 35,214 --------------------------------------------------------======================
RETAINED INTERESTS Beginning in April 2000, the Company entered into off-balance sheet arrangements under which the Company originates mortgage loans and sells the mortgage loans the same day the loans are funded in a whole-loan sale to a third-party trust. Under these arrangements, the Company retains a receivable from the trust that is then pledged to a qualified special purpose entity who securitizes the related mortgage loans. The Company then retains a residual interest in these securitized loans that is classified as either an available-for-sale security or a trading security depending on certain criteria as established by the Company. The Company then securitizes these residual interests in net interest margin ("NIM") transactions. The Company securitized $380,267 of these residual interests in NIM transactions. The receivable from the whole-loan sales of $66,587 and the pledge of this receivable of $14,206, were treated as a noncash investing activities in the consolidated statement of cash flows for the year ended April 30, 2001. The Company received proceeds from NIM securitizations of $319,620, servicing fees of $214 and cash flows from interest-only strips of $2,127 from the securitization trusts in fiscal 2001. In connection with these off-balance sheet arrangements, the Company entered into forward loan sale commitments whereby the Company was obligated to sell, during fiscal 2001, a minimum of $2,000,000 and a maximum of $6,000,000 in mortgage loans. There was no commitment fee and the commitments are renewable annually. For fiscal 2002, the forward loan sale commitments were not renewed. The Company securitized $3,767,010 in mortgage loans during the year ended April 30, 2000, resulting in residual interests with an allocated 42 ONE TO ONE | H&R BLOCK | 2001 23 carrying value if $245,801. The Company securitized $248,555 of residual interests through NIM transactions. The remaining residual interests from the securitizations during 2000 of $28,042 were treated as noncash investing activities in the consolidated statement of cash flows for the year ended April 30, 2000. Included in investments in available-for-sale marketable securities as of April 30, 2001 and April 30, 2000 are residual interests in securitizations. The Company estimates future cash flows from these residuals and values them utilizing assumptions that it believes are consistent with those that would be utilized by an unaffiliated third-party purchaser. The fair value of residuals are determined by computing the present value of the excess of the weighted average coupon on the loans sold over the sum of (1) the coupon on the senior interests, (2) a base servicing fee paid to the servicer of the loans (which is usually the Company), (3) expected losses to be incurred on the portfolio of the loans sold (as projected to occur) over the lives of the loans, (4) fees payable to the trustee and insurer, (5) estimated collections of prepayment penalty fees, and (6) other fees. Prepayment and loss assumptions used in estimating the cash flows are based on evaluation of the actual experience of the Company's servicing portfolio or on market rates on new portfolios, taking into consideration the current and expected interest rate environment and its expected impact on future prepayment and default rates. The estimated cash flows expected to be received by the Company are discounted at an interest rate the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. To the extent that actual future excess cash flows are different from estimated excess cash flows, the fair value of the Company's residual could increase or decrease. Mortgage servicing rights are included in other assets on the consolidated balance sheet. Assumptions used in estimating the value of MSRs includes market discount rates and anticipated prepayment speeds. The prepayment speeds are estimated using the Company's historical experience and third party market sources for fixed-rated mortgages with similar coupons and prepayment reports for comparable adjustable rate mortgage loans. The key assumptions the Company utilizes to estimate the cash flows of the residual interests and MSRs are as follows:
--------------------------------------------------------- Estimated annual prepayments 23% to 75% Estimated annual credit losses .5% to 3.5% Discount rate - residual interests 12% to 20% Discount rate - MSRs 12.8% ---------------------------------------------------------
The fair value of the residuals at April 30, 2001 and April 30, 2000 were $238,600 and $185,946, respectively. The fair value of MSRs at April 30, 2001 and April 30, 2000 were $61,796 and $42,282, respectively. Additions to and amortization of MSRs for 2001 were $37,661 and $18,147, respectively. At April 30, 2001, the sensitivity of the current fair value of the residuals and MSRs to 10% and 20% adverse changes in the above key assumptions are as follows:
-------------------------------------------------------------------------------------------------- Residential Mortgage Loans Fixed-Rate Adjustable NIMs Servicing Assets ------------------------------------------------------ Carrying amount/fair value $ 31,635 $ 46,843 $ 160,122 $ 61,796 Weighted average life (in years) 7.8 5.5 3.9 2.5 Annual prepayments: Adverse 10% - $ impact on fair value $ (1,026) $ (1,350) $ (21,911) $ (6,916) Adverse 20% - $ impact on fair value (1,824) (2,326) (37,947) (15,172) Annual credit losses: Adverse 10% - $ impact on fair value $ (686) $ (792) $ (19,168) Not applicable Adverse 20% - $ impact on fair value (1,451) (1,508) (37,004) Not applicable Discount rate: Adverse 10% - $ impact on fair value $ (1,052) $ (1,703) $ (7,603) $ (1,422) Adverse 20% - $ impact on fair value (2,039) (3,314) (14,749) (2,776) Variable interest rates: Adverse 10% - $ impact on fair value $ (127) $ 22 $ (43,838) $ (6) Adverse 20% - $ impact on fair value (114) (8) (85,925) (12) --------------------------------------------------------------------------------------------------
ONE TO ONE | H&R BLOCK | 2001 43 24 These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in this table, the effect of a variation of a particular assumption on the fair value of the retained interest is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. RECEIVABLES Receivables consist of the following:
April 30 2001 2000 ------------------------------------------------------------------------------ Business services accounts receivable $ 188,041 $ 148,109 Mortgage loans held for sale 80,925 163,033 Participation in refund anticipation loans 38,824 47,581 Software receivables 33,456 31,721 Loans to franchises 28,716 24,888 Other 50,386 68,992 ----------------------- 420,348 484,324 Allowance for doubtful accounts 47,125 49,602 ----------------------- $ 373,223 $ 434,722 -------------------------------------------------------=======================
EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE ASSETS ACQUIRED Excess of cost over fair value of net tangible assets acquired consists of the following:
April 30 2001 2000 ------------------------------------------------------------------------------ Goodwill $ 667,608 $ 636,350 Customer relationships 397,049 387,775 Assembled workforce 116,312 104,044 Trade names 55,638 55,638 Management infrastructure 29,147 29,147 Noncompete agreements 17,769 12,425 ----------------------- 1,283,523 1,225,379 Less accumulated amortization 231,697 130,305 ----------------------- $1,051,826 $1,095,074 -------------------------------------------------------=======================
Amortization expense for 2001, 2000 and 1999 amounted to $104,276, $66,346, and $24,378, respectively. PROPERTY AND EQUIPMENT A summary of property and equipment follows:
April 30 2001 2000 ------------------------------------------------------------------------------ Land $ 42,420 $ 42,338 Buildings 83,855 74,260 Computers and other equipment 338,271 290,386 Capitalized software 67,636 50,655 Leasehold improvements 80,952 67,827 ----------------------- 613,134 525,466 Less accumulated depreciation and amortization 324,287 225,967 ----------------------- $ 288,847 $ 299,499 -------------------------------------------------------=======================
44 ONE TO ONE | H&R BLOCK | 2001 25 Depreciation and amortization expense for 2001, 2000 and 1999 amounted to $101,332, $80,872 and $50,227, respectively. The Company has property and equipment with a cost of $45,913 under capital lease. The Company has an agreement to lease real estate and buildings under a noncancelable capital lease for the next 19 years with an option to purchase after six years. The real estate, building and long-term debt of $14,075 related to this lease was treated as a noncash investing activity on the consolidated statement of cash flows for the year ended on April 30, 2000. LONG-TERM DEBT On April 13, 2000, the Company issued $500,000 of 8 1/2 % Senior Notes under a shelf registration statement. The Senior Notes are due April 15, 2007, and are not redeemable prior to maturity. The net proceeds of this transaction were used to repay a portion of the short-term borrowings which initially funded the acquisition of OLDE Financial Corporation and Financial Marketing Services, Inc. (collectively, "OLDE"). On October 21, 1997, the Company issued $250,000 of 6 3/4 % Senior Notes under a shelf registration statement. The Senior Notes are due November 1, 2004, and are not redeemable prior to maturity. The net proceeds of this transaction were used to repay short-term borrowings which initially funded the acquisition of Option One Mortgage Corporation ("Option One"). The Company had obligations related to acquisitions of accounting firms of $154,110 and $169,103 at April 30, 2001 and 2000, respectively. The current portion of these amounts is included in the current portion of long-term debt on the consolidated balance sheet. The long-term portions are due from August 2002 to January 2006. The Company had mortgage notes and capitalized lease obligations of $22,377 at April 30, 2001 that are collateralized by