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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>/in/edgar/work/20000728/0000950124-00-004430/0000950124-00-004430.txt : 20000921
<SEC-HEADER>0000950124-00-004430.hdr.sgml : 20000921
ACCESSION NUMBER: 0000950124-00-004430
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20000430
FILED AS OF DATE: 20000728
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: H&R BLOCK INC
CENTRAL INDEX KEY: 0000012659
STANDARD INDUSTRIAL CLASSIFICATION: [7200
] IRS NUMBER: 440607856
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0430
</COMPANY-DATA>
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-06089
FILM NUMBER: 681684
</FILING-VALUES>
BUSINESS ADDRESS:
STREET 1: 4400 MAIN ST
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
BUSINESS PHONE: 8167536900
</BUSINESS-ADDRESS>
MAIL ADDRESS:
STREET 1: 4410 MAIN STREET
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
</MAIL-ADDRESS>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>e10-k405.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED: APRIL 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
COMMISSION FILE NUMBER: 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4400 MAIN STREET, KANSAS CITY, MISSOURI 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold on
June 1, 2000, was $2,927,823,165.
Number of shares of registrant's Common Stock, without par value, outstanding on
June 1, 2000: 94,620,816.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant's annual report to
security holders for the fiscal year ended April 30, 2000, are incorporated
herein by reference in response to Part I, Item 1, and Part II, Items 5 through
7 and Item 8, and certain specified portions of the registrant's definitive
proxy statement filed within 120 days after April 30, 2000, are incorporated
herein by reference in response to Part III, Items 10 through 13, inclusive.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. is a corporation that was organized in 1955 under the
laws of the State of Missouri (the "Company"). It is the parent corporation in a
two-tier holding company structure following a 1993 corporate restructuring. The
second-tier holding company is H&R Block Group, Inc., a Delaware corporation and
the direct or indirect owner of the operating subsidiaries that provide tax and
financial services to the general public principally in the United States, but
also in Canada, Australia, the United Kingdom and other foreign countries.
Approximately 62% of the consolidated revenues of the Company in fiscal year
2000 were generated by subsidiaries involved in tax return preparation,
electronic filing of income tax returns and other tax-related services. The
Company's subsidiaries also offer investment services through broker-dealers,
originate, purchase, service, sell and securitize mortgages, offer personal
productivity software, purchase participation interests in refund anticipation
loans made by a third-party lender, and offer accounting, tax and consulting
services to business clients.
Developments during fiscal year 2000 within U.S. tax operations,
International tax operations, Financial services and Business services are
described in the section below entitled "Description of Business."
On August 2, 1999, the Company, through its wholly-owned, indirect
subsidiary, RSM McGladrey, Inc. ("RSM"), purchased substantially all of the
non-attest assets of McGladrey & Pullen, LLP ("McGladrey"), at that time the
seventh largest accounting and consulting firm in the United States with more
than 70 offices located primarily in the Eastern, Midwestern, Northern and
Southwestern United States. The purchase price was $240 million in cash payments
over four years and the assumption of certain pension liabilities with a present
value at the date of acquisition of $52.7 million. The acquisition agreement
also provides for contingent consideration based on earnings in years two, three
and four after the acquisition. In addition, the Company made cash payments of
$65.5 million for outstanding accounts receivable and work-in-process balances
that have been repaid to the Company as RSM collected these amounts in the
ordinary course of business.
On December 1, 1999, the Company completed the acquisition of the
outstanding capital stock of OLDE Financial Corporation ("OLDE Financial") and
Financial Marketing Services, Inc. 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 consideration payable for up to five years
after the acquisition based upon revenues generated from certain online
brokerage services. The acquisition was initially funded with short-term
borrowings and a portion of these borrowings were repaid upon
2
<PAGE> 3
the issuance of $500 million in Senior Notes in the fourth quarter of fiscal
2000. OLDE Financial is the parent company of OLDE Discount Corporation ("OLDE
Discount"), the fourth largest discount brokerage firm in the United States at
the time of the acquisition. OLDE Discount offers brokerage services and other
financial services through its network of registered representatives in branch
offices in 35 states and the District of Columbia.
On March 27, 2000, the Company's Board of Directors authorized the
repurchase of 12 million shares of the Company's Common Stock. The number of
shares purchased will depend upon a number of factors including the price of the
stock, availability of excess cash, the ability to maintain financial
flexibility, securities law restrictions and other capital structure and
investment considerations.
After the conclusion of fiscal year 2000, the Company announced that
Henry W. Bloch would retire as Chairman of the Board of Directors of the Company
and as a director in September 2000. On June 21, 2000, the Board of Directors
approved a succession plan for senior management under which Frank L. Salizzoni
will succeed Henry Bloch as Chairman of the Board of Directors in September 2000
and retire as Chief Executive Officer on December 31, 2000. Mr. Salizzoni will
continue in the role of Chairman of the Board of Directors following his
retirement as Chief Executive Officer. The plan calls for Mark A. Ernst,
currently President and Chief Operating Officer, to assume the role of President
and Chief Executive Officer of the Company effective January 1, 2001.
During the fiscal year ended April 30, 2000, the Company was not
involved in any bankruptcy, receivership or similar proceedings or any material
reclassifications, mergers or consolidations, and the Company did not acquire or
dispose of any material amount of assets during such year otherwise than in the
ordinary course of business or in connection with the OLDE and the McGladrey
transactions.
The information contained in this Form 10-K and the exhibits hereto may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by Federal, state and local authorities and their impact on any proposed or
possible transactions and the lines of business in which the Company's
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability of the Company's subsidiaries to successfully expand
the financial planning and investment services business, the national accounting
practice, the retail mortgage business, and the core tax business; the inability
to implement the Company's strategies with respect to such expansion and other
strategies; changes in management and management strategies; the Company's
inability to successfully design, create, modify and operate its computer
systems and networks; litigation involving the Company; the inability of the
Company to purchase shares of its Common Stock pursuant to the share repurchase
program and risks described
3
<PAGE> 4
from time to time in reports and registration statements filed by the Company
and its subsidiaries with the Securities and Exchange Commission ("SEC").
Readers should take these factors and risks into account in evaluating any such
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by Item 101(b) of Regulation S-K relating to
financial information about industry segments is contained in the Notes to
Consolidated Financial Statements in the Company's annual report to security
holders for the fiscal year ended April 30, 2000, and is hereby incorporated
herein by reference.
NUMBER OF EMPLOYEES
The Company itself has no employees. Its direct and indirect wholly
owned subsidiaries, have approximately 10,000 regular full-time employees. The
highest number of persons employed by the subsidiaries during the fiscal year
ended April 30, 2000, including seasonal employees, was approximately 103,000.
DESCRIPTION OF BUSINESS
U.S. TAX OPERATIONS
Generally. This reportable operating segment provides to the general
public in the United States income tax return preparation services, electronic
filing services and other services related to income tax return preparation,
purchases participation interests in refund anticipation loans made to tax
clients by a third-party lending institution, offers online tax preparation,
electronic filing, mortgage products and brokerage services through the web site
at www.hrblock.com, and sells to the general public tax return preparation
software and other personal productivity computer software.
Tax Services. The income tax return preparation and related services
business is the original core business of the Company. These services are
provided to the public in the United States through a system of offices operated
by H&R Block Tax Services, Inc. and other tax operations subsidiaries, which are
collectively referred to as "Tax Services," or by others to whom Tax Services
has granted franchises. Tax Services and its franchisees (collectively referred
to herein as "H&R Block") provide to the general public H&R Block income tax
return preparation services, electronic filing services, the Peace of Mind
program (described below) and other services relating to income tax return
preparation. For U.S. returns, H&R Block offers a refund anticipation loan
service, the Refund Rewards program (described below) and an electronic refund
service in conjunction with its electronic filing service. H&R Block also
markets its knowledge of how to prepare income tax returns through its income
tax training schools.
Taxpayers Served. H&R Block served approximately 16,933,000 taxpayers
in the United States during fiscal year 2000, an increase from 16,542,000
taxpayers served in fiscal year 1999 and 15,835,000 taxpayers served in fiscal
1998. "Taxpayers served" includes taxpayers for whom H&R Block prepared income
tax returns as well as taxpayers for whom Block provided only electronic filing
services.
4
<PAGE> 5
Tax Return Preparation. During the 2000 income tax filing season
(January 2 through April 30), H&R Block offices in the United States prepared
approximately 16,276,000 individual income tax returns, compared to the
preparation of 15,761,000 returns in fiscal year 1999, and 14,838,000 returns in
fiscal year 1998. These returns constituted about 14% of an IRS estimate of
total individual income tax returns filed as of April 30, 2000 compared to 13.7%
in fiscal 1999. The following table shows the approximate number of income tax
returns prepared at H&R Block offices during the last five tax filing seasons:
Tax Season Ended April 30
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Returns Prepared 13,360 14,302 14,838 15,761 16,276
</TABLE>
During the tax season, most H&R Block offices are open from 9:00 a.m.
to 9:00 p.m. weekdays and from 9:00 a.m. to 5:00 p.m. Saturdays and Sundays.
Office hours are often extended during peak periods. Most tax preparation
business is transacted on a cash basis. The procedures of Tax Services have been
developed so that a tax return is prepared on a computer in the presence of the
customer, in most instances in less than one hour, on the basis of information
furnished by the customer. Pursuant to the one-stop service offered at
company-owned offices, the return is reviewed for accuracy and presented to the
customer for signature and filing during his or her initial visit to the office.
H&R Block Premium. In addition to its regular offices, H&R Block offers
tax return preparation services at H&R Block Premium offices in the United
States. Appealing to taxpayers with more complicated returns, H&R Block Premium
stresses the convenience of appointments, year-round tax service from the same
preparer and private office interviews. The number of H&R Block Premium offices
decreased in fiscal year 2000 to 555, compared to 617 in fiscal year 1999, and
598 in fiscal 1998. In fiscal 2000, the number of H&R Block Premium clients
decreased to approximately 619,000, compared to approximately 719,000 in fiscal
year 1999 and approximately 647,000 in fiscal year 1998.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the Internal Revenue Service, is
mathematically accurate. If the customer desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the customer.
An eligible electronic filing customer may also apply for a refund
anticipation loan ("RAL") at an H&R Block office. Under the 2000 RAL program,
Tax Services' electronic filing customers who meet certain eligibility criteria
are offered the opportunity to apply for loans from Household Bank ("Household")
in amounts based upon the customers' anticipated Federal income tax refunds.
Income tax return information is simultaneously transmitted by H&R Block to the
IRS and the lending bank. Within a few days after the date of filing, a check in
the amount of the loan, less the bank's transaction fee and H&R Block's tax
return preparation fee (and, where applicable, electronic filing fee), is
received by the RAL customer. The IRS then directly deposits the participating
customer's actual Federal income tax refund into a designated account at the
bank in order for the loan to be repaid.
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<PAGE> 6
Tax Services received a $9.00 fee per RAL from Household for sublicense of
patent rights, the license of trademarks and certain expenses incurred in
connection with the making of RALs.
H&R Block was named a partner in the IRS's "Debt Indicator" pilot
program for the 2000 tax season. The Debt Indicator program is designed to
increase the number of electronically filed returns and aid the IRS, H&R Block
and other IRS partners in screening for electronic filing fraud. Under the
program, the IRS advises its partners if a requested refund will be reduced by
an offset, such as back taxes, delinquent student loans or overpayment from
federal agencies. Household uses the Debt Indicator in determining whether to
make a refund anticipation loan. Participation in the program resulted in an
approximate 40% overall reduction in refund anticipation loan pricing for
clients in the 2000 tax season. In exchange for access to the Debt Indicator,
tax preparers agree to help in strengthening anti-fraud efforts and increasing
the number of electronically filed returns.
H&R Block also offers an electronic refund service pursuant to which an
eligible electronic filing service customer's income tax refund is directly
deposited into an account at a bank (Tax Services used Household in 2000) within
approximately three weeks after the tax return is electronically filed. A check
is thereafter issued to the taxpayer in the amount of the refund, less the
bank's transaction fee and H&R Block's tax return preparation fee (and, where
applicable, electronic filing fee).
H&R Block filed approximately 12,592,000 U.S. tax returns
electronically in fiscal 2000 compared to 11,139,000 in fiscal 1999 and
9,423,000 in fiscal 1998. Approximately 4,814,000 refund anticipation loans were
processed in fiscal 2000 by H&R Block, compared to 2,811,000 in fiscal 1999 and
2,420,000 in fiscal 1998. Approximately 1,499,000 electronic refunds were
processed in fiscal 2000 by H&R Block, compared to 1,916,000 in fiscal 1999 and
1,855,000 in fiscal 1998.
In 2000, H&R Block offered a service to transmit state income tax
returns electronically to state tax authorities in 39 states and the District of
Columbia (compared to 38 states and the District of Columbia in fiscal 1999 and
35 states and the District of Columbia in fiscal 1998) and plans to continue to
expand this program as more states make this filing alternative available to
their taxpayers.
Refund Rewards Program. Under the Refund Rewards(TM) program, H&R Block
clients who electronically file their returns can choose to have the amount of
their refunds, less the tax preparation fee (and, where applicable, the
electronic filing fee) directly deposited into an account at Household Bank and
then loaded onto a prepaid buying card. The card can then be used when making
purchases with the program's participating retail merchants, including General
Motors and Sears Roebuck & Co. ("Sears"), to receive special discounts, to
obtain cash at an ATM or to make purchases anywhere MasterCard(TM) is accepted.
H&R Block Guarantee and "Peace of Mind" Program. If an H&R Block
preparer makes an error in the preparation of a customer's tax return that
results in the assessment of any interest or penalties on additional taxes due,
while H&R Block does not assume the liability for the additional taxes (except
under its "Peace of Mind" Program described below), it guarantees payment of the
interest and penalties.
In addition to H&R Block's standard guarantee to pay penalty and
interest attributable to errors made by an H&R Block preparer, under the "Peace
of Mind" program, H&R Block agrees to pay additional taxes owed by the customer
(for which liability would not ordinarily accrue) resulting from
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<PAGE> 7
such errors. The Peace of Mind program has a per customer cumulative limit of
$4,000 ($5,000 at H&R Block Premium offices) in additional taxes paid with
respect to the Federal, state and local tax returns prepared by H&R Block for
the taxable year covered by the Program.
Income Tax Courses. H&R Block offers to the public income tax return
preparation courses that teach taxpayers how to prepare their own income tax
returns, as well as provide H&R Block with a source of trained income tax return
preparers. During the 2000 fiscal year, 175,200 students enrolled in H&R Block's
basic and advanced income tax courses in the United States, compared to 159,216
students during fiscal year 1999 and 130,884 students during fiscal year 1998.
Owned and Franchised Offices. Most H&R Block offices are similar in
appearance and usually contain the same type of furniture and equipment, in
accordance with the specifications of Tax Services. Free-standing offices are
generally located in business and shopping centers of large metropolitan areas
and in the central business areas of smaller communities. All offices are open
during the tax season. During the balance of the year, only a limited number of
offices are open, but through telephone listings, H&R Block personnel are
available to provide service to customers throughout the entire year.
In fiscal year 2000, H&R Block also operated 756 offices in department
stores in the United States, including offices in Sears stores operated as
"Sears Income Tax Service by H&R Block." During the 2000 tax season, the Sears'
facilities constituted approximately eight percent of the tax office locations
of H&R Block. Tax Services is a party to a license agreement with Sears relating
to Tax Service's operation in Sears' locations throughout the United States.
Such license agreement expires on December 31, 2004, subject to termination
rights of both parties for a limited period of time after each tax season. Tax
Services believes its relations with Sears to be excellent and that both parties
to the license arrangement view the operations thereunder to date as
satisfactory.
On April 17, 2000, there were 9,210 H&R Block offices in operation in
the United States compared to 8,923 offices in operation on April 15, 1999, and
8,780 offices in operation on April 15, 1998. Of the 9,210 offices, 5,162 were
owned and operated by Tax Services (compared to 4,880 in fiscal year 1999 and
4,640 in fiscal year 1998) and 4,048 were owned and operated by independent
franchisees (compared to 4,043 in fiscal 1999 and 4,140 in fiscal 1998). Of such
franchised offices in fiscal 2000, 2,749 were operated by "satellite"
franchisees of Tax Services (described below), 818 were operated by "major"
franchisees (described below) and 481 were operated by satellite franchisees of
major franchisees.
Two types of franchises have principally been granted by the Company
and its subsidiaries. "Major" franchisees entered into agreements with the
Company (primarily in the Company's early years) covering larger cities and
counties and providing for the payment of franchise royalties based upon a
percentage of gross revenues of their offices. Under the agreements, the Company
granted to each franchisee the right to the use of the name "H&R Block" and
provided a Policy and Procedure Manual and other supervisory services. Tax
Services offers to sell furniture, signs, advertising materials, office
equipment and supplies to major franchisees. Each major franchisee selects and
trains the employees for its office or offices. Since March 1993, HRB Royalty,
Inc., an indirect subsidiary of the Company, has been the franchisor under the
major franchise agreements.
In smaller localities, Tax Services has granted what it terms
"satellite" franchises. A satellite franchisee receives from Tax Services signs,
designated equipment, specialized forms, local
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<PAGE> 8
advertising, initial training, and supervisory services and, consequently, pays
Tax Services a higher percentage of his or her gross tax return preparation and
related service revenues as a franchise royalty than do major franchisees. Many
of the satellite franchises of Tax Services are located in cities with
populations of 15,000 or less. Some major franchisees also grant satellite
franchises in their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure compliance
with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue to
do so if future conditions warrant such acquisitions and satisfactory terms can
be negotiated. In October 1999, Tax Services acquired a major tax franchise
operation serving parts of North and South Carolina through 90 offices operated
by major franchisees and their subfranchisees. The Company issued 475,443 shares
of its Common Stock from treasury shares, with a value of approximately $21.0
million, for the purchase. In fiscal year 2000, Tax Services also acquired 11
satellite franchise offices and 13 offices of other tax businesses.
E-Commerce Initiatives. The Company's subsidiaries offer online tax
preparation, electronic filing of tax returns, mortgage products and brokerage
services through its web site at www.hrblock.com. In January 2000, these
subsidiaries launched an upgraded web site which is organized into three main
areas: Tax, Mortgage and Investment Centers.
The Tax Center offers a program that enables individuals to prepare
federal and state income tax returns online, file federal and many state tax
returns electronically, receive tax tips, subscribe to a tax newsletter and use
withholding and refund calculators for tax planning. The web site also offers a
program called Electronic Refund Advance ("ERA"), a unique loan product that
allows users to have a tax refund advance of up to $5,000 deposited directly
into their bank accounts usually within two days after the IRS accepts the
taxpayer's electronically filed return. ERA is a loan and the lending
institution, Household, charges a $19.95 fee for each transaction during the
2000 tax season. Household paid Block Financial Corporation ("BFC") a license
fee for each approved ERA of $7.21 for the sublicense of patent rights, the
license of trademarks and certain expenses incurred in connection with the
making of ERAs.
Pursuant to a three-year agreement announced in March 2000, BFC has
teamed with Microsoft Corporation ("Microsoft") to provide exclusive web-and
desktop-based tax preparation products for its customers who use the MSN(TM)
Money Central(TM) personal finance service and Microsoft(R) Money. Microsoft
and BFC plan to collaborate on integration capabilities between Microsoft
financial products and BFC's software and online-based tax preparation
products. As a result of this alliance, Microsoft has indicated its intention
to cease further development of its Microsoft(R) TaxSaver(TM) tax preparation
software, a product competitive with BFC's TaxCut(R) tax preparation software.
The Mortgage Center enables users to apply for mortgages online and
track the status of their applications through the web site. Block Financial
has teamed with E-Loan, Inc. ("E-Loan"), a leading online lender, to provide a
competitive mortgage marketplace where users can shop with more than 70 loan
providers for low rates on mortgages. The Mortgage Center also includes
interactive calculators to estimate the tax implications and benefits of home
ownership, e-mail notification when the desired loan
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<PAGE> 9
rate becomes available, a tool that recommends the best loan types for a
borrower's situation, customized rate quotes and a mortgage comparison feature.
The Investment Center provides online brokerage services through H&R
Block Financial Corporation, a subsidiary of OLDE Financial. Users can monitor
investment portfolios, calculate unrealized profits and losses and open a
variety of investment accounts with access to stocks, bonds and mutual funds.
Trades at H&R Block Financial Corporation are executed and cleared by, and
accounts are carried by, OLDE Discount on a fully disclosed basis.
BFC has arranged with InsWeb, a leading Internet insurance marketplace,
to offer through the Company's web site free, multiple insurance quotes for
term-life, homeowners and automobile insurance products from leading insurers.
Software Products. BFC develops and markets the TaxCut tax preparation
software package (known as Kiplinger TaxCut during fiscal year 2000) and markets
Kiplinger's Home Legal Advisor(SM), Kiplinger's Small Business Attorney(R),
Kiplinger's NetWealth(SM) and Kiplinger's WILLPower(SM) and Names & Dates(R)
software products. H&R Block Investments, Inc. a wholly owned subsidiary of BFC
and a federally registered investment advisor markets Kiplinger's NetWealth(SM).
Refund Anticipation Loan Participations. BFC is a party to a July 1996
agreement with Household to purchase a participation interest in RALs provided
by Household to H&R Block tax customers. See "Electronic Filing" under "Tax
Services" above for a discussion of RALs. In the 10-year agreement, BFC agreed
to purchase an initial 40% participation interest in such RALs, which interest
would be increased to nearly 50% in specified circumstances. Beginning in fiscal
1999, the participation interest was increased to 49.9% in company-owned RALs,
and BFC participated in 25% of major franchise RALs. BFC's purchases of the
participation interests are financed through short-term borrowings. BFC bears
all of the risks associated with its interests in the RALs. BFC's total RAL
revenue in fiscal year 2000 was approximately $89.8 million (compared to revenue
of $90.2 million in fiscal 1999 and $53.3 million in fiscal 1998), generating
approximately $45.8 million in pretax profits (compared to $19.1 million in
pretax profits in fiscal year 1999 and $6.4 million in pretax profits in fiscal
year 1998).
Seasonality of Business. Since most of the customers of Tax Services
file their tax returns during the period from January through April of each
year, substantially all of Tax Services' revenues from income tax return
preparation, related services and franchise royalties are received during this
period. As a result, Tax Services operates at a loss through the first eight or
nine months of its fiscal year. Historically, such losses primarily reflect
payroll of year-round personnel, training of income tax preparers, rental and
furnishing of tax offices, and other costs and expenses relating to preparation
for the following tax season.
BFC's income tax return preparation software, online tax preparation
and RAL participation businesses are also seasonal, with the substantial portion
of the revenues from these businesses generated during the tax season.
Service Marks and Trademarks. HRB Royalty, Inc., a Delaware
corporation, claims ownership of the following service marks and trademark
registered on the principal register of the United States Patent and Trademark
Office:
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Accufile
Alguien En Quien Confiar
Block Mortgage
Executive (when used in connection with the preparation of
income tax returns for others)
H&R Block in Two Distinct Designs
H&R Block Premium
Rapid Refund H&R Block and Design
Someone You Can Count On
The Income Tax People
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
America's Largest Tax Service
BlockBonus
H&R Block in a Third Distinct Design
Nation's Largest Tax Service
Refund Rewards
We know. Do you?
Tax Services has a license to use the trade names, service marks and
trademarks of HRB Royalty, Inc., in the conduct of the business of Tax Services.
BFC claims ownership of the following services marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
Audit Buster Names & Dates
B and Design (2) Small Business Attorney
Block Financial (2) Tax Cut
Block Financial and B Design (2) TaxCut and Design
Conductor Web
Conductor and Baton Design WebBank
Conductor and Hand-Held Baton Design WebCard
Conductor Card Review WebPay
Financial Finder
BFC also claims ownership of the following unregistered service marks
and trademarks:
CONDUCTOR.COM WebAccount
DittoCard WebBroker
Download Depot WebBuyer
Fast Lane WebCheck
Home Legal Advisor WebChecking
NetGuard WebQuote
NetWealth WILLPower
NetWealth and Design Your Complete Personal
Solve Your Everyday Business Problems Legal Resource
The Fastest and Easiest Way To Do Your Taxes
The Easy Way to Financial Success
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BFC also claims ownership of the patent "SYSTEM FOR ON-LINE FINANCIAL
SERVICES USING DISTRIBUTED OBJECTS" registered as Patent No. 5,706,442 on
January 6, 1998, on the principal register of the United States Patent and
Trademark Office.
In connection with BFC's sale of its credit card portfolio in January
1999, it granted to Providian National Bank non-exclusive, non-transferable and
royalty-free licenses to use the mark "Conductor and Baton Design" for up to two
years, the patent "SYSTEM FOR ON-LINE FINANCIAL SERVICES USING DISTRIBUTED
OBJECTS" for a period of ten years, and the mark "CONDUCTOR.COM" perpetually.
Competitive Conditions. The tax return preparation and electronic
filing businesses are highly competitive. There are a substantial number of tax
return preparation firms and accounting firms that offer tax return preparation
services. Many tax return preparation firms and many firms not otherwise in the
tax return preparation business are involved in providing electronic filing and
refund anticipation loan services to the public. Commercial tax return preparers
and electronic filers are highly competitive with regard to price, service and
reputation for quality. Tax Services believes that, in terms of the number of
offices and tax returns prepared, it is the largest tax return preparation firm
in the United States. Tax Services also believes that in terms of the number of
offices and tax returns electronically filed in fiscal year 2000, it is the
largest provider of electronic filing services in the United States.
The software and e-commerce businesses are highly competitive and
consist of a large number of companies. In the software industry, Intuit, Inc.
is a dominant supplier of personal financial software. The online tax
preparation market is a relatively new market, and BFC expects increased
competition in this area as more competitors enter the market or existing
providers of online tax preparation services consolidate.
Government Regulation. Several states have enacted, or have considered,
legislation regulating commercial tax return preparers. Primary efforts toward
the regulation of such preparers have historically been made at the Federal
level. Federal legislation requires income tax return preparers to, among other
things, set forth their signatures and identification numbers on all tax returns
prepared by them, and retain for three years all tax returns prepared. Federal
laws also subject income tax return preparers to accuracy-related penalties in
connection with the preparation of income tax returns. Preparers may be enjoined
from further acting as income tax return preparers if the preparers continuously
and repeatedly engage in specified misconduct. With certain exceptions, the
Internal Revenue Code also prohibits the use or disclosure by income tax return
preparers of certain income tax return information without the prior written
consent of the taxpayer.
The Company believes that the Federal legislation regulating commercial
tax return preparers has not had and will not have a material adverse effect on
the operations of H&R Block. In addition, no present state statutes of this
nature have had a material adverse effect on the business of H&R Block. However,
the Company cannot predict what the effect may be of the enactment of new
statutes or adoption of new regulations.
The Federal government regulates the electronic filing of income tax
returns in part by specifying certain criteria for individuals and businesses to
participate in the government's electronic filing program for U.S. individual
income tax returns. Individuals and businesses must, upon
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application, be accepted into the electronic filing program. Once accepted,
electronic filers must comply with all publications and notices of the IRS
applicable to electronic filing, provide certain information to the taxpayer,
comply with advertising standards for electronic filers, and be subjected to
possible monitoring by the IRS, penalties for disclosure or use of income tax
return preparation and other preparer penalties, and suspension from the
electronic filing program.
The Federal statutes and regulations also regulate an electronic
filer's involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is in fact a loan, and not a
substitute for or a quicker way of receiving an income tax refund. The Federal
laws place restrictions on the fees that an electronic filer may charge in
connection with refund anticipation loans.
States that have adopted electronic filing programs for state income
tax returns have also enacted laws that regulate electronic filers. In addition,
some states and localities have enacted laws and adopted regulations that
regulate refund anticipation loan facilitators and/or the advertisement and
offering of electronic filing and refund anticipation loans.
The Company believes that the Federal, state and local legislation
regulating electronic filing and the facilitation of refund anticipation loans
has not, and will not in the future, materially adversely affect the operations
of H&R Block. However, the Company cannot predict what the effect may be of the
enactment of new statutes or the adoption of new regulations pertaining to
electronic filing and/or refund anticipation loans.
The repayment of RALs generally depends on IRS direct deposit
procedures. The IRS may from time to time change its direct deposit procedures
or may determine not to make direct deposits of all or portions of a borrower's
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lender's ability to collect a RAL and result in a loss to
BFC in connection with its purchases of interests in RALs and a loss to Tax
Services for tax preparation fees not collected. However, the Company believes
that Federal statutes and regulations regulating electronic filing and RALs have
not had and will not have a material adverse effect on the operations of BFC or
Tax Services. However, the Company cannot predict what the effect may be of the
enactment of new Federal or state statutes or the adoption of new regulations.
As noted above under "Owned and Franchised Offices," many of the income
tax return preparation offices operating in the United States under the name
"H&R Block" are operated by franchisees. Certain aspects of the
franchisor/franchisee relationship have been the subject of regulation by the
Federal Trade Commission and by various states. The extent of such regulation
varies, but relates primarily to disclosures to be made in connection with the
grant of franchises and limitations on termination by the franchisor under the
franchise agreement. To date, no such regulation has materially affected the
business of the Company's subsidiaries. However, the Company cannot predict what
the effect may be of the enactment of new statutes or adoption of new
regulations pertaining to franchising.
From time to time, and especially in election years, the subjects of
tax reform, tax simplification, the restructuring of the tax system, a flat tax,
a consumption tax, a value-added tax or a national sales tax surface. While each
flat tax proposal and most other tax simplification proposals have fallen short
of adoption, such issues have received serious attention in recent years.
Historically, changes in tax laws have increased H&R Block's business. The
immediate result of tax law changes
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has been an increase in complexity. The transition from the current system to a
new, untested system is likely to take a number of years and, under most serious
tax reform proposals, Americans will still need to file Federal and state tax
returns. The Company believes that customers will still come to H&R Block for
convenience, accuracy and answers to tax questions. However, if enacted, the
effect of tax reform or simplification legislation on the business of the
Company's subsidiaries over time is uncertain, and such legislation could have a
material adverse effect on the Company's business, financial position and
results of operations.
INTERNATIONAL TAX OPERATIONS
Generally. This reportable operating segment provides the preparation
of tax returns, electronic filing and related services to the general public in
Canada, Australia and the United Kingdom. Tax preparation of U.S. tax returns
and related services are offered by franchisees in ten countries. The electronic
filing of U.S. income tax returns is offered at franchised offices located in
Europe, and the electronic filing of Australian, Canadian and United Kingdom
income tax returns is offered at H&R Block offices in Australia, Canada and the
United Kingdom, respectively.
The returns prepared at 1,404 company-owned and franchised offices in
countries outside of the United States constituted 12.3% of the total returns
prepared by H&R Block in the last fiscal year (compared to 12.8% in fiscal year
1999 and 13.8% in fiscal year 1998).
Canadian Operations. H&R Block Canada, Inc. ("Block Canada") and its
franchisees prepared approximately 1,805,000 Canadian regular and discounted
returns filed with Revenue Canada during the 2000 income tax filing season,
compared to 1,858,000 Canadian returns prepared during fiscal year 1999, and
1,945,000 Canadian returns prepared in fiscal 1998. The number of offices
operated by H&R Block Canada decreased in fiscal year 2000 to 966 from 1,032 in
fiscal year 1999 (928 in 1998). Of the 966 offices in Canada, 537 were owned and
operated by Block Canada and 429 were owned and operated by franchisees. H&R
Block operated 142 offices in department stores in Canada in fiscal year 2000,
including 79 offices in Sears' facilities.