land, buildings and equipment. The obligations are due at varying dates for up to 19 years. The aggregate payments required to retire long-term debt are $51,763, $44,470, $40,360, $265,788, $12,361 and $507,995 in 2002, 2003, 2004, 2005, 2006 and beyond, respectively. Based upon borrowing rates currently available to the Company for indebtedness with similar terms, the fair value of the long-term debt was approximately $907,115 and $896,894 at April 30, 2001 and 2000, respectively. OTHER NONCURRENT LIABILITIES The Company has deferred compensation plans which permit directors and certain employees to defer portions of their compensation and accrue earnings on the deferred amounts. The compensation, together with Company matching of deferred amounts, has been accrued, and the only expenses related to these plans are the Company match and the earnings on the deferred amounts which are not material to the financial statements. Included in other noncurrent liabilities are $44,490 and $39,862 at April 30, 2001 and 2000, respectively, to reflect the liability under these plans. The Company purchases whole-life insurance contracts on certain related directors and employees to recover distributions made or to be made under the plans and records the cash surrender value of the policies in other assets. If all the assumptions regarding mortality, earnings, policy dividends and other factors are realized, the Company will ultimately realize its investment plus a factor for the use of its money. In connection with the Company's acquisition of the non-attest assets of McGladrey & Pullen, LLP ("McGladrey") in August 1999, the Company assumed certain pension liabilities related to McGladrey's retired partners. The Company makes payments in varying amounts on a monthly basis. Included in other noncurrent liabilities at April 30, 2001 and 2000 are $31,360 and $36,128, respectively, related to this liability. STOCKHOLDERS' EQUITY The Company is authorized to issue 6,000,000 shares of Preferred Stock, without par value. At April 30, 2001, the Company had 5,560,833 shares of authorized but unissued Preferred Stock. Of the unissued shares, 600,000 shares have been designated as Participating Preferred Stock in connection with the Company's shareholder rights plan. On March 8, 1995, the Board of Directors authorized the issuance of a series of 500,000 shares of nonvoting Preferred Stock designated as Convertible Preferred Stock, without par value. In April 1995, 401,768 shares of Convertible Preferred Stock were issued in connection with an acquisition. In addition, options to purchase 51,828 shares of Convertible Preferred Stock were issued as a part of the acquisition and 37,399 shares of Convertible Preferred Stock were issued in connection with these options. Each share of Convertible Preferred Stock became convertible on April 5, 1998 into four shares of Common Stock of the Company, subject to adjustment upon certain events. The holders of the Convertible ONE TO ONE | H&R BLOCK | 2001 45 26 Preferred Stock are not entitled to receive dividends paid in cash, property or securities and, in the event of any dissolution, liquidation or winding-up of the Company, will share ratably with the holders of Common Stock then outstanding in the assets of the Company after any distribution or payments are made to the holders of Participating Preferred Stock or the holders of any other class or series of stock of the Company with preference over the Common Stock. COMPREHENSIVE INCOME The Company's comprehensive income is comprised of net earnings, foreign currency translation adjustments and the change in the net unrealized gain or loss on available-for-sale marketable securities. Included in stockholders' equity at April 30, 2001 and 2000, the net unrealized holding gain (loss) on available-for-sale securities was $(2,088) and $2,574, respectively, and the foreign currency translation adjustment was $(40,679) and $(28,815), respectively.
Year Ended April 30 2001 2000 1999 -------------------------------------------------------------------------------------------------------- Net earnings $ 281,162 $ 251,895 $ 215,366 Unrealized gains on securities (less applicable taxes (benefit) of ($3,307), ($124) and $1,619): Unrealized holding gains (losses) arising during period (less applicable taxes of $4,057, $4,426, and $3,186) 5,718 6,953 5,199 Less: Reclassification adjustment for gains included in earnings (less applicable taxes of $7,364, $4,550, and $1,567) (10,380) (7,147) (2,557) Foreign currency translation adjustments (11,864) (2,647) (1,525) ----------------------------------- Comprehensive income $ 264,636 $ 249,054 $ 216,483 ---------------------------------------------------------------------===================================
STOCK COMPENSATION PLANS The Company has four stock compensation plans: the 1993 Long-Term Executive Compensation Plan, the 1989 Stock Option Plan for Outside Directors, the 1999 Stock Option Plan for Seasonal Employees, and the 2000 Employee Stock Purchase Plan ("ESPP"). The 1993 plan was approved by the shareholders in September 1993 to replace the 1984 Long-Term Executive Compensation Plan, which terminated at that time except with respect to outstanding awards thereunder. Under the 1993 and 1989 plans, options may be granted to selected employees and outside directors to purchase the Company's Common Stock for periods not exceeding 10 years at a price that is not less than 100% of fair market value on the date of the grant. The options are exercisable either (1) starting one year after the date of the grant, (2) starting one year or three years after the date of the grant on a cumulative basis at the annual rate of 33 1/3% of the total number of option shares, or (3) starting three years after the date of the grant on a cumulative basis at the rate of 40%, 30%, and 30% over the following three years. In addition, certain option grants have accelerated vesting provisions based on the Company's stock price reaching specified levels. The 1999 Stock Option Plan for Seasonal Employees provided for the grant of options on June 30, 2000, 1999 and 1998 at the market price on the date of the grant. The options are exercisable during September through November in each of the two years following the calendar year of the grant. Changes during the years ended April 30, 2001, 2000 and 1999 under the stock option plans were as follows:
2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------- Options outstanding, beginning of year 8,440,614 $ 44.22 5,726,494 $ 38.03 5,110,392 $ 32.71 Options granted 4,305,517 32.51 5,059,802 50.16 4,127,742 42.20 Options exercised (510,458) 34.07 (1,032,251) 36.12 (2,196,673) 32.67 Options which expired (2,781,642) 39.55 (1,313,431) 46.50 (1,314,967) 39.40 Options outstanding, end of year 9,454,031 40.80 8,440,614 44.22 5,726,494 38.03 Shares exercisable, end of year 4,336,857 42.33 5,206,457 42.70 3,505,737 37.62 Shares reserved for future grants, end of year 8,055,518 11,037,281 2,966,135 ----------------------------------------------------------------------------------------------------------------------------
46 ONE TO ONE | H&R BLOCK | 2001 27 A summary of stock options outstanding and exercisable at April 30, 2001 follows:
------------------------------------------------------------------------------------------------------------ Outstanding Exercisable ----------------------------------------------- ---------------------------- Number Weighted-Average Weighted- Number Weighted- Outstanding Remaining Average Exercisable Average Range of Exercise Prices at April 30 Contractual Life Exercise Price at April 30 Exercise Price ------------------------------------------------------------------------------------------------------------ $19.9375 - 28.75 265,684 6 years $ 27.62 265,684 $ 27.62 $30.6875 - 36.875 4,102,382 6 years 32.49 1,145,905 32.57 $37.00 - 44.625 1,508,298 8 years 41.92 869,267 41.62 $45.00 - 52.00 2,998,667 4 years 49.92 2,056,001 49.97 $55.0625 - 55.625 579,000 9 years 55.62 - - ------------------------------------------------------------------------------ 9,454,031 4,336,857 ------------------------------==============================================================================
The 2000 ESPP provides the option to purchase shares of the Company's Common Stock through payroll deductions to a majority of the employees of subsidiaries of the Company. The purchase price of the stock is 90% of the lower of either the fair market value of the Company's Common Stock on the first trading day within the Option Period or on the last trading day within the Option Period. The Option Periods are six-month periods beginning January 1 and July 1 each year. During fiscal 2001, 27,345 shares were purchased under the ESPP out of a total authorized 3,000,000 shares. The Company applies APB 25 in accounting for its stock compensation plans, under which no compensation cost has been recognized. Had compensation cost for the stock compensation plans been determined in accordance with the fair value accounting method prescribed under SFAS 123, the Company's net earnings and net earnings per share would have been as follows:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------ Net earnings: As reported $ 281,162 $ 251,895 $ 215,366 Pro forma 262,701 237,544 202,421 Basic net earnings per share: As reported $ 3.06 $ 2.57 $ 2.16 Pro forma 2.86 2.42 2.03 Diluted net earnings per share: As reported $ 3.04 $ 2.55 $ 2.14 Pro forma 2.85 2.41 2.01 ------------------------------------------------------------------------------
For the purposes of computing the pro forma effects of stock compensation plans under the fair value accounting method, the fair value of each stock option grant or purchase right grant was estimated on the date of the grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $9.34, $9.09 and $5.84, respectively. The weighted-average fair value of purchase rights granted during 2001 was $4.58, using the following weighted-average assumptions: expected life of four months, volatility of 26.37%, dividend yield of 3.38% and risk-free interest rate of 6.05%. The following weighted-average assumptions were used for stock option grants during the following periods:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------- Risk-free interest rate 6.25% 5.75% 5.41% Expected life 3 years 3 years 3 years Expected volatility 61.21% 30.67% 21.86% Dividend yield 3.39% 2.20% 2.36% -------------------------------------------------------------------------------
ONE TO ONE | H&R BLOCK | 2001 47 28 SHAREHOLDER RIGHTS PLAN On July 25, 1998, the rights under the July 1988 shareholder rights plan, as amended, expired and the rights under a shareholder rights plan adopted by the Company's Board of Directors on March 25, 1998 became effective. Like the 1988 plan, the 1998 plan was adopted to deter coercive or unfair takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. Under the 1998 plan, a dividend of one right (a "Right") per share was declared and paid on each share of the Company's Common Stock outstanding on July 25, 1998. Rights automatically attach to shares issued after such date. Under the 1998 plan, a Right becomes exercisable when a person or group of persons acquires beneficial ownership of 15% or more of the outstanding shares of the Company's Common Stock without the prior written approval of the Company's Board of Directors (an "Unapproved Stock Acquisition"), and at the close of business on the tenth business day following the commencement of, or the public announcement of an intent to commence, a tender offer that would result in an Unapproved Stock Acquisition. The Company may, prior to any Unapproved Stock Acquisition, amend the plan to lower such 15% threshold to not less than the greater of (1) any percentage greater than the largest percentage of beneficial ownership by any person or group of persons then known by the Company, and (2) 10% (in which case the acquisition of such lower percentage of beneficial ownership then constitutes an Unapproved Stock Acquisition and the Rights become exercisable). As adjusted in connection with the two-for-one stock split effective on August 1, 2001, when exercisable, the registered holder of each Right may purchase from the Company one two-hundredth of a share of a class of the Company's Participating Preferred Stock, without par value, at a price of $107.50, subject to adjustment. The registered holder of each Right then also has the right (the "Subscription Right") to purchase for the exercise price of the Right, in lieu of shares of Participating Preferred Stock, a number of shares of the Company's Common Stock having a market value equal to twice the exercise price of the Right. Following an Unapproved Stock Acquisition, if the Company is involved in a merger, or 50% or more of the Company's assets or earning power are sold, the registered holder of each Right has the right (the "Merger Right") to purchase for the exercise price of the Right a number of shares of the common stock of the surviving or purchasing company having a market value equal to twice the exercise price of the Right. After an Unapproved Stock Acquisition, but before any person or group of persons acquires 50% or more of the outstanding shares of the Company's Common Stock, the Board of Directors may exchange all or part of the then outstanding and exercisable Rights for Common Stock at an exchange ratio of one share of Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of any holder to exercise a Right terminates. Upon the occurrence of any of the events giving rise to the exercisability of the Subscription Right or the Merger Right or the ability of the Board of Directors to effect the Exchange, the Rights held by the acquiring person or group under the new plan will become void as they relate to the Subscription Right, the Merger Right or the Exchange. The Company may redeem the Rights under the 1998 plan at a price of $.000625 per Right at any time prior to the earlier of (i) an Unapproved Stock Acquisition, or (ii) the expiration of the rights. The Rights under the new plan will expire on March 25, 2008, unless extended by the Board of Directors. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including the right to vote or to receive dividends. The issuance of the Rights alone has no dilutive effect and does not affect reported net earnings per share. OTHER EXPENSES Included in other expenses are the following:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------ Legal and professional $ 76,232 $ 47,934 $ 13,164 Purchased services 55,985 33,347 19,466 Loan servicing 29,396 15,821 11,158 Refund anticipation loan servicing fees 27,315 28,820 15,028 Travel and entertainment 26,668 26,695 15,094 Taxes and licenses 13,250 17,469 14,531 Brokerage commissions and trading fees 11,516 15,639 3,137 ------------------------------------------------------------------------------
48 ONE TO ONE | H&R BLOCK | 2001 29 TAXES ON EARNINGS The components of earnings from continuing operations before income taxes upon which Federal and foreign income taxes have been provided are as follows:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------ United States $ 466,437 $ 408,024 $ 381,443 Foreign 6,641 4,242 2,098 ----------------------------------- $ 473,078 $ 412,266 $ 383,541 -------------------------------------------===================================
Deferred income tax provisions (benefits) reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The current and deferred components of taxes on earnings from continuing operations are comprised of the following:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------ Current: Federal $ 204,060 $ 163,535 $ 123,035 State 27,701 23,036 16,128 Foreign 3,439 3,898 1,553 ----------------------------------- 235,200 190,469 140,716 ----------------------------------- Deferred: Federal (33,724) (24,412) 5,114 State (4,578) (3,438) 670 Foreign (568) (2,248) (754) ----------------------------------- (38,870) (30,098) 5,030 ----------------------------------- $ 196,330 $ 160,371 $ 145,746 -------------------------------------------===================================
Provision is not made for possible income taxes payable upon distribution of unremitted earnings of foreign subsidiaries. Such unremitted earnings aggregated $65,229 at December 31, 2000. Management intends to reinvest any foreign earnings, therefore, a provision has not been made for income taxes payable upon remittance of such earnings, as management believes the amount would be immaterial. The following table reconciles the U.S. Federal income tax rate to the Company's effective tax rate:
Year Ended April 30 2001 2000 1999 ------------------------------------------------------------------------------ Statutory rate 35.0% 35.0% 35.0% ----------------------------------- Increases (reductions) in income taxes resulting from: State income taxes, net of Federal income tax benefit 3.2% 3.1% 2.9% Foreign income taxes, net of Federal income tax benefit 0.1% 0.1% 0.2% Amortization of intangibles 3.6% 2.6% 0.3% Nontaxable Federal income (0.3%) (0.3%) (0.7%) Other (0.1%) (1.6%) 0.3% ----------------------------------- Effective rate 41.5% 38.9% 38.0% -------------------------------------------===================================
ONE TO ONE | H&R BLOCK | 2001 49 30 A summary of deferred taxes follows:
April 30 2001 2000 ----------------------------------------------------------------- Gross deferred tax assets: Accrued expenses $ (31,923) $ (17,729) Allowance for credit losses (18,406) (8,800) ----------------------- Current (50,329) (26,529) ----------------------- Residual interest income (42,048) (22,193) Deferred compensation (20,439) (18,509) Depreciation (8,128) (12,879) Amortization of intangibles (3,258) - ----------------------- Noncurrent (73,873) (53,581) ----------------------- Gross deferred tax liabilities: Mark-to-market adjustments 3,886 8,437 Accrued income 964 198 ----------------------- Current 4,850 8,635 ----------------------- Mortgage servicing rights 22,944 12,608 Depreciation - 1,329 ----------------------- Noncurrent 22,944 13,937 ----------------------- Net deferred tax assets $ (96,408) $ (57,538) ------------------------------------------=======================
ACQUISITIONS During fiscal year 2001, the Company acquired several accounting firms. The purchased prices aggregated $54,443. Each acquisition was accounted for as a purchase and, accordingly, results for each acquisition are included since the date of acquisition. The excess of cost over fair value of net tangible assets acquired was $54,322 and is being amortized on a straight-line basis over periods up to 20 years. On December 1, 1999, the Company completed the purchase of all the issued and outstanding shares of capital stock of OLDE for $850,000 in cash plus net tangible book value payments of $48,472. The purchase agreement also provides for possible future consideration payable for up to five years after the acquisition based upon revenues generated from certain online brokerage services and such consideration will be treated as purchase price when paid. The transaction was accounted for as a purchase and, accordingly, OLDE's results are included since the date of acquisition. Liabilities assumed of $1,774,156 were treated as a noncash investing activity in the consolidated statement of cash flows for the year ended April 30, 2000. The excess of cost over fair value of net tangible assets acquired was $471,133 at April 30, 2000. Such is being amortized on a straight-line basis over periods up to 20 years. The acquisition was initially financed with short-term borrowings and a portion of these borrowings were repaid with the issuance of $500,000 in Senior Notes in the fourth quarter of fiscal 2000. The following unaudited pro forma summary combines the consolidated results of operations of the Company and OLDE as if the acquisition had occurred on May 1, 1999 and 1998, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt and the related income tax effects. The pro forma information is presented for informational purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of those dates. In addition, the pro forma information is not intended to be a projection of future results.