Block Canada and its franchisees offer a refund discount ("CashBack")
program to their customers in Canada. The procedures which H&R Block must follow
in conducting the program are specified by Canadian law. In accordance with
current Canadian regulations, if a customer's tax return indicates that such
customer is entitled to a tax refund, a check is issued by H&R Block to the
customer for an amount which is equal to the sum of (i) 85% of that portion of
the anticipated refund which is less than or equal to $300 and (ii) 95% of that
portion of the refund in excess of $300. The customer assigns to H&R Block the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to H&R Block and deposited by H&R Block
in its bank account. In accordance with the law, the discount is deemed to
include both the tax return preparation fee and the fee for tax refund
discounting. This program is financed by short-term borrowings. In some parts of
Canada, CashBack services are offered at offices identified as "H&R Block
Express." The number of returns discounted under the CashBack program increased
to approximately 547,000 in fiscal year 2000 from 516,000 in fiscal year 1999
and 532,000 in fiscal year 1998.
Block Canada also provides check-cashing and other low-end financial
services through its subsidiary Cashplan Systems Inc. These services are
offered in offices operated under the name "Financial Stop," where no tax
return preparation services are offered, as well as in some H&R Block Express
offices.
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Australian Operations. The number of returns prepared by H&R Block
Limited, the Company's indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 455,000 in fiscal year 2000 from 428,000
in fiscal 1999 and 406,000 in fiscal year 1998. The number of offices operated
by H&R Block in Australia in fiscal year 2000 was 349, compared to 347 offices
operated in fiscal 1999 and 334 offices operated in fiscal 1998. Of the 349
offices, 219 were owned and operated by H&R Block Limited and 130 were
franchised offices.
United Kingdom Operations. The Tax Team Limited, a Horsham-based firm
acquired by an indirect subsidiary of the Company, provides tax return
preparation services in the United Kingdom. The Tax Team operated 26 offices in
fiscal year 2000, the same number it operated in fiscal year 1999 (compared to
28 offices in 1998).
Seasonality of Business. Revenues in this segment are seasonal in
nature with peak revenues occurring during the applicable tax seasons (January
through April in Canada; July through October in Australia; and August through
March in the United Kingdom).
Competitive Conditions. The tax return preparation business is highly
competitive, with a substantial number of firms offering tax preparation
services. Block Canada and H&R Block Limited believe that they operate the
largest tax return preparation business in their respective countries. The Tax
Team Limited believes that it is one of the largest providers of tax
preparation services in the United Kingdom.
Government Regulation. Statutes and regulations relating to income tax
return preparers, electronic filing, franchising and other areas affecting the
income tax business also exist outside of the United States. In addition, the
Canadian government regulates the refund discounting program in Canada, as
discussed under "Canadian Operations," above. These laws have not materially
affected the international tax operations conducted by subsidiaries of the
Company.
FINANCIAL SERVICES
Generally. The financial services reportable operating segment consists
of investment services and mortgage operations and such segment provides
financial planning, investment advice, brokerage services and the origination,
purchase, servicing, securitization and sale of conforming and nonconforming
mortgage loans in the United States. The investment services business is
conducted primarily through OLDE Discount and Birchtree Financial Services, Inc.
("Birchtree"). The mortgage business is conducted primarily through the
Company's indirect subsidiaries: Option One Mortgage Corporation ("Option One")
and H&R Block Mortgage Corporation ("H&R Block Mortgage") (formerly Assurance
Mortgage Corporation of America).
Investment Services
Generally. The Company's commitment to becoming a full service provider
of financial services was exemplified during fiscal year 2000 by the December 1,
1999 purchase of OLDE Financial, a Detroit-based financial services holding
company incorporated in the State of Michigan on August 5, 1986, and Financial
Marketing Services, Inc., a Michigan corporation incorporated in 1971. See the
discussion of the acquisition under "General Development of Business," above.
OLDE Discount. OLDE Discount, a Michigan corporation and the principal
subsidiary of OLDE Financial, is one of the largest discount brokers in the
United States. OLDE Discount is a
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registered broker-dealer with the SEC and is a member of the New York Stock
Exchange, other national securities exchanges and the National Association of
Securities Dealers, Inc. ("NASD"). OLDE Discount currently has no operations
outside of the United States. Effective August 1, 2000, OLDE Discount will
change its name to H&R Block Financial Advisors, Inc., but will be referred to
herein as OLDE Discount.
Revenues from OLDE Discount's discount brokerage activities are
generated through customer purchases and sales of stocks, bonds, options,
mutual funds, investment trusts, certificates of deposit and other financial
products. Commissions may be charged on both listed and over-the-counter
("OTC") transactions executed on an agency basis. Registered representatives
receive compensation in the form of commissions on OLDE Discount's revenues
from customer transactions and may receive additional compensation on customer
transactions in securities recommended by OLDE Discount or for which OLDE
Discount provides research as a result of the firm's market making activities.
Discount Brokerage Business and Securities Trading. OLDE Discount
engages in a discount brokerage business primarily for retail customers
throughout the United States. OLDE Discount is also a dealer and engages in
market making activities in common stocks regularly trading in securities on a
principal basis and for its own account in the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), OTC market and on
regional stock exchanges. OLDE Discount acts as a qualified dealer in certain
listed securities on the Cincinnati Stock Exchange. In addition, OLDE Discount
regularly trades in corporate and municipal bonds, various U.S. Government and
U.S. Government Agency securities and certificates of deposit.
OLDE Discount is a full service broker dealer which effects
transactions on an unsolicited or solicited basis for its customers at
commission rates lower than the rates full-commission brokerage firms charge.
Although OLDE Discount offers discount brokerage services to retail customers,
OLDE Discount also offers services and products typically offered by
full-commission firms such as investment research with regard to individual
securities. Other services and products offered include money market funds with
sweep provisions for settlement of customer transactions; fixed-income
products; mutual funds; margin accounts; checking privileges; option accounts;
stock research; account access/review via the Internet; dividend reinvestment
plans and individual retirement accounts with no annual fees ("IRAs").
When OLDE Discount executes transactions as a dealer on a principal
basis, it may charge mark-ups or mark-downs which are equivalent to its
discounted commission schedule. Under certain circumstances, customers may be
eligible to effect securities transactions in which commissions, mark-ups and/or
mark-downs are not charged. OLDE Discount selects the stocks in which it makes a
market based upon fundamental and market factors. For those stocks in which OLDE
Discount makes a market, it may derive revenue from the spread which is the
difference between the bid and offer prices. However, due to the nature of the
activity and the volatility of the securities markets, OLDE Discount may realize
losses as a result of adverse market fluctuations.
Online Brokerage Services and Other Business. H&R Block Financial
Corporation ("H&R Block Financial"), a subsidiary of OLDE Financial, provides
online brokerage services through the Company's web site located at
www.hrblock.com. H&R Block Financial introduces its accounts to OLDE Discount.
OLDE Discount carries H&R Block Financial's accounts and provides clearing and
execution services to H&R Block Financial on a fully disclosed basis. The
Investment Center on the Company's web site is powered by SmartVest, a
convenient, user-friendly and powerful online
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investment service. H&R Block Financial is licensed in 49 states and the
District of Columbia. Additional information regarding online operations is
provided under the "E-Commerce Initiatives" in the "U.S. Tax Operations"
section, above.
Other Services. OLDE Discount also acts as custodian, as well as
broker, for IRAs and charges no annual fee. The OLDE Custodian Fund (the
"Fund"), organized as a Massachusetts business trust, operates as a
diversified, open-end management investment company and consists of three
series of shares of beneficial interest: OLDE Money Market Series, OLDE Premium
Money Market Series and OLDE Premium Plus Money Market Series. All three series
are offered as "no load" funds. OLDE Money Market Series commenced operations
in October 1989; OLDE Premium Plus Money Market Series in July 1990; and OLDE
Premium Plus Money Market Series in January 1992. Each series of the Fund is
managed by OLDE Asset Management, Inc., a subsidiary of OLDE Financial and a
registered investment adviser. The shares of the Fund are underwritten by OLDE
Discount and distributed exclusively by OLDE Discount.
Advertising and Marketing. Advertising and marketing play a significant
role in expanding OLDE Discount's client base as well as in introducing new
products and services. OLDE Discount uses a combination of media including
newspapers, magazines, the yellow pages, direct mail, television and its
Internet home page at www.olde.com. When an investor contacts OLDE Discount, the
investor receives a package including an account application and a brochure
containing information on the services and products offered by OLDE Discount.
Additional detailed information is available upon request and can be tailored to
match the client's investment preferences.
Retail Branch Offices and H&R Block Financial Centers. OLDE Discount is
authorized to do business as a broker-dealer in all 50 states and the District
of Columbia. At fiscal year end, OLDE Discount operated in 198 offices located
in 35 states and the District of Columbia. Ninety-three of these offices were
H&R Block Financial Centers, and the remaining offices are planned to be
converted to Financial Centers over the next two years. These locations offer
services year-round to clients including financial products and services, tax
preparation and, in some offices, mortgage services. OLDE Discount believes that
the existence of branch offices contributes to its growth and client
satisfaction. The existence of a branch office generally results in an increase
in unsolicited customer transactions in the geographic area near the branch.
Many clients prefer to conduct business with personnel in local rather than
distant offices. Clients may use branch offices to receive and deliver checks
and deliver securities.
Birchtree Financial Services, Inc. Birchtree, a full service investment
firm headquartered in Kansas City, Missouri, offers stocks, bonds, mutual funds
and other securities and insurance products through a network of registered
representatives across the country. Included among Birchtree's registered
representatives are employees of H&R Block's tax subsidiaries. These employees
are tax preparers who are licensed to sell securities, mutual funds and
insurance products.
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Mortgage Operations
Generally. Mortgage operations originate, purchase, service, securitize
and sell conforming and nonconforming mortgage loans in the United States.
Conforming mortgages are those that may be offered through government sponsored
loan agencies. Nonconforming mortgages are those that may not be offered through
government-sponsored loan agencies, and typically involve borrowers with
impaired credit, who have substantial equity in the property which will be used
to secure the loan. Retail and wholesale mortgage origination services were
offered in fiscal year 2000 through a network of mortgage brokers in 48 states,
H&R Block Financial Center offices in 12 states, and branch offices in 15
states.
Option One Mortgage Corporation. Option One, based in Irvine,
California, has a network of more than 7,500 mortgage brokers in 48 states.
Option One originates and purchases loans through wholesale channels. Option One
originated $5.7 billion in mortgage loans in fiscal year 2000, compared to $3.6
billion in fiscal 1999 and approximately $1.9 billion in fiscal year 1998 after
its acquisition. The average Option One loan during fiscal year 2000 had a
$106,700 principal balance (compared to $108,000 in fiscal 1999), and was
secured by a first lien on a single-family residence. During fiscal 2000, Option
One sold or securitized approximately $6.1 billion of mortgage loans, as
compared to $3.6 billion sold in fiscal 1999 and $1.8 billion in fiscal 1998
after its acquisition. At the end of fiscal year 2000, Option One's servicing
portfolio was 114,300 loans totaling more than $11.3 billion, compared to 65,300
loans totaling $6.5 billion at the end of fiscal 1999 and 42,800 loans totaling
$4.3 billion at the end of fiscal 1998.
Wholesale originations and purchases represented the substantial
majority of Option One's total loan production. Wholesale loan originations
involve a broker who assists the borrower in completing the loan application,
the gathering of necessary information and identifying a lender that offers a
loan product which is best suited to the borrower's financial needs. Brokers are
free to submit an application to one or more nonconforming lenders, such as
Option One. Upon receipt of an application from a broker, Option One's branch
office processes and underwrites the loan. Based upon this review, Option One
advises the broker whether the loan application meets with Option One's
underwriting guidelines and product description by issuing a loan approval or
denial, and in some cases, issues a "conditional approval," which requires the
submission of additional information or clarification. Option One sells
virtually all of its loan production through a combination of securitization and
bulk sales of whole loans to institutional purchasers.
In July 1999, the Company announced that it was evaluating strategic
alternatives for Option One, including a possible sale or joint venture with a
business partner. On March 27, 2000, the Company announced that no expression of
interest regarding the acquisition of Option One resulted in an offer considered
to be in the best interests of the Company's shareholders. The Company also
announced plans for off-balance sheet financing arrangements and whole-loan sale
arrangements relating to Option One. Option One received commitments from three
banks totaling $2 billion for external warehouse financing for its subprime
mortgage production over a 12-month period. Option One has also received
commitments from two investment banks to purchase subprime mortgage loans
ranging from a minimum of $2.5 billion to a maximum of $6 billion over a
12-month period.
H&R Block Mortgage Corporation. On February 1, 2000, Assurance Mortgage
Corporation, which BFC acquired on March 5, 1999, changed its name to H&R Block
Mortgage Corporation ("H&R Block Mortgage"). H&R Block Mortgage is a retail
mortgage lender for conventional,
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nonconventional and government loans and is licensed to conduct business in 48
states. H&R Block Mortgage is an approved seller/servicer for Fannie Mae and
Freddie Mac, and is HUD authorized to originate and underwrite FHA and VA
mortgage loans. In fiscal year 2000, H&R Block Mortgage originated retail
mortgage loans from various sales channels, including 35 branch offices in 15
states, and two regional call centers located in Tampa, Florida and Pleasanton,
California, and by teaming with E-Loan over the Internet at www.hrblock.com. See
"E-Commerce Initiatives" under "U.S. Tax Operations," above.
In April 2000, H&R Block Mortgage entered into a strategic alliance
with Countrywide Home Loans, Inc. ("Countrywide") to sell 95% of its qualifying
conforming mortgage loans to Countrywide. The majority of mortgage loans sold to
Countywide are underwritten through an automated system under which H&R Block
Mortgage's representations and warranties relating to compliance with
Countrywide's underwriting guidelines are assumed by Countrywide. This alliance
allows H&R Block Mortgage, on average, an increase of 50 basis points in
execution due to price, efficiencies in delivery, and elimination of
redundancies in operations.
H&R Block Mortgage maintains a committed warehouse financing facility
with GE Capital Mortgage Services, Inc. and an off-balance sheet financing
arrangement with Prudential Securities Credit Corp. H&R Block Mortgage sells
substantially all of its mortgage loans servicing-released into the secondary
market.
NCS Mortgage Services, LLC. The mortgage loan origination operations
and certain assets of NCS Mortgage Services, a wholesale originator of subprime
mortgage loans, were sold by BFC to Centura Banks, Inc. of Rocky Mount, North
Carolina in March 2000.
Service Marks and Trademarks. OLDE Discount claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Chevron Design SmartTrading
IRA United SmartVest
The OLDE Investors Account SmartVestor
SmartBroker SmartViews
SmartRetirement SmartWire
SmartTrade
In addition, Smart Travel, Inc., a wholly-owned subsidiary of OLDE
Financial, claims ownership of the following registered mark: Smart Travel.
Birchtree Financial Services, Inc. claims ownership of the following
unregistered service marks and trademarks: Birchtree Financial Services (logo)
and Birchtree.com.
Option One claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
AppOne
CorOne
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Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
PartnerPlus
SumOne
The Big 2
Competitive Conditions. OLDE Discount competes directly with a broad
range of companies seeking to attract consumer financial assets, including
full-service discount brokerage firms, mutual fund companies, investment banking
firms, commercial and savings banks, insurance companies and others. The
financial services industry has become considerably more concentrated as
numerous securities firms have been acquired by or merged into other firms. Some
of these competitors have greater financial resources than OLDE Discount and
offer certain additional financial products and services. In addition, OLDE
Discount expects competition from domestic and international commercial banks to
increase as a result of recent legislative and regulatory initiatives in the
U.S. (including the passage of the Gramm-Leach-Bliley Act in November 1999) to
remove or relieve certain restrictions on mergers between commercial banks and
other types of financial services providers. OLDE Discount primarily competes
with these firms on the basis of quality of customer service, breadth of
products and services offered, prices, accessibility through delivery channels,
and technological innovation and expertise.
Discount brokerage firms and online-only financial services providers
compete vigorously with OLDE Discount with respect to commission charges.
Full-commission brokerage firms also offer discounted commissions and on-line
services to selected retail brokerage customers. In addition, some competitors
in both the full-commission and discount brokerage industries have substantially
increased their spending on advertising and direct solicitation of customers.
Competition in the online-trading business has become similarly intense
as recent expansion and customer acceptance of conducting financial transactions
online has attracted new brokerage firms to the market. Price competition
continues to intensify in online investing as traditional brokerage firms have
entered the market and existing competitors have aggressively sought to gain
market share.
The securities business is directly affected by economic and political
conditions, trends in business and finance and changes in the conditions of the
securities markets in which OLDE Discount's customers trade.
Both the conventional and sub-prime sectors of the residential mortgage
loan market are highly competitive. The principal methods of competition are in
service, quality and price. There are a substantial number of companies
competing in the residential loan market, including mortgage banking companies,
commercial banks, savings associations, credit unions and other financial
institutions. No one firm is a dominant supplier of conforming and nonconforming
mortgage loans.
Seasonality of Business. The financial services operating segment does
not, as a whole, experience significant seasonal fluctuations.
Residential mortgage volume is subject to seasonal trends, with real
estate sales being generally lower in the first calendar quarter of the calendar
year, peaking in the spring and summer seasons, and
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then declining again in November and December. Accordingly, the revenues of the
mortgage operations reporting segment are generally higher in the peak months,
but the seasonal trends do not have a material impact on overall results of the
Company.
Government Regulation. The securities industry is subject to extensive
regulation covering all aspects of the securities business, including
registration of OLDE Discount's and Birchtree's offices and personnel, sales
methods, the acceptance and execution of customer orders, the handling of
customer funds and securities, trading practices, capital structure, record
keeping policies and practices, margin lending, execution and settlement of
transactions, the conduct of directors, officers and employees, and the
supervision our employees. The various governmental authorities and industry
self-regulatory organizations which have supervisory and regulatory jurisdiction
over the Company's broker-dealer subsidiaries generally have broad enforcement
powers to censure, fine, issue cease-and-desist orders or suspend or expel a
broker-dealer or any of its officers or employees who violate applicable laws or
regulations.
The Securities and Exchange Commission is the federal agency
responsible for the administration of the federal securities laws. OLDE
Discount is registered as broker-dealer, and OLDE Asset Management, Inc. is a
registered investment adviser with the SEC. Much of the regulation of
broker-dealers has been delegated by the SEC to self-regulatory organizations,
principally the Municipal Securities Rulemaking Board, the National Association
of Securities Dealers ("NASD") and the New York Stock Exchange ("NYSE"), which
has been designated by the SEC as OLDE Discount's primary regulator. These
self-regulatory organizations adopt rules (subject to approval by the SEC) that
govern the industry and conduct periodic examinations of the operations of OLDE
Discount's brokerage and clearing activities. Securities firms are also subject
to regulation by state securities administrators in those states in which they
conduct business.
As a registered broker-dealer, OLDE Discount is subject to the net
capital rule (Rule 15c3-1) promulgated by the SEC and adopted through
incorporation by reference in NYSE Rule 325. The Rule, which specifies minimum
net capital requirements for registered brokers and dealers, is designed to
measure the financial soundness and liquidity of a broker-dealer and requires at
least a minimum portion of its assets be kept in liquid form.
OLDE Discount has elected to compute net capital under the alternative
method of computation permitted by Rule 15c3-1 which required that net capital
be not less than the greater of $1,000,000 or 2% of aggregate debit balances
(primarily receivables from customers and other broker-dealers). In computing
net capital, various deductions are made from net worth and qualifying
subordinated indebtedness. These deductions include the book value of assets not
readily convertible into cash and prescribed percentages of securities owned or
sold short. Any failure of OLDE Discount to maintain the required net capital
may subject OLDE Discount to suspension or revocation of registration or other
limitations on the firm's activity by the SEC, and suspension or expulsion by
the NYSE, NASD or other regulatory bodies, and ultimately could require the
broker-dealer's liquidation. OLDE Discount could also be prohibited from paying
dividends and redeeming stock. OLDE Discount would be prohibited from prepaying
or making payments of principal on subordinated indebtedness if its net capital
were to become less than the greater of 5% of combined aggregate debit balances,
or $1,000,000.
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<PAGE> 21
Under NYSE Rule 326, OLDE Discount is required to reduce its business
if its net capital is less than 4% of aggregate debit balances, and is
prohibited from expanding business or redeeming subordinated indebtedness if its
net capital is less than 5% of its aggregate debit balances.
Net capital rules could limit OLDE Discount's ability to engage in new
activities and expansion, and could restrict the Company's ability to withdraw
capital from its brokerage subsidiaries. Such a restriction in turn, could limit
the Company's ability to repay or reduce indebtedness (including subordinated
debentures of the Company) and pay dividends. Further, a significant operating
loss or an extraordinary charge against net capital could adversely affect OLDE
Discount's ability to expand or maintain its current levels of business. At
April 30, 2000, OLDE Discount's net capital of $340.4 million, which was 11.46%
of aggregate debit items, exceeded by $281 million its minimum required net
capital of $59.4 million. OLDE Discount has declared a dividend of $33.3 million
payable to OLDE Financial on or before July 31, 2000. Had the anticipated
dividend occurred at April 30, 2000, OLDE Discount's net capital ratio would
have been 10.34%
H&R Block Financial Corporation is subject to SEC Uniform Net Capital
Rule 15c3-3, which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital (net capital ratio),
shall not exceed 15 to 1. At April 30, 2000, H&R Block Financial Corporation had
net capital of $1.9 million, which was $1.7 million in excess of its required
net capital of $250,000. The ratio of aggregate indebtedness to net capital was
.03 to 1.
Birchtree is subject to substantially the same laws and regulations as
OLDE Discount.
The Company believes that Federal and state statutes and regulations
governing mortgage lending have not had and will not have a material adverse
effect on the operations of its mortgage subsidiaries. However, the Company
cannot predict what the effect may be of the enactment of new statutes or the
adoption of new regulations.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure and, unless an exemption is available,
require licensing of the originators of certain mortgage loans. In addition,
most states have other laws, public policies and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, and
practices that may apply to the origination, servicing and collection of
mortgage loans. The mortgage loans purchased or originated by of the Company's
mortgage subsidiaries are also subject to Federal laws, including, without
limitation, the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act, the Real Estate Settlement Procedures
Act, the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, and
certain other laws and regulations. Under environmental legislation and case law
applicable in certain states, it is possible that liability for environmental
hazards in respect of real property may be imposed on a holder of a mortgage
note secured by real property.
BUSINESS SERVICES
Generally. The business services operating segment provides accounting,
tax and consulting services to business clients, primarily mid-sized companies,
and tax, estate planning and financial planning services to individuals in the
Unites States through a network of 100 offices.
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<PAGE> 22
In addition to providing these services to the public, the subsidiaries
involved in the business services segment provide management and administrative
services to the public accounting firms from which non-attest assets have been
acquired. The subsidiaries receive fees from the public accounting firms, which
continue to provide to the public "attest" services that constitute the practice
of public accounting which H&R Block and its subsidiaries, by regulation,
generally cannot provide.
RSM McGladrey, Inc. On August 2, 1999, the Company made its largest
acquisition in the accounting sector when it completed the purchase of
substantially all of the non-attest assets of McGladrey & Pullen, LLP. At the
time of the acquisition, McGladrey 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. The purchase price was $240
million in cash payments over four years and the assumption of certain pension
liabilities with a present value of approximately $52.7 million at the time of
the acquisition. See "General Development of Business," above for additional
details regarding the acquisition. Prior to the McGladrey acquisition, HRB
Business Services, Inc., an indirect subsidiary of the Company, had acquired
regional accounting firms in Kansas City, Chicago, Indianapolis, Buffalo,
Dallas, Baltimore and Philadelphia.
The Company is in the process of integrating its previously acquired
regional accounting firms into RSM. Upon completion of the integration, RSM will
have 100 offices and offer services in 13 of the top 25 U.S. markets. This
national accounting firm will also share a single client service philosophy and
have more than 470 managing directors and approximately 4,000 employees.
In January 2000, RSM acquired Toback CPAs, P.C., a Phoenix-based
accounting firm recognized throughout the Southwest United States for serving
the accounting and business consulting needs of closely-held, privately owned
businesses. Toback's attest business was combined with that of McGladrey.
RSM continues to be a member of RSM International, the world's tenth
largest accounting and consulting organization with 400 offices in 75 countries.
McGladrey's attest business (including audit, reviews and other engagements in
which the firm issues written opinions evaluating client financial statements)
remains in a partnership owned by the McGladrey & Pullen, LLP partners and is
not affiliated with the Company.
As noted above, in the Company's acquisition of certain assets of
McGladrey in August 1999, it did not acquire assets of McGladrey relating to
McGladrey's audit business because of regulatory and other concerns. In
connection with this acquisition and the evaluation of the regulatory
restrictions and environment, the Company and McGladrey had discussions with the
staff of the SEC regarding appropriate disclosure of the policy and procedures
being implemented by McGladrey, RSM and the Company to safeguard McGladrey's
independence and integrity as an audit firm in compliance with applicable
regulations and professional responsibilities.
While such discussions have not yet resulted in any definitive
pronouncement by the SEC staff on this matter, investors should be aware that
the Company and McGladrey are tentatively considered by the SEC staff to be one
entity for purposes of applying applicable auditor independence rules with
respect to McGladrey and its clients who are required to file audited financial
statements with the SEC ("SEC Audit Clients"). Because of this consideration,
any financial interest or business relationship of the Company or its officers,
directors, principal shareholders, control persons or affiliates with a SEC
22
<PAGE> 23
Audit Client will be regarded by the SEC staff as a financial interest or
business relationship between McGladrey and the SEC Audit Client for purposes of
applying the SEC's rules regarding auditor independence. Under such rules,
McGladrey and its partners are precluded from holding certain financial
interests in and entering into certain business relationships with a SEC Audit
Client for whom McGladrey performs audit services. As presently interpreted by
the SEC staff, any such financial interest or business relationship, whether
held or engaged by McGladrey or its partners or by the Company, its officers,
directors, principal shareholders, control persons or affiliates, would threaten
to impair McGladrey's independence as an auditor of the SEC Audit Client so
involved.
The Company and McGladrey have enacted certain policies and controls to
monitor and prevent violations by them of the SEC's auditor independence rules
as so interpreted by the SEC staff. These policies and controls include the
following:
- The Company has informed its officers, directors and affiliates
(the Company has no principal shareholders or control persons for
these purposes) of the SEC staff's interpretation that certain
financial interests and business relationships with McGladrey SEC
Audit Clients are prohibited in as much as they would be deemed
to impair McGladrey's independence as an auditor.
- McGladrey's Independence and Relationship Policies and the Code
of Conduct promulgated by the American Institute of Certified
Public Accountants ("AICPA"), which address auditor independence
issues, have been distributed to all of the Company's executive
officers and directors.
- McGladrey's Prohibited Securities List, which lists securities of
McGladrey SEC Audit Clients, is distributed to the Company's
executive officers and directors on a monthly basis so that they
can detect whether they own such securities and ensure that they
do not acquire such securities.
- Each of the Company's executive officers, directors and
affiliates periodically submits an Independence Compliance
Questionnaire ("Questionnaire") that addresses auditor
independence issues. Each Questionnaire is reviewed by
McGladrey's partner responsible for independence matters.
- McGladrey informs the audit committee of each SEC Audit Client,
in writing, of the SEC staff's interpretation regarding the
attribution to McGladrey, for purposes of McGladrey's auditor
independence, of the financial interests and business
relationships of the Company, its officers, directors and
affiliates with SEC Audit Clients.
- McGladrey informs the audit committee of each SEC Audit Client of
the SEC staff's interpretation that ownership of the Company's
stock by such SEC Audit Client or its officers, directors,
controlling shareholders or affiliates could affect McGladrey's
independence as an auditor, and McGladrey obtains confirmation
and representations from such parties that they own no shares of
the Company.
- McGladrey has designated a partner responsible for independence
matters who reports directly to its Managing Partner. The partner
responsible for independence matters monitors changes in
independence standards promulgated by the AICPA, the Independence
Standards Board ("ISB") and the SEC. This partner periodically
recommends corresponding modifications to McGladrey's
Independence Relationship Policies that become effective upon the
approval of McGladrey's Board of Directors.
- RSM has agreed to comply and cause its employees to comply with
the Independence and Relationship policies of McGladrey.
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<PAGE> 24
- Employees of RSM and employees of McGladrey are informed of
changes to McGladrey's Independence and Relationship Policies and
its Prohibited Securities List on a monthly basis via electronic
bulletin boards.
- Employees of RSM and partners and employees of McGladrey
periodically complete an Independence Compliance Questionnaire
that is reviewed and approved by McGladrey's National Office of
Audit & Accounting. All exceptions are reviewed by and approved
by McGladrey's partner responsible for independence matters, its
Managing Partner and its Board of Directors.
- As mandated by its membership in the SEC Practice Section of the
AICPA, McGladrey has implemented independence training programs
and is in the process of implementing programs to test compliance
with its Independence and Relationship Policies and the
completeness and accuracy of Independence Compliance
Questionnaires.
- McGladrey has established consultation procedures for the
resolution of all identified exceptions to its policies and
AICPA, ISB or SEC independence requirements. The Company and RSM
have agreed to fully cooperate with McGladrey in the resolution
of all exceptions and the implementation of any remedial actions,
including disciplinary actions.
While the Company and McGladrey believe that their policies and
controls in place regarding auditor independence are reasonable and adequate to
address the matters involved, there can be no assurance (and the SEC staff has
indicated that it cannot provide any assurance) that such policies and controls
will positively ensure complete compliance by the Company, RSM and McGladrey
with the SEC auditor independence rules as so interpreted by the SEC staff. Any
noncompliance by the Company, RSM or McGladrey with such rules may impair
McGladrey's independence as an auditor of SEC Audit Clients and may adversely
affect the ability of McGladrey to attract and retain such clients and perform
audits of financial statements filed with the SEC.
Seasonality of Business. Revenues for this segment are seasonal in
nature, with peak revenues occurring during January through April.
Service Marks and Trademarks. RSM claims ownership of the following
service marks and trademarks registered on the principal register of the United
States Patent and Trademark Office:
Don't Be A Sitting Duck Pulsemark
M (and design) Pyramid (and design)
Med-Rate Renaissance
Operations Diagnosis Roger
RSM claims ownership of the following unregistered service marks and
trademarks:
Business Recovery Planning System E-Accounting
Business Continuity Planning System PersonProsperity
E.Vantage! Retirement Link
FERS Business Services, Inc. ("FERS"), a wholly owned subsidiary of HRB
Business Services, Inc., claims ownership of the following service marks and
trademarks registered on the principal register of the United States Patent and
Trademark Office:
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<PAGE> 25
Because Results Come First
FERS Profit Edge
Pension Resources
Tonelink
FERS also claims ownership of the following unregistered service mark
and trademark:
Benelink
Practice Development Institute, a wholly owned subsidiary of HRB
Business Services, Inc., claims ownership of the following unregistered service
marks and trademarks:
Certified Profit Enhancement Consultant
CPEC
Turning Your Firm's Potential Into Profit
Toback, Inc., a wholly owned subsidiary of RSM, claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Solutions for Today. Strategies for Tomorrow
The Local Firm with a National Reputation
Competitive Conditions. The accounting and consulting business is
highly competitive. There are a substantial number of accounting firms offering
similar services at the nationwide, regional and local levels.
Government Regulation. Many of the same Federal and state regulations
relating to tax preparers and the information concerning tax reform discussed
above in "Government Regulation" section of "U.S. Tax Operations" apply to
Business Services as well, except that accountants are not subject to the same
prohibition on the use or disclosure of certain income tax return information as
the Tax Services income tax return preparers are. These accounting firms are
also subject to state and Federal regulations governing accountants, auditors
and financial planners. The Company believes that these state and Federal
regulations do not and will not have a material adverse effect on the operations
of the Company and its subsidiaries, but it cannot predict what the effect of
future regulations may be.
ITEM 2. PROPERTIES.
The executive offices of the Company, Tax Services, BFC and HRB
Business Services, Inc. are located at 4400 Main Street, Kansas City, Missouri,
in a multi-level building owned by Tax Services. The building was constructed in
1963 and expanded or redesigned in 1965, 1973, 1981, and 1996. Shortly after the
end of the 1999 fiscal year, Tax Services entered into a 20-year lease for a
newly constructed building located at 4400 East Blue Parkway, Kansas City,
Missouri, which is being utilized by Tax Services and its affiliates as a
service center. Most other offices of Tax Services (except those in department
stores) are operated in premises held under short-term leases providing fixed
monthly rentals, usually with renewal options. BFC also leases other office
space in Kansas City, Missouri.
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<PAGE> 26
OLDE's executive offices are located at 751 Griswold, Detroit, Michigan
in a building owned by OLDE. Many branch offices of OLDE Discount are located in
facilities owned by various real estate subsidiaries of OLDE Financial and
leased primarily to OLDE Discount. Some branch offices and H&R Block Financial
Centers are operated in leased premises. OLDE Discount's branch offices and H&R
Block Financial Centers are located in 35 states and the District of Columbia.
Birchtree Financial Services, Inc. is headquartered in leased offices in Kansas
City, Missouri.
Option One's executive offices are located in leased offices at 3 Ada,
Irvine, California. Option One also leases offices for its branch office
operations throughout the United States. H&R Block Mortgage Corporation is
headquartered in leased offices in Burlington, Massachusetts. H&R Block Mortgage
also leases offices in Arizona, California, Colorado, Connecticut, Florida,
Illinois, Indiana, Massachusetts, Maine, Michigan, New Hampshire, New Jersey,
Ohio and Virginia.
RSM's executive offices are located in leased offices at 3600 West 80th
Street, Bloomington, Minnesota. Its administrative offices are located in leased
offices at 220 North Main Street, Davenport, Iowa. RSM and the other accounting
firm subsidiaries of HRB Business Services, Inc. lease office space in 22
states.
ITEM 3. LEGAL PROCEEDINGS.
CompuServe Corporation ("CompuServe"), certain current and former
officers and directors of CompuServe and the Company have been named as
defendants in six lawsuits pending before the state and Federal courts in
Columbus, Ohio. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in connection
with CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit also alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the lead
underwriters of CompuServe's initial public offering as additional defendants
and as representatives of a defendant class consisting of all underwriters who
participated in such offering. The Federal suits were consolidated, the
defendants filed a motion to dismiss the consolidated suits, the district court
stayed all proceedings pending the outcome of the state court suits, and the
United States Court of Appeals for the Sixth Circuit affirmed such stay. The
four state court lawsuits also allege violations of various state statutes and
common law of negligent misrepresentation in addition to the 1933 Act claims.
The state lawsuits were consolidated for discovery purposes and defendants filed
a motion for summary judgment covering all four state lawsuits. In July 1998,
the state court certified a plaintiff class of all persons and entities who
purchased shares of common stock of CompuServe between April 18, 1996 and July
16, 1996 pursuant to the initial public offering or on the open market, and who
were damaged thereby, excluding the named defendants and their affiliates. The
named plaintiffs in three of the state court cases were designated class
representatives.
On July 24, 2000, after the end of fiscal year 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 will pay a gross settlement amount of $9.5 million in
exchange for dismissal of the class action suit and a release of all claims.
Payment of plaintiffs' attorneys' fees and expenses are to be paid out of the
gross settlement fund. The gross settlement fund will be paid in its entirety by
the Company's insurance carrier. Among other things, the settlement is subject
to certain contingencies relating to the number of class members that choose to
exclude themselves from the settlement and the final approval of the settlement
by the court. The Stipulation is
26
<PAGE> 27
not an admission 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 to put to rest all controversy
concerning all claims.
As a part of the sale of its interest in CompuServe, the Company agreed
to indemnify WorldCom and CompuServe against 80.1% of any losses and expenses
incurred by them with respect to these lawsuits. In the opinion of management,
the ultimate resolution of these suits through the agreed upon settlement or
otherwise will not have a material adverse impact on the Company's consolidated
financial position or results of operations. The lawsuits discussed herein were
reported in the Company's Forms 10-Q for the first, second and third quarters of
fiscal year 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended April 30, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and principal occupations (for the past five years) of
the executive officers of the Company, each of whom has been elected to serve at
the discretion of the Board of Directors of the Company, are:
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Henry W. Bloch (77) Chairman of the Board since August 1989; Chief Executive
Officer from August 1989 through July 1992; Member of the
Board of Directors since 1955. See Note 1.
Frank L. Salizzoni (62) Chief Executive Officer since June 1996; President, from
June 1996 through September 1999; Member of the Board of
Directors since 1988. See Note 2.
Mark A. Ernst (42) President of the Company since September 1999; Chief
Operating Officer since September 1998; Executive Vice
President from September 1998 until September 1999. See Note
3.
David F. Byers (37) Senior Vice President and Chief Marketing Officer since June
1999. See Note 4.
Frank J. Cotroneo (41) Senior Vice President and Chief Financial Officer since
February 2000. See Note 5.
Gene S. Goldenberg (55) Senior Vice President, Software and E-Commerce, Block
Financial Corporation, since July 1999; Vice President and
Publisher in Charge of Software
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Operations, Block Financial Corporation, July 1995 to July
1999. See Note 6.
Stephanie R. Otto (39) Senior Vice President, Human Resources effective July 2000;
Vice President, Human Resources August 1999
through June 2000; Vice President, National Director of
Finance, HRB Business Services, Inc., October 1998 through
August 1999; Director, Internal Audit, December 1995 until
October 1998.
James D. Rose (49) Senior Vice President and Chief Information Officer since
July 1999; Vice President and Chief Information Officer from
June 1997 through June 1999. See Note 7.
Robert E. Dubrish (48) President and Chief Executive Officer, Option One Mortgage
Corporation, since March 1996; Executive Vice President and
Chief Operating Officer, Option One Mortgage Corporation,
from December 1992 until March 1996. See Note 8.
David J. Kasper (48) President, Financial Services Group, Block Financial
Corporation, since February 2000. See Note 9.
Jeffery W. Yabuki (40) President, H&R Block International since September 1999.
See Note 10.
Thomas L. Zimmerman (50) President, H&R Block Tax Services, Inc., since June 1996;
Executive Vice President, Field Operations, H&R Block Tax
Services, Inc. from May 1994 through May 1996.
Cheryl L. Givens (34) Vice President and Corporate Controller since July 1998;
Assistant Vice President and Assistant Controller from
October 1996 until July 1998; Assistant Vice President and
Corporate Controller from June 1996 until October 1996;
Corporate Accounting Manager from May 1994 until May 1996.
James H. Ingraham (46) Vice President, General Counsel since July 1999; Secretary
since June 1990; Vice President, Legal from October 1996
through June 1999; Assistant Vice President, Corporate Legal
and Human Resources from December 1995 until October 1996;
Assistant Vice President, Legal from May 1994 until December
1995.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Name and age Office(s)
------------ ----------
<S> <C>
Linda M. McDougall (47) Vice President, Communications since July 1999; Assistant
Vice President, Communications from November 1995 through
June 1999. See Note 11.
Brian N. Schell (34) Vice President and Treasurer since December 1997; Director
of Investor Relations since November 1996; Assistant
Treasurer from November 1996 until December 1997; Director
of Corporate Development from May 1995 until December 1997.
Robert A. Weinberger (56) Vice President, Government Relations, since March 1996.
Bret G. Wilson (41) Vice President, Corporate Planning and Development since
September 1999; Vice President, Corporate Development, from
December 1997 until September 1999; Vice President, Mortgage
Operations, Block Financial Corporation, since March 1997;
Vice President, Corporate Counsel and Secretary, Block
Financial Corporation, from June 1994 until March 1997.
Robert D. Wilson (41) Vice President, Business Development since July 1999; Vice
President, Tax Services Marketing, H&R Block Tax Services,
Inc., from September 1998 through
June 1999; Assistant Vice President, Marketing, H&R Block Tax
Services, Inc., from February 1996 until September 1998.
See Note 12.
</TABLE>
Note 1: Mr. Bloch will retire as Chairman of the Board of Directors
and as a director in September 2000.
Note 2: The Board of Directors of the Company has approved a
succession plan pursuant to which Mr. Salizzoni will serve as
Chairman of the Board and Chief Executive Officer of the
Company from September 13, 2000 through December 31, 2000, and
as Chairman of the Board thereafter. Mr. Salizzoni was
President and Chief Operating Officer of USAir Group, Inc. and
USAir, Inc. from March 1994 until April 1996. He served as
Chairman of the Board of CompuServe Corporation from October
1996 until January 1998.
Note 3: The Board of Directors of the Company has approved a
succession plan pursuant to which Mr. Ernst will become
President and Chief Executive Officer of the Company effective
January 1, 2001. Mr. Ernst served as Senior Vice President,
Third Party and International Distribution for American
Express Company, Minneapolis, Minnesota, from July 1997 until
June 1998; Senior Vice President, WorkPlace Financial
Services,
29
<PAGE> 30
American Express Company, from November 1995 until July 1997
and Vice President, Retail Services Group, American Express
Company, from December 1993 until November 1995.
Note 4: Mr. Byers was employed by Foote, Cone and Belding, an
advertising agency in San Francisco, California, from June
1987 until May 1999, most recently serving as the Senior Vice
President and Director of Business Development.
Note 5: Mr. Cotroneo served as the Chief Financial Officer of
MasterCard International, Inc., New York, New York from 1996
to February 2000 and as Regional Financial Officer, MasterCard
International, Inc., Singapore, from 1992 to 1996.
Note 6: Mr. Goldenberg was employed by The Kiplinger Washington
Editors, Inc., in Washington, DC from 1985 through July 1995,
most recently serving as Director, New Product Development.
Note 7: Mr. Rose served as Vice President, Chief Information Officer,
Integon Insurance Corporation, Winston-Salem, North Carolina,
from May 1996 until June 1997, and as Director of Information
Systems, National Association of Insurance Commissioners,
Kansas City, Missouri, from November 1987 until May 1996.
Note 8: Block Financial Corporation acquired Option One Mortgage
Corporation on June 17, 1997, at which time Mr. Dubrish became
an employee of a subsidiary of the Company.
Note 9: Mr. Kasper was Executive Vice President, National Sales
Manager, Norwest Investment Services, Inc., Minneapolis,
Minnesota from 1998 to February 2000; and Senior Vice
President, Regional Sales Manager, Norwest Investment
Services, Inc., from 1989 to 1998.
Note 10: Mr. Yabuki served as President and Chief Executive Officer of
American Express Tax & Business Services, Inc., New York, New
York, from 1998 to September 1999; Vice President, Mergers and
Acquisitions, American Express, Minneapolis, Minnesota, from
1996 to 1998; and Regional Vice President, American Express
Tax & Business Services, Inc., Los Angeles, California and
Minneapolis, Minnesota, from 1991 to 1996.
Note 11: Ms. McDougall was the District Manager, Creative Services for
AT&T Corp., Basking Ridge, New Jersey, from September 1993
until October 1995.
Note 12: Mr. Robert Wilson was Senior Product Manager for
Thompson*Minwax from September 1993 until February 1996.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item is contained in part in the
Company's annual report to security holders for the fiscal year ended April 30,
2000, under the heading "Common Stock Data," and is hereby incorporated by
reference. The Company's Common Stock is traded principally on the New York
Stock Exchange. The Company's Common Stock is also traded on the Pacific Stock
Exchange. On June 12, 2000, there were 33,305 shareholders of record of the
Company.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2000,
under the heading "Selected Financial Data," and is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information called for by this item is contained in the Company's
annual report to security holders for the fiscal year ended April 30, 2000,
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition," and is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERALLY
In the operations of its subsidiaries and the reporting of its
consolidated financial results, the Company is affected by changes in interest
rates and currency exchange rates. The principal risks of loss arising from
adverse changes in market rates and prices to which the Company and its
subsidiaries are exposed relate to:
- interest rates on debt, cash equivalents, available-for-sale
securities, trading securities, mortgage loan origination
commitments, investments in mortgage loans for resale or
securitization and residual interests in securitizations; and
- foreign exchange rates, generating translation gains and
losses
Changes in interest rates and/or exchange rates have not, and are not
expected to, materially impact the consolidated financial position, results of
operations or cash flows of the Company.
The Company and its subsidiaries have market risk sensitive instruments
entered into for "non-trading" and "trading" purposes. The Company's
broker-dealers hold marketable securities for trading purposes.
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<PAGE> 32
NON-TRADING
INTEREST RATES
The debt portfolio, rate-sensitive assets and related interest rate
risk are managed centrally by the office of the Chief Financial Officer of the
Company by taking into consideration investment opportunities and risks, tax
consequences and the financing strategies approved by the Finance Committee of
the Company's Board of Directors.
The available-for-sale investment portfolios of the Company and its
subsidiaries at April 30, 2000, primarily consisted of cash equivalents and
available-for-sale securities. Almost 31% of the Company's total cash and
available-for-sale securities are classified as long-term, compared to 41% in
1999. A majority of the long-term portfolio is made up of residual interests in
securitizations, 70% in 2000 and 54% in 1999. Assuming all cash equivalents and
available-for-sale securities (excluding residual interests) held at year-end
were variable rate investments, a 50 basis point change in interest (an
approximate 10% decline in interest rates) would negatively impact consolidated
pretax earnings by approximately $1.9 million, or about one-half percent. In
fiscal 1999, a 50 basis point change in interest (an approximate 10% decline in
interest rates) would have negatively impacted 1999 consolidated pretax earnings
by approximately $2 million, or about one-half percent.
The residual interests in securitizations are exposed to interest rate
risk related to the sensitivity of the residual interests to prepayments. A
mortgage borrower has the option to prepay a mortgage loan at any time. This
risk tends to increase when interest rates fall due to the benefits of
refinancing. Since the future prepayment behavior of the mortgages is uncertain,
the interest rate sensitivity of these residual interests can not be exactly
determined. Management has developed a number of assumptions for use in its cash
flow model to determine market value. Depending on the product or behavior in
question, each assumption will reflect some combination of market data, research
analysis and business judgment.
Under its risk management strategy, the Company may hedge its interest
rate risk related to its fixed-rate mortgage portfolio and debt by selling short
FNMA mortgage-backed securities and utilizing forward commitments. It is the
Company's policy to utilize these financial instruments only for the purpose of
offsetting or reducing the risk of loss associated with a defined or quantified
exposure. They are purchased from certain broker-dealer counterparties. If the
counterparties do not fulfill their obligations, the Company may be exposed to
risk. As the risk of default depends on the creditworthiness of the
counterparty, the Company's policy requires that such transactions may be
entered into only with counterparties that are rated A or better (or an
equivalent rating) by recognized rating agencies. As a matter of practice, the
Company has limited the counterparties to major banks and financial institutions
meeting such standards. All interest rate contracts conform to the standard
International Swaps and Derivatives Association, Inc. documentation.
The Company's variable rate mortgage portfolios are generally
short-term in nature, as it is the Company's policy to sell or securitize these
loans quarterly, and such portfolios are carried at the lower of cost or market.
Because the Company funds these short-term assets with short-term, variable rate
debt, the Company is not significantly exposed to interest rate risk in this
area. As a result, any change in interest rates would not materially impact the
Company's consolidated pretax earnings.
32
<PAGE> 33
The Company's long-term debt consists primarily of fixed-rate Senior
notes; therefore, a change in interest rates would have no impact on
consolidated pretax earnings.
The Company's broker-dealers hold interest bearing receivables from
customers, brokers, dealers and clearing organizations which consist primarily
of amounts due on margin and cash transactions and are generally short-term in
nature. Because the Company funds these short-term assets with short-term
variable rate liabilities from customers, brokers and dealers, the Company is
not significantly exposed to interest rate risk in this area. As a result, any
change in interest rate would not materially impact the Company's consolidated
pretax earnings.
FOREIGN EXCHANGE RATES
The operation of the Company's subsidiaries in international markets
provides exposure to volatile movements in currency exchange rates. The
currencies involved are the Canadian dollar, the Australian dollar and the
British pound. International tax operations constituted approximately 1.2% of
the Company's fiscal year 2000 consolidated pretax earnings, compared to 1% in
fiscal 1999. As currency exchange rates change, translation of the financial
results of International tax operations into U.S. dollars does not presently
materially affect, and has not historically materially affected, the
consolidated financial results of the Company, although such changes do affect
the year-to-year comparability of the operating results of the international
businesses.
The Company does not hedge translation risks because (1) cash flows
from international operations are generally reinvested locally and (2) the
minimal exposure to material volatility to reported earnings does not justify
the cost.
The Company estimates that a 10% change in foreign exchange rates by
itself would impact reported pretax earnings from continuing operations by
approximately $425,000. Such impact represents approximately 9% of the pretax
earnings of International tax operations for fiscal year 2000, and approximately
.10% of the Company's pretax earnings for such year. In fiscal 1999, a 10%
change in interest rates would have impacted fiscal 1999 pretax earnings by
approximately $200,000 or .05 percent.
TRADING
The Company's trading portfolio is effected by changes in market
rates/prices. The risk is the loss of earnings arising from adverse changes in
the value of the trading portfolio. The Company's broker-dealers hold the
trading portfolio at quoted market prices and such represents .8% of the
Company's total assets. The market value of the Company's trading portfolio at
April 30, 2000 was approximately $45.4 million. The impact of a 10% change in
the market value of these investments would be approximately $4.5 million, or
about 1.1% of consolidated pretax earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item and listed at Item 14(a) 1 is
contained in the Company's annual report to security holders for the fiscal year
ended April 30, 2000, and is hereby incorporated by reference.
33
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in the registrant's accountants during the two
most recent fiscal years or any subsequent interim time period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item with respect to directors of
the Company and with respect to compliance with Section 16(a) of the Securities
Exchange Act is included under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance," respectively, in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, and in Item 4a "Executive Officers of the Registrant"
in this report, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the sections entitled "Directors' Meetings,
Compensation and Committees" and "Compensation of Executive Officers," and is
incorporated herein by reference, except that information contained in the
section entitled "Compensation of Executive Officers" under the subtitles
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference and is not to be deemed
"filed" as part of this filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the section titled "Election of Directors" and in
the section titled "Information Regarding Security Holders," and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is contained in the Company's
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2000, in the section titled "Election of Directors," and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements of
H&R Block, Inc., and subsidiaries are incorporated by
reference from the Company's annual report to
34
<PAGE> 35
security holders for the fiscal year ended April 30,
2000:
Page
Consolidated Statements of Earnings 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Stockholders' Equity 24
Notes to Consolidated Financial Statements 25
Quarterly Financial Data 39
Report of Independent Accountants 42
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule for
PricewaterhouseCoopers LLP, Certified Public Accountants
Independent Auditors' Consent and Report on Schedule for Deloitte &
Touche LLP, Certified Public Accountants
Schedule VIII - Valuation and Qualifying Accounts
Schedules not filed herewith are either not applicable, the information
is not material or the information is set forth in the financial
statements or notes thereto.
3. Exhibits
3.1 Restated Articles of Incorporation of H&R Block, Inc., as amended,
filed as Exhibit 3(b) to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1996, are incorporated herein by
reference.
3.2 Amended and Restated Bylaws of H&R Block, Inc., as amended, filed as
Exhibit 3.1 to the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1999, are incorporated herein by reference.
4.1 Indenture dated as of October 20, 1997, among H&R Block, Inc., Block
Financial Corporation and Bankers Trust Company, as Trustee, filed as
Exhibit 4(a) to the Company's quarterly report on Form 10-Q for the
quarter ended October 31, 1997, is incorporated herein by reference.
4.2 First Supplemental Indenture, dated as of April 18, 2000, among H&R
Block, Inc., Block Financial Corporation, Bankers Trust Company and the
Bank of New York, filed as Exhibit 4(a) to the Company's current report
on Form 8-K dated April 13, 2000, is incorporated herein by reference.
4.3 Form of 6 3/4% Senior Note due 2004 of Block Financial Corporation,
filed on October 23, 1997 as Exhibit 2.2 to the Company's current
report on Form 8-K, is incorporated herein by reference.
35
<PAGE> 36
4.4 Form of 8.50% Senior Note due 2007 of Block Financial Corporation,
filed as Exhibit 4(b) to the Company's current report on Form 8-K dated
April 13, 2000, is incorporated herein by reference.
4.5 Copy of Rights Agreement dated March 25, 1998 between H&R Block, Inc.
and ChaseMellon Shareholder Services, L.L.C., filed on July 22, 1998 as
Exhibit 1 to the Company's Registration Statement on Form 8-A, is
incorporated herein by reference.
4.6 Form of Certificate of Designation, Preferences and Rights of
Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(e)
to the Company's annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
4.7 Form of Certificate of Amendment of Certificate of Designation,
Preferences and Rights of Participating Preferred Stock of H&R Block,
Inc., filed as Exhibit 4(j) to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1998 is incorporated by reference.
4.8 Form of Certificate of Designation, Preferences and Rights of Delayed
Convertible Preferred Stock of H&R Block, Inc., filed as Exhibit 4(f)
to the Company's annual report on Form 10-K for the fiscal year ended
April 30, 1995, is incorporated by reference.
10.1 The Company's 1993 Long-Term Executive Compensation Plan, as amended
through September 8, 1999, filed as Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the quarter ended October 31, 1999,
is incorporated herein by reference.
10.2 The H&R Block Deferred Compensation Plan for Directors, as amended
through March 9, 1994.
10.3 Amendment No. 2 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1997, is incorporated herein by
reference.
10.4 Amendment No. 3 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated herein by
reference.
10.5 Amendment No. 4 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(d) to the Company's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, is incorporated herein by
reference.
10.6 Amendment No. 5 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10(c) to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 1998, is incorporated herein by
reference.
36
<PAGE> 37
10.7 Amendment No. 6 to H&R Block Deferred Compensation Plan for Directors,
filed as Exhibit 10.2 to the Company's quarterly report on Form 10-Q
for the quarter ended January 31, 2000, is incorporated by reference.
10.8 The H&R Block Deferred Compensation Plan for Executives, as Amended and
Restated, filed as Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the quarter ended January 31, 1999, is incorporated
herein by reference.
10.9 Amendment No. 1 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.2.to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 1999, is incorporated herein by reference.
10.10 Amendment No. 2 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1999, is incorporated herein by reference.
10.11 Amendment No. 3 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.5 to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1999, is incorporated herein by reference.
10.12 Amendment No. 4 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated, filed as Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 2000, is incorporated herein by reference.
10.13 The H&R Block Short-Term Incentive Plan, filed as Exhibit 10(a) to the
Company's quarterly report on Form 10-Q for the quarter ended October
31, 1996, is incorporated herein by reference.
10.14 The Company's 1989 Stock Option Plan for Outside Directors, as amended,
filed as Exhibit 10.1 to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 1998, is incorporated herein by
reference.
10.15 The H&R Block Stock Plan for Non-Employee Directors, filed as Exhibit
10(e) to the Company's quarterly report on Form 10-Q for the quarter
ended October 31, 1997, is incorporated herein by reference.
10.16 Employment Agreement dated October 11, 1996, between the Company and
Frank L. Salizzoni, filed as Exhibit 10(b) to the Company's quarterly
report on Form 10-Q for the quarter ended October 31, 1996, is
incorporated herein by reference.
10.17 Employment Agreement dated July 16, 1998, between the Company and Mark
A. Ernst, filed as Exhibit 10(a) to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 1998, is incorporated herein
by reference.
37
<PAGE> 38
10.18 Employment Agreement dated January 20, 1998, between H&R Block Tax
Services, Inc, and Thomas L. Zimmerman, filed as Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended January
31, 2000, is incorporated herein by reference.
10.19 Employment Agreement dated September 7, 1999, between HRB Management,
Inc. and Jeffery Yabuki, filed as Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarter ended January 31, 2000,
is incorporated herein by reference.
10.20 Employment Agreement dated January 26, 2000, between HRB Management,
Inc. and Frank J. Cotroneo, filed as Exhibit 10.5 to the Company's
quarterly report on Form 10-Q for the quarter ended January 31, 2000,
is incorporated herein by reference.
10.21 Employment Agreement dated January 31, 2000, between Block Financial
Corporation and David J. Kasper.
10.22 Employment Agreement dated May 15, 1998, between Terrence E. Putney and
DMJK Business Services, Inc.
10.23 Senior Managing Director Employment Agreement dated August 2, 1999,
between RSM McGladrey, Inc. and Thomas G. Rotherham.
10.24 Agreement dated February 21, 2000, between HRB Management, Inc. and
Ozzie Wenich.
10.25 Asset Purchase Agreement dated June 28, 1999 by and among H&R Block,
Inc., MGP Business Services, Inc., HRB Business Services, Inc.,
McGladrey & Pullen, LLP, MP Active Partner Trust, Clifford Newman,
Trustee, and MP Retired Partner Trust, Clifford Newman, Trustee, filed
as Exhibit 10.1 to the Company's Form 8-K on July 8, 1999, is
incorporated herein by reference.
10.26 Stock Purchase Agreement dated August 31, 1999 among Block Financial
Corporation, H&R Block, Inc., OLDE Financial Corporation, Financial
Marketing Services, Inc. and the Shareholders of OLDE Financial
Corporation and Financial Marketing Services, Inc., filed as Exhibit
10.1 to the Company's Form 8-K filed September 10, 1999, is
incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges for the five years
ended April 30, 2000.
13 That portion of the annual report to security holders for the fiscal
year ended April 30, 2000 which is expressly incorporated by reference
in this filing. Portions of such annual report to security holders not
expressly incorporated by this reference in this filing are not deemed
"filed" with the Commission.
38
<PAGE> 39
16 Letter regarding change in Certifying Accountants dated July
27, 1998 from Deloitte & Touche LLP addressed to the Securities
and Exchange Commission, filed on July 27, 1998 as Exhibit 16.1
to the Company's current report on Form 8-K, is incorporated
herein by reference. The statements contained in Item 4 of the
Company's Form 8-K dated July 27, 1998 to which Deloitte &
Touche LLP concurred in such letter are also contained in Item
9 of the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1998.
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, Certified Public
Accountants.
23.2 Consent of Deloitte & Touche LLP, Certified Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
(1) The Company filed a current report on Form 8-K/A on February
14, 2000 to file certain audited Financial Statements of OLDE
Financial Corporation and unaudited pro forma consolidated
financial statements of H&R Block, Inc., in connection with the
acquisition of OLDE Financial Corporation. Certain consents of
PricewaterhouseCoopers, LLP, Certified Public Accountants
Deloitte & Touch LLP, Certified Public Accountants; and Ernst &
Young LLP, Certified Public Accounts were included as Exhibit
23.1, and the press release dated December 1, 1999 announcing
the completion of the acquisition of OLDE Financial and
Financial Marketing Services, Inc. was included as Exhibit
99.1.
(2) The Company filed a current report on form 8-K on April 7,
2000, to file as exhibits certain consents of
PricewaterhouseCoopers, LLP, Certified Public Accountants;
Deloitte & Touche LLP, Certified Public Accountants; and Ernst
& Young, LLP, Certified Public Accountants. No financial
statements were filed as a part of the Form 8-K.
(3) The Company filed a current report on Form 8-K on April 17,
2000, to file as exhibits certain documents relating to 8.50%
Senior Notes Due 2007 to be issued by Block Financial
Corporation, an indirect, wholly-owned subsidiary of the
Company. No financial statements were filed as a part of the
Form 8-K.
Except for the Form 8-K/A filed on February 14, 2000, and the
Forms 8-K filed on April 7, 2000 and 17, 2000, the Company did
not file any reports on Form 8-K during the fourth quarter of
the year ended April 30, 2000.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
H&R BLOCK, INC.
July 28, 2000 By /s/ Frank L. Salizzoni
-----------------------
Frank L. Salizzoni
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Frank L. Salizzoni Chief Executive Officer and
- ------------------------------------
Frank L. Salizzoni Director (principal executive officer)
/s/ G. Kenneth Baum Director
- ------------------------------------
G. Kenneth Baum
/s/Henry W. Bloch Director
- ------------------------------------
Henry W. Bloch
/s/ Robert E. Davis Director
- ------------------------------------
Robert E. Davis
/s/ Donna R. Ecton Director
- ------------------------------------
Donna R. Ecton
/s/ Mark A. Ernst Director
- ------------------------------------
Mark A. Ernst
/s/ Henry F. Frigon Director
- ------------------------------------
Henry F. Frigon
/s/ Roger W. Hale Director
- ------------------------------------
Roger W. Hale
/s/ Louis W. Smith Director
- ------------------------------------
Louis W. Smith
/s/ Morton I. Sosland Director
- ------------------------------------
Morton I. Sosland
</TABLE>
(Signed as to each on July 28, 2000)
40
<PAGE> 41
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Frank J. Cotroneo Senior Vice President and Chief Financial
- ---------------------------------
Frank J. Cotroneo Officer (principal financial officer)
/s/ Cheryl L. Givens Vice President and Corporate Controller
- ----------------------------------
Cheryl L. Givens (principal accounting officer)
</TABLE>
(Signed as to each on July 28, 2000)
41
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
H&R Block, Inc.
Our audits of the consolidated financial statements referred to in our report
dated June 20, 2000 appearing in the 2000 Annual Report to Shareholders of H&R
Block, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the information as of and for the years ended April 30, 2000 and April
30, 1999 presented in the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information as of and for the years
ended April 30, 2000 and 1999 set forth therein when read in conjunction with
the related consolidated financial statements. The information included in the
financial statement schedule as of and for the year ended April 30, 1998 was
audited by other independent accountants whose report dated June 16, 1998 and
July 12, 1999 (as to the effects of the discontinued credit card operations
described in the note to the consolidated financial statements on the sale of
subsidiaries) expressed an unqualified opinion on that information.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
June 20, 2000
42
<PAGE> 43
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors and Shareholders
H&R Block, Inc.
Kansas City, Missouri
We consent to the incorporation by reference in Post-Effective Amendment No. 4
to Registration Statement No. 33-185 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the 1984 Long-Term Executive
Compensation Plan) on Form S-8; Registration Statement No. 33-33889 of H&R
Block, Inc. and subsidiaries (relating to shares of Common Stock issuable under
the 1989 Stock Option Plan for Outside Directors) on Form S-8; Registration
Statement No. 33-54989 of H&R Block, Inc. and subsidiaries (relating to shares
of Common Stock issued under the 1993 Long-Term Executive Compensation Plan) on
Form S-8; Registration Statement No. 33-64147 of H&R Block, Inc. and
subsidiaries (relating to shares of Delayed Convertible Preferred Stock issuable
under the Spry, Inc. 1995 Stock Option Plan) on Form S-8; Registration Statement
No. 333-62515 of H&R Block, Inc. and subsidiaries (relating to shares of Common
Stock issuable under the Third Stock Option Plan for Seasonal Employees) on Form
S-8; Registration Statement No. 333-42143 of H&R Block, Inc. and subsidiaries
(relating to shares of Common Stock issued under the H&R Block Stock Plan for
Non-Employee Directors) on Form S-8; and Registration Statements Nos. 333-33655
and 333-33655-01 of Block Financial Corporation and H&R Block, Inc.,
respectively, (relating to debt securities of Block Financial Corporation) on
Form S-3 of our report dated June 16, 1998 (July 12, 1999 as to the effects of
the discontinued credit card operations described in the note on the sale of
subsidiaries), appearing in this Annual Report on Form 10-K of H&R Block, Inc.
and subsidiaries for the year ended April 30, 2000.