April 30 (unaudited) 2000 1999 ----------------------------------------------------------------- Revenues $2,678,022 $ 2,007,422 Net earnings 218,275 172,566 Basic net earnings per share $ 2.23 $ 1.73 Diluted net earnings per share 2.21 1.71 -----------------------------------------------------------------
50 ONE TO ONE | H&R BLOCK | 2001 31 On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. ("RSM McGladrey"), completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP. The purchase price was $240,000 in cash payments over four years and the assumption of certain pension liabilities with a present value, at the date of acquisition, of $52,728. The purchase agreement also provides for possible future contingent consideration based on a calculation of earnings in year two, three and four after the acquisition and such consideration will be treated as purchase price when paid. In addition, the Company made cash payments of $65,453 for outstanding accounts receivable and work-in-process that have been repaid to the Company as RSM McGladrey collected these amounts in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, RSM McGladrey's results are included since the date of acquisition. The present value of the additional cash payments due over four years, the present value of the pension liability and other liabilities assumed of $206,784, were treated as noncash investing activities in the consolidated statement of cash flows for the year ended April 30, 2000. The excess of cost over the fair value of net tangible assets acquired was $242,266 and is being amortized on a straight-line basis over periods up to 20 years. During fiscal year 2000, the Company acquired several accounting firms. The purchase prices aggregated $18,494. Each acquisition was accounted for as a purchase and, accordingly, results for each acquisition are included since the date of acquisition. The excess of cost over fair value of net tangible assets acquired was $17,914 and is being amortized on a straight-line basis over periods up to 20 years. On October 7, 1999, the Company acquired one of its major tax franchises. The Company issued 475,443 shares of its common stock from treasury, with a value of $21,000, for the purchase. The acquisition was accounted for as a purchase and, accordingly, its results are included since the date of acquisition. The issuance of Common Stock was treated as a noncash investing activity in the consolidated statement of cash flows for the year ended April 30, 2000. The excess of cost over fair value of net tangible assets acquired was $34,919 and is being amortized on a straight-line basis over 15 years. During fiscal year 1999, the Company acquired six regional accounting firms and several smaller market firms. The purchase prices aggregated $102,285. Each acquisition was accounted for as a purchase and, accordingly, results for each acquisition are included since the date of acquisition. The excess of cost over fair value of net tangible assets acquired was $98,012 and is being amortized on a straight-line basis over periods up to 20 years. On March 5, 1999, the Company acquired Assurance Mortgage Corporation of America (now H&R Block Mortgage Corporation), a company engaged in the origination and sale of conventional mortgage loans. The Company issued 268,325 shares of its Common Stock from treasury, with a value of $11,860, for the purchase. The acquisition was accounted for as a purchase and, accordingly, its results are included since the date of acquisition. The issuance of Common Stock was treated as a noncash investing activity in the consolidated statement of cash flows for the year ended April 30, 1999. The excess of cost over fair value of net tangible assets acquired was $21,710 and is being amortized on a straight-line basis over 15 years. During fiscal 2001, 2000 and 1999, the Company made other acquisitions which were accounted for as purchases. Their operations, which are not material, are included in the consolidated statements of earnings since the date of acquisition. SALE OF SUBSIDIARIES On December 31, 2000, the Company completed the sale of the assets of KSM Business Services, part of the Company's Business services segment. The Company recorded a gain before taxes of $2,040 on the transaction. In March 2000, the Company sold certain assets related to its mortgage operations. The Company recorded a pretax loss of $14,501 on the transaction, included in other expenses on the consolidated statements of earnings for the year ended April 30, 2000. On January 29, 1999, the Company completed the sale of its credit card portfolio. The Company recorded a $20,939 loss, net of taxes, on the transaction. The consolidated statements of earnings reflect the Company's Credit card operations segment as discontinued operations. Revenues from discontinued operations for the year ended April 30, 1999 were $24,143. COMMITMENTS AND CONTINGENCIES Substantially all of the operations of the Company's subsidiaries are conducted in leased premises. Most of the operating leases are for a one-year period with renewal options of one to three years and provide for fixed monthly rentals. Lease commitments at April 30, 2001, for fiscal 2002, 2003, 2004, 2005 and 2006 aggregated $148,915, $103,153, $65,114, $29,073 and $13,074, respectively, with no significant commitments ONE TO ONE | H&R BLOCK | 2001 51 32 extending beyond that period of time. The Company's rent expense for the years 2001, 2000 and 1999 aggregated $156,325, $135,823 and $99,654, respectively. Prior to March 31, 1999, the Company was obligated to purchase 60% of the mortgage loan volume which met certain criteria as established by the Company from a 40%-owned affiliate. The Company obtained majority ownership of this affiliate on March 31, 1999. From May 1, 1998 to March 31, 1999 the Company had purchased $312,173 of such loans. The Company has commitments to fund mortgage loans to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The commitments to fund loans amounted to $1,518,456 and $546,473 at April 30, 2001 and 2000, respectively. External market forces impact the probability of commitments being exercised, and therefore, total commitments outstanding do not necessarily represent future cash requirements. At April 30, 2001, the Company maintained a $1,860,000 backup credit facility to support various financial activities conducted by its subsidiaries through a commercial paper program. The annual commitment fee required to support the availability of this facility is nine and one-half basis points per annum on the unused portion of the facility. Among other provisions, the credit agreement limits the Company's indebtedness. The Company maintains a revolving credit facility in Canada to support a commercial paper program with varying borrowing levels throughout the year, reaching its peak during January through April for the Canadian tax season. The Company is responsible for servicing mortgage loans for others of $12,329,021, subservicing loans of $5,872,902, and the master servicing of $538,169 previously securitized mortgage loans held in trust at April 30, 2001. Fiduciary bank accounts that are maintained on behalf of investors and for impounded collections were $279,381 at April 30, 2001. These bank accounts are not assets of the Company and are not reflected in the accompanying consolidated financial statements. As of April 30, 2001, the Company had provided clearing organizations with bank letters of credit totaling $68,000 that satisfied margin deposit requirements of $63,812. These letters of credit are collateralized by customers' margin securities. The Company is required, in the event of non-delivery of customers' securities owed to it by other broker-dealers or by its customers, to purchase identical securities in the open market. Such purchases could result in losses not reflected in the accompanying consolidated financial statements. The Company monitors the credit standing of brokers and dealers and customers with whom it does business. In addition, the Company monitors the market value of collateral held and the market value of securities receivable from others, and seeks to obtain additional collateral if insufficient protection against loss exists. The Company has commitments to fund certain attest entities, that are not consolidated, related to accounting firms it has acquired. The Company is also committed to loan up to $40,000 to McGladrey & Pullen, LLP on a revolving basis through July 31, 2004, subject to certain termination clauses. This revolving facility bears interest at prime rate plus four and one-half percent on the outstanding amount and a commitment fee of one-half percent per annum on the unused portion of the commitment. The Company is involved in various legal proceedings which are ordinary routine litigation incident to its business, many of which are covered in whole or in part by insurance. It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. Under the Company's Guarantee and Peace of Mind programs, the Company may be liable for certain interest, penalties and/or additional taxes due. The Company is effectively self-insured related to these risks and claims made in excess of self-insurance levels are fully insured by a third-party carrier. At April 30, 2001 the Company has provided for the