Our audit of the consolidated financial statements referred to in our
aforementioned report also included the 1998 financial statement schedule of
H&R Block, Inc., and subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit. In our opinion, such 1998
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
July 27, 2000
43
<PAGE> 44
H&R BLOCK, INC.
AND SUBSIDIARIES
SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance Charged to Balance
Beginning Costs and Charged At End
Description Of Period Expenses To Other Deductions Of Period
- -------------------------- ---------------- --------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts - deducted from
accounts receivable in
the balance sheet
2000 $61,872,000 $51,719,000 -- $63,230,000 $50,361,000
================ =============== ============= ================ ==================
1999 $45,314,000 $71,662,000 -- $55,104,000 $61,872,000
================ =============== ============= ================ ==================
1998 $30,144,000 $75,171,000 -- $60,001,000 $45,314,000
================ =============== ============= ================ ==================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>2
<FILENAME>ex10-2.txt
<DESCRIPTION>DEFERRED COMPENSATION PLAN FOR DIRECTORS
<TEXT>
<PAGE> 1
EXHIBIT 10.2
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
(As Amended Through March 9, 1994)
<PAGE> 2
TABLE OF CONTENTS
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT..............................1
Section 1.1 Establishment of Account............................1
Section 1.2 Property of Company.................................1
ARTICLE 2 DEFINITIONS, GENDER AND NUMBER.............................1
Section 2.1 Definitions.........................................1
Section 2.2 Gender and Number...................................4
ARTICLE 3 PARTICIPATION..............................................4
Section 3.1 Who May Participate.................................4
Section 3.2 Time and Conditions of Participation................4
Section 3.3 Termination of Participation........................4
Section 3.4 Missing Persons.....................................4
Section 3.5 Relationship to Other Plans.........................5
ARTICLE 4 ENTRIES TO THE ACCOUNT.....................................5
Section 4.1 Deferrals...........................................5
Section 4.2 Crediting Rate......................................5
ARTICLE 5 VESTING....................................................7
ARTICLE 6 DISTRIBUTION OF BENEFITS...................................7
Section 6.1 Time of Payment.....................................7
Section 6.2 Form of Benefits Upon Retirement or
Attainment of Age 75..............................7
Section 6.3 Deferral of Payment.................................8
Section 6.4 Death Benefits......................................8
Section 6.5 Claims Procedure...................................10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 6.6 Alternate Forms of Benefit Distribution............11
Section 6.7 Distributions on Plan Termination..................11
ARTICLE 7 FUNDING....................................................11
Section 7.1 Source of Benefits.................................11
Section 7.2 No Claim on Specific Assets........................11
ARTICLE 8 ADMINISTRATION AND FINANCES................................11
Section 8.1 Administration.....................................11
Section 8.2 Powers of the Committee............................11
Section 8.3 Actions of the Committee...........................12
Section 8.4 Delegation.........................................12
Section 8.5 Reports and Records................................12
ARTICLE 9 AMENDMENTS AND TERMINATION.................................12
Section 9.1 Amendments.........................................12
Section 9.2 Termination........................................13
ARTICLE 10 MISCELLANEOUS..............................................13
Section 10.1 No Guarantee of Membership.........................13
Section 10.2 Individual Account Plan............................13
Section 10.3 Release............................................13
Section 10.4 Notices............................................14
Section 10.5 Non-Alienation.....................................14
Section 10.6 Tax Liability......................................14
Section 10.7 Captions...........................................14
Section 10.8 Applicable Law.....................................14
SCHEDULE A - ANNUAL ADMINISTRATIVE CHARGES....................................15
</TABLE>
<PAGE> 4
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
H&R Block, Inc. (the "Company") hereby establishes, effective September
1, 1987, a nonqualified deferred compensation plan for the benefit of specified
Directors of the Company, and of the following affiliates of the Company:
CompuServe Incorporated, Personnel Pool of America, Inc., Path Management
Industries, Inc. and such other entities as may be designated by the Company
from time to time. This plan shall be known as the H&R Block Deferred
Compensation Plan for Directors (the "Plan"). The Plan is intended to be an
unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees as
described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement
Income Security Act of 1974 ("ERISA").
ARTICLE 1. DEFERRED COMPENSATION ACCOUNT.
Section 1.1. Establishment of Account. The Company shall establish an
account ("Account") for each Participant which shall be utilized solely as a
device to measure and determine the amount of deferred director's fees to be
paid under the Plan.
Section 1.2. Property of Company and Participating Affiliates. Any
amounts so set aside for benefits payable under the Plan are the property of the
Company and its participating affiliates ("Participating Affiliates"), except,
and to the extent, of any assignment of such assets to an irrevocable trust.
ARTICLE 2. DEFINITIONS, GENDER, AND NUMBER.
Section 2.1. Definitions. Whenever used in the Plan, the following
words and phrases shall have the meanings set forth below unless the context
plainly requires a different meaning, and when a defined meaning is intended,
the term is capitalized.
2.1.1. "Account" means the device used to measure and
determine the amount of deferred director's fees to be paid to a
Participant or Beneficiary under the Plan, and may refer to the
separate Accounts that represent amounts deferred by a Participant
under separate Permissible Deferral elections.
2.1.2. "Affiliates" or "Affiliate" means a group of entities,
including the Company, which constitutes a controlled group of
corporations (as defined in section 414(b) of the Code), a group of
trades or businesses
<PAGE> 5
(whether or not incorporated) under common control (as defined in
section 414(c) of the Code), and members of an affiliated service group
(within the meaning of section 414(m) of the Code.)
2.1.3. "Age" of a Participant means the number of whole
calendar years that have elapsed since the date of the Participant's
birth.
2.1.4. "Beneficiary" or "Beneficiaries" means the persons or
trusts designated by a Participant in writing pursuant to Section 6.4.4
of the Plan as being entitled to receive any benefit payable under the
Plan by reason of the death of a Participant, or, in the absence of
such designation, the persons specified in Section 6.4.5 of the Plan.
2.1.5. "Board" means the Board of Directors of the Company as
constituted at the relevant time.
2.1.5a. "Closing Price" means the closing price of the
Company's Common Stock on the New York Stock Exchange as of the
applicable date; provided, however, that if no closing price is
available for such date, "Closing Price" means the closing price of the
Company's Common Stock as of the next most recent date for which a
price is available.
2.1.6. "Code" means the Internal Revenue Code of 1986, as
amended from time to time and any successor statute. References to a
Code section shall be deemed to be to that section or to any successor
to that section.
2.1.7. "Committee" means the Compensation Committee of the
Company's Board.
2.1.7a. "Common Stock" means the common stock of the Company.
2.1.8. "Company" means H&R Block, Inc.
2.1.8a. "Deferred Compensation Unit" means a unit equal in
value to one share of Common Stock and posted to a Participant's
Account for the purpose of measuring the benefits payable under the
Plan.
2.1.9. "Director" or "Directors" means a Non-Employee
serving as a member on the Board of Directors of a Participating
Affiliate.
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<PAGE> 6
2.1.10. "Director's Fees" of a Director for any Plan Year
means that individual's total Retainer and Meeting Fees for that Plan
Year.
2.1.11. "Effective Date" means the date on which this Plan
became effective, i.e., September 1, 1987.
2.1.12. "Enrollment Period" means the period of February 15
through April 15 prior to the Plan Year to which a Permissible Deferral
election first applies. However, for the first Plan Year, the
Enrollment Period shall be August 1, 1987 through August 31, 1987.
2.1.13. "Non-Employee" means any person who is not employed
as a common-law employee by an Affiliate.
2.1.14. "Participant" means a Non-Employee Director who
elects to participate in the Plan and who is eligible to participate in
the Plan.
2.1.15. "Participating Affiliate" or "Participating
Affiliates" means the Company and the following indirect subsidiaries
of the Company: HRB Management, Inc., H&R Block Tax Services, Inc.,
CompuServe Incorporated, Block Financial Corporation, and MECA
Software, Inc., and the U.S. subsidiaries of such indirect
subsidiaries; and such other entities as may be designated as such by
the Company from time to time.
2.1.16. "Permissible Deferral" means a deferral in each of the
next four (4) consecutive Plan Years of an amount or percentage of
Director's Fees that is not less nor more than one hundred percent
(100%) of Director's Fees.
Director's Fees deferrals shall be made in single sum
deferrals at the time that the Director's Fees would otherwise be paid
to the Director. All deferrals must be completed by the later of (a)
the Plan Year in which the Participant attains Age 68 or (b) April 30,
1991.
2.1.17. "Plan" means the "H&R Block Deferred Compensation Plan
for Directors" as set forth herein and as amended or restated from time
to time.
2.1.18. "Plan Year" means May 1 through April 30, except that
the first Plan Year shall be from September 1, 1987 through April 30,
1988.
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<PAGE> 7
2.1.19. "Smoker" or "Smokers" with respect to any Permissible
Deferral election means any individual who has smoked at least one
cigarette with a twelve (12) month period ending on the date on which
such individual makes the Permissible Deferral election.
2.1.20. "Standard Form of Benefit" as to any Participant
means monthly payments for a ten (10) year period.
2.1.21. "Trust" means the H&R Block Inc., Deferred
Compensation Trust Agreement.
Section 2.2. Gender and Number. Except as otherwise indicated by
context, masculine terminology used herein also includes the feminine and
neuter, and terms used in the singular may also include the plural.
ARTICLE 3. PARTICIPATION.
Section 3.1. Who May Participate. Participation in the Plan is
limited to Directors.
Section 3.2. Time and Conditions of Participation. An eligible Director
shall become a Participant only upon (a) the individual's completion of a
Permissible Deferral election for the succeeding Plan Years during an Enrollment
Period, in accordance with a form established by the Company from time to time,
and (b) compliance with such terms and conditions as the Committee may from time
to time establish for the implementation of the Plan, including, but not limited
to, any condition the Committee may deem necessary or appropriate for the
Company to meet its obligations under the Plan.
Section 3.3. Termination of Participation. Once a Director has become a
Participant in the Plan, participation shall continue until the first to occur
of (a) payment in full of all benefits to which the Participant or Beneficiary
is entitled under the Plan, or (b) the occurrence of an event specified in
Section 3.4 which results in loss of benefits. Except as otherwise specified in
the Plan, the Company may not terminate an individual's participation in the
Plan.
Section 3.4. Missing Persons. If the Company is unable to locate the
Participant or his Beneficiary for purposes of making a distribution, the amount
of a Participant's benefits under this Plan that would otherwise be considered
as non-forfeitable shall be forfeited effective four (4) years after (a) the
last date a payment of said benefit was made, if at least one such payment was
made, or (b) the first date a payment of said benefit was directed to be made by
the Company pursuant to the terms of the Plan, if no
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<PAGE> 8
payments had been made. If such person is located after the date of such
forfeiture, the benefits for such Participant or Beneficiary shall not be
reinstated hereunder.
Section 3.5. Relationship to Other Plans. Participation in the Plan
shall not preclude participation of the Participant in any other fringe benefit
program or plan sponsored by an Affiliate for which such Participant would
otherwise be eligible.
ARTICLE 4. ENTRIES TO THE ACCOUNT.
Section 4.1. Deferrals. if the Participant elects the fixed or variable
crediting rate option for measuring the performance of the Account under Section
4.2, the Company shall post to the Account of each Participant on the date the
Director's Fees would otherwise be paid the amount of Director's Fees to be
deferred as designated by the Participant's Permissible Deferral election in
effect for that Plan Year. If the Participant elects the Common Stock crediting
rate option for measuring the performance of the Account under Section 4.2, (a)
the Company shall post to the Account of such Participant a number of Deferred
Compensation Units equivalent to the amount of Director's Fees to be deferred as
designated by the Participant's Permissible Deferral election in effect for than
Plan Year; (b) deferrals of Director's Fees (and the corresponding number of
Deferred Compensation Units) shall be posted as of the date the Director's Fees
would otherwise be paid the amount of Director's Fees to be deferred; and (c)
the number of Deferred Compensation Units posted for each calendar month in
which Director's Fees would otherwise be paid the amount of Director's Fees to
be deferred shall be calculated by dividing: (i) the dollar amount deferred
during that month; by (ii) the Closing Price on the first business day of the
following calendar month.
Section 4.2. Crediting Rate. Gains or losses shall be posted to the
Account in accordance with the Participant's irrevocable election of an
investment option which will be a reference for measuring the performance of the
Account. The Company intends to measure the performance of the Account in
accordance with the Participant's election but reserves the right to do
otherwise. The election shall be made concurrently with the Permissible Deferral
election. The Participant shall elect one of the following investment options:
(i) a fixed rate as described in 4.2.1, (ii) a variable rate as described in
4.2.2, or (iii) a Common Stock crediting rate as described in 4.2.3. A separate
irrevocable election shall be made for each Permissible Deferral election.
Section 4.2.1. Fixed Rate. Except as specified in Section
4.2.4, if a Participant elects a fixed rate, the interest will be
compounded on a daily basis and
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<PAGE> 9
posted to the Participant's Account per each pay period at an effective
annual yield equal to the rate of ten-year United States Treasury
notes. The rate will be determined once each Plan Year and will be the
rate in effect as of April 30 of the year prior to the Plan Year to
which it applies, as published by Salomon Brothers Inc., or any
successor thereto, or as determined by the Chief Financial Officer of
the Company.
Section 4.2.2. Variable Rate. Except as specified in Section
4.2.4, if a Participant elects a variable rate, the Participant's
Account will be credited or debited as if the Account balance were
invested in one or more funds selected by the Company in the
proportions elected by the Participant. Statements will be provided on
a quarterly basis. Initially the funds will be from the Pruco Variable
Appreciable Life Insurance Contracts and include the Common Stock
Portfolio, the Aggressively Managed Flexible Portfolio, the
Conservatively Managed Flexible Portfolio, the Money Market Portfolio,
the Bond Portfolio, the High Yield Bond Portfolio and the Real Property
Account. Participants may elect to have their Accounts treated as if
they were invested in one or more of the funds selected, provided the
election is in at least ten percent (10%) increments of the Account.
Participants may change their measuring fund elections up to four (4)
times in any calendar year by giving the Committee written notice of
such change on a form provided by the Company for that purpose. Upon
receipt of such notice, the Committee will effect the change within two
(2) business weeks. The Participant's Account will be reduced by the
annual administrative charge set forth on Schedule A attached hereto,
which may be amended from time to time by the Committee.
Section 4.2.3. Common Stock Crediting Rate. If a Participant
elects the Common Stock crediting rate, the Participant's Account will
be valued as if his or her Account were invested in shares of Common
Stock equal to the number of Deferred Compensation Units posted to his
or her Account. The value of a Participant's Account will vary with the
value of the Company's Common Stock. The Participant's Account will be
credited, as of the applicable dividend payment date, with additional
Deferred Compensation Units equal in value to any dividends declared on
the Company's Common Stock based on the number of Deferred Compensation
Units posted to the Participant's Account as of the
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<PAGE> 10
record date with respect to the declaration of such dividend. As of
any date of valuation, the value of a Participant's Account will be
equal to the value (at the Closing Price on such date) of the number of
shares of Common Stock represented by the Deferred Compensation Units
credited to the Account as of that date.
Section 4.2.4. Crediting for Smokers. The crediting rate under
Sections 4.2.1 and 4.2.2 for Smokers shall be reduced by four tenths of
one percent (.4%) annually. The Committee may, in its discretion, waive
the reduction required by this Section 4.2.4 for an individual
classified as a Smoker with respect to a Permissible Deferral election
if the Committee receives a request for such a waiver, on a form
provided by the Company for that purpose, from such individual which
certifies that he or she has not smoked a cigarette within a twelve
(12) month period ending on the date such request is submitted. Such a
request may be submitted no sooner than twelve (12) months following
the date on which the Permissible Deferral was made.
ARTICLE 5. VESTING.
Participant deferrals are fully vested immediately.
ARTICLE 6. DISTRIBUTION OF BENEFITS.
Section 6.1. Time of Payment. Payments of benefits shall be made by
the Company upon the earliest to occur of the following:
(a) the termination, voluntary or involuntary, of the
Participant as a Director;
(b) the Participant's death; or
(c) for Participants Age sixty-eight (68) or older on the date
on which they first become eligible to participate in the Plan, Age 75.
Except as otherwise provided, benefit payments shall begin no later that six (6)
months after the occurrence of the event described in the preceding sentence
which results in benefit distribution.
Section 6.2. Form of Benefits Upon Retirement or Attainment of Age 75.
For distributions made for reasons other than the death of the Participant,
payments from the Account shall be made in accordance with the Standard Form of
Benefit. However, the Participant in the Plan Year prior to payment of benefits
may
-7-
<PAGE> 11
petition the Committee for, and the Committee may approve at such time, one of
the following forms of benefit:
(a) monthly payment over a five (5) year period; or
(b) a single distribution.
Except for single distributions, benefit payments shall be a level amount for
each twelve (12) month period calculated using the balance in the Account at the
beginning of the twelve (12) month period and dividing it by the total periods
remaining in the entire payment period. The benefit payment shall be adjusted
each subsequent twelve (12) month period to reflect the Account as of that time.
The Account shall continue to be credited during the payment period with gains
and losses as provided in Section 4.2.
Section 6.3. Deferral of Payment. A Participant may elect at the time
of each Permissible Deferral election to defer commencement of the payment of
benefits with respect to each such Permissible Deferral election as follows:
(a) for Participants Age 65 or older on the date on which they
first become eligible to participate in the Plan, commencement of
benefits may be deferred until the earlier of (i) five (5) years from
the date on which they retire or (ii) Age 75;
(b) for all other Participants, commencement of benefits may
be deferred until the earlier of (i) five (5) years from the date on
which they retire or (ii) Age 70.
Notwithstanding the preceding sentence, if a Participant elects to defer
commencement of benefits pursuant to this Section 6.3, but dies prior to the
date on which benefits would commence under such election, benefits shall begin
no later than six (6) months after the Participant's death.
Section 6.4. Death Benefits.
6.4.1. Death After Benefit Commencement. In the event a
Participant dies after commencement of benefits, the remaining benefit
payments, if any, shall be paid to the Participant's Beneficiary in the
same manner such benefits would have been paid to the Participant had
the Participant survived. A Beneficiary may petition the Committee for
an alternative method of payment. The Account shall be credited from
the date of the Participant's death at an interest rate set by the
Chief Financial Officer of the
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<PAGE> 12
Company in his discretion, which shall not be less than the rate then
payable on Investment Savings Accounts of $1,000 or less at Commerce
Bank of Kansas City, Missouri, N.A., or any successor thereto.
6.4.2. Death Prior to Benefit Commencement. In the event a
Participant dies prior to the time benefits commence, the Company shall
pay a pre-retirement death benefit to the Participant's Beneficiary
equal to the Participant's Account as of the date of the Participant's
death annuitized over a ten-year period at an interest rate set by the
Chief Financial Officer of the Company in his discretion. The
pre-retirement death benefit shall be paid monthly for a ten-year
period. The Beneficiary may petition the Committee to make a single sum
distribution as an alternative method of payment.
6.4.3. Marital Deduction. Any benefits which become payable
under this Article 6 to the surviving spouse of a Participant shall be
paid in a manner which will qualify such benefits for a marital
deduction in the estate of a deceased Participant under the terms of
Section 2056 of the Code, and unless specifically directed by a
Participant to the contrary pursuant to an effective beneficiary
designation, any portion of a Participant's death benefit payable to a
surviving spouse which remains unpaid at the death of such spouse shall
be paid to the spouse's estate.
6.4.4. Designation by Participant. Each Participant has the
right to designate primary and contingent Beneficiaries for death
benefits payable under the Plan. Such Beneficiaries may be individuals
or trusts for the benefit of individuals. A beneficiary designation by
a Participant shall be in writing on a form acceptable to the Committee
and shall only be effective upon delivery to the Company. A beneficiary
designation may be revoked by a Participant at any time by delivering
to the Company either written notice of revocation or a new beneficiary
designation form. The beneficiary designation form last delivered to
the Company prior to the death of a Participant shall control.
6.4.5. Failure to Designate Beneficiary. In the event there is
no beneficiary designation on file with the Company, or all
Beneficiaries designated by a Participant have predeceased the
Participant, the benefits payable by reason of the death of the
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<PAGE> 13
Participant shall be paid to the Participant's spouse, if living; if
the Participant does not leave a surviving spouse, to the Participant's
issue by right of representation; or, if there are no such issue then
living, to the Participant's estate. In the event there are benefits
remaining unpaid at the death of a sole Beneficiary and no successor
Beneficiary has been designated, either by the Participant or the
Participant's spouse pursuant to 6.4.3, the remaining balance of such
benefit shall be paid to the deceased Beneficiary's estate; or, if the
deceased Beneficiary is one of multiple concurrent Beneficiaries, such
remaining benefits shall be paid proportionally to the surviving
Beneficiaries.
Section 6.5. Claims Procedure. The Committee shall notify a Participant
in writing within ninety (90) days of the Participant's written application for
benefits of his eligibility or noneligibility for benefits under the Plan. If
the Committee determines that a Participant is not eligible for benefits or full
benefits, the notice shall set forth (a) the specific reasons for such denial,
(b) a specific reference to the provision of the Plan on which the denial is
based, (c) a description of any additional information or material necessary for
the claimant to perfect his claim, and a description of why it is needed, and
(d) an explanation of the Plan's claims review procedure and other appropriate
information as to the steps to be taken if the Participant wishes to have his
claim reviewed. If the Committee determines that there are special circumstances
requiring additional time to make a decision, the Committee shall notify the
Participant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional 90-day
period. If a Participant is determined by the Committee to be not eligible for
benefits, or if the Participant believes that he is entitled to greater or
different benefits, he shall have the opportunity to have his claim reviewed by
the Committee by filing a petition for review with the Committee within sixty
(60) days after receipt by him of the notice issued by the Committee. Said
petition shall state the specific reasons the Participant believes he is
entitled to benefits or greater or difference benefits. Within sixty (60) days
after receipt by the Committee of said petition, the Committee shall afford the
Participant (and his counsel, if any) an opportunity to present his position t
the Committee orally or in writing, and said Participant (or his counsel) shall
have the right to review the pertinent documents, and the Committee shall notify
the Participant of its decision in writing within said sixty (60) day period,
stating specifically the basis of said decision written in a manner calculated
to be understood by the Participant and the specific provisions of the Plan on
which the decision is based. If, because of the need for a hearing, the sixty
(60) day period is not sufficient, the
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<PAGE> 14
decision may be deferred for up to another sixty (60) day period at the election
of the Committee, but notice of this deferral shall be given to the Participant.
Section 6.6. Alternate Forms of Benefit Distribution. Participants, in
the Plan Year prior to payment of benefits may petition the Committee to request
methods of benefit distribution other than those provided pursuant to this
Article 6.
Section 6.7. Distributions on Plan Termination. Notwithstanding
anything in this Article 6 to the contrary, if the Plan is terminated,
distributions shall be made in accordance with Section 9.2.
ARTICLE 7. FUNDING
Section 7.1. Sources of Benefits. All benefits under the Plan shall be
paid when due by the Company our of its assets of from an irrevocable trust
established by the Company for that purpose. The Company may, but shall have no
obligations to, make such advance provision for the payment of such benefit as
the Board may from time to time consider appropriate.
Section 7.2. No Claim on Specific Assets. No Participant shall be
deemed to have, by virtue of being a Participant in the .Plan, any claim on any
specific assets of the Company such that the Participant would be subject to
income taxation on his benefits under the Plan prior to distribution and the
rights of Participants and Beneficiaries to benefits to which they are otherwise
entitled under the Plan shall be those of an unsecured general creditor of the
Company.
ARTICLE 8. ADMINISTRATION AND FINANCES
Section 8.1. Administration. The Plan shall be administered by the
Committee. The Company shall bear all administrative costs of the Plan other
than those specifically charged to a Participant or Beneficiary.
Section 8.2. Powers of Committee. In addition to the other powers
granted under the Plan, the Committee shall have all powers necessary to
administer the Plan, including, without limitation, powers:
(a) to interpret the provisions of the Plan;
(b) to establish and revise the method of accounting for
the Plan and to maintain the Accounts; and
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<PAGE> 15
(c) to establish rules for the administration of the Plan
and to prescribe any forms required to administer the Plan.
Not in limitation, but in amplification of the foregoing and of the authority
conferred upon the Committee in Section 8.1, the Company specifically intends
that the Committee have the greatest permissible discretion to construe the
terms of the Plan and to determine all questions concerning eligibility,
participation and benefits. Any such decision made by the Committee is intended
to be subject to the most deferential standard of judicial review. Such standard
of review is not to be effected by any real or alleged conflict of interest on
the part of the Company or any member of the Committee.
Section 8.3. Actions of the Committee. Except as modified by the
Company, all determinations, interpretations, rules, and decisions of the
Committee shall be conclusive and binding upon all persons having or claiming to
have any interest or right under the Plan.
Section 8.4. Delegation. The Committee, or any officer designated by
the Committee, shall have the power to delegate specific duties and
responsibilities to officers or other employees of the Company or other
individuals or entities. Any delegation may be rescinded by the Committee at any
time. Each person or entity to whom a duty or responsibility has been delegated
shall be responsible for the exercise of such duty or responsibility and shall
not be responsible for any act or failure to act of any other person or entity.
Section 8.5. Reports and Records. The Committee and those to whom the
Committee has delegated duties under the Plan shall keep records of all their
proceedings and actions and shall maintain books of account, records, and other
data as shall be necessary for the proper administration of the Plan and for
compliance with applicable law.
ARTICLE 9. AMENDMENTS AND TERMINATION
Section 9.1. Amendments. The Company, by action of the Board, may amend
the Plan, in whole or in part, at any time and from time to time. Any such
amendment shall be filed with the Plan documents. No amendment, however, may be
effective to eliminate or reduce the benefits of any retired Participant or the
Beneficiary of any deceased Participant then eligible for benefits or the
benefits, if any, in any active Participant's Account immediately before the
effective date of such amendment, and each such Account will be credited to the
date of such amendment in accordance with Section 4.2. Notwithstanding anything
in this Section 9.1 to the contrary, the Committee may, in its discretion,
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<PAGE> 16
amend the Plan to reduce the rates set forth in Section 4.2 for crediting the
Accounts of active Participants effective for crediting from the date of any
such amendment.
Section 9.2. Termination. The Company expects the Plan to be permanent,
but necessarily must, and hereby does, reserve the right to terminate the Plan
at any time by written action of the Board. In all events, the Plan will be
terminated if the existence of a trust causes a federal court to hold that the
Plan is "funded" for ERISA purposes, as defined in Section 2.02-4 of the Trust,
and appeals from that holding are no longer timely or have been exhausted, and
the trust is therefore terminated with respect to the Plan. Upon termination of
the Plan, all deferrals will cease and no future deferrals will be made.
Termination of the Plan shall not operate to eliminate or reduce benefits of any
retired Participant or the Beneficiary of any deceased Participant then eligible
for benefits or the benefits, if any, in any active Participant's Account
immediately before the effective date of such termination, and each such Account
will be credited, to the date of distribution of all benefits in such Account,
in accordance with Section 4.2, as it may be amended from time to time pursuant
to Section 9.1.
If the Plan shall at any time be terminated, payments from the Accounts
of all Participants and Beneficiaries shall be made as soon as administratively
convenient in the form of monthly payments over a five (5) year period; however,
the Committee in its sole discretion may pay the benefits in a lump sum.
Notwithstanding the preceding sentence, if the termination occurs because the
Plan is held to be "funded" as described in the first paragraph of this Section
9.2, the distribution will be paid in a lump sum not later than ninety (90) days
after such termination.
ARTICLE 10. MISCELLANEOUS
Section 10.1 No Guarantee of Membership. Neither the adoption and
maintenance of the Plan nor the execution by the Company of a Permissible
Deferral agreement with any Director shall be deemed to be a contract between
the Company and any Participant to retain his or her position as a Director.
Section 10.2. Individual Account Plan. If it is determined that the
Plan is not an unfunded plan maintained primarily for a select group of
management or highly compensated employees as described in Sections 201(2),
301(a)(3) and 401(a)(1) of ERISA, then the Plan is intended to be an individual
account plan (other than a money purchase plan) as described in Section
301(a)(8) of ERISA.
Section 10.3. Release. Any payment of benefits to or for the benefit of
a Participant or a Participant's Beneficiaries that
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<PAGE> 17
is made in good faith by the Company in accordance with the Company's
interpretation of its obligations hereunder, shall be in full satisfaction of
all claims against the Company for benefits under this Plan to the extent of
such payment.
Section 10.4. Notices. Any notice permitted or required under the Plan
shall be in writing and shall be hand delivered or sent, postage prepaid,
certified or registered mail with return receipt requested, to the principal
office of the Company, if to the Company, or to the address last shown on the
records of the Company, if to a Participant or Beneficiary. Any such notice
shall be effective as of the date of hand delivery or mailing.
Section 10.5. Non-Alienation. No benefit payable at any time under this
Plan shall be subject in any manner to alienation, sale, transfer, assignment,
pledge, levy, attachment, or encumbrance of any kind.
Section 10.6. Tax Liability. The Company may direct the trustee of the
Trust to withhold from any payment of benefits under the Plan such amounts as
the Company determines are reasonably necessary to pay any taxes (and interest
thereon) required to be withheld or for which the trustee of the Trust may
become liable under applicable law. The Company may also direct the trustee of
the Trust to forward to the appropriate taxing authority any amounts required to
be paid by the Company or the Trust under the preceding sentence. Any amounts
withheld pursuant to this Section 10.6 in excess of the amount of taxes due (and
interest thereon) shall be paid to the Participant or Beneficiary upon final
determination, as determined by the Company, of such amount. No interest shall
be payable by the Company to any Participant or Beneficiary by reason of any
amounts withheld pursuant to this Section 10.6.
Section 10.7. Captions. Article and section headings and captions are
provided for purposes of reference and convenience only and shall not be relied
upon in any way to construe, define, modify, limit, or extend the scope of any
provision of the Plan.
Section 10.8. Applicable Law. The Plan and all rights hereunder shall
be governed by and construed according to the laws of the State of Missouri,
except to the extent such laws are preempted by the laws of the United States of
America.
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<PAGE> 18
Schedule A - Annual Administrative Charges
<TABLE>
<CAPTION>
Annual Administrative
Portfolio Gross Crediting Rate Charge
- ------------------------------ --------------------
<S> <C>
Up to 9.99% 1.40%
10.00% to 11.99% 1.00%
12.00% and above 0.00%
</TABLE>
-15-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>3
<FILENAME>ex10-21.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT DATED JANUARY 31, 2000
<TEXT>
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of
the 31st day of January, 2000, by and between BLOCK FINANCIAL CORPORATION, a
Delaware corporation ("BFC"), and David J. Kasper ("Executive").
ARTICLE ONE
EMPLOYMENT
1.01 - Agreement as to Employment. Effective February 14, 2000
or a later date as agreed upon by both parties (the "Employment Date"), BFC
hereby employs Executive as its President, Financial Services Group, and
Executive hereby accepts such employment by BFC, subject to the terms of this
Agreement. Subject to the terms of Section 1.06 of this Agreement, either party
may terminate this Agreement for any reason, or no reason, by providing not less
than 45 days' prior written notice of such termination to the other party, and,
if such notice is properly given, this Agreement and Executive's employment
hereunder shall terminate as of the close of business on the 45th day after such
notice is deemed to have been given or such later date as is specified in such
notice. Any termination of this Agreement shall not be effective as to those
portions of this Agreement which, by their express terms as set forth below,
require performance by either party following termination of this Agreement.
1.02 - Duties.
(a) Executive is employed by BFC to serve as its President,
Financial Services Group, subject to the authority and direction of the BFC's
Board of Directors, the Chief Executive Officer of H&R Block, Inc., a Missouri
corporation ("Block"), and the Chief Operating Officer of Block. Subject to the
foregoing, the Executive shall have such authority and responsibility and duties
as are normally associated with the position of President of an operating
subsidiary.