settlement of a class action lawsuit involving the Company's broker-dealer. In the settlement agreement, the Company admits to no wrongdoing. In the regular course of business, the Company is subject to routine examinations by Federal, state and local taxing authorities. In management's opinion, the disposition of matters raised by such taxing authorities, if any, in such tax examinations would not have a material adverse impact on the Company's consolidated financial position or results of operations. CompuServe, certain current and former officers and directors of CompuServe and the Company were named as defendants in six lawsuits 52 ONE TO ONE | H&R BLOCK | 2001 33 pending before the state and Federal courts in Columbus, Ohio. All suits alleged 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 brought by the Florida State Board of Administration also alleged certain oral omissions and misstatements in connection with such offering. Relief sought in the lawsuits was unspecified, but included pleas for rescission and damages. In July 2000, the class representatives and the defendants in the class action pending in state court, by their authorized counsel, entered into a Stipulation of Settlement, pursuant to which the defendants were required to pay a gross settlement amount of $9,500 in exchange for dismissal of the class action suit and a release of all claims. The court preliminarily approved the settlement in August 2000 and notices to the class were mailed and published. The fairness hearing relating to the settlement was held on November 30, 2000, and the court issued its order approving the settlement. Payment of plaintiffs' attorneys' fees and expenses were to be paid out of the gross settlement fund. The gross settlement fund was paid in its entirety by the Company's insurance carrier. The Stipulation and payment of the gross settlement fund are not admissions of the validity of any claim or any fact alleged by the plaintiffs and defendants continue to deny any wrongdoing and any liability. The Stipulation states that the defendants consider it desirable to settle to avoid further expense, inconvenience, and delay, and put to rest all controversy concerning all claims. The Florida State Board of Administration opted out of the class action settlement and that litigation continues separately from the state court class action. The parties have reached a settlement that will dispose of the case in its entirety with no material adverse impact on the Company's consolidated financial position or results of operations. FINANCIAL INSTRUMENTS The Company utilizes forward contracts on FNMA mortgage-backed securities to reduce the interest rate risk related to its fixed rate mortgage portfolio. The position on certain or all of the fixed rate mortgages is closed, on standard Public Securities Association ("PSA") settlement dates, when the Company enters into a forward commitment to sell those mortgages or decides to securitize the mortgages. These instruments are carried at market value and changes in the fair market value are recorded in revenues on the consolidated statements of earnings. There were no FNMA contracts at April 30, 2001. The Company purchases these instruments from certain broker-dealer counterparties. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty. It is the Company's policy to review, as necessary, the credit standing of each counterparty. The Company is exposed to on-balance sheet credit risk related to its receivables. Mortgage loans made to subprime borrowers present a higher level of risk of default than conforming loans. These loans also involve additional liquidity risk due to a more limited secondary market than conforming loans. While the Company believes that the underwriting procedures and appraisal processes it employs enable it to mitigate these risks, no assurance can be given that such procedures or processes will be adequate protection against these risks. The Company is exposed to off-balance sheet credit risk related to mortgage loan receivables which the Company has committed to fund. SUBSEQUENT EVENT (UNAUDITED) On June 20, 2001, the Company's Board of Directors declared a two-for-one stock split of its Common Stock in the form of a 100% stock distribution effective August 1, 2001, to shareholders of record as of the close of business on July 10, 2001. Common Stock outstanding, giving retroactive effect to the stock split at April 30, 2001 and 2000 would be 217,945,398 shares. Pro forma Common Stock and retained earnings at April 30, 2001 would be $2,179 and $1,449,022, respectively. ONE TO ONE | H&R BLOCK | 2001 53 34 Pro forma net earnings per share are as follows:
Year Ended April 30 2001 2000 1999 ---------------------------------------------------------------------------------------- Basic net earning per share: Net earnings from continuing operations $ 1.51 $ 1.29 $ 1.19 Net loss from discontinued operations - - (.11) Cumulative effect of change in accounting principle .02 - - ---------------------------- Net earnings $ 1.53 $ 1.29 $ 1.08 ============================ Diluted net earnings per share: Net earnings from continuing operations $ 1.50 $ 1.27 $ 1.18 Net loss from discontinued operations - - (.11) Cumulative effect of change in accounting principle .02 - - ---------------------------- Net earnings $ 1.52 $ 1.27 $ 1.07 ------------------------------------------------------------============================
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2001 Quarter Ended April 30, Jan. 31, Oct. 31, July 31, 2001 2001 2000 2000 ------------------------------------------------------------------------------------ Revenues $1,703,991 $ 656,000 $ 337,474 $ 304,110 -------------------------------------------------- Earnings (loss) before income taxes (benefits) 641,635 7,792 (86,356) (89,993) Taxes (benefits) on earnings 267,946 3,332 (36,701) (38,247) -------------------------------------------------- Net earnings (loss) before change in accounting 373,689 4,460 (49,655) (51,746) Cumulative effect of change in accounting principle 4,414 - - - -------------------------------------------------- Net earnings (loss) $ 378,103 $ 4,460 $ (49,655) $ (51,746) ================================================== Basic net earnings per share: Net earnings (loss) before change in accounting $ 4.08 $ .05 $ (.54) $ (.55) ================================================== Net earnings (loss) $ 4.13 $ .05 $ (.54) $ (.55) ================================================== Diluted net earnings per share: Net earnings (loss) before change in accounting $ 4.00 $ .05 $ (.54) $ (.55) ================================================== Net earnings (loss) $ 4.05 $ .05 $ (.54) $ (.55) ----------------------------------================================================== Fiscal 2000 Quarter Ended April 30, Jan. 31, Oct. 31, July 31, 2000 2000 1999 1999 ------------------------------------------------------------------------------------ Revenues $1,607,930 $ 512,507 $ 209,946 $ 121,560 -------------------------------------------------- Earnings (loss) before income taxes (benefits) 557,743 (13,523) (72,157) (59,797) Taxes (benefits) on earnings 216,962 (6,448) (27,420) (22,723) -------------------------------------------------- Net earnings (loss) before change in accounting 340,781 (7,075) (44,737) (37,074) Cumulative effect of change in accounting principle - - - - -------------------------------------------------- Net earnings (loss) $ 340,781 $ (7,075) $ (44,737) $ (37,074) ================================================== Basic net earnings per share: Net earnings (loss) before change in accounting $ 3.47 $ (.07) $ (.46) $ (.38) ================================================== Net earnings (loss) $ 3.47 $ (.07) $ (.46) $ (.38) ================================================== Diluted net earnings per share: Net earnings (loss) before change in accounting $ 3.45 $ (.07) $ (.46) $ (.38) ================================================== Net earnings (loss) $ 3.45 $ (.07) $ (.46) $ (.38) ----------------------------------==================================================
The accumulation of four quarters in fiscal 2001 and 2000 for net earnings per share does not equal the related per share amounts for the years ended April 30, 2001 and 2000 due to the repurchase of treasury shares, the timing of the exercise of stock options, and the antidilutive effect of stock options in the first three quarters. Quarterly results for the fiscal year ended April 30, 2001 in the table above have been adjusted to reflect the implementation of SAB 101. The cumulative effect of this change for periods prior to April 30, 2001 of $(1,185), net of income taxes, is included in the third quarter of fiscal 2001. There is no year-to-date effect of implementation. The effect of the implementation of SAB 101 on third quarter revenues and net earnings before the change in accounting principle follows: 54 ONE TO ONE | H&R BLOCK | 2001 35
SAB 101 Implementation ------------------------------ 3 months ended Jan. 31, 2001 10-Q Reported Restated ------------------------------------------------------------------------- Revenues $661,354 $656,000 Net earnings before change in accounting 5,645 4,460 -------------------------------------------------------------------------