(b) So long as he is employed under this Agreement, Executive
agrees to devote his full business time and efforts exclusively on behalf of BFC
and to competently and diligently discharge his duties hereunder. Executive
shall not be prohibited from engaging in such personal, charitable, or other
nonemployment activities that do not interfere with his full-time employment
hereunder and that do not violate the other provisions of this Agreement.
Executive shall comply fully with all reasonable policies of BFC as are from
time to time in effect and applicable to his position.
1.03 - Compensation.
(a) Base Salary. BFC shall pay to Executive a gross salary at
an annual rate of $375,000 ("Base Salary"), payable semimonthly or at any other
pay periods as BFC may use for its other executive employees. The Base Salary
shall be reviewed for adjustment by the Board of Directors of Block (the Board")
or appropriate committee thereof no less often than annually during
<PAGE> 2
the term of Executive's employment hereunder and, if adjusted by the Board, such
adjusted amount shall become the "Base Salary" for purposes of this Agreement.
(b) Additional Annual Payments. On the first, second, third,
fourth, and fifth anniversary of the Employment Date, BFC shall pay to Executive
$63,500, plus an additional amount as is necessary to "gross up" such payment to
cover the anticipated income tax liability resulting from such taxable income.
(c) Short-Term Incentive Compensation. As approved by the
Compensation Committee of the Board, Executive shall participate in the H&R
Block Short-Term Incentive Plan and the discretionary short-term incentive
program. Under such Plan and program, the Executive shall have an aggregate
target bonus for fiscal year 2000 of $206,250 and an opportunity to earn 200% of
such target bonus. The payment of the actual award under the Plan (20% of
target) shall be based upon the actual consolidated pretax earnings of Block for
its fiscal year 2000 compared to the actual consolidated pretax earnings of
Block for its fiscal year 1999. The payment of the actual award under the
discretionary program (80%) shall be based upon the performance of the Financial
Service Group and Executive's individual performance, as determined by the Chief
Operating Officer and Chief Executive Officer of Block and approved by the
Compensation Committee. For purposes of Executive's participation in such Plan
for the fiscal year ending April 30, 2000, Executive's actual incentive
compensation shall be prorated based upon the number of months during such year
that he is actually employed by BFC. Executive must remain employed through
April 30, 2000 to receive payments under the Plan and program.
(d) Performance Grant. As approved by the Board and the Chief
Operating Officer of Block, Executive shall participate in the Performance Grant
Program, subject to the terms of that Program, and shall have a target cash
award of $500,000.
(e) Stock Options. As approved by the Compensation Committee
of the Board and the Board itself, Executive shall be granted (i) on the
Employment Date a stock option under Block's 1993 Long-Term Executive
Compensation Plan (the "1993 Plan") to purchase 20,000 shares of Block's common
stock at a price per share equal to its closing price on the New York Stock
Exchange on the date of grant, such option to expire on the tenth anniversary of
the date of grant; to vest and become exercisable as to 40% of the shares
covered thereby on the third anniversary of the date of grant, as to an
additional 30% of such shares on the fourth anniversary of the date of grant,
and as to the remaining 30% of the shares on the fifth anniversary of the date
of grant; to be an incentive stock option for the maximum number of shares
permitted by Internal Revenue Code Section 422 and the regulations promulgated
thereunder; and to otherwise be a nonqualified stock option; and (ii) a stock
option to purchase a minimum of 20,000 shares of Block's common stock at a price
per share equal to its closing price on the New York Stock Exchange on the date
in fiscal year 2001 on which options are granted under the 1993 Plan to all or
substantially all other senior executive officers of Block and its subsidiaries,
such stock option to have terms and conditions consistent with the terms and
conditions of options granted to such other
2
<PAGE> 3
senior executive officers except as provided in Section 1.06(a).
(f) Restricted Stock. As approved by the Compensation
Committee of the Board and the Board itself, Executive shall be awarded promptly
after the Employment Date, 5,000 Restricted Shares of Block's common stock under
the 1993 Plan. One-third of the 5,000 shares shall vest, respectively, on each
of the first three anniversaries following such employment commencement date.
Prior to the time such Restricted Shares are so vested, (i) such Restricted
Shares shall be nontransferable, and (ii) Executive shall be entitled to receive
any cash dividends payable with respect to unvested Restricted Shares and vote
such unvested Restricted Shares at any meeting of shareholders of Block.
(g) Relocation Benefits.
(i) BFC shall reimburse Executive for reasonable packing,
shipping, transportation costs and other expenses incurred by Executive
in relocating himself, his family and personal property to the Greater
Kansas City Area, in accordance with the H&R Block Executive Relocation
Program.
(ii) To the extent that Executive incurs taxable income
related to any relocation benefits paid pursuant to this Agreement, BFC
shall pay to Executive such additional amount as is necessary to "gross
up" such benefits and cover the anticipated income tax liability
resulting from such taxable income.
1.04 - Business Expenses. BFC shall promptly pay directly, or
reimburse Executive for, all business expenses, to the extent such expenses are
paid or incurred by Executive during the term hereof in accordance with Block
policy in effect from time to time and to the extent such expenses are
reasonable and necessary to the conduct by Executive of BFC's business.
1.05 - Fringe Benefits. During the term of Executive's
employment hereunder, BFC shall make available to Executive such insurance, sick
leave, deferred compensation, short-term incentive compensation, bonuses, stock
options (also referred to in Subsection 1.03(e) above), retirement, vacation,
and other like benefits as are approved by the Board or the Compensation
Committee thereof and provided from time to time to the other executive-level
employees of BFC or Block's other subsidiaries.
1.06 - Termination of Employment.
(a) Termination Due to a Change in Control or Without Cause.
(i) If Executive terminates Executive's employment under
this Agreement during the 180-day period following the date of the
occurrence of a "Change in Control" of Block, or if BFC terminates
Executive's employment under this Agreement for any reason other than
for "cause," then, upon any such termination of Executive's employment,
(A)
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<PAGE> 4
BFC shall pay to Executive compensation at an annual rate equal to the
sum of (I) the annual rate of Base Salary in effect upon such
termination, and (II) the aggregate short-term incentive compensation
(under the H&R Block Short-Term Incentive Plan and any discretionary
incentive program) paid by BFC to Executive for the last fiscal year
completed before the fiscal year in which the termination of employment
occurs (or, if such termination occurs prior to end of the fiscal year
in which the Employment Date occurs, the amount of actual aggregate
short-term incentive compensation to which Executive would have been
entitled (with any discretionary incentive compensation calculated at
target) had Executive remained employed through the last day of such
fiscal year), such compensation to be paid throughout the one-year
period following such termination at such periodic intervals as Base
Salary would have been made had Executive remained employed by BFC
hereunder; (B) any portion of any option to purchase shares of Block
common stock granted pursuant to Subsections 1.03(e) or 1.05 of this
Agreement and held by Executive at the time of such termination of
employment that is not yet vested in accordance with its terms shall
fully vest upon the date of such termination of employment, and shall
be exercisable to the extent so vested for a period of three months
after such date of termination of employment; (C) any Restricted Shares
granted pursuant to Subsection 1.03(f) of this Agreement and held by
Executive at the time of such termination of employment that are not
yet vested (meaning the Shares are still subject to restrictions) shall
fully vest upon the date of such termination of employment, and all
restrictions on any Restricted Shares so vested shall terminate; and
(D) HRB shall, during the one-year period following such termination,
continue Executive's health, basic life, and disability insurance
benefits (such health insurance benefits to be provided by BFC's
payment (whether directly or by reimbursement) of Executive's
premiums/contributions due as a result of Executive selecting
continuation coverage (COBRA) under the plan providing such benefits)
but only to the extent Executive does not obtain similar benefits paid
for by a third party after such termination..
(ii) For the purpose of this subsection, a "Change of
Control" shall mean:
(A) the acquisition, other than from Block,
by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 35% or more of the then outstanding
voting securities of Block entitled to vote generally in the
election of directors, but excluding, for this purpose, any
such acquisition by Block or any of its subsidiaries, or any
employee benefit plan (or related trust) of Block or its
subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners of the voting securities of Block
immediately prior to such acquisition in substantially the
same proportion as their ownership,
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<PAGE> 5
immediately prior to such acquisition, of the then outstanding
voting securities of Block entitled to vote generally in the
election of directors, as the case may be; or
(B) individuals who, as of the date hereof,
constitute the Board (as of the date hereof, the "Incumbent
Board") cease for any reason to constitute at least a majority
of the Board, provided that any individual or individuals
becoming a director subsequent to the date hereof, whose
election, or nomination for election by Block's shareholders,
was approved by a vote of at least a majority of the Board (or
nominating committee of the Board) shall be considered as
though such individual were a member or members of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the
election of the directors of Block (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or
(C) approval by the shareholders of Block of
(I) a reorganization, merger or consolidation of Block, in
each case, with respect to which all or substantially all of
the individuals and entities who were the respective
beneficial owners of the voting securities of Block
immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more
than 50% of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation
resulting from such reorganization, merger or consolidation,
(II) a complete liquidation or dissolution of Block, voluntary
or involuntary, or (III) the sale or other disposition of all
or substantially all of the assets of Block.
(iii) For the purpose of this subsection, "cause"
shall mean any one or more of the following grounds:
(A) Executive's commission of an act
materially and demonstrably detrimental to the good will of
Block or any subsidiary of Block, which act constitutes gross
negligence or willful misconduct by the Executive in the
performance of his material duties to Block; or
(B) commission by Executive of any act of
dishonesty or breach of trust resulting or intending to result
in material personal gain or enrichment of Executive at the
expense of Block or any subsidiary of Block; or
(C) Executive's conviction of a misdemeanor
(involving an act of moral turpitude) or a felony; or
(D) for any reason (or no reason) at any
time after the last day of Block's fiscal year during which
Executive attains normal retirement age under
5
<PAGE> 6
Block's benefit plans; or
(E) Executive's death or total and permanent
disability. The term "total and permanent disability" shall
have the meaning ascribed thereto under any long-term
disability plan maintained by BFC or Block for BFC executives.
(b) Termination Due to Mutual Agreement. The parties may
terminate Executive's employment under this Agreement at any time by mutual
written agreement.
(c) No Further Obligations. Upon termination of Executive's
employment under this Agreement, BFC shall have no further obligations under
this Agreement and no further payments of Base Salary or other compensation or
benefits shall be payable by BFC to Executive, except (i) as set forth in this
Section 1.06, (ii) as required by the express terms of any written benefit plans
or written arrangements maintained by BFC and applicable to Executive at the
time of such termination of Executive's employment, (iii) as may be required by
law, or (iv) as may be mutually agreed upon between the parties in a negotiated
Employment Agreement Termination package.
ARTICLE TWO
LOAN
BFC shall loan $250,000 to Executive on the Employment Date.
Such loan and its terms shall be evidenced by a promissory note in the form
attached hereto as Exhibit A, to be signed by Executive on the Employment Date.
ARTICLE THREE
CONFIDENTIALITY
3.01 - Background and Relationship of Parties. The parties
acknowledge (for all purposes including, without limitation, Articles Three and
Four of this Agreement) that Block and its subsidiaries have been and will be
engaged in a continuous program of acquisition and development respecting their
businesses, present and future, and that, in connection with Executive's
employment by BFC, Executive will be expected to have access to all information
of value to BFC and Block and that Executive's employment creates a relationship
of confidence and trust between Executive and Block with respect to any
information applicable to the businesses of Block and its subsidiaries.
Executive will possess or have unfettered access to information that has been
created, developed, or acquired by Block and its subsidiaries or otherwise
become known to Block and its subsidiaries and which has commercial value in the
businesses in which Block and its subsidiaries have been and will be engaged and
has not been publicly disclosed by Block. All information described above is
hereinafter called "Proprietary Information." By way of illustration, but not
limitation, Proprietary Information includes trade secrets, customer lists and
information, employee lists and information, developments, systems, designs,
know-how, marketing plans,
6
<PAGE> 7
product information, business and financial information and plans, strategies,
forecasts, new products and services, financial statements, budgets,
projections, prices, and acquisition and disposition plans. Proprietary
Information shall not include any portions of such information which are now or
hereafter made public by third parties in a lawful manner or made public by
parties hereto without violation of this Agreement.
3.02 - Proprietary Information is Property of Block.
(a) All Proprietary Information shall be the sole property of
Block (or the applicable subsidiary of Block) and its assigns, and Block (or the
applicable subsidiary of Block) shall be the sole owner of all patents,
copyrights, trademarks, names, and other rights in connection therewith and
without regard to whether Block (or any subsidiary of Block) is at any
particular time developing or marketing the same. Executive hereby assigns to
Block any rights Executive may have or may acquire in such Proprietary
Information. At all times, Executive will keep in strictest confidence and trust
all Proprietary Information and Executive will not use or disclose any
Proprietary Information without the written consent of Block, except as may be
necessary in the ordinary course of performing duties as an employee of BFC or
as may be required by law or the order of any court or governmental authority.
(b) In the event of the termination of Executive's employment
by BFC, Executive shall promptly deliver to BFC all copies of all documents,
notes, drawings, specifications, documentation, data, and other materials of any
nature belonging to Block or any subsidiary of Block and obtained during the
course of Executive's employment with BFC. In addition, upon such termination,
Executive will not remove from the premises of Block or any subsidiary of Block
any of the foregoing or any reproduction of any of the foregoing or any
Proprietary Information that is embodied in a tangible medium of expression.
ARTICLE FOUR
NON-HIRING; NO CONFLICTS; NONCOMPETITION
4.01 - General. The parties hereto acknowledge that, during
the course of Executive's employment by BFC, Executive shall have access to
information valuable to BFC and Block concerning the key employees of Block and
its subsidiaries ("Block Employees") and, in addition to Executive's access to
such information, Executive may, during (and in the course of) Executive's
employment by BFC, develop relationships with such Block Employees whereby
information valuable to Block and its subsidiaries concerning the Block
Employees was acquired by Executive. Such information includes, without
limitation: the identity, skills, and performance levels of the Block Employees,
as well as compensation and benefits paid by Block to such Block Employees.
4.02 - Non-Hiring. During the period of Executive's employment
hereunder and during the time Executive is receiving payments hereunder and for
a period of one year after the
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<PAGE> 8
later of termination by BFC or Executive of such employment or cessation of such
payments, the Executive will not knowingly recruit, solicit, or hire any Block
Employee or otherwise induce any such Block Employee to leave the employment of
Block (or the applicable employer-subsidiary of Block) to become an employee of
or otherwise be associated with any other party or with Executive or any company
or business with which Executive is or may become associated.
4.03 - No Conflicts. Executive represents in good faith that,
to the best of his knowledge, the performance by Executive of all the terms of
this Agreement will not breach any agreement to which Executive is or was a
party and which requires Executive to keep any information in confidence or in
trust. Executive has not brought and will not bring with him to BFC or Block nor
will Executive use in the performance of employment responsibilities at BFC any
proprietary materials or documents of a former employer that are not generally
available to the public, unless Executive has obtained express written
authorization from such former employer for their possession and use. Executive
has not and will not breach any obligation of confidentiality that Executive may
have to former employers and Executive shall fulfill all such obligations during
his employment with BFC.
4.04 - Non-Competition.
(a) During any period of Executive's employment with BFC,
Executive shall not engage in, or own or control any interest in (except as a
passive investor in publicly held companies, holding less than one percent of
its outstanding securities), or act as an officer, director, or employee of, or
consultant, advisor or lender to, any firm, corporation, institution, or
business which engages in any line of business which is competitive with any
line of business of Block or any of its subsidiaries (or which Block or any
subsidiary is engaged in evaluating or developing).
(b) During the one-year period immediately following the
termination of Executive's employment hereunder by BFC or Executive, Executive
will not own or control any interest in (except as a passive investor in
publicly held companies, holding less than one percent of its outstanding equity
securities) or act as an officer, director, or employee of, or consultant,
advisor, or lender to, any firm, corporation, institution, or business which
engages in the income tax return preparation business at the time Executive's
employment terminates.
(c) During the one-year period immediately following the
termination of Executive's employment hereunder by BFC or Executive, Executive
will not own or control any interest in (except as a passive investor in
publicly held companies, holding less than one percent of its outstanding equity
securities) or act as an officer, director, or employee of, or consultant,
advisor, or lender to, any firm, corporation, institution, or business which
engages in any line of business which is competitive with any line of business
included, as of the Employment Date, in the financial services segment of Block
(for Block's financial reporting purposes); except, however, during the one-year
period immediately following termination of Executive's employment hereunder by
BFC without "cause," Executive may, at Executive's option, own or control an
interest in (including as a passive investor in a publicly held company, holding
one percent or more
8
<PAGE> 9
of its outstanding equity securities), or act as an officer, director or
employee of, or consultant, advisor or lender to, any firm, corporation,
institution or business which engages in any line of business which, at the time
Executive's employment terminates, is competitive with any line of business
included in such financial services segment of Block (and which does not also
engage in the income tax return preparation business) as of the Employment Date.
As of the effective date of any such ownership, control or act, HRB shall have
no further obligation to continue to pay compensation pursuant to subsection
1.06(a)(i)(A) of this Agreement and no further obligation to continue
Executive's health, basic life, and disability insurance benefits pursuant to
subsection 1.06(a)(i)(D) of this Agreement.
4.05 - Reasonableness of Restrictions. Executive and BFC
acknowledge that the restrictions contained in this Agreement are reasonable,
but should any provisions of any Article of this Agreement be determined to be
invalid, illegal, or otherwise unenforceable or unreasonable in scope by any
court of competent jurisdiction, the validity, legality, and enforceability of
the other provisions of this Agreement shall not be affected thereby and the
provision found invalid, illegal, or otherwise unenforceable or unreasonable
shall be considered by BFC and Executive to be amended as to scope of
protection, time, or geographic area (or any one of them, as the case may be) in
whatever manner is considered reasonable by that court and, as so amended, shall
be enforced.
ARTICLE FIVE
MISCELLANEOUS
5.01 - Third-Party Beneficiary. The parties hereto agree that
Block is a third-party beneficiary as to the obligations imposed upon Executive
under this Agreement and as to the rights and privileges to which BFC is
entitled pursuant to this Agreement, and that Block is entitled to all of the
rights and privileges associated with such third-party-beneficiary status.
5.02 - Entire Agreement. This Agreement constitutes the entire
agreement and understanding between BFC and Executive concerning the subject
matter hereof. No modification, amendment, termination, or waiver of this
Agreement shall be binding unless in writing and signed by Executive and a duly
authorized officer of BFC. Failure of BFC, Block or Executive to insist upon
strict compliance with any of the terms, covenants, or conditions hereof shall
not be deemed a waiver of such terms, covenants, and conditions.
5.03 - Specific Performance by Executive. The parties
acknowledge that money damages alone will not adequately compensate BFC or Block
or Executive for breach of any of the covenants and agreements herein and,
therefore, in the event of the breach or threatened breach of any such covenant
or agreement by either party, in addition to all other remedies available at
law, in equity or otherwise, a wronged party shall be entitled to injunctive
relief compelling specific performance of (or other compliance with) the terms
hereof.
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<PAGE> 10
5.04 - Successors and Assigns. This Agreement shall be binding
upon Executive and the heirs, executors, assigns and administrators of Executive
or his estate and property and shall inure to the benefit of BFC, Block and
their successors and assigns. Executive may not assign or transfer to others the
obligation to perform Executive's duties hereunder.
5.05 - Withholding Taxes. From any payments due hereunder to
Executive from BFC, there shall be withheld amounts reasonably believed by BFC
to be sufficient to satisfy liabilities for federal, state, and local taxes and
other charges and customary withholdings. Executive remains primarily liable to
such authorities for such taxes and charges to the extent not actually paid by
BFC. This Section 5.05 shall not affect BFC's obligation to "gross up" any
relocation benefits paid to Executive pursuant to Subsection 1.03(g)(ii).
5.06 - Indemnification. To the fullest extent permitted by law
and Block's Bylaws, BFC hereby indemnifies during and after the period of
Executive's employment hereunder the Executive from and against all loss, costs,
damages, and expenses including, without limitation, legal expenses of counsel
selected by BFC to represent the interests of Executive (which expenses BFC
will, to the extent so permitted, advance to executive as the same are incurred)
arising out of or in connection with the fact that Executive is or was a
director, officer, employee, or agent of BFC or Block or serving in such
capacity for another corporation at the request of BFC or Block. Notwithstanding
the foregoing, the indemnification provided in this Section 5.06 shall not apply
to any loss, costs, damages, and expenses arising out of or relating in any way
to any employment of Executive by any former employer or the termination of any
such employment.
5.07 - Notices. Notices hereunder shall be deemed delivered
five days following deposit thereof in the United States mails (postage prepaid)
addressed to Executive at: [Address], with a copy to [Name and Address]; and to
BFC at: 4400 Main Street, Kansas City, Missouri 64111; Attn: Mark A. Ernst, with
a copy to James H. Ingraham, Esq., H&R Block, Inc., 4400 Main Street, Kansas
City, Missouri 64111; or to such other address and/or person designated by
either party in writing to the other party.
5.08 - Counterparts. This Agreement may be signed in
counterparts and delivered by facsimile transmission confirmed promptly
thereafter by actual delivery of executed counterparts.
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<PAGE> 11
Executed as a sealed instrument under, and to be governed by,
construed and enforced in accordance with, the laws of the State of Missouri.
EXECUTIVE:
Dated: 2/01/00 /s/ David J. Kasper
---------- ---------------------
David J. Kasper
Accepted and Agreed:
BLOCK FINANCIAL CORPORATION,
a Missouri corporation
By: /s/ Frank L. Salizzoni
----------------------------------
Frank L. Salizzoni, President
Dated: 2/3/00
----------
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>4
<FILENAME>ex10-22.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT DATED MAY 15, 1998
<TEXT>
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the
15th day of May, 1998, by and between DMJK BUSINESS SERVICES, INC., a Missouri
Corporation ("Old DMJK"), and TERRENCE E. PUTNEY (the "Employee").
RECITALS
WHEREAS, Old DMJK is a wholly owned subsidiary of HRB BUSINESS
SERVICES, INC. ("HRB Business Services"), which is in turn a wholly owned
subsidiary of H&R BLOCK GROUP, INC. ("Group"); and Old DMJK is engaged in the
provision of business services to the general public;
WHEREAS, Employee is a Certified Public Accountant ("CPA") who
desires employment by Old DMJK to provide certain business services to clients
or customers of Old DMJK;
WHEREAS, Employee is also employed by and is a shareholder of
Donnelly Meiners Jordan Kline, P.C. (Employee and such other shareholders of
Donnelly Meiners Jordan Kline, P.C. who are also employees of Old DMJK being
sometimes herein referred to as "Shareholder CPAs") an accounting firm licensed
as a CPA firm by the Board of Accountancy of the State of Missouri ("New DMJK");
and
WHEREAS, Old DMJK and Employee desire to evidence the terms
and conditions of their relationship.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto agree as follows:
1. EMPLOYMENT. Old DMJK and Employee confirm that Employee is
an Employee of Old DMJK pursuant to all the terms and conditions of this
Agreement.
2. TERM. The term of the Employee's employment and of this
Agreement shall commence on the date hereof and, if not sooner terminated
pursuant to the terms hereof, shall expire on that date which is five years
after the date hereof (the "Initial Term"). Thereafter, such employment and this
Agreement shall continue pursuant to the terms hereof from year to year, subject
to termination, with or without cause, upon ninety (90) days prior written
notice by either party or as otherwise set forth in Section 9 herein. The term
of this Agreement, including references to the Initial Term, will be hereafter
referred to as the "Term."
3. DUTIES.
3.1 DUTIES OF EMPLOYEE. Employee shall render such lawful
services for Old DMJK and its customers or clients as are from time to time
reasonably requested of Employee and assigned to Employee by Old DMJK (the
"Services"). The duties of the
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<PAGE> 2
Employee may be changed from time to time by Old DMJK after consultation
with Employee. Old DMJK and Employee intend that Employee shall perform for Old
DMJK only those Services which do not constitute the performance of attestations
and services related thereto or any other services for which a Certified Public
Accountant ("CPA") certificate and license (for either Employee or Old DMJK) are
required by either the laws of the State of Missouri or Kansas, whichever
state's law is applicable ("Public Accounting Services"). Also, Old DMJK and
Employee intend that Employee shall only be required to perform for Old DMJK
services of a type reasonably consistent with those traditionally performed by
CPAs (other than those services required to be performed by New DMJK pursuant to
law or rules of the State Board of Accounting) generally, including, without
limitation, accounting, bookkeeping, write up, tax preparation, administration,
supervision, marketing, promotion and training. Old DMJK shall not require
Employee to relocate outside the Kansas City metropolitan area. All fees for
provision of the Services by Employee pursuant to this Agreement shall belong
and be payable to Old DMJK; provided, however, that if Employee provides
services to or is employed by New DMJK whether or not pursuant to a management
or similar agreement between Old DMJK and New DMJK, fees earned from providing
services as an employee of New DMJK shall be retained by New DMJK or forwarded
to Old DMJK as the management or other agreement may provide. However, no fees
paid for Public Accounting Services shall be paid directly to Old DMJK. Old DMJK
specifically approves employment of Employee by New DMJK provided that the only
services which Employee provides for New DMJK shall be those services which both
Employee and New DMJK must have licenses from the State of Missouri Board of
Accountancy to provide. Employee shall, in addition to the duties described
above:
(a) Keep or cause to be kept, appropriate records,
reports, claims and correspondence ("Records") necessary and
appropriate in connection with the Services provided by Employee
hereunder. All such Records shall belong to Old DMJK;
(b) Promote, to the extent permitted by law, the
business of Old DMJK;
(c) Perform all acts necessary to maintain all of
Employee's skills at an appropriate level; and
(d) Maintain all licenses or certifications
necessary for Employee to hold Employee out as a CPA and to
perform attestations in Missouri and/or Kansas.
3.2 PERFORMANCE IN GOOD FAITH. The Employee will, to the
best of the Employee's abilities, competently, with diligence, in good faith and
with integrity, devote Employee's business time, attention, energy and skill
necessary to the fulfillment of Employee's duties hereunder.
3.3 POLICIES AND PROCEDURES. The Employee will be subject
to such policies and procedures as are from time to time established by Old DMJK
or its direct or indirect parent companies for employees of Old DMJK generally.
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<PAGE> 3
3.4 CHARITABLE AND COMMUNITY ACTIVITIES. It is hereby
acknowledged that, subject to Section 7 hereof, the Employee may either
presently, or in the future, be involved in charitable or community activities
so long as such other activities do not interfere with the performance by the
Employee of Employee's duties hereunder and such involvement is in conformity
with the Code of Business Ethics and Conduct of H&R Block, Inc., as the same may
be amended from time to time.
4. EMPLOYEE COMPENSATION. Employee shall receive that portion
of the consideration identified in this Article 4 as is allocated to Employee
pursuant to subsections 4.1.(b), 4.2(e), 4.3(d) and 4.4(e) below.
4.1 ANNUAL AGGREGATE COMPENSATION. Old DMJK shall annually
pay an aggregate amount to the Shareholder CPAs identified in Schedule 4.1
(which may be amended from time to time by New DMJK subject to prior approval by
Old DMJK) (the "Annual Aggregate Compensation"), as set forth in Schedule
4.1(a):
4.1(a) PAYMENT OF ANNUAL AGGREGATE COMPENSATION. The Annual
Aggregate Compensation payable under subsection 4.1(a) for each fiscal
year in question shall be paid in equal semi-monthly installments with
each such installment equal to 1/24 of the amount set forth in Section
1 of Schedule 4.1(a) and subsection (ii) of Sections 2-5 of Schedule
4.1(a). The Annual Aggregate Compensation payable for the fiscal year
ended April 30, 1999 shall be prorated so that the amount of Annual
Aggregate Compensation payable under Section 1 of Schedule 4.1(a) shall
be the percentage of fiscal year 1999 (in days) that this Agreement is
in effect multiplied by One Million Two Hundred Twenty-Seven Thousand
Four Hundred Thirty-Two Dollars ($1,227,432), and the payment thereof
shall be made in semi-monthly payments over the remaining term of such
year. Promptly after the conclusion of each of the fiscal years set
forth on the attached Schedule 4.1(a), an annual reconciliation shall
be performed, and if the amount payable to the Employee, together with
the amounts payable to all other Shareholder CPAs (the "Actual
Compensation Paid"), exceeds the amount which should have been paid
pursuant to Schedule 4.1(a) (as reduced, if at all, by the provisions
of subsection 4.1(c) below), then the Shareholder CPAs, including
Employee, shall pay the excess to Old DMJK within 30 days after demand
or the Annual Aggregate Compensation for the next year shall be reduced
accordingly, at the option of Old DMJK. Alternatively, if the Actual
Compensation paid is less than the amount which should have been paid
pursuant to Schedule 4.1(a) (as reduced, if at all, by the provisions
of subsection 4.1(c)) then Old DMJK shall pay the Shareholder CPAs,
including Employee, such deficit within thirty (30) days after the
reconciliation is completed.
4.1(b) ALLOCATION OF ANNUAL AGGREGATE COMPENSATION. The
amounts payable pursuant to this subsection 4.1 shall be paid and
allocated by Old DMJK to Employee in such amount as may be established
by the Old DMJK Compensation Committee (the "Compensation Committee"),
the members of which for the fiscal year ended April 30, 1999, are
identified on Schedule 4.1(b) attached hereto. The Annual Aggregate
Compensation for the fiscal year ended April 30, 1999 shall be
allocated in the amount agreed upon and set forth on Schedule 4.1(b)
hereto (the "Allocated Amount"). Other than for the fiscal year ended
April 30, 1999, such allocation is subject to approval
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<PAGE> 4
by the Old DMJK Board of Directors, such approval not to be
unreasonably withheld. The Shareholder CPAs shall select the members of
such Compensation Committee on May 1 to serve for the fiscal year
beginning on that date and shall notify Old DMJK of the identity of the
Compensation Committee on such May 1. The Compensation Committee so
identified shall establish that percentage of the Annual Aggregate
Compensation to be received by each Employee for the succeeding fiscal
year, and such base compensation shall not change without the prior
written consent of Old DMJK, which consent shall not unreasonably be
withheld.
4.1(c) REDUCTION OF ANNUAL AGGREGATE COMPENSATION. The
Annual Aggregate Compensation payable as set forth in this subsection
4.1 shall be reduced, if at all, as follows: (i) if the operations of
Old DMJK and New DMJK (treated for this purpose as if such operations
were consolidated for purposes of financial statements and reporting)
result in a net loss (as determined in accordance with generally
accepted accounting principles ("GAAP") and including Annual Aggregate
Compensation prior to any adjustment pursuant to this subsection
4.1(c)) in any year during the Term, then the Annual Aggregate
Compensation for that year shall be reduced by the amount of such net
loss. In determining whether there is a net loss for any year for
purposes of this subsection 4.1(c), (x) Old DMJK and New DMJK will be
charged a cost of capital (for funds advanced to Old DMJK by HRB
Business Services or any affiliate or to New DMJK by HRB Business
Services or any affiliate or by Old DMJK for purposes other than
acquiring accounting practices) at a variable rate of interest equal to
the prime rate announced by Commerce Bank, N.A. of Kansas City plus one
percent (1%), adjusted monthly on the first day of each month (the
"Intercompany Interest") and (y) goodwill shall not be included in
determining net loss; and (ii) the Annual Aggregate Compensation shall
be reduced, dollar for dollar by the amounts, if any, payable to the
Shareholder CPAs by New DMJK, which are in excess of $135,000. In the
event of reduction under either subsection 4.1(c)(i) or 4.1(c)(ii)
above, the amount of the reduction shall be paid to Old DMJK by the
Shareholder CPA's within 30 days from written notice to such effect, or
shall be deducted from the Annual Aggregate Compensation payable for
the next succeeding fiscal year, at the option of Old DMJK.