SEGMENT INFORMATION The principal business activity of the Company's operating subsidiaries is providing tax and financial services to the general public. Management has determined the reportable segments identified below according to differences in types of services, geographic locations, and how operational decisions are made. In the third quarter of fiscal 2001, management re-evaluated its reportable operating segments to more closely reflect how the business is now analyzed and evaluated. As a result, the Company's Financial services segment is now separated into Mortgage operations and Investment services. Geographical information is presented within the segment data below. A majority of the foreign countries in which subsidiaries of the Company operate, which are individually immaterial, are included in International tax operations. Included below is the financial information on each segment that is used by management to evaluate the segment's results. The Company operates in the following reportable segments: U.S. TAX OPERATIONS: This segment is primarily engaged in providing tax return preparation, filing, and related services to the general public in the United States. Tax-related service revenues include fees from company-owned tax offices and royalties from franchised offices. This segment participates in the refund anticipation loan products offered by a third-party lending institution to tax clients. This segment includes the Company's tax preparation software - Kiplinger TaxCut(R) from H&R Block, and other personal productivity software offered to the general public and offers online tax preparation through a tax preparer (whereby the client fills out an online tax organizer and sends it to a tax preparer for preparation), online do-it-yourself-tax preparation, online professional tax review and online tax advice to the general public through the hrblock.com website. Revenues of this segment are seasonal in nature. INTERNATIONAL TAX OPERATIONS: This segment is primarily engaged in providing local tax return preparation, filing, and related services to the general public in Canada, Australia and the United Kingdom. In addition, International tax operations has franchise offices in 9 countries that prepare U.S. tax returns for U.S. citizens living abroad. Tax-related service revenues include fees from company-owned tax offices and royalties from franchised offices. Revenues of this segment are seasonal in nature. MORTGAGE OPERATIONS: This segment is primarily engaged in the origination, servicing, and sale of nonconforming and conforming mortgage loans to the general public in the United States. This segment mainly offers a flexible product line to borrowers who are creditworthy but do not meet traditional underwriting criteria through a network of 16,453 mortgage brokers. Conforming mortgage loan products, as well as the same flexible product line available through brokers are offered through 22 H&R Block Financial Centers and 9 H&R Block Mortgage Corporation retail offices. INVESTMENT SERVICES: This segment is primarily engaged in offering full service investment opportunities to the general public. This segment essentially consists of H&R Block Financial Advisors, Inc. (formally OLDE Discount Corporation), a full-service discount securities broker. Financial planning and investment advice are offered through 105 H&R Block Financial Centers, 75 H&R Block Financial Advisors offices and 345 tax offices, and stocks, bonds, mutual funds and other products and securities are offered through a nationwide network of 1,690 registered representatives, at the same locations. BUSINESS SERVICES: This segment is primarily engaged in providing accounting, tax and consulting services to business clients and tax, estate planning, financial planning, wealth management and insurance services to individuals. This segment offers services through 100 offices located throughout the United States. Revenues of this segment are seasonal in nature. IDENTIFIABLE ASSETS: Identifiable assets are those assets, including the excess of cost over fair value of net tangible assets acquired, associated with each reportable segment. The remaining assets are classified as corporate assets and consist primarily of cash, marketable securities and corporate equipment. ONE TO ONE | H&R BLOCK | 2001 55 36 Information concerning the Company's operations by reportable segment as of and for the years ended April 30, 2001, 2000 and 1999 is as follows:
2001 2000 1999 --------------------------------------------------------------------------------------- REVENUES: U.S. tax operations $ 1,654,123 $ 1,431,085 $ 1,258,269 International tax operations 79,568 81,518 74,714 Mortgage operations 415,802 355,429 255,944 Investment services 472,425 268,376 3,989 Business services 373,820 310,867 47,341 Unallocated corporate 5,837 4,668 4,408 ----------------------------------------- Total revenues $ 3,001,575 $ 2,451,943 $ 1,644,665 ========================================= EARNINGS FROM CONTINUING OPERATIONS: U.S. tax operations $ 433,514 $ 319,992 $ 314,113 International tax operations 7,678 4,869 2,514 Mortgage operations 139,036 88,574 62,749 Investment services 12,689 41,226 (1,623) Business services 17,045 17,111 7,121 Unallocated corporate (37,527) (22,476) (20,729) Interest expense on acquisition debt (98,759) (56,118) (17,757) ----------------------------------------- 473,676 393,178 346,388 Investment income, net 5,977 9,840 32,234 Intercompany interest (6,575) 9,248 4,919 ----------------------------------------- Earnings from continuing operations before income taxes $ 473,078 $ 412,266 $ 383,541 ========================================= DEPRECIATION AND AMORTIZATION: U.S. tax operations $ 73,604 $ 66,523 $ 49,380 International tax operations 5,011 5,494 5,741 Mortgage operations 22,715 20,311 15,764 Investment services 65,384 25,663 204 Business services 38,772 29,060 3,340 Unallocated corporate 122 167 176 ----------------------------------------- Total depreciation and amortization $ 205,608 $ 147,218 $ 74,605 ========================================= IDENTIFIABLE ASSETS: U.S. tax operations $ 334,030 $ 348,726 $ 268,650 International tax operations 42,627 59,725 55,684 Mortgage operations 938,379 685,292 1,033,261 Investment services 2,011,517 3,678,614 5,648 Business services 575,998 517,134 146,252 Unallocated corporate 219,073 423,378 400,681 ----------------------------------------- Total assets $ 4,121,624 $ 5,712,869 $ 1,910,176 ========================================= CAPITAL EXPENDITURES: U.S. tax operations $ 42,260 $ 95,338 $ 72,325 International tax operations 2,328 3,641 7,857 Mortgage operations 34,423 15,915 8,754 Investment services 3,557 21,582 611 Business services 9,762 9,065 1,778 Unallocated corporate 81 212 80 ----------------------------------------- Total capital expenditures $ 92,411 $ 145,753 $ 91,405 ----------------------------------------------=========================================
56 ONE TO ONE | H&R BLOCK | 2001 37 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Block Financial Corporation ("BFC") is an indirect, wholly owned subsidiary of the Company. BFC is the Issuer and the Company is the Guarantor of the $250,000 6 3/4 % Senior Notes issued on October 21, 1997 and of the $500,000 8 1/2 % Senior Notes issued on April 13, 2000. The Company's guarantee is full and unconditional. The following condensed consolidating financial statements present separate information for BFC, for the Company and for the Company's other subsidiaries, and should be read in conjunction with the consolidated financial statements of the Company. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company's investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholder's equity and other intercompany balances and transactions. CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Year Ended April 30, 2001
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block --------------------------------------------------------------------------------------------------------------------------------- Total revenues $ - $ 1,087,471 $ 1,926,020 $ (11,916) $ 3,001,575 ======================================================================================= Expenses: Compensation & benefits - 299,263 893,031 - 1,192,294 Occupancy & equipment - 56,093 227,088 - 283,181 Interest - 223,816 18,735 - 242,551 Depreciation & amortization - 90,660 114,948 - 205,608 Marketing & advertising - 45,440 98,576 (457) 143,559 Supplies, freight & postage - 20,949 49,491 - 70,440 Other - 240,474 170,086 (11,684) 398,876 --------------------------------------------------------------------------------------- - 976,695 1,571,955 (12,141) 2,536,509 Operating earnings - 110,776 354,065 225 465,066 Other income, net 480,209 (29) 8,041 (480,209) 8,012 --------------------------------------------------------------------------------------- Earnings before income taxes 480,209 110,747 362,106 (479,984) 473,078 Taxes on earnings 199,047 61,814 134,430 (198,961) 196,330 --------------------------------------------------------------------------------------- Net earnings from continuing operations before change in accounting principle 281,162 48,933 227,676 (281,023) 276,748 Change in accounting principle - 4,414 - - 4,414 --------------------------------------------------------------------------------------- Net earnings $ 281,162 $ 53,347 $ 227,676 $ (281,023) $ 281,162 ------------------------------------------=======================================================================================