4.2 REGIONAL AND MARKET BONUSES. For the Initial Term, New
DMJK shall be designated the "Market Firm" and the "Regional Firm" in a market
or region encompassing Old DMJK's Kansas City office, which determination of
such market (the "Market") or region (the "Region") is in the reasonable
discretion of HRB Business Services and may be amended during each of the fiscal
years ended April 30, 1999 through 2003. Pursuant to such designation as a
Market Firm and a Regional Firm, Old DMJK shall pay the Shareholder CPAs, the
following amounts, if any are earned, as set forth herein.
4.2(a) REGIONAL BONUS. An aggregate amount equal to five
percent (5%) of the aggregate Earnings (defined below) (after Market
Bonuses similar to the Market Bonus described in subsection 4.2(b)
below paid or payable to "market level" firms within the designated
region and after Local Incentive Bonuses paid or payable as described
in subsection 4.4 below) of any accounting firm operations of those
subsidiaries or affiliates of HRB Business Services in the Region (the
"Regional Bonus").
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<PAGE> 5
4.2(b) MARKET BONUS. An aggregate amount equal to five
percent (5%) of the aggregate Earnings (after Local Incentive Bonuses
paid or payable as described in subsection 4.4 below) of the accounting
firm operations of those subsidiaries or affiliates of HRB Business
Services in the Market (the "Market Bonus").
4.2(c) LIMITATION ON REGIONAL BONUS. The Regional Bonus
payable for any particular fiscal year shall only be payable if the
aggregate Earnings of the Region (after bonuses otherwise payable under
subsections 4.2(a) and 4.2(b) and after "market level" bonuses paid or
payable to other firms within such Region for the applicable fiscal
year) exceed ten percent (10%) of the Gross Revenues (defined below) of
the Region for such fiscal year. The maximum aggregate Regional Bonus
payable to all firms in any region shall not exceed five percent (5%)
of the aggregate Earnings of the region determined as set forth in this
subsection 4.2.
4.2(d) LIMITATION ON MARKET BONUS. The Market Bonus payable
for any particular fiscal year shall only be payable if the aggregate
Earnings of the Market after the Market Bonus otherwise payable under
subsection 4.2(b)) exceeds ten percent (10%) of the Gross Revenues of
the Market for such fiscal year. The maximum aggregate Market Bonus
payable to all firms in any market shall not exceed five percent (5%)
of the aggregate Earnings of the market determined as set forth in this
subsection 4.2.
4.2(e) ALLOCATION OF REGIONAL AND MARKET BONUSES. Any
amounts payable pursuant to this subsection 4.2 shall be allocated
among the Shareholder CPAs by the Compensation Committee, subject to
approval by Old DMJK, which approval shall not be unreasonably
withheld. Employee has no right to receive a portion of the Market
Bonus or Regional Bonus, and Employee may be allocated a portion of the
Regional Bonus and Market Bonus only if the Compensation Committee,
subject to Old DMJK's approval as described in this subsection 4.2(e),
so determines. Employee shall have no claim against Old DMJK for any
such allocation (or the failure to allocate any such amount to
Employee). Employee shall forfeit any amount allocated to Employee for
a Regional Bonus or a Market Bonus in the event that Employee is not
employed by Old DMJK (other than due to retirement from practice,
disability or death) on the date of payment of such allocated amounts.
Amounts payable under this subsection 4.2 shall be paid within sixty
(60) days following the end of each fiscal year for which such Market
Bonuses and Regional Bonuses are payable.
4.3 NATIONAL BONUS. Subject to the conditions set forth
herein, Old DMJK shall pay to the Shareholder CPAs the following aggregate
amounts, if any are earned, as set forth herein (the "National Bonus").
4.3(a) FISCAL YEAR ENDED APRIL 30, 2000. Five Hundred
Thousand Dollars ($500,000) if the aggregate Earnings of all United
States accounting firm operations affiliated with HRB Business Services
(the "HRB Business Services Accounting Operations") equal or exceed
Eight Million Dollars ($8,000,000) for the fiscal year ended April 30,
2000.
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<PAGE> 6
4.3(b) FISCAL YEAR ENDED APRIL 30, 2001. Five Hundred
Thousand Dollars ($500,000) if the aggregate Earnings of the HRB
Business Services Accounting Operations equal or exceed Sixteen Million
Dollars ($16,000,000) for the fiscal year ended April 30, 2001.
4.3(c) FISCAL YEAR ENDED APRIL 30, 2002. Five Hundred
Thousand Dollars ($500,000) if the aggregate Earnings of the HRB
Business Services Accounting Operations affiliated with HRB Business
Services equal or exceed twenty-four Million Dollars ($24,000,000) for
the fiscal year ended April 30, 2002.
4.3(d) ALLOCATION OF NATIONAL BONUS. Any amounts payable for
any fiscal year pursuant to this subsection 4.3 shall be allocated
among the Shareholder CPAs by the Compensation Committee, subject to
approval by Old DMJK, which approval shall not be unreasonably
withheld. Employee has no right to receive a portion of the National
Bonus, and Employee will be allocated a portion of the National Bonus
only if the Compensation Committee, subject to Old DMJK's approval as
described in this subsection 4.3(d), so determines. Employee shall have
no claim against Old DMJK for any such allocation (or the failure to
allocate any such amount to Employee). Employee shall forfeit any
amount allocated to Employee in the event that Employee is not employed
by Old DMJK (other than due to retirement from practice, disability or
death) on the date of payments of any amounts allocated to Employee.
Amounts payable under this subsection 4.3 shall be paid within sixty
(60) days following the end of each fiscal year for which such National
Bonus is payable.
4.4 LOCAL INCENTIVE BONUS. Subject to the conditions set
forth herein, Old DMJK shall pay the Shareholder CPAs the amounts, if any,
determined as follows.
4.4(a) ELIGIBILITY FOR LOCAL INCENTIVE BONUS. Each fiscal
year (May-April) during the Term and for the fiscal year ended April
30, 2004 in the event the Term is extended through such year (a "Plan
Year"), the Shareholder CPAs who are employed by Old DMJK or New DMJK
shall be entitled to receive a bonus, if earned, determined in the
aggregate as follows in this subsection 4.4 (the "Local Incentive
Bonus").
4.4(b) DEFINITIONS. For purposes of this subsection 4.4
only, the following terms shall have the meanings set forth. "Excess
Profit" means the amount by which the Net Margin for the applicable
fiscal year exceeds the Profit Threshold for the Plan Year. "Net
Margin" means the amount by which Adjusted Earnings Before Shareholder
Compensation for the applicable Plan Year exceeds Shareholder
Compensation for such Plan Year. "Profit Threshold" means the following
amounts for the Plan Years shown:
<TABLE>
<S> <C>
1999 $1,295,000
2000 $1,372,700
2001 $1,455,062
2002 $1,542,366
2003 $1,634,908
2004 $1,733,002
</TABLE>
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<PAGE> 7
If Old DMJK or New DMJK acquires accounting practice(s), firms or fees
which are consolidated with such office's operations and financial
statements, the Profit Threshold shall be adjusted as is necessary so
that same reflects an internal rate of return on the additional capital
outlays for such acquisitions equal to fifteen percent (15%). The
calculation of such rate of return shall be the same method as was used
for the calculation of the above Profit Threshold(s). "Adjusted
Earnings Before Shareholder Compensation" means the consolidated net
income of New DMJK and Old DMJK determined in accordance with GAAP,
provided that such consolidated net income shall be before (i) income
taxes (ii) amortization of goodwill, (iii) Shareholder Compensation
(whether such compensation is Annual Aggregate Compensation, Regional
Bonus, Market Bonus, National Bonus or Local Incentive Bonus) and the
national director's compensation. "Shareholder Compensation" means
compensation payable pursuant to subsections 4.1, 4.2 and 4.3 of this
Agreement.
4.4(c) CALCULATION OF LOCAL INCENTIVE BONUS. Each Plan Year
during the Term, the Shareholder CPAs shall be entitled to a bonus, if
earned, equal in the aggregate to fifty percent of the Excess Profit.
4.4(d) PAYMENT OF LOCAL INCENTIVE BONUS. Any Local Incentive
Bonus earned by the Shareholder CPAs shall be payable, if at all, on
the first June 15 which is at least one year following the conclusion
of the Plan Year for which the Local Incentive Bonus was earned;
provided, however, that the Local Incentive Bonus shall only be payable
on such June 15 if the aggregate Net Margin for all Plan Years ending
before such June 15 equal or exceed the sum of the Profit Thresholds
for such Plan Years.
4.4(e) ALLOCATION OF LOCAL INCENTIVE BONUS. Any amounts
payable pursuant to this subsection 4.4 shall be allocated among the
Shareholder CPAs by the Compensation Committee, subject to approval by
Old DMJK, which approval shall not be unreasonably withheld. Employee
has no right to receive a portion of the Local Incentive Bonus, and
Employee will be allocated a portion of the Local Incentive Bonus only
if the Compensation Committee, subject to Old DMJK's approval as
described in this subsection 4.4(e), so determines. Employee shall have
no claim against Old DMJK for any such allocation (or the failure to
allocate any such amount to Employee). Employee shall forfeit any
amount allocated to Employee in the event that Employee is not employed
by Old DMJK (other than due to retirement from practice, disability or
death) on the date of the payment of such allocated amount.
4.5 DEFINITION OF EARNINGS. For purposes of subsections 4.2
and 4.3 above, except as otherwise set forth, the aggregate "Earnings" of HRB
Business Services accounting firm operations shall be net income as determined
for the applicable market, region or nationality in accordance with GAAP;
provided that such net income shall not include (a) Intercompany Interest; (b)
provision for income taxes; or (c) indirect overhead costs not directly incurred
by Old DMJK or New DMJK. Goodwill shall be amortized over a fifteen (15) year
period and shall reduce net income for the purposes of computing Earnings under
subsection 4.2, but shall not be deducted from net income for purposes of
computing Earnings under subsection 4.3.
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<PAGE> 8
4.6 DEFINITION OF "LOCAL" OR "GROSS" REVENUES. As used
herein, the term "Local Revenues" or "Gross Revenues" shall mean the total gross
revenues of Old DMJK from the provision of accounting and other services to
clients plus the total gross revenues of New DMJK from provision of accounting
and other services each as determined in accordance with GAAP (less intercompany
revenues payable by Old DMJK or New DMJK to the other which would be eliminated
if Old DMJK and New DMJK were consolidated) and less returns, credits and
allowances).
4.7 AUTOMOBILE ALLOWANCE. Employee shall receive on the first
day of each month during the Term hereof, an automobile allowance in the amount
set forth on Schedule 4.7 hereto.
5. VACATION. The Employee shall be entitled to four (4) weeks
of paid vacation during each year of the Term hereunder in conformance with the
H&R Block, Inc. Company Paid Time Off Policy. Vacation shall be taken at times
mutually agreed upon by the Employee and Old DMJK.
6. BENEFITS.
6.1 BENEFITS. During the Term, the Employee shall be eligible
to participate in those pension, profit-sharing, stock option or similar plan(s)
or program(s) of Old DMJK, if any, established hereafter for the benefit of
employees of Old DMJK, subject to all eligibility requirements applicable to
employees covered thereby. The Employee shall be entitled to participate in any
group insurance, hospitalization, medical, health and accident, disability or
similar or non-similar plan or program of Old DMJK established hereafter for the
benefit of employees of Old DMJK, subject to all eligibility requirements
applicable to employees covered thereby. Set forth on Schedule 6.1 to this
Agreement are the benefits which Old DMJK shall provide to Employee.
6.2 PROFESSIONAL LIABILITY INSURANCE. During the Term, Old
DMJK shall maintain, at its expense, professional liability insurance of at
least One Million Dollars ($1,000,000) per occurrence and One Million Dollars
($1,000,000) annual aggregate, covering Employee for Employee's acts and
omissions in the performance of Employee's duties hereunder. Old DMJK may
provide all or any portion of the insurance required hereby under a program of
self-insurance.
7. NON-COMPETITION.
7.1 SCOPE. Until the later to occur of April 30, 2003 or that
date which is (3) years after the expiration or termination of this Agreement,
for any reason or for no reason, Employee shall not directly or indirectly:
7.1(a) Own, have any interest in or be, serve or act as an
individual proprietor, employee, agent, stockholder, officer, employee,
consultant, director, joint-venturer, investor, lender, or in any other
capacity whatsoever (other than as the holder of not more than five
percent (5%) of the total outstanding stock of Old DMJK if Old DMJK
becomes a publicly-held entity) of or with, or assist in any way, any
corporation, employee, firm or business enterprise (other than New
DMJK) which does business
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<PAGE> 9
anywhere in the United States and which is engaged or to Employee's
knowledge after due inquiry intends to engage in the provision of
financial or accounting services or tax return preparation services of
a type which are provided by H&R Block, Inc. or any of its affiliates
(or which H&R Block, Inc. or any of its affiliates are planning to
offer, but as to planned activities only if Employee is or was engaged
in such planning) at the time of such expiration or termination.
7.1(b) Solicit or induce, or attempt to solicit or induce,
any Employee or independent contractor of Old DMJK, their respective
parents or affiliates or any other person who shall otherwise be in the
service of Old DMJK, their respective parents or affiliates to
terminate his or her employment with or otherwise cease his or her
relationship with Old DMJK, their respective parents or affiliates; or
7.1(c) Solicit, divert or take away, or attempt to solicit,
divert or take away, the business or patronage of any of the clients,
customers (whether any such customer has done business with Old DMJK
once or more than once), suppliers or accounts, or prospective clients,
customers, suppliers or accounts, of Old DMJK, their respective parents
or affiliates.
Notwithstanding the foregoing, any Employee may own less than two percent (2%)
of the outstanding voting stock of a corporation coming within the restrictions
of this Section 7, the securities of which are listed on a national securities
exchange or are traded in the national over-the-counter market as quoted by the
National Association of Securities Dealers to The Wall Street Journal, if the
Employee does not participate in the management of, perform services for, or
have any other beneficial interest in, such corporation.
7.2 LIMITATIONS ON ENFORCEMENT. If any restriction set forth
in this Section 7 is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time, over too great a
range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which such court shall consider enforceable.
7.3 EXTENSION OF PERIOD OF NON-COMPETITION. If Employee
violates any of the provisions of this Section 7 after the date hereof, the
computation of the time period provided in subsection 7.1 shall be extended for
a period equal to the period of any such violation.
8. CONFIDENTIALITY.
8.1 CONFIDENTIAL INFORMATION. Employee agrees that Employee
shall not use, or disclose to any person, either during the Term or after the
termination of this Agreement for any reason, any confidential or proprietary
information (herein collectively referred to as "Confidential Information")
furnished or provided by Old DMJK or HRB Business Services, its parents or
affiliates to Employee hereunder or otherwise, whether such information is
conveyed directly or on Old DMJK's behalf, except for purposes consistent with
the administration and performance of Employee's obligations hereunder, or as
required by law, provided that written notice of any legally required disclosure
shall be given to Old DMJK promptly prior to any such
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<PAGE> 10
disclosure and the Employee shall reasonably cooperate with Old DMJK to protect
the confidentiality thereof pursuant to applicable law or regulation. For
purposes of this Agreement, the term "Confidential Information" includes
(without limitation) information in any format, including without limitation,
written, graphic or electromagnetic information and including but not limited
to, technical, financial and business information and models, designs,
manufacturing and test processes, procedures, names of customers or suppliers,
plans, data, specifications or any other confidential and proprietary
information. The term "Confidential Information," as used herein, does not
include information (a) which was already in the public domain, or (b) which was
in the rightful possession of Employee, at the time of its disclosure, or (c)
which is disclosed as a matter of right by a third party source after the
execution of this Agreement provided such third party source is not bound by a
confidentiality agreement with Old DMJK or (d) which passes into the public
domain by acts other than the unauthorized acts of the Employee.
8.2 USE OF CONFIDENTIAL INFORMATION. It is hereby agreed that
Employee will not use the Confidential Information in any way detrimental to Old
DMJK or HRB Business Services, and that the Confidential Information will be
kept confidential by Employee; provided, however, that any disclosure of such
Confidential Information may be made to any party to which Old DMJK or HRB
Business Services consent in writing prior to such disclosure.
8.3 PROTECTION OF CONFIDENTIAL INFORMATION. For the purpose
of complying with the confidentiality obligations set forth herein, the Employee
shall, at a minimum, use efforts commensurate with those that Employee uses for
protecting the confidentiality of corresponding information of Employee.
8.4 PRIOR CONFIDENTIAL INFORMATION. Any Confidential
Information supplied to Employee by Old DMJK or HRB Business Services prior to
the execution of this Agreement shall be considered in the same manner and be
subject to the same treatment as the Confidential Information made available
after the execution of this Agreement, and it is understood that this Agreement
is not intended to, and does not, obligate either Employee or Old DMJK to enter
into any further agreements or to proceed with any possible relationship or
other transaction.
9. TERMINATION. In addition to termination pursuant to the
provisions of Section 2, the Employment of the Employee may be terminated (the
"Termination Date") as follows:
9.1 BY OLD DMJK FOR CAUSE. During the Term, effective upon
notice of termination given to the Employee by Old DMJK if Old DMJK determines
that "cause" for such termination exists. "Cause" shall be deemed to exist if
the Employee:
(a) engages in unethical or unprofessional conduct or
commits an act of dishonesty, including, but not limited to,
misappropriation of funds or any property of Old DMJK, its
parent or affiliates;
(b) engages in activities or conduct injurious to the
reputation of Old DMJK, its parent or affiliates;
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<PAGE> 11
(c) demonstrates gross insubordination in connection
with Employee's services to Old DMJK under this Agreement;
(d) commits a felony;
(e) fails to maintain in good standing
(without any limitations or restrictions) Employee's
certification and license as a CPA in all states where
Employee's activities require such certification and license;
(f) ceases to be a Shareholder CPA;
(g) enters into an arrangement and/or agreement or
becomes a member, shareholder, employee, officer or director of
any entity that provides services substantially similar to those
provided by New DMJK or Old DMJK in violation of Section 7 of
this Agreement;
(h) otherwise breaches Section 7 or 8 hereof; or
(i) violates any term or condition of this Agreement not
covered by items (a) - (h) above and does not cure such
violation within fifteen (15) days after notice of same by Old
DMJK;
9.2 DEATH OR DISABILITY. In addition to termination for the
reasons otherwise set forth herein, this Agreement and Employee's employment
shall also terminate upon the Employee's death or "Disability." "Disability"
means the inability of the Employee to perform Employee's duties or services as
provided in this Agreement because of mental, physical or other illness, disease
or injury, where such disability (a) shall have existed for an aggregate of
twelve months in any 24-month period and Old DMJK shall have so notified the
Employee thereof, or (b) has prevented Employee from performing substantially
all of his or her duties hereunder for a period of twelve (12) consecutive
months.
9.3 BY OLD DMJK WITHOUT CAUSE. After the Initial Term, Old
DMJK may terminate this Agreement and Employee's employment, without cause, upon
not less than ninety (90) days prior written notice to the Employee as set forth
in Section 2 above.
9.4 BY EMPLOYEE. During the Term, Employee may terminate this
Agreement for "cause" which shall mean breach of any material provision hereof
by Old DMJK if Old DMJK does not either commence cure thereof within 15 days
after written notice from Employee, or, having commenced cure, does not
thereafter promptly and diligently prosecute cure to completion. In addition to
termination for the reasons otherwise stated herein, this Agreement and
Employee's employment with Old DMJK may be terminated during the Initial Term by
Employee on not less than 30 days prior written notice, without cause. After the
Initial Term, Employee may terminate this Agreement and Employee's Employment
upon ninety (90) days prior written notice to Old DMJK as set forth in Section 2
herein, with or without cause.
9.5 TERMINATION BY OLD DMJK. In addition to the termination
for the reasons otherwise stated herein, this Agreement and Employee's
employment with Old
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<PAGE> 12
DMJK shall be terminated automatically, without any action by Old DMJK, upon the
effective date of any termination of Employee's employment by New DMJK, for
whatever reason.
9.6 TERMINATION OF MANAGEMENT SERVICES AGREEMENT. In addition
to the termination for the reasons otherwise stated herein, this Agreement and
Employee's employment with Old DMJK shall be terminated at Old DMJK's option
upon termination of the Management Services Agreement. Such termination shall be
effective on the date of any termination of the Management Services Agreement.
9.7 EFFECT OF TERMINATION. Upon any termination of the
Employee's employment and this Agreement, Old DMJK and the Employee shall have
no further obligations under this Agreement to the other except:
(a) If the termination is pursuant to subsections 9.1,
9.2 if Employee is suffering a Disability, or subsection 9.4 if
termination is without cause, Employee's obligations under Section 7
shall continue for the period set forth therein, and the Employee's
obligations under Section 8 shall continue in full force and effect
indefinitely;
(b) If the termination is pursuant to subsection 9.3
without cause or subsection 9.4 with cause, Employee's obligations
under subsection 7.1(a) shall cease on the Termination Date, but
Employee's obligations under Section 8 and subsections 7.1(b) and
7.1(c) shall continue in full force and effect indefinitely;
(c) If the Management Services Agreement is terminated by
Old DMJK because HRB Business Services determines to cease providing
accounting services, and if Employee's employment hereunder is
terminated as a result thereof, then Employee's obligations under
subsection 7.1(a) shall cease on the Termination Date and Employee's
obligations under Section 8 and subsections 7.1(b) and 7.1(c) shall
continue in full force and effect indefinitely;
(d) If the Management Services Agreement is terminated by
Old DMJK because (1) New DMJK loses or has suspended any license or
certification to practice public accounting and/or to hold itself out
as a firm engaged in public accounting; (2) New DMJK is dissolved or
liquidated or files a voluntary petition in bankruptcy or other action
is taken voluntarily or involuntarily under any statute for the
protection of creditors; or (3) New DMJK beaches a material provision
of the Management Services Agreement and fails either to commence a
cure of the breach within fifteen (15) days after the delivery of
notice of such breach by Old DMJK or having so commenced cure, fails
thereafter to prosecute cure promptly to completion within thirty (30)
days after receipt of such initial notices, and if Employee's
employment hereunder is terminated as a result thereof, then Employee's
obligations under Section 7 shall continue for the term set forth
therein, and Employee's obligations under Section 8 shall continue
indefinitely.
12
<PAGE> 13
(e) If the Management Services Agreement is terminated by
New DMJK because Old DMJK breaches a material provision of the
Management Services Agreement and fails either to commence cure of the
breach within fifteen (15) days after the receipt of notice of such
breach by New DMJK, or having so commenced cure, fails thereafter to
prosecute cure promptly to completion within thirty (30) days after
receipt of such written notice, and if Employee's employment hereunder
is terminated as a result thereof, then Employee's obligations under
subsection 7.1(a) shall cease on the Termination Date, and Employee's
obligations under Section 8 and subsections 7.1(b) and 7.1(c) shall
continue indefinitely.
(f) In the event this Agreement is terminated after a change
in any applicable statutes, regulations or interpretations thereof, the
adoption of any new regulations or legislation (collectively, the
"Laws"), or an enforcement of Laws that would materially affect the
operation or compensation under the Management Services Agreement, or
which would make the Management Services Agreement unlawful, and the
parties fail to negotiate a new Management Services Agreement, and if
Employee's employment hereunder is terminated as a result thereof,
Employee's obligations shall continue under Section 7 as set forth
therein and Employee's obligations under Section 8 shall continue
indefinitely. However, this Agreement shall remain in effect during any
negotiation period described in the preceding sentence.
(g) Old DMJK's obligation to pay Employee compensation shall
continue for any periods up and through the Termination Date worked by
the Employee for which Employee has not been paid; however, Employee
will be paid for any Market Bonus, Regional Bonus, or National Bonus
unless Employee is not employed by Old DMJK (other than due to
retirement from practice, disability or death) on the date that such
Market Bonus, Regional Bonus or National Bonus is paid.
9.8 AVAILABILITY OF INJUNCTIVE RELIEF. In the event of a
breach or threatened breach by Employee of any provision of Sections 7 or 8
hereof, Old DMJK shall be entitled to seek an injunction restraining such
breach, but nothing herein shall be construed as prohibiting Old DMJK from
pursuing any additional remedy available to Old DMJK for such breach or
threatened breach.
13
<PAGE> 14
10. MISCELLANEOUS.
10.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding among Old DMJK and the Employee concerning the
subject matter hereof. No modification, amendment, termination or waiver of this
Agreement shall be binding unless in writing and signed by the Employee and a
duly authorized officer of Old DMJK. Failure of Old DMJK or the Employee to
insist upon strict compliance with any of the terms, covenants or conditions
hereof shall not be deemed a waiver of such terms, covenants and conditions.
10.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the Employee and the heirs, executors and administrators of the Employee or
of his or her estate and property, and shall inure to the benefit of Old DMJK
and its successors and assigns. Being a contract for personal services, the
Employee may not assign or transfer to others (a) the right to receive payments
hereunder or (b) the obligation to perform his duties and services hereunder.
Old DMJK may assign or transfer this Agreement (provided the Employee is given
notice thereof) to any subsidiary, parent or affiliate of Old DMJK.
10.3 TAXES. From any payments due hereunder to the Employee
from Old DMJK, there shall be withheld amounts reasonably believed by Old DMJK
to be sufficient to satisfy liabilities for federal, state and local income and
related taxes and other charges.
10.4 NOTICES. Any notices required or permitted by this
Agreement must be in writing to be effective, and shall be deemed made or given,
if by mail, three days after depositing such notice in the United States mails,
postage prepaid, addressed to the parties, or by facsimile (if receipt is
confirmed) as follows:
If to the Employee:
To: Terrence E. Putney
________________________
________________________
If to Old DMJK:
To: HRB Business Services, Inc.
4400 Main Street
Kansas City, Missouri 64111
Attn: Bret G. Wilson
with a copy to John R. Cox at the same address.
or, if by delivery, when delivered personally to the Employee or to the
above-named representative of Old DMJK, as the case may be. A copy of each
notice forwarded by Employee to Old DMJK or by Old DMJK to Employee shall be
forwarded at the time of first mailing or delivery, to Old DMJK.
14
<PAGE> 15
10.5 RIGHT TO OFFSET. Subject to subsection 10.6, Old DMJK
shall have the right but not the obligation to offset any amounts due Old DMJK
by Shareholder CPAs or New DMJK against amounts that Old DMJK owes to the
Shareholder CPAs or New DMJK under this Agreement, the Management Services
Agreement (but only with respect to amounts payable by New DMJK to any
Shareholder CPA) or that certain Agreement for Purchase and Sale of Stock of
Donnelly Meiners Jordan Kline P.C or any agreement referred to therein. Offsets
for damages incurred by Old DMJK resulting from a breach of Sections 7 or 8
herein shall be applied only against amounts due the breaching Shareholder CPAs.
Otherwise, all offsets involving amounts owed to the Shareholder CPAs shall be
taken against amounts due all Shareholder CPAs.
10.6 ARBITRATION. The parties hereto agree that any such
dispute relating to or in respect of this Agreement, its negotiation, execution,
performance, subject matter, or any course of conduct or dealing or actions
under or in respect of this agreement, shall be submitted to, and resolved
exclusively pursuant to arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall take place in Kansas City, Missouri, and decisions pursuant to such
arbitration shall be final, conclusive and binding on the parties. Upon the
conclusion of arbitration, the parties may apply to any court of competent
jurisdiction to enforce the decision pursuant to such arbitration. The
arbitration proceeding shall be subject to the laws of the State of Missouri.
Each party will bear its own costs. The parties hereto hereby waive and shall
not seek a jury trial in any lawsuit, proceeding, claim, counterclaim, defense
or other litigation or dispute under or in respect of this Agreement. The
parties will use their best efforts to complete any arbitration within ninety
(90) days from the date the arbitration is initiated by a party.
10.7 HEADINGS. All headings in this Agreement are for
convenience only and are not intended to affect the meaning of any provision
hereof.
10.8 COUNTERPARTS. This Agreement may be executed in two or
more counterparts with the same effect as if the signatures to all such
counterparts were upon the same instrument, and all such counterparts shall
constitute but one instrument.
15
<PAGE> 16
IN WITNESS WHEREOF, the Employee has executed this Agreement
and Old DMJK has caused this Agreement to be executed by its duly authorized
officer as of the day and year first above written.
DONNELLY MEINERS JORDAN KLINE,
INC.
By: /s/ Bret G. Wilson
------------------------------------
Name: Bret G. Wilson
------------------------------------
Title: Vice President
------------------------------------
/s/ Terrence E. Putney
---------------------------------------------
Terrence E. Putney
16
<PAGE> 17
SCHEDULE 4.1
SHAREHOLDER CPAS
1. David E. Enenbach
2. Daniel J. Haake
3. Edwin C. Hoguland
4. Terrence E. Putney
5. Harry E. Jordan
6. James R. Kline Jr.
7. Gerard J. Meiners
8. Robert A. Thomas, Jr.
<PAGE> 18
SCHEDULE 4.1(a)
ANNUAL AGGREGATE CONSIDERATION
1. FISCAL YEAR ENDED APRIL 30, 1999. For the fiscal year ended April 30, 1999,
the Shareholder CPAs shall receive Annual Aggregate Compensation equal to One
Million Two Hundred Twenty-Seven Thousand Four Hundred Thirty-Two Dollars
($1,227,432). Such Aggregate Annual Compensation shall be prorated and only paid
for the portion of the fiscal year ended April 30, 1999 in which this Agreement
is in effect.
2. FISCAL YEAR ENDED APRIL 30, 2000. For the fiscal year ended April 30, 2000,
the Shareholder CPAs shall receive Annual Aggregate Compensation equal to (i)
Twenty-Three and 49/100 percent (23.49%) of Local Revenues for fiscal year (as
defined below) of Old DMJK or (ii) One Million Two Hundred Ninety-Five Thousand
Five Hundred Fifty-Four Dollars ($1,295,554), whichever is less.
3. FISCAL YEAR ENDED APRIL 30, 2001. For the fiscal year ended April 30, 2001,
the Shareholder CPAs shall receive Annual Aggregate Compensation equal to the
lesser of (i) Twenty-Three and 49/100 percent (23.49%) of Local Revenues for
such year, or (ii) One Million Three Hundred Sixty-Seven Thousand Eighty-One
Dollars ($1,367,081).
4. FISCAL YEAR ENDED APRIL 30, 2002. For the fiscal year ended April 30, 2002,
the Shareholder CPAs shall receive Annual Aggregate Compensation equal to the
lesser of (i) Twenty-Three and 49/100 (23.49%) of Local Revenues for such year
or (ii) One Million Four Hundred Forty-Two, One Hundred Eighty-Five Dollars
($1,442,185).
5. FISCAL YEAR ENDED APRIL 30, 2003. For the fiscal year ended April 30, 2003,
the Shareholder CPAs shall receive Annual Aggregate Compensation equal to the
lesser of (i) Twenty-Three and 49/100 percent (23.49%) of Local Revenues for
such year or (ii) One Million Five Hundred Twenty-One and Forty-Four Dollars
($1,521,044).
6. DEFINITION OF "LOCAL" OR "GROSS" REVENUES. As used herein, the term "Local
Revenues" or "Gross Revenues" shall mean the total gross revenues of Old DMJK
from the provision of accounting and other services to clients plus the total
gross revenues of New DMJK from provision of accounting and other services each
as determined in accordance with GAAP (less intercompany revenues payable by Old
DMJK or New DMJK to the other which would be eliminated if Old DMJK and New DMJK
were consolidated) and less returns, credits and allowances).
<PAGE> 19
SCHEDULE 4.1(b)
COMPENSATION COMMITTEE FOR FISCAL YEAR ENDED APRIL 30, 1999
David E. Enenbach
Gerard J. Meiners
James R. Kline, Jr.
ALLOCATED AMOUNT FOR FISCAL YEAR ENDED APRIL 30, 1999
<TABLE>
<S> <C>
Enenbach, David E. 176,066
Haake, Daniel J. 120,731
Hogueland, Edwin C. 120,731
Jordan, Harry E. 181,097
Kline, James R., Jr. 125,761
Meiners, Gerard J. 186,127
Putney, Terrence E. 191,157
Thomas, Robert, Jr. 125,761
---------
1,227,432
</TABLE>
<PAGE> 20
SCHEDULE 4.7
AUTOMOBILE ALLOWANCE
$500 per month for each Shareholder CPA
<PAGE> 21
SCHEDULE 6.1
COMPENSATION PLANS AND BENEFITS
DEFERRED COMPENSATION
STOCK OPTIONS
401(k) PLAN
HEALTH INSURANCE
CONTINUING PROFESSIONAL EDUCATION
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>5
<FILENAME>ex10-23.txt
<DESCRIPTION>SENIOR MANAGING DIR EMPLOYMENT AGREEMENT 8/2/99
<TEXT>
<PAGE> 1
EXHIBIT 10.23
SENIOR MANAGING DIRECTOR EMPLOYMENT AGREEMENT
(THOMAS G. ROTHERHAM)
THIS SENIOR MANAGING DIRECTOR EMPLOYMENT AGREEMENT (the
"Agreement") is made effective as of the 2nd day of August, 1999 (the "Effective
Date"), by and between RSM McGladrey, Inc. and assigns ("RSM McGladrey") and
Thomas G. Rotherham (the "Senior Managing Director"). All terms not otherwise
defined herein shall have the meaning set forth in that certain asset purchase
agreement by and among RSM McGladrey, McGladrey & Pullen, LLP ("McGladrey"), H&R
Block, Inc. ("Block") and others dated June 28, 1999.
RECITALS
WHEREAS, RSM McGladrey is a wholly owned, indirect subsidiary
Block and RSM McGladrey is engaged in providing business services to the general
public;
WHEREAS, Senior Managing Director desires employment with RSM
McGladrey, and RSM McGladrey desires to employ Senior Managing Director to
provide business services to clients of RSM McGladrey, on the terms and
conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT; POSITION; RESPONSIBILITIES.
1.1. EMPLOYMENT. RSM McGladrey hereby employs Senior
Managing Director, and Senior Managing Director hereby accepts and undertakes
such employment, pursuant to the terms and conditions of this Agreement.
1.2. POSITION; RESPONSIBILITIES. Senior Managing
Director shall hold the position of Chief Operating Officer and shall report to
the Chief Executive Officer or Chief Operating Officer of Block. Senior Managing
Director shall have the duties and responsibilities usually held by a Chief
Operating Officer of a Block subsidiary corporation which duties and
responsibilities shall include the integration of Block's national accounting
firm operations with McGladrey's operations.
2. TERM. The term of the Senior Managing Director's
employment hereunder and of this Agreement shall be at will. This Agreement
shall commence on the date hereof. Thereafter, this Agreement may be terminated
pursuant to the provisions of Section 9 hereof. The term of this Agreement is
hereafter referred to as the "Term".
3. CLASS OF SENIOR MANAGING DIRECTOR. Senior Managing
Director shall be in the Class of Senior Managing Directors.
<PAGE> 2
4. PROFESSIONAL RESPONSIBILITIES AND DUTIES.
4.1. CERTAIN DUTIES OF SENIOR MANAGING DIRECTOR.
Senior Managing Director shall render such lawful services for RSM McGladrey and
its customers or clients as are from time to time reasonably requested of Senior
Managing Director and assigned to Senior Managing Director by RSM McGladrey (the
"Services"). RSM McGladrey and Senior Managing Director intend that Senior
Managing Director shall perform for RSM McGladrey only those Services which do
not constitute the performance of any services for which a CPA certificate,
permit and/or license (for either Senior Managing Director or RSM McGladrey) are
required by the laws of the applicable jurisdiction ("Public Accountancy").
Senior Managing Director shall, in addition to the duties described above:
(a) Keep or cause to be kept, appropriate
records, reports, claims and correspondence ("Records")
necessary and appropriate in connection with the Services
provided by Senior Managing Director hereunder.
(b) Promote, to the extent permitted by
applicable law and regulations, the business of RSM McGladrey;
(c) Perform all acts necessary to maintain all
of Senior Managing Director's skills at an appropriate level;
and
(d) Participate, at RSM McGladrey's request, in
activities designed to enhance and develop the national
accounting practice of RSM McGladrey and its affiliates.
(e) Promptly remedy any non-compliance with any
policies or procedures of RSM McGladrey.
(f) Promptly furnish to RSM McGladrey all
relevant information requested by RSM McGladrey related
directly or indirectly to Senior Managing Director's
performance of services for RSM McGladrey or any customer or
client of RSM McGladrey.
4.2. PERFORMANCE IN GOOD FAITH. Senior Managing
Director shall devote such of his productive time, attention, and energies to
RSM McGladrey's business, to the best of the Senior Managing Director's
abilities, competently, with diligence, in good faith and with integrity, as is
required for performance of his duties set forth under Section 4.2 above. Senior
Managing Director shall not, during the Term, engage in any other business
activity whether or not such business activity is pursued for gain, profit, or
other pecuniary advantage.
4.3. POLICIES AND PROCEDURES. The Senior Managing
Director will be subject to, and shall at all times comply with, the policies
and procedures which are from time to time established by RSM McGladrey or its
direct or indirect parent companies for Senior Managing Directors specifically
and for employees of RSM McGladrey generally. Senior Managing Director shall
also, at all times, conduct Senior Managing Director's activities hereunder and
otherwise in manner compliance with all applicable laws and rules promulgated
2
<PAGE> 3
thereunder, and with all policies, procedures and standards of any applicable
organization, for example, the AICPA.
4.4. CHARITABLE AND COMMUNITY ACTIVITIES. It is
hereby acknowledged that, Senior Managing Director may either presently, or in
the future, be involved in charitable or community activities so long as such
other activities do not interfere with the performance by Senior Managing
Director of Senior Managing Director's duties hereunder and such involvement is
in conformity with all laws applicable to Senior Managing Director.
4.5. PERFORMANCE OF PROFESSIONAL RESPONSIBILITY.
Senior Managing Director shall discharge Senior Managing Director's professional
responsibility with integrity, objectivity and due professional care.
5. COMPENSATION.
5.1. SENIOR MANAGING DIRECTOR COMPENSATION. Pursuant
to this Agreement, Senior Managing Director shall receive that amount of
compensation as is set forth on Schedule 5.1 hereto. The compensation payable to
Senior Managing Director hereunder is intended to be the fair value for the
services actually performed by the Senior Managing Director on behalf of RSM
McGladrey and its customers or clients.
5.2. VACATION. Senior Managing Director shall be
entitled to vacation in amount and subject to such conditions as are set forth
in the RSM McGladrey personnel policy manual. Vacation shall be taken at times
mutually agreed upon by the Senior Managing Director and RSM McGladrey. Vacation
will accrue on a monthly basis and unused vacation cannot be carried over at the
end of each year of the Term.
5.3. BENEFITS. During the Term, the Senior Managing
Director shall be eligible to participate in those pension, profit-sharing,
stock option or similar plan(s) or program(s) made available to Senior Managing
Directors or executive officers of RSM McGladrey from time to time, including
but not limited to those benefits set forth on Schedule 5.3 of this Agreement.
5.4. ADVERSELY AFFECTED PROVISION. If Senior Managing
Director's planned annual Base Salary (as defined in Schedule 5.1 hereto) (i) is
reduced by more than 25% from the greatest amount of such annual Base Salary
while employed by RSM McGladrey or (b) is reduced to less than 75% of his
greatest amount of actual annual Base Salary while employed by RSM McGladrey
then the Senior Managing Director has the right to claim to be "adversely
affected." If the Senior Managing Director elects to be adversely affected, then
such Senior Managing Director may elect one of the following:
(a) To terminate this Agreement and employment with
RSM McGladrey hereunder, and subject to compliance with all
applicable provisions hereof, to continue to perform services
as an accountant or consultant in competition with RSM
McGladrey. With respect to such competition, it is agreed that
considerable time, effort, and monies have been expended by
RSM McGladrey and its predecessors over the years to cultivate
and acquire the client group presently served by RSM
McGladrey, and it is that client group, among
3
<PAGE> 4
other assets, that represents the intangible value of RSM
McGladrey. It is, therefore, agreed that the Senior Managing
Director will compensate RSM McGladrey without interest (1)
for any client, customer or account of RSM McGladrey that was
serviced by an office of RSM McGladrey or a predecessor
organization to which the withdrawing Senior Managing Director
was assigned during the two-year period prior to termination,
or (2) for any client, customer or account of RSM McGladrey or
predecessor organization served or counseled by such
withdrawing Senior Managing Director during the two-year
period prior to such Senior Managing Director's withdrawal, or
(3) any client, customer or account who was introduced to such
withdrawing Senior Managing Director during that two-year
period of time, which client(s) within the five years
subsequent to withdrawal, transfers all of its work formerly
performed by RSM McGladrey to such withdrawing Senior Managing
Director, or organization with which he or she associates. The
amount of compensation shall be an amount equal to 100% of the
dollar amount of net services performed by RSM McGladrey or
any predecessor organization for such client(s) during the
twelve-month period ending on the last date services were
performed by RSM McGladrey or predecessor organization for
such client(s). Net services shall be determined on a full
accrual basis in accordance with RSM McGladrey's then current
method of accounting. The payments shall be made in three
annual equal installments, payable without interest,
commencing thirty (30) days after RSM McGladrey notifies the
Senior Managing Director of the amount payable by the Senior
Managing Director pursuant to this Section, and the subsequent
payments due on each of the first and second anniversary dates
of the date the first installment is due, without interest. In
addition, if the withdrawing Senior Managing Director or any
person or organization with whom or which he or she is
employed, professionally associated on behalf of which Senior
Managing Director sets ("New Organization") earns or accepts
fees or compensation from a client, customer or account
identified in Subsections 5.4(a)(1)-(3) above, while not
displacing RSM McGladrey for all services, provided to such
client, customer or account Senior Managing Director shall pay
RSM McGladrey 100% of such fees or compensation earned and/or
accepted by the terminated Senior Managing Director or New
Organization during the five-year period following Senior
Managing Director's withdrawal date within 30 days of receipt
by the withdrawing Senior Managing Director, to a maximum
amount equal to 100% of the dollar amount of net services
performed by RSM McGladrey or any predecessor organization for
such client, customer or account during the twelve-months
immediately prior to the date of withdrawal. RSM McGladrey
further shall have the right to set off any amounts due it
from the withdrawing Senior Managing Director against any
other amounts or accounts due the Senior Managing Director by
RSM McGladrey; or
(b) To terminate this Agreement and employment with
RSM McGladrey hereunder, and to receive, subject to compliance
with all provisions of Sections 6 and 7, a severance payment
of Five Thousand Dollars ($5,000) per year as a Senior
Managing Director (including previous year's as a partner or
equivalent position in a predecessor organization) with a
maximum payment of
4
<PAGE> 5
One Hundred Twenty-Five Thousand Dollars ($125,000) paid out
over a five-year period without interest.
(c) This Section 5.4 is not applicable if Senior
Managing Director is terminated for "cause" as defined in
Section 9.1(a) below.
6. CERTAIN COVENANTS OF SENIOR MANAGING DIRECTOR.
6.1. CERTAIN ACKNOWLEDGMENTS. Senior Managing
Director acknowledges and agrees as follows in exchange for valuable
consideration which Senior Managing Director acknowledges:
(a) RSM McGladrey and Block have obtained and
will maintain an advantage over their respective competitors
as a result of name, location and reputation developed at
great expense;
(b) Senior Managing Director's relationship
with RSM McGladrey involves the understanding of and access to
certain trade secrets and confidential information pertaining
to the property, business and operations of RSM McGladrey and
its affiliates;
(c) Senior Managing Director recognizes the
value of the special, unique and extraordinary knowledge and
skill required to accept, undertake and perform the type of
work normally undertaken and performed by Senior Managing
Director, RSM McGladrey and RSM McGladrey's other employees
and agents;
(d) Senior Managing Director's competition with
RSM McGladrey and/or its affiliates following the termination
of his employment hereunder would impair the operation of RSM
McGladrey and/or such affiliates beyond that which would arise
from the competition of an unrelated third party with similar
skills;
(e) All clients/customers of RSM McGladrey,
regardless of when or by whom acquired, are RSM McGladrey
assets and not assets of the individual Senior Managing
Director;
(f) Senior Managing Director has carefully
considered the restrictions contained herein, and Senior
Managing Director specifically agrees that same are reasonable
and necessary and essential to the preservation of the
business of RSM McGladrey; and
(g) Senior Managing Director's agreements and
covenants under this Section 6 are an essential part of the
inducement to RSM McGladrey to enter into this Agreement.
5
<PAGE> 6
6.2. CERTAIN RESTRICTIONS ON SUBSEQUENT PRACTICE AND
ACTIVITIES.
(a) PRACTICE OF ACCOUNTING (OTHER THAN PUBLIC
ACCOUNTING) WITHIN THE TERRITORY. Senior Managing Director agrees that
upon termination of his relationship with RSM McGladrey for whatever
reason, with or without cause, he shall refrain from providing any
services offered by, or planned to be offered by, RSM McGladrey or
McGladrey, to their respective clients or prospective clients, for
himself, or for others, either directly or indirectly, in his
individual capacity or as an employee, independent contractor or agent
of another, for a period of two years after his termination date in any
city or area located within a 50 mile radius of the following:
(i) any RSM McGladrey office operated by this or
a predecessor organization to which the terminating Senior
Managing Director was assigned, or from which he had rendered
services or serviced clients, customers, or accounts during
any part of the two-year period immediately prior to his
termination; or
(ii) any principal residence maintained by the
terminating Senior Managing Director during any part of the
two-year period immediately prior to his termination.
(b) SOLICITATION OF PROTECTED CLIENTS. In addition,
each Senior Managing Director covenants and agrees that upon
termination of his employment by RSM McGladrey for whatever reason,
with or without cause, that the Senior Managing Director shall not for
himself, or for others, either directly or indirectly, in his
individual capacity, or as a Senior Managing Director, employee,
independent contractor or agent of another, for a period of five years
after his termination date:
(i) solicit, or attempt to solicit, divert or
attempt to divert or take away or attempt to take away any
Protected Client as defined below, or
(ii) render any services to or sell any products
to any Protected Client.
For purposes hereof, the term "Protected Client" means:
(x) any client, customer, or account serviced by an
office of RSM McGladrey or of a predecessor organization to
which the Senior Managing Director was assigned during the
two-year period prior to the effective date of termination; or
(y) any client, customer, or account that was
serviced or counseled by the Senior Managing Director during
the two-year period prior to the effective date of
termination; or
6
<PAGE> 7
(z) any client, customer or account serviced who was
introduced to the withdrawing Senior Managing Director during
the two-year period prior to withdrawal.
(c) CERTAIN MONETARY REMEDIES FOR VIOLATION OF
SECTIONS 6.2(a) OR 6.2(b).
(i) Liquidated Damages. Notwithstanding the above
and the fact that money damages will be inadequate as a remedy
for any breach, threatened breach, or continuing breach of the
agreements and covenants contained in this Section, if a
Senior Managing Director violates any of the agreements and
covenants as contained in Section 6.2 (a) or (b) above, and if
RSM McGladrey for whatever reason elects not to pursue its
right to injunctive or other equitable relief as provided in
Section 7.1 or otherwise, or if upon submission to a court of
competent jurisdiction such injunctive or equitable relief is
not granted for any reason whatsoever, with respect to any
client which transfers all of the work formerly performed by
RSM McGladrey to the said withdrawing Senior Managing Director
or the organization with which he associates, the said
withdrawing Senior Managing Director shall pay to RSM
McGladrey without interest, as liquidated damages and not as
any for of penalty, in an amount equal to 100% of the dollar
amount of net services performed by RSM McGladrey or any
predecessor organization for such client(s) during the
twelve-month period ending on the last date services were
performed by RSM McGladrey or predecessor organization for
such clients. Net services shall be determined on a full
accrual basis in accordance with RSM McGladrey's then current
method of accounting. In fixing this formula for liquidated
damages, all Senior Managing Directors acknowledge that it is
difficult, if not impossible, to fix actual damages.
Nevertheless, all Senior Managing Directors agree that such
formula is fair and reasonable under the circumstances as a
method of partially compensating RSM McGladrey for the damage
it shall suffer as a result of such breach. Payment of this
amount shall be made in three equal annual installments with
the first installment due without interest within 30 days
after RSM McGladrey notifies the Senior Managing Director of
the amount payable by the Senior Managing Director pursuant to
this Section, and the subsequent installments are due without
interest on the first and second anniversary dates of the date
the first installment is due.
(ii) Payment of Fees. In addition, if a Senior
Managing Director violates the agreements and covenants as
contained in Section 6.2(a) and/or (b) above resulting in the
Senior Managing Director earning and/or accepting fees or
compensation from a client as defined above, while not
necessarily displacing RSM McGladrey for all services, 100% of
such fees or compensation earned and/or accepted by the
terminated Senior Managing Director or any person,
organization with whom he or she is employed, professionally
associated or in any manner acting for or
7
<PAGE> 8
on behalf of during the five-year period after Senior Managing
Director's termination date will be paid to RSM McGladrey
without interest within 30 days of receipt by the Senior
Managing Director, to a maximum amount of 100% of the
displaced net services performed by RSM McGladrey or any
predecessor organization for such client during the twelve
months immediately prior to the date of termination.
(iii) Right of Offset. RSM McGladrey further
shall have the right (but not the obligation) to set off any
amount due from the withdrawing Senior Managing Director
against any other amounts or accounts due the Senior Managing
Director by RSM McGladrey.
(d) EMPLOYMENT OF PROTECTED PERSONNEL. Senior
Managing Director covenants and agrees that in the event of the
termination of his employment with RSM McGladrey for any reason
whatsoever, or under any circumstance, with or without cause, that for
a period of two (2) years following the effective date of such
withdrawal (the "Prohibited Period"), the withdrawing Senior Managing
Director shall not without the prior written consent of RSM McGladrey
solicit, induce or in any manner encourage any employee of RSM
McGladrey who is a professional employee with in excess of two years
experience in work (the "Protected Personnel") to terminate Senior
Managing Director's position at RSM McGladrey. Further, each Senior
Managing Director covenants and agrees that upon termination, he will
not during the Prohibited Period offer, or cause to be offered, a
position of employment or of professional affiliation as a partner,
member, owner, agent, representative or independent contractor to any
member of the class of Protected Personnel who is employed by RSM
McGladrey at the effective date of termination of employment of the
Senior Managing Director, or was so employed at any time during the six
(6) month period immediately prior to the effective date of withdrawal.
(e) CERTAIN MONETARY REMEDIES FOR VIOLATION OF
SECTION 6.2(d).
(i) Liquidated Damages. Notwithstanding the fact
that money damages will be inadequate as a remedy for any
breach, threatened breach, or continuing breach of the
agreements and covenants contained in Section 6.2(d) and if
RSM McGladrey for whatever reason elects not to pursue its
right to injunctive or other equitable relief as provided in
Section 7.1 or otherwise or if upon submission to a court of
competent jurisdiction such injunctive or equitable relief is
not granted for any reason whatsoever, if Senior Managing
Director violates any of the agreements and covenants as
contained in Section 6.2(d), Senior Managing Director will pay
without interest the greater of Fifty Thousand Dollars
($50,000) or one half of the base compensation of the
Protected Personnel for the 12 months prior to the termination
of Senior Managing Directors employment hereunder per person
to RSM McGladrey as liquidated damages for each Protected
Personnel induced or encouraged to terminate Senior Managing
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Director's position or who was offered or caused to be offered
a position of employment by such Senior Managing Director. In
fixing this formula for liquidated damages, Senior Managing
Director acknowledges that it is difficult, if not impossible,
to fix actual damages. Nevertheless, Senior Managing Director
agrees that such formula is fair and reasonable under the
circumstances as a method of partially compensating RSM
McGladrey for the damage it shall suffer as a result of such
breach. Payment of the damages will be due within 30 days
after RSM McGladrey notifies the Senior Managing Director of
the amount payable pursuant to this Section.
(ii) Right of Offset. RSM McGladrey further shall
have the right (but not the obligation) to set off any amount
due from the withdrawing Senior Managing Director against any
other amounts or accounts due the Senior Managing Director by
RSM McGladrey.
6.3. TOLLING OF COVENANT PERIOD. If Senior Managing Director
violates any of the provisions of Section 6.2 after the date hereof, the
Covenant Period shall be extended for a period of time equal to the period of
any such violation.
6.4. DUTY TO COOPERATE IN DEFENSE OF CLAIMS. Any retired or
terminated Senior Managing Director in consideration of this Agreement and the
mutual promises contained herein shall have a continuing obligation to RSM
McGladrey in connection with the defense of any claim involving RSM McGladrey
and/or its employees or agents in the event a claim is asserted against RSM
McGladrey and/or its employees or agents the Senior Managing Director (whether
or not then still employed by RSM McGladrey) shall assist and cooperate with RSM
McGladrey in good faith and in such manner as is reasonably possible in
developing the information, or providing the statements, documents or testimony
reasonably required to properly respond to or defend such claim. The Senior
Managing Director shall take no action at any time to initiate or voluntarily
assist the assertion or development of a claim.
6.5. NONDISCLOSURE. Senior Managing Director shall not at any
time or in any manner, directly or indirectly, during or after the Term, use or
disclose to any party other than RSM McGladrey any trade secrets or other
Confidential Information (defined herein) learned or obtained by Senior Managing
Director while a Senior Managing Director of RSM McGladrey. As used herein, the
term "Confidential Information" means information disclosed to or known by
Senior Managing Director (whether before or after the date of this Agreement) as
a consequence of Senior Managing Director's position with RSM McGladrey and not
generally known in the industry in which RSM McGladrey is engaged and that in
any way relates to the products, processes, services, inventions (whether
patentable or not), formulas, techniques or know-how, including, but not limited
to, information relating to distribution systems and methods, research,
development, manufacturing, purchasing, accounting, procedures, engineering,
marketing, customers, vendors, merchandising and selling, of RSM McGladrey, and
regardless of the format in which it is presented or embodied (written, graphic,
electromagnetic or otherwise). The term "Confidential Information," as used
herein, shall also include information regarding the clients of any person or
entity for which RSM McGladrey provides services pursuant to contract between
RSM McGladrey and such entity. The term "Confidential Information," as used
herein, does not include information: (a) which was already in the public
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domain through authorized disclosures by RSM McGladrey or its affiliates or (b)
which is disclosed as a matter of right by a third party source after the
execution of this Agreement provided such third party source is not bound by
confidentiality obligations in favor of RSM McGladrey.
6.6. INVENTIONS. Senior Managing Director agrees that all
inventions, discoveries, written materials, brochures, training programs,
training materials, programs, seminars, estate planning products, financial
planning products and asset management products conceived of or developed by the
Senior Managing Director during the Term, whether alone or jointly with others
and whether during working hours or otherwise, which relate to the business of
RSM McGladrey or any affiliate of RSM McGladrey shall be RSM McGladrey's
exclusive property. Senior Managing Director shall: (i) promptly disclose in
writing to RSM McGladrey each invention, written material, brochure, training
program, training material, program, seminar, estate planning product, financial
planning product or asset management product conceived by or developed by Senior
Managing Director during the term of Senior Managing Director's employment with
RSM McGladrey, (ii) assign all rights to the same to RSM McGladrey, and (iii)
assist RSM McGladrey in every way to obtain and protect any patents, trademarks,
copyrights or service marks on the same.
6.7. LIMITATIONS ON ENFORCEMENT. If any restriction set forth
in this Section is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time, over too great a
range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which such court shall consider enforceable.
6.8. TERMINATION OF RESTRICTIVE COVENANTS. The restrictive
covenants set forth in Section 6.2(a) and 6.2(b) hereof shall expire if a
Payment Event of Default (defined below) occurs under the Guaranty dated August
____, 1999 by Block in favor of McGladrey (the "Guaranty"). For purposes of this
Section, a "Payment Event of Default" shall be deemed to occur if (i) any
undisputed Guaranteed Obligation (as defined in the Guaranty) is not timely paid
by RSM McGladrey when due and owing and (ii) Block fails to pay the amount of
any such Guaranteed Obligation (provided that RSM McGladery's nonpayment then
exists and is continuing) within thirty (30) days after delivery of written
notice thereof to Block pursuant to the notice provisions of the Guaranty. Any
expiration of such restrictive covenants pursuant to this Section shall not,
however, act or be deemed to work on or effect any expiration, termination,
waiver, forfeiture, or release of such restrictive covenants or in any way
affect their enforcement for any period prior to the occurrence of the
applicable Payment Event of Default.
7. CERTAIN REMEDIES.
7.1. SPECIFIC PERFORMANCE. If Senior Managing Director shall
at any time breach, violate or fail to comply fully with any of the terms,
provisions or conditions of this Agreement, the parties intend that RSM
McGladrey shall be entitled to equitable relief against Senior Managing Director
by way of injunction (in addition to, but not in substitution for, any and all
other relief to which RSM McGladrey may be entitled either at law or in equity,
or hereunder including, but not limited to, the payments provided in Section
6.2(c) and (e)) to restrain such breach or violation or to compel compliance
fully with the terms, provisions or
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conditions per this Agreement. Liquidated damages and right of offset pursuant
to Section 6.2(c) and (e) shall be in addition to, and not in lieu of any other
remedy of RSM McGladrey.
7.2. NO PROOF OF BREACH; WAIVER. In any proceeding, whether in
equity or at law, Senior Managing Director specifically waives any requirement
that RSM McGladrey prove that any breach, violation or failure to comply fully
with the terms, provisions or conditions of this Agreement will cause
irreparable injury or that there is no adequate remedy at law(s); Senior
Managing Director also agrees not to raise as a defense in any such proceeding
any allegation; (i) that any of the provisions of Sections 6 and/or 7 are either
unnecessary, unreasonable or unenforceable, that any of them illegally restrain
trade, competition or any personal rights of Senior Managing Director; or (ii)
that payments made by RSM McGladrey subsequent to gaining knowledge of a
violation of this Agreement prejudices RSM McGladrey's rights to enforce the
Agreement or recover payments made, or (iii) that the non-enforcement of RSM
McGladrey's rights to enforce the Agreement or recover payments made or that the
non-enforcement of RSM McGladrey's rights with regard to one Senior Managing
Director or one act prejudices RSM McGladrey's rights and remedies of RSM
McGladrey under this Agreement, all of which are in addition to all rights and
remedies to which RSM McGladrey is or shall be otherwise entitled at law or in
equity. RSM McGladrey shall not be required to post bond in any proceeding to
enforce the provisions of Section 6 and/or 7 hereof.
8. EARLY RETIREMENT. [Reserved]
9. TERMINATION.
9.1. METHODS OF TERMINATION. This Agreement and the
employment of the Senior Managing Director hereunder may be terminated as
follows:
(a) By RSM McGladrey for "cause," upon the delivery
of written notice thereof to Senior Managing Director. For purposes of
this Agreement, "cause" shall mean the occurrence of any one of the
following on the part of the Senior Managing Director:
(i) Senior Managing Director's conviction of a
plea of guilty or nolo contendere to a crime involving moral
turpitude or a crime providing for a term of imprisonment.
(ii) Senior Managing Director's engagement in
willful misconduct (including but not limited to Senior
Managing Director discrimination or harassment or unethical or
unprofessional conduct) injurious to RSM McGladrey, its
affiliates or any of their respective reputations.
(iii) Senior Managing Director's breach of
his/her fiduciary duty to RSM McGladrey;
(iv) Senior Managing Director's engagement in
activities which constitute a material breach of this
Agreement or
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any other material agreement or contract between Senior
Managing Director and RSM McGladrey;
(v) Senior Managing Director's gross negligence
in the execution of, or Senior Managing Director's willful
failure to carry out, his duties and responsibilities up to
the standards of performance which could reasonably be
expected from an Senior Managing Director in his position.
(vi) An act or acts of fraud, embezzlement or
dishonesty either (a) taken by the Senior Managing Director to
the detriment of RSM McGladrey or (b) by others in conspiracy
or affiliation with Senior Managing Director and intended to
result in enrichment or advantage to Senior Managing Director
at the expense of RSM McGladrey or with use of RSM McGladrey's
assets or information; or
(vii) Senior Managing Director's failure to
maintain a license as a certified public accountant in any
state where such license is required.
(viii) Senior Managing Director's material
violations of RSM McGladrey's policies or procedures except
those policies or procedures with respect to which an
exception has been granted under authority exercised or
delegated by the Advisory Board of RSM McGladrey.
(ix) Senior Managing Director's failure to pay
and file on a timely basis, including extensions, complete and
accurate Federal and state tax returns.
(x) Other gross misconduct which is detrimental
to the best interests of RSM McGladrey.
To prevent the inadvertent loss of rights as a result of
actions deemed to fall under (i) through (ix) above, the
Senior Managing Director shall first receive a written notice
from the Executive Management Committee of RSM McGladrey of
each item of misconduct and such Senior Managing Director
shall have not less than 30 days in which to cure any
misconduct by restoration, compensation and/or performance. If
the misconduct is so cured within the 30-day period, then the
Senior Managing Director shall not be terminated "for Cause".
(b) By RSM McGladrey without cause upon written notice to the
Senior Managing Director.
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(c) By Senior Managing Director on 180 days' written notice to
RSM McGladrey (which notice period may be accelerated at RSM
McGladrey's discretion);
(d) Upon the death or Disability (defined herein) of Senior
Managing Director. For purposes of this Agreement, "Disability" means
the inability of a Senior Managing Director to perform such Senior
Managing Director's duties or services as provided in the RSM McGladrey
Employment Agreement because of mental, physical or other illness,
disease or injury, where such disability (a) shall have existed for an
aggregate of six (6) months in any 12-month period and McGladrey and/or
RSM McGladrey shall have so notified the Senior Managing Director
thereof, or (b) has prevented Senior Managing Director from performing
substantially all of his duties under the RSM McGladrey Employment
Agreement for a period of six (6) consecutive months.
(e) By express mutual written agreement signed by Senior
Managing Director and RSM McGladrey.
(f) Upon a "Change of Control" as defined in Section 9.2
below.
9.2. Termination of Employment Upon a Change of Control.
(a) If RSM McGladrey terminates Senior Managing Director's
employment under this Agreement following a "Change of Control" (as
defined herein) without "Cause" (as defined in Section 9.1), or if
Senior Managing Director terminates his employment under this Agreement
following both a Change of Control and a substantial reduction by RSM
McGladrey (over the objection of Senior Managing Director) in Senior
Managing Director's duties, authority or status, then, upon any such
termination of Senior Managing Director's employment, (i) RSM McGladrey
shall continue to pay to Senior Managing Director the base salary in
effect upon such termination throughout the two-year period following
such termination as the same would have been made had Senior Managing
Director remained employed by RSM McGladrey hereunder; and (ii) any
portion of any option to purchase shares of Block common stock granted
pursuant to any stock option plan of Block and held by Senior Managing
Director at the time of such termination of employment that is not yet
vested in accordance with its terms shall vest upon the effective date
of such termination of employment and shall be exercisable for a period
of three months after such date of termination of employment.