ONE TO ONE | H&R BLOCK | 2001 57 38 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Year Ended April 30, 2000
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ------------------------------------------------------------------------------------------------------------------------------- Total revenues $ - $ 761,908 $ 1,701,325 $ (11,290) $ 2,451,943 ====================================================================================== Expenses: Compensation & benefits - 199,124 764,412 - 963,536 Occupancy & equipment - 29,264 223,907 - 253,171 Interest - 156,123 (1,096) - 155,027 Depreciation & amortization - 47,510 99,708 - 147,218 Marketing & advertising - 49,099 91,584 - 140,683 Supplies, freight & postage - 11,490 53,109 - 64,599 Other - 158,200 178,711 (11,290) 325,621 -------------------------------------------------------------------------------------- - 650,810 1,410,335 (11,290) 2,049,855 Operating earnings - 111,098 290,990 - 402,088 Other income, net 412,266 113 10,065 (412,266) 10,178 -------------------------------------------------------------------------------------- Earnings before income taxes 412,266 111,211 301,055 (412,266) 412,266 Taxes on earnings 160,371 52,494 107,877 (160,371) 160,371 -------------------------------------------------------------------------------------- Net earnings $ 251,895 $ 58,717 $ 193,178 $ (251,895) $ 251,895 -----------------------------------------======================================================================================
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Year Ended April 30, 1999
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ------------------------------------------------------------------------------------------------------------------------------- Total revenues $ - $ 386,938 $ 1,270,441 $ (12,714) $ 1,644,665 ====================================================================================== Expenses: Compensation & benefits - 71,670 539,196 - 610,866 Occupancy & equipment - 10,740 171,961 - 182,701 Interest - 72,034 (2,696) - 69,338 Depreciation & amortization - 16,604 58,001 - 74,605 Marketing & advertising - 18,512 71,544 - 90,056 Supplies, freight & postage - 4,821 52,336 - 57,157 Other - 123,138 94,444 (12,714) 204,868 ------------------------------------------------------------------------------------- - 317,519 984,786 (12,714) 1,289,591 Operating earnings - 69,419 285,655 - 355,074 Other income, net 346,772 (3,777) 32,244 (346,772) 28,467 -------------------------------------------------------------------------------------- Earnings before income taxes 346,772 65,642 317,899 (346,772) 383,541 Taxes on earnings 131,406 23,933 121,813 (131,406) 145,746 -------------------------------------------------------------------------------------- Net earnings from continuing operations 215,366 41,709 196,086 (215,366) 237,795 Discontinued operations - (22,429) - - (22,429) -------------------------------------------------------------------------------------- Net earnings $ 215,366 $ 19,280 $ 196,086 $ (215,366) $ 215,366 -----------------------------------------======================================================================================
58 ONE TO ONE | H&R BLOCK | 2001 39 CONDENSED CONSOLIDATING BALANCE SHEET April 30, 2001
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ------------------------------------------------------------------------------------------------------------------------------- Cash & cash equivalents $ - $ 167,139 $ 104,674 $ - $ 271,813 Receivables from customers, brokers, dealers and clearing organizations - 1,310,804 - - 1,310,804 Receivables - 172,409 200,814 - 373,223 Excess of cost over fair value of net tangible assets acquired - 573,691 478,135 - 1,051,826 Investment in subsidiaries 2,452,643 215 262 (2,452,643) 477 Other assets - 720,004 394,431 (954) 1,113,481 -------------------------------------------------------------------------------------- Total assets $ 2,452,643 $ 2,944,262 $ 1,178,316 $(2,453,597) $ 4,121,624 ====================================================================================== Notes payable $ - $ - $ - $ - $ - Accounts payable to customers, brokers and dealers - 1,058,000 - - 1,058,000 Long-term debt - 746,250 124,724 - 870,974 Other liabilities 4,763 228,847 782,058 3,241 1,018,909 Net intercompany advances 1,274,139 637,487 (1,907,206) (4,420) - Stockholders' equity 1,173,741 273,678 2,178,740 (2,452,418) 1,173,741 -------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,452,643 $ 2,944,262 $ 1,178,316 $(2,453,597) $ 4,121,624 -----------------------------------------======================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET April 30, 2000
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ------------------------------------------------------------------------------------------------------------------------------- Cash & cash equivalents $ - $ 256,823 $ 123,078 $ - $ 379,901 Receivables from customers, brokers, dealers and clearing organizations - 2,857,379 - - 2,857,379 Receivables - 257,987 176,735 - 434,722 Excess of cost over fair value of net tangible assets acquired - 620,780 474,294 - 1,095,074 Investment in subsidiaries 2,188,835 615 903 (2,188,835) 1,518 Other assets - 565,741 377,867 667 944,275 -------------------------------------------------------------------------------------- Total assets $ 2,188,835 $ 4,559,325 $ 1,152,877 $(2,188,168) $ 5,712,869 ====================================================================================== Notes payable $ - $ 283,797 $ - $ - $ 283,797 Accounts payable to customers, brokers and dealers - 2,570,200 - - 2,570,200 Long-term debt - 745,600 126,796 - 872,396 Other liabilities 4,763 174,697 604,483 (16,056) 767,887 Net intercompany advances 965,483 559,843 (1,542,049) 16,723 - Stockholders' equity 1,218,589 225,188 1,963,647 (2,188,835) 1,218,589 -------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,188,835 $ 4,559,325 $ 1,152,877 $(2,188,168) $ 5,712,869 -----------------------------------------======================================================================================
ONE TO ONE | H&R BLOCK | 2001 59 40 CONDENSED CONSOLIDATING BALANCE SHEET April 30, 1999
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ---------------------------------------------------------------------------------------------------------------------------------- Cash & cash equivalents $ - $ 16,026 $ 177,214 $ - $ 193,240 Receivables - 686,602 56,699 - 743,301 Excess of cost over fair value of net tangible assets acquired - 189,784 215,750 - 405,534 Investment in subsidiaries 1,902,665 1,490 226 (1,902,665) 1,716 Other assets - 229,016 337,369 - 566,385 ----------------------------------------------------------------------------- Total assets $ 1,902,665 $ 1,122,918 $ 787,258 $(1,902,665) $ 1,910,176 ============================================================================= Notes payable $ - $ 71,939 $ - $ - $ 71,939 Long-term debt - 249,725 - - 249,725 Other liabilities 4,764 84,029 437,732 - 526,525 Net intercompany advances 835,914 552,301 (1,388,215) - - Stockholders' equity 1,061,987 164,924 1,737,741 (1,902,665) 1,061,987 ----------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,902,665 $ 1,122,918 $ 787,258 $(1,902,665) $ 1,910,176 -----------------------------------------------------=============================================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended April 30, 2001
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 2,235 $ (186,171) $ 479,451 $ - $ 295,515 ----------------------------------------------------------------------------- Cash flows from investing activities: Purchases of available-for-sale securities - - (10,636) - (10,636) Maturities of available-for-sale securities - 16,024 5,500 - 21,524 Sales of available-for-sale securities - 319,620 36,572 - 356,192 Purchases of property and equipment, net - (33,004) (57,029) - (90,033) Payments made for business acquisitions - - (21,143) - (21,143) Proceeds from sale of subsidiary - - 23,200 - 23,200 Net intercompany advances 308,656 77,644 (386,300) - - Other, net - - (20,497) - (20,497) ----------------------------------------------------------------------------- Net cash provided by (used in) investing activities 308,656 380,284 (430,333) - 258,607 ---------------------------------------------------------------- ------------ Cash flows from financing activities: Repayments of notes payable - (18,219,741) - - (18,219,741) Proceeds from issuance of notes payable - 17,935,944 - - 17,935,944 Payments on acquisition debt - - (68,743) - (68,743) Dividends paid (108,374) - - - (108,374) Payments to acquire treasury shares (222,895) - - - (222,895) Proceeds from stock options exercised 19,550 - - - 19,550 Other, net 828 - 1,221 - 2,049 ----------------------------------------------------------------------------- Net cash used in financing activities (310,891) (283,797) (67,522) - (662,210) ----------------------------------------------------------------------------- Net decrease in cash & cash equivalents - (89,684) (18,404) - (108,088) Cash & cash equivalents at beginning of the year - 256,823 123,078 - 379,901 ----------------------------------------------------------------------------- Cash & cash equivalents at end of the year $ - $ 167,139 $ 104,674 $ - $ 271,813 -----------------------------------------------------=============================================================================
60 ONE TO ONE | H&R BLOCK | 2001 41 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended April 30, 2000
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 3,736 $ 176,517 $ 310,325 $ - $ 490,578 ----------------------------------------------------------------------------- Cash flows from investing activities: Purchases of available-for-sale securities - - (14,281) - (14,281) Maturities of available-for-sale securities - 10,845 57,416 - 68,261 Sales of available-for-sale securities - 191,839 19,997 - 211,836 Purchases of property and equipment, net - (36,481) (105,375) - (141,856) Payments made for business acquisitions - (817,587) (154,215) - (971,802) Net intercompany advances 119,697 8,081 (127,778) - - Other, net - (75) (6,430) - (6,505) ----------------------------------------------------------------------------- Net cash used in investing activities 119,697 (643,378) (330,666) - (854,347) ----------------------------------------------------------------------------- Cash flows from financing activities: Repayments of notes payable - (50,800,661) - - (50,800,661) Proceeds from issuance of notes payable - 51,012,519 - - 51,012,519 Proceeds from issuance of long-term debt - 495,800 - - 495,800 Payments on acquisition debt - - (4,730) - (4,730) Dividends paid (105,480) - - - (105,480) Payments to acquire treasury shares (50,654) - - - (50,654) Proceeds from stock options exercised 36,958 - - - 36,958 Other, net (4,257) - (29,065) - (33,322) ----------------------------------------------------------------------------- Net cash provided by (used in) financing activities (123,433) 707,658 (33,795) - 550,430 ----------------------------------------------------------------------------- Net increase (decrease) in cash & cash equivalents - 240,797 (54,136) - 186,661 Cash & cash equivalents at beginning of the year - 16,026 177,214 - 193,240 ----------------------------------------------------------------------------- Cash & cash equivalents at end of the year $ - $ 256,823 $ 123,078 $ - $ 379,901 -----------------------------------------------------=============================================================================
ONE TO ONE | H&R BLOCK | 2001 61 42 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended April 30, 1999
H&R Block, Inc. BFC Other Consolidated (Guarantor) (Subsidiary Issuer) Subsidiaries Eliminations H&R Block ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 4,315 $ (77,843) $ 312,802 $ - $ 239,274 ----------------------------------------------------------------------------- Cash flows from investing activities: Purchases of available-for-sale securities - - (251,627) - (251,627) Maturities of available-for-sale securities - 8,161 211,239 - 219,400 Sales of available-for-sale securities - 90,126 432,126 - 522,252 Purchases of property and equipment, net - (6,499) (83,283) - (89,782) Payments made for business acquisitions - - (123,657) - (123,657) Net intercompany advances 506,211 657,263 (1,163,474) - - Other, net - (3,460) (22,183) - (25,643) ----------------------------------------------------------------------------- Net cash provided by (used in) investing activities 506,211 745,591 (1,000,859) - 250,943 ----------------------------------------------------------------------------- Cash flows from financing activities: Repayments of notes payable - (17,276,595) - - (17,276,595) Proceeds from issuance of notes payable - 16,593,978 - - 16,593,978 Dividends paid (95,004) - - - (95,004) Payments to acquire treasury shares (492,945) - - - (492,945) Proceeds from stock options exercised 73,481 - - - 73,481 Other, net 3,942 - (4,690) - (748) ----------------------------------------------------------------------------- Net cash used in financing activities (510,526) (682,617) (4,690) - (1,197,833) ----------------------------------------------------------------------------- Net decrease in cash & cash equivalents - (14,869) (692,747) - (707,616) Cash & cash equivalents at beginning of the year - 30,895 869,961 - 900,856 ----------------------------------------------------------------------------- Cash & cash equivalents at end of the year $ - $ 16,026 $ 177,214 $ - $ 193,240 -----------------------------------------------------=============================================================================
62 ONE TO ONE | H&R BLOCK | 2001 43 MANAGEMENT'S REPORT & REPORT OF INDEPENDENT ACCOUNTANTS MANAGEMENT'S REPORT The financial information in this Annual Report, including the consolidated financial statements, has been prepared by the management of H&R Block, Inc. Management believes the information presented in the Annual Report is consistent with the financial statements, the financial statements are prepared in accordance with generally accepted accounting principles, and the financial statements do not contain material misstatements due to fraud or error. Where appropriate, the financial statements reflect management's best estimates and judgments. Management also is responsible for maintaining a system of internal accounting controls with the objectives of providing reasonable assurance that the Company's assets are safeguarded against material loss from unauthorized use or disposition, and that authorized transactions are properly recorded to permit the preparation of accurate financial data. However, limitations exist in any system of internal controls based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of accounting controls, of which its internal auditing function is an integral part, accomplishes the stated objectives. PricewaterhouseCoopers LLP, independent accountants, audited H&R Block's 2001 and 2000 consolidated financial statements and issued opinions thereon. Their audits were made in accordance with generally accepted auditing standards and included an objective, independent review of the system of internal controls to the extent necessary to express an opinion on the financial statements. The Audit Committee of the Board of Directors, composed of outside directors, meets periodically with management, the independent accountants and the internal auditor to review matters relating to the Company's annual financial statements, internal audit activities, internal accounting controls and non-audit services provided by the independent accountants. The independent accountants and the internal auditor have full access to the Audit Committee and meet with it, both with and without management present, to discuss the scope and results of their audits including internal controls, audit and financial matters. /s/ Mark A. Ernst Mark A. Ernst President and Chief Executive Officer /s/ Frank J. Cotroneo Frank J. Cotroneo Senior Vice President and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders H&R Block, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of H&R Block, Inc. and its subsidiaries (the "Company") at April 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri June 19, 2001 ONE TO ONE | H&R BLOCK | 2001 63 44
COMMON STOCK DATA Stock Price Cash Dividend ------------------------- --------------- High Low Paid per Share --------- --------- --------------- 2000 FISCAL YEAR: Quarter ended 7/31/99 $ 58.88 $ 45.50 $ .25 Quarter ended 10/31/99 59.50 38.00 .275 Quarter ended 1/31/00 49.50 39.88 .275 Quarter ended 4/30/00 49.50 39.50 .275 2001 FISCAL YEAR: Quarter ended 7/31/00 $ 42.56 $ 26.94 $ .275 Quarter ended 10/31/00 37.38 31.31 .30 Quarter ended 1/31/01 44.06 32.81 .30 Quarter ended 4/30/01 55.00 41.80 .30
Traded on the New York Stock Exchange; Ticker Symbol: HRB 64 ONE TO ONE | H&R BLOCK | 2001 45 SELECTED FINANCIAL DATA Amounts in thousands, except per share amounts and number of shareholders
April 30 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------ FOR THE YEAR: Total revenues $3,001,575 $2,451,943 $1,644,665 $1,269,981 $1,066,410 Net earnings from continuing operations $ 276,748 $ 251,895 $ 237,795 $ 183,788 $ 148,132 Net earnings $ 281,162 $ 251,895 $ 215,366 $ 392,130 $ 47,755 AT YEAR END: Total assets $4,121,624 $5,712,869 $1,910,176 $2,904,083 $1,707,058 Cash, cash equivalents and marketable securities $ 596,396 $ 681,567 $ 420,649 $1,590,192 $ 539,107 Long-term debt $ 870,974 $ 872,396 $ 249,725 $ 249,675 $ - Stockholders' equity $1,173,741 $1,218,589 $1,061,987 $1,341,632 $ 999,097 Shares outstanding 91,804 98,035 97,629 106,981 104,067 Number of shareholders 31,523 33,557 34,624 31,177 33,517 MEASUREMENTS: Per basic share of common stock: Net earnings from continuing operations $ 3.01 $ 2.57 $ 2.38 $ 1.75 $ 1.42 Net earnings $ 3.06 $ 2.57 $ 2.16 $ 3.74 $ .46 Per diluted share of common stock: Net earnings from continuing operations $ 2.99 $ 2.55 $ 2.36 $ 1.71 $ 1.40 Net earnings $ 3.04 $ 2.55 $ 2.14 $ 3.65 $ .45 Other per share data: Cash dividends declared $ 1.17 1/2 $ 1.07 1/2 $ .95 $ .80 $ 1.04 Net book value $ 12.79 $ 12.43 $ 10.88 $ 12.54 $ 9.60 Return on total revenues 9.2% 10.3% 14.5% 14.5% 13.9% Return on stockholders' equity 29.7% 25.1% 22.0% 38.1% 5.2%
ONE TO ONE | H&R BLOCK | 2001 65