(b) For the purpose of this subsection, a "Change of Control"
shall mean:
(i) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 50% or more of
the then outstanding voting securities of RSM McGladrey or any
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direct or indirect parent company of RSM McGladrey (the
"Acquired Block Entity") entitled to vote generally in the
election of directors, but excluding, for this purpose, any
such acquisition by any Block Entity, or any employee benefit
plan (or related trust) of any Block Entity, or any
corporation with respect to which, following such acquisition,
more than 50% of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities
who were the beneficial owners of the voting securities of the
Acquired Block Entity immediately prior to such acquisition in
substantially the same proportion as their ownership,
immediately prior to such acquisition, of the then outstanding
voting securities of the Acquired Block Entity entitled to
vote generally in the election of directors, as the case may
be; or
(ii) individuals who, as of the date hereof,
constitute the Board of Directors of Block (as of the date
hereof, the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board, provided that
any individual or individuals becoming a director subsequent
to the date hereof, whose election, or nomination for election
by Block's shareholders, was approved by a vote of at least a
majority of the Board (or nominating committee of the Board)
shall be considered as though such individual were a member or
members of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of
office is in connection with an actual or threatened election
contest relating to the election of the directors of Block (as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or
(iii) approval by the shareholders of an Acquired
Block Entity of a reorganization, merger or consolidation of
such Acquired Block Entity, in each case, with respect to
which all or substantially all of the individuals and entities
who were the respective beneficial owners of the voting
securities of the Acquired Block Entity immediately prior to
such reorganization, merger or consolidation do not, following
such reorganization, merger or consolidation, beneficially
own, directly or indirectly, more than 50% of the then
outstanding voting securities entitled to vote generally in
the election of directors of the corporation or other entity
resulting from such reorganization, merger or consolidation,
or a complete liquidation or dissolution of an Acquired Block
Entity, or of the sale or other disposition of all or
substantially all of the assets of an Acquired Block Entity,
but excluding any such reorganization, merger, consolidation,
liquidation, dissolution or sale or other disposition of
assets after which a Block Entity continues to own more than
50% of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation or
other entity resulting from a reorganization, merger or
consolidation, or more than 50% of the assets of the
liquidated or dissolved Acquired Block Entity, or more than
50% of the assets of the Acquired Block Entity selling or
otherwise disposing of its assets.
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9.3. PAYMENTS UPON TERMINATION. Except as set forth in
Section 9.2, upon termination, any amount due RSM McGladrey or Senior Managing
Director under this Agreement shall be paid to RSM McGladrey or the Senior
Managing Director or Senior Managing Director's representative (as may be in
case in the event of death or disability), as set forth below:
(a) If this Agreement is terminated pursuant to
Section 9.1(a) or by Senior Managing Director (pursuant to Section
9.1(c)), RSM McGladrey shall pay to Senior Managing Director, if not
already paid, any Base Compensation (as defined in Schedule 5) paid
through the date of such termination but the Senior Managing Director
shall not be eligible or entitled to receive any other compensation,
whether bonus or other form thereof, for the year in which such
termination occurred or any subsequent year, to the extent not
theretofore paid;
(b) If this Agreement is terminated by RSM McGladrey
without Cause pursuant to Section 9.1 (b) or because of the death or
disability of the Senior Managing Director (pursuant to Section 9.1
(d), RSM McGladrey shall pay to Senior Managing Director, if not
already paid, any Base Salary paid through the date of such termination
plus the portion of any bonus allocated to the Senior Managing Director
by the Executive Committee of RSM McGladrey plus the remuneration
provided for in Section 5.4(b) assuming the Senior Managing Director
was eligible for but did not elect the provisions under Section 5.4(a).
(c) If this Agreement is terminated by mutual
agreement of the Senior Managing Director and RSM McGladrey pursuant to
Section 9.1(e), RSM McGladrey shall pay to Senior Managing Director
such payments, if any, as may be so agreed.
(d) Except as otherwise provided herein, no other
consideration of any type will be due and owing to Senior Managing
Director by RSM McGladrey upon any termination of this Agreement.
9.4. RELEASE OF CLAIMS. Notwithstanding the foregoing, RSM
McGladrey shall not be obligated to pay the Senior Managing Director any of the
payments referred to in Section 9.3(b) or Section 9.3(c) unless and until RSM
McGladrey has received a Release of Claims executed by Senior Managing Director
in a form satisfactory to RSM McGladrey at its reasonable discretion.
9.5. EFFECT OF TERMINATION. Upon any termination of the Senior
Managing Director's employment and this Agreement pursuant to Section 9.1 or 9.2
hereof, RSM McGladrey and the Senior Managing Director shall have no further
obligations under this Agreement to the other except Senior Managing Director's
obligations under the provisions of Section 6.2 shall continue for the Covenant
Period, and the Senior Managing Director's obligations under and the provisions
of the remainder of Section 6 and Section 7 shall continue in full force and
effect indefinitely.
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10. MISCELLANEOUS.
10.1. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding among RSM McGladrey and Senior Managing Director
concerning the subject matter hereof. No modification, amendment, termination or
waiver of this Agreement shall be binding unless in writing and signed by Senior
Managing Director. To insist upon strict compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such terms,
covenants and conditions.
10.2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the Senior Managing Director and the heirs, executors and administrators of
Senior Managing Director or Senior Managing Director's estate and property, and
shall inure to the benefit of RSM McGladrey and its successors and assigns.
Being a contract for personal services, RSM McGladrey may not assign or transfer
to others (a) the right to receive payments hereunder, or (b) the obligation to
perform Senior Managing Director's duties and services hereunder. RSM McGladrey
may assign this Agreement to any person or entity on notice to Senior Managing
Director.
10.3. TAXES. From any payments due hereunder to Senior
Managing Director from RSM McGladrey, there shall be withheld amounts reasonably
believed by Senior Managing Director to be sufficient to satisfy liabilities for
federal, state and local income and related taxes and other charges.
10.4. NOTICES. Any notice, request, consent or communication
(collectively, a "Notice") under this Agreement shall be effective only if it is
in writing and (a) personally delivered, (b) sent by certified or registered
mail, return receipt requested, postage prepaid, (c) sent by a nationally
recognized overnight delivery service, with delivery confirmed, or (d) faxed or
telecopied, with receipt confirmed, addressed as follows:
If to Senior Managing Director:
McGladrey & Pullen, LLP
3600 West 80th Street
Suite 500
Bloomington, Minnesota 55431
If to RSM McGladrey to:
c/o H&R Block
4400 Main Street
Kansas City, Missouri 64111
Attn: Bret G. Wilson
with a copy to James H. Ingraham at the same address
with a copy to:
Bryan Cave LLP
3500 One Kansas City Place
1200 Main Street
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Kansas City, Missouri 64105
Attn: Gregory G. Johnson
10.5. ARBITRATION OF DISPUTES. Any controversy, claim, or
dispute arising out of or relating to this Agreement or any breach thereof,
including without limitation any dispute concerning the scope of the arbitration
clause set forth below, shall be resolved as set forth below. Any party may seek
injunctive relief pending the completion of mediation and arbitration under this
Agreement.
(a) In the event a dispute arises relating to this
Agreement, any party may demand mediation by notifying the American
Arbitration Association ("AAA") in the location where any arbitration
would be conducted as set forth below, in writing with copies to all
other parties involved in the dispute. The notification will state with
specificity the nature of the dispute and the amount of any claims.
Upon receipt of the mediation demand, the AAA will immediately convene
a pre-mediation telephone conference of the parties hereto. The parties
will make a representative, with full authority to settle, available
for such a conference within five (5) business days of being contacted
by the AAA or its designated mediator ("Mediator"). During the
pre-mediation telephone conference, the parties will agree on mediation
procedures or, in the event they cannot agree, Mediator will set the
mediation procedures. The mediation procedures will provide for the
mediation to be completed within thirty (30) business days of the date
of the initial demand for mediation. The parties will participate in
good faith in the mediation and will use their best efforts to reach a
resolution within the thirty (30) day time period. Each party will make
available in a timely fashion a representative with authority to
resolve the dispute. In the event that the dispute has not been
resolved within thirty (30) days, the mediation may continue if the
parties so desire. If not, the Mediator will so notify the parties and
declare the mediation terminated. In the event that the mediation
continues beyond thirty (30) days, but is not resolved within what
Mediator believes is a reasonable time thereafter, the Mediator will so
notify the parties, and declare the mediation terminated. Fees of the
mediator shall be split equally between the parties.
(b) After the mediation has been declared terminated,
the matters in dispute shall be settled by binding arbitration in
accordance with the Commercial Arbitration Rules (the "Rules") of the
AAA as supplemented herein and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
The governing law of this Agreement shall be the law used by the
arbitrators in rendering their award, except that the Federal Rules of
Evidence shall apply. There shall be three arbitrators. Each party
shall choose one arbitrator, and the two chosen arbitrators shall
choose the third arbitrator. Pending final award, the arbitrators'
compensation and expenses shall be advanced equally by the parties. The
AAA shall hold an administrative conference with counsel for the
parties within twenty (20) days after the filing of the demand for
arbitration by any one or more of the parties. The parties and the
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AAA shall thereafter cooperate in order to complete the appointment of
three arbitrators as quickly as possible. Within 15 days after all
three arbitrators have been appointed, an initial meeting (which, if
the arbitrators so determine, may be by phone) among the arbitrators
and counsel for the parties shall be held for the purpose of
establishing a plan for administration of the arbitration, including:
(1) definition of issues; (2) scope, timing, and types of discovery,
which may at the discretion of the arbitrators include production of
documents in the possession of the parties, but may not without consent
of all parties include depositions; (3) exchange of documents and
filing of detailed statements of claims, prehearing memoranda and
dispositive motions; (4) schedule and place of hearings; and (5) any
other matters that may promote the efficient, expeditious, and
cost-effective conduct of the proceeding. Each party shall have the
right to request the arbitrator to make specific findings of fact.
(c) The majority decision of the arbitrators shall
contain findings of facts on which the decision is based, including any
specific factual findings requested by either party, and shall further
contain the reasons for the decision with reference to the legal
principles on which the arbitrators relied. Such decision of the
arbitrators shall be final and binding upon the parties. The
arbitration shall take place in Chicago, Illinois. The final award
shall award to the prevailing party its reasonable attorneys' fees and
costs incurred in connection with the arbitration (but if the
prevailing party is not awarded all of the damages sought, only to the
extent, prorata, of its award compared to the damages sought) and may
grant such other, further, and different relief as authorized by the
Rules, including damages and out-of-pocket costs but which may not
include exemplary, consequential or punitive damages.
10.6. RIGHT TO OFFSET. RSM McGladrey, for itself and as an
affiliate of Block, a subsidiary of Block, shall have the right but not the
obligation to offset against amounts due Senior Managing Director hereunder any
amounts due RSM McGladrey by Senior Managing Director which are not paid to RSM
McGladrey by the primary obligor within ten (10) days following demand,
regardless of the source of such obligation from Senior Managing Director to RSM
McGladrey.
10.7. GOVERNING LAW. This Agreement shall be governed by the
laws of the State of Missouri, without giving effect to its choice of law
provisions.
10.8. HEADINGS. All headings in this Agreement are for
convenience only and are not intended to affect the meaning of any provision
hereof.
10.9. COUNTERPARTS. This Agreement may be executed in two or
more counterparts with the same effect as if the signatures to all such
counterparts were upon the same instrument, and all such counterparts shall
constitute but one instrument.
10.10. AMENDMENT. This Agreement cannot be added to, altered,
changed, modified or amended in any respect except by a writing duly executed by
the parties hereto. Where an amendment is agreed to by the parties hereto, the
box indicating that an
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addendum is attached to this Agreement must be checked on this page 18 of this
Agreement and the addendum must be attached to this Agreement.
THIS AGREEMENT IS SUBJECT TO AN ARBITRATION PROVISION WHICH IS
BINDING THE PARTIES.
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IN WITNESS WHEREOF, the Senior Managing Director has executed
this Agreement and RSM McGladrey has caused this Agreement to be executed by its
duly authorized officer as of the day and year first above written.
RSM MCGLADREY, INC.
By: /s/ Bret G. Wilson
-------------------------------
Bret G. Wilson, Vice President
SENIOR MANAGING DIRECTOR
By: /s/Thomas G. Rotherham
-------------------------------
Thomas G. Rotherham
[ ] Indicate that an approved addendum/amendment to this agreement is attached.
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SCHEDULE 5.1
SENIOR MANAGING DIRECTOR COMPENSATION
1. DEFINITIONS. For purposes of this Schedule 5, the following
terms shall have the following meanings:
1.1. "Annual Compensation" shall mean sixty-four percent
(64%) of the Compensation Base for a specified annual period.
1.2. "Collection Deficit" shall mean the excess of net
accounts receivable and net unbilled services over eighty-five percent (85%) of
net services and expenses charged to clients for the preceding three months. Net
services are defined as gross services plus or minus billing adjustments,
unbilled services reserve adjustments, provision for bad debts and accounts
receivable reserve adjustments. The Collection Deficit will be computed at
October 31, January 31, April 30 and July 31 to adjust the Quarterly Target
Payments and Quarterly IPU Bonus at December 1, March 1, June 1 and September 1,
respectively.
1.3. "Compensation Base" shall mean an amount equal to the
aggregate net income earned by Contractor and McGladrey and all of its
wholly-owned subsidiaries (excluding TP Services, LLC) for a specified annual
period before (1) the aggregate compensation and distributions paid by McGladrey
or Contractor to those persons who are partners and principals of McGladrey at
the Closing and thereafter; (2) amortization of goodwill; (3) income taxes; (4)
interest expense incurred with respect to Post-Closing Development Expenditures
(as defined in the Asset Purchase Agreement); (5) interest expense imputed on
purchase price installments paid after the Closing Date (as defined in the Asset
Purchase Agreement); (6) interest incurred with respect to Retired Partner
Obligations (as defined in the Asset Purchase Agreement); (7) Post-Closing
Development Expenditures that are accounted for as expenses; (8) any expense for
incremental direct expenses incurred or paid by the operations group
attributable to the business, operations or management of Foundation Firms,
Foundation Firm Managers or Prior Add-On Firms (each as defined in the Asset
Purchase Agreement); (9) any income for any gain, or expense for any loss, of
Contractor or McGladrey or any income for funds received by McGladrey or
Contractor on the sale of the Mutual Fund Business (as defined in the Asset
Purchase Agreement); and (10) compensation expenses up to One Hundred Thousand
Dollars ($100,000) annually corresponding to the grant of Block stock options to
employees or equity owners of McGladrey and after Contractor's and McGladrey's
aggregate share of FICA, federal and state unemployment taxes, Medicare, and
workers' compensation payments all as determined in accordance with GAAP.
1.4. "Executive Management Committee" shall have the
meaning set forth in that certain Operations Agreement among Contractor,
McGladrey and others dated even date hereto.
1.5. "Fringe Benefits" shall mean the value of the fringe
benefits (including but not limited to those set forth on Schedule 5.4 to the
Managing Director Employment Agreement) granted to such Managing Director or
Senior Managing Director from time to time for a specified period.
<PAGE> 22
1.6. "IPUs" shall mean income participation units. The
designated value of an IPU and the number granted to any Managing Director or
Senior Managing Director on an annual basis shall be determined by the
Management Executive Committee of Contractor.
1.7. "Senior Managing Directors" shall mean certain of
those Managing Directors who are designated "Senior Managing Directors."
1.8. "Managing Directors" shall mean certain of those
individuals who from time to time on or after Closing are parties to a Managing
Director Employment Agreement with Contractor and who are partners or principals
of McGladrey.
1.9. "Partner Compensation System" shall mean a system
approved by the Executive Management Committee from time to time, subject to
approval by the Contractor which approval shall not be unreasonably withheld.
1.10. "McGladrey" shall mean McGladrey & Pullen, LLP an Iowa
limited liability partnership.
1.11. "Retired Partners" shall have the meaning set forth in
the Asset Purchase Agreement.
1.12. "Rotherham and Scally Compensation" shall mean all
compensation amounts (not including Fringe Benefits) paid to Thomas Rotherham
and Mark Scally under their respective Managing Director Employment Agreements.
1.13. Other terms not otherwise defined herein shall have
the meanings set forth in the Managing Director Employment Agreement.
2. AGGREGATE ANNUAL COMPENSATION. Each year during the Term, the
Managing Directors and Senior Managing Directors shall receive as compensation
from Contractor (in consideration of the provision of their services for the
year) an aggregate amount (the "Net Annual Aggregate Compensation") equal (i) to
the Annual Compensation, minus (ii) the net income of McGladrey for such year
(whether or not distributed to equity owners) determined in accordance with
generally accepted accounting principals ("Distributable McGladrey Earnings").
The Rotherham and Scally Compensation shall be included in the Net Annual
Aggregate Compensation.
3. SENIOR MANAGING DIRECTOR COMPENSATION.
3.1. TARGET INCOME. Prior to the first Quarterly Target
each distribution year ending July 31, each Senior Managing Director will be
assigned a certain number of IPUs prior to the first quarterly target. Each
Senior Managing Director's annual estimated target income shall be calculated as
such number of IPUs multiplied by the designated value of the IPUs less the
Fringe Benefits elected by the Senior Managing Director during such year (the
"Target Income").
2
<PAGE> 23
3.2. DISTRIBUTION OF BASE INCOME. Each month, each Senior
Managing Director shall be an amount determined annually by the Executive
Management Committee (collectively the "Base Income Payments").
3.3. QUARTERLY TARGET PAYMENT. Subject to Section 4, the
Target Income less the Base Income Payments shall be paid to the Senior Managing
Director on a quarterly basis in equal payments on the following dates: December
1, March 1, June 1 and September 1 (each a "Quarterly Target Payment").
4. RESTRICTIONS ON PAYMENT OF CERTAIN QUARTERLY PAYMENTS.
4.1. Senior Managing Director must be employed by either
Contractor or McGladrey on the date the Quarterly Target Payment is paid to
receive the applicable Quarterly Target Payment.
4.2. If the actual net actual aggregate compensation income
of RSM McGladrey is less than total IPUs times the designated value plus
Guaranteed income of RSM McGladrey, the fourth quarter distribution of the
Quarterly Target Payments to the Senior Managing Directors, payable on September
1 shall be reduced by the amount of such shortfall. The distribution will be
reduced pro rata among Senior Managing Directors in proportion to the value of
each Senior Managing Directors' IPUs to the total value of all Senior Managing
Directors' IPUs.
4.3. The Quarterly Target Payments are subject to
adjustment for the Collection Deficit pursuant to the procedure set forth in
Section 5 of this Schedule 5.
4.4. Notwithstanding anything to the contrary herein, the
total aggregate annual compensation for the applicable annual period (including
Fringe Benefits and bonuses) of the Senior Managing Directors and the Managing
Directors from Contractor paid by and/or due from and McGladrey (including
Distributable McGladrey Earnings), shall not exceed the Annual Compensation for
such period.
5. ALLOCATION OF THE COLLECTION DEFICIT. The Collection Deficit
will be allocated among the Managing Directors and Senior Managing Directors as
follows:
5.1. A percentage of the Collection Deficit for RSM
McGladrey and McGladrey will be allocated to firmwide Managing Directors and
Senior Managing Directors. The percentage will approximately equal the
percentage that the base income of all firmwide Managing Directors and Senior
Managing Directors bears to the total of such compensation for all Managing
Directors and Senior Managing Directors who will share in the Collection
Deficit. It will be allocated to each firmwide Managing Director and Senior
Managing Director in the proportion that his or her Guaranteed Income or Target
Income, respectively, for the year bears to the total of such base income of all
firmwide Managing Directors and Senior Managing Directors.
5.2. The Collection Deficit assigned to firmwide Managing
Directors and Senior Managing Directors will be deducted from the Collection
Deficits of economic units
3
<PAGE> 24
in the proportion that the Collection Deficit of each economic unit bears to the
total Collection Deficit. Collection surpluses will be ignored in the
allocation.
5.3. The remaining Collection Deficit for each economic
unit will be allocated among the economic unit's Managing Directors and Senior
Managing Directors in the proportion that each Senior Managing Director's and
Managing Director's Target Income or Guaranteed Income bears to the total of
such Target Income or Guaranteed Income, respectively, of all Senior Managing
Directors and Managing Directors in the economic unit.
6. ANNUAL PERFORMANCE AWARDS. Annual performance awards shall be
paid based on the Partner Compensation System approved by the Executive
Management Committee. The annual performance awards shall be distributed on
January 1 of each year.
4
<PAGE> 25
SCHEDULE 5.1
BASE SALARY AND PERFORMANCE BONUS
1. BASE SALARY. During the first twelve (12) months of the Term, the
Managing Director shall be paid $360,000 per annum as base salary (the "Base
Salary"), which Base Salary shall be paid to the Managing Director in $30,000
monthly increments. For each twelve (12) month period during the Term,
thereafter, Managing Director's Base Salary shall be determined by the Chief
Executive Officer and Chief Operations Officer of H&R Block, Inc. ("Block")
subject to the approval of the Compensation Committee of the Board of Directors
of Block.
2. PERFORMANCE BONUS. Each year during the Term, the Managing Director
shall be eligible for a bonus (the "Target Bonus") equal to 40% of the Base
Salary ($144,000). The actual bonus which the Managing Director is eligible for
(the "Performance Bonus") will be more or less than Target Bonus based on the
profit of RSM and McGladrey and its wholly-owned subsidiaries McGladrey (the
"Profit" as defined below). The performance targets and Performance Bonus are
set forth below: For purposes of this Schedule 5.1 "Profit" shall mean an amount
equal to the aggregate net income earned by Contractor and McGladrey and all of
its wholly-owned subsidiaries (excluding TP Services, LLC) for a specified
annual period before (1) the aggregate compensation and distributions paid by
McGladrey or Contractor to those persons who are partners and principals of
McGladrey at the Closing and thereafter; (2) amortization of goodwill; (3)
income taxes; (4) interest expense incurred with respect to Post-Closing
Development Expenditures (as defined in the Asset Purchase Agreement); (5)
interest expense imputed on purchase price installments paid after the Closing
Date (as defined in the Asset Purchase Agreement); (6) interest incurred with
respect to Retired Partner Obligations (as defined in the Asset Purchase
Agreement); (7) Post-Closing Development Expenditures that are accounted for as
expenses; (8) any expense for incremental direct expenses incurred or paid by
the operations group attributable to the business, operations or management of
Foundation Firms, Foundation Firm Managers or Prior Add-On Firms (each as
defined in the Asset Purchase Agreement); (9) any income for any gain, or
expense for any loss, of Contractor or McGladrey or any income for funds
received by McGladrey or Contractor on the sale of the Mutual Fund Business (as
defined in the Asset Purchase Agreement); and (10) up to One Hundred Thousand
Dollars ($100,000) per year compensation expenses corresponding to the grant of
Block stock options to employees or equity owners of McGladrey pursuant to the
Asset Purchase Agreement and after Contractor's and McGladrey's aggregate share
of FICA, federal and state unemployment taxes, Medicare, and workers'
compensation payments all as determined in accordance with GAAP.
<PAGE> 26
PERFORMANCE BONUS
<TABLE>
<CAPTION>
- ----------------------------- --------------------------- ----------------------
Percentage Performance
of Bonus
Profit Target Bonus Amount
(in millions)
- ----------------------------- --------------------------- ----------------------
<S> <C> <C>
$90 0% $ 0
95 33.3% 48,000
100 66.7% 96,000
105 100.0% 144,000
110 133.3% 192,000
115 166.7% 240,000
120 200.0% 288,000
- ----------------------------- --------------------------- ----------------------
</TABLE>
During the Term, the Performance Bonus shall be calculated for the
period from August 1-July 31 (the "Bonus Calculation Period") and shall be
distributed to the Managing Director on or before September 15 following each
Bonus Calculation Period.
2
<PAGE> 27
SCHEDULE 5.3
BENEFITS
1. DEFERRED COMPENSATION PLAN. The Senior Managing Director will be
eligible to participate in the Deferred Compensation Plan developed by Block for
certain partners or principles of McGladrey.
2. STOCK OPTIONS. On the Closing Date (as defined in the Asset
Purchase Agreement), the Senior Managing Director will be awarded stock options
for 21,000 shares of Block common stock, no par value (the "Block Common
Stock"), which options shall (a) have an option exercise price per share equal
to the closing price of the Block Common Stock on the New York Stock Exchange on
the Closing Date (the "Grant Date") (or, if the Closing Date is a date on which
such common stock is not traded on the New York Stock Exchange, on the last
trading day preceding the Grant Date); and (b) in all respects be granted and
governed by the terms of the H&R Block, Inc. 1993 Long Term Executive
Compensation Plan and (c) be evidenced by stock option agreements. Such option
shall vest as follows: 40% upon the third anniversary of the Grant Date; 30%
upon the fourth anniversary of the Grant Date; and 30% upon the fifth
anniversary of the Grant Date provided that such vesting shall be accelerated
upon retirement at or after age 55.
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>6
<FILENAME>ex10-24.txt
<DESCRIPTION>AGREEMENT DATED FEBRUARY 21, 2000
<TEXT>
<PAGE> 1
EXHIBIT 10.24
AGREEMENT
THIS AGREEMENT is entered into as of the 21st day of February, 2000,
("Agreement Date") by and between HRB Management, Inc. ("Block") and Ozzie
Wenich ("Wenich").
WHEREAS, Wenich is employed by HRB Management, Inc. to serve as Senior Vice
President and Chief Financial Officer of H&R Block, Inc., in addition to other
director and officer positions held with Block, its affiliates and subsidiaries
(a complete list of all such positions is attached hereto as Exhibit A);
WHEREAS, Wenich possesses intimate knowledge of the business and affairs of
Block, its parents, subsidiaries and affiliates, particularly related to
financial and operational matters; and
WHEREAS, the parties desire to set forth the terms and conditions upon
which Wenich will retire as of August 31, 2000;
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, Block and Wenich (collectively, the
"Parties") agree as follows:
1. Change in Employment. As of February 21, 2000, it is agreed that Wenich
will no longer serve as Senior Vice President and Chief Financial Officer of H&R
Block, Inc. or hold any other officer and director position now held with Block,
its parents, subsidiaries and affiliates; however, his employment with Block
will continue through his retirement on August 31, 2000 (the "Employment
Termination Date"). During the period February 21, 2000, through the Employment
Termination Date, Wenich will work on such projects and assignments as are
mutually agreed upon by Block and Wenich, provided that, unless otherwise agreed
to by Wenich, all such projects and assignments shall relate to the transition
to new management. Wenich shall make himself available for deposition and trial
testimony in matters of litigation involving Block and its affiliates through
the Employment Termination Date. He shall continue to be a regular, full-time
Block employee through the Employment Termination Date for the purposes of
salary and certain benefits, as set forth in this Agreement. Wenich shall have
no set hours of work and services shall be provided by Wenich from his home,
except to the extent that such work must be performed at Block's offices or
another location, as mutually agreed by Block and Wenich. As Wenich continues as
an employee through the Employment Termination Date, Wenich's salary will be at
the same annual rate as his annual rate of salary in effect on the Agreement
Date and will be paid semi-monthly on the 15th and last day of each month.
During the period February 21, 2000, through the Employment Termination Date any
accrued and available vacation, floating holidays, personal days or paid time
off benefits to which Wenich is eligible as of February 21, 2000, shall not be
applied to any and all periods during which Wenich is not actively pursuing
projects, tasks or functions on Block's behalf, and Wenich shall be paid for
such days and benefits in accordance with Paragraph 3 of this Agreement. Wenich
will resign (a) as Senior Vice President and Chief Financial Officer of H&R
Block, Inc. and (b) from any
<PAGE> 2
and all officer and director positions held with Block, its parents, affiliates
and subsidiaries effective as of February 21, 2000 (a complete list of all
positions held on the date of this Agreement (collectively, the "Executive
Positions") is attached hereto as Exhibit A). Such resignations shall not affect
Wenich's status as an employee of Block or affect Wenich's participation in, or
vesting under, any employee benefit or welfare plans of Block or any of Block's
affiliates or parent companies, including, without limitation, the H&R Block
Deferred Compensation Plan for Executives, the 1993 Long-Term Executive
Compensation Plan and any other executive compensation, benefit or bonus plans
(collectively, the "Plans") for which Wenich would be eligible to receive
compensation or benefits through the Employment Termination Date. In other
words, Mr. Wenich shall participate in and vest under all such Plans as if he
held the Executive Positions through the Employment Termination Date.
2. Termination of Employment. By mutual agreement, Wenich's employment with
Block will terminate on the Employment Termination Date. Said termination will
be treated as a retirement for all purposes.
3. Payment to account for Past Accrued and Unused Paid-Time-Off. In
consideration of the covenants and agreements set forth herein, Block agrees to
pay to Wenich no later than the close of business on the Employment Termination
Date the sum of $146,568.16 representing (a) $125,188.44 as compensation for
1,025.59 hours of vacation days accumulated prior to January 1, 2000, including
861.41 hours forfeited as unused under Block's policy, (b) $4,113.28 as
compensation for 32.0 hours of floating holidays and personal days accumulated
prior to January 1, 2000 and not forfeited under Block's policy, (c) $13,281.80
as compensation for 106.664 hours of vacation days accumulated between January
1, 2000 and the Employment Termination Date, and (d) $3,984.64 as compensation
for 32.0 hours of personal days and floating holidays accumulated between
January 1, 2000 and the Employment Termination Date. Such payment shall be
subject to deferral under the H&R Block Deferred Compensation Plan for
Executives in accordance with Wenich's deferral election for calendar year 2000
and the provisions of such Plan pertaining to Company Matching Contributions
shall apply to the deferred portion of such payment.
4. Employment Benefits.
(a) Up to and through the Employment Termination Date, Wenich shall
continue to be a Block employee and all benefits and rights of employment will
extend to Wenich through the Employment Termination Date. Continuation of
Wenich's employment by Block through the Employment Termination Date shall
continue Wenich's participation in, and vesting under, any employee benefit or
welfare plans of Block or any of Block's affiliates or parent companies through
the Employment Termination Date. Wenich will share in the allocation of the
contributions to any employee pension benefit plans maintained by Block for the
year ending April 30, 2000, and, as an employee of Block on April 30, 2000, will
be entitled to participate in Block's short-term incentive compensation program
and discretionary incentive compensation program for the fiscal year ending
April 30, 2000, each as approved by the compensation committee of the H&R Block,
Inc. Board of Directors in June 1999 (including an aggregate target incentive
amount under the programs of $129,500).
2
<PAGE> 3
Hours of service will be credited to him under such plans based on compensation
paid to him through the Employment Termination Date. Benefits under employee
benefit or welfare plans will accrue and be payable to Wenich after the
Employment Termination Date as expressly provided in the post-termination
provisions of such plans. Up to and through the Employment Termination Date,
Block will credit Wenich's account under the H&R Block Deferred Compensation
Plan for Executives with salary deferrals, bonus deferrals and Company matching
contributions in accordance with the provisions of such Plan and Wenich's
deferred election for the 2000 plan year. Wenich will continue as a participant
in the Executive Survivor Plan through the Employment Termination Date and will
be entitled to continuation of coverage after the Employment Termination Date
only in accordance with established Plan terms.
(b) Wenich will not be considered an employee of Block after the Employment
Termination Date. Nothing in this Agreement will constitute or cause a
continuation of Wenich's employment by Block or extend Wenich's participation
in, or vesting under, any employee benefit or welfare plans of Block or any of
Block's parent, subsidiary or affiliated companies after the Employment
Termination Date. Benefits under such plans will not accrue or be payable to
Wenich after the Employment Termination Date except as may be expressly provided
in the post-termination provisions of such plans, or except as stated in
Paragraph 4(c) below.
(c) Wenich will have three (3) months after the Employment Termination Date
to exercise any outstanding stock options granted to Wenich under the 1993
Long-Term Executive Compensation Plan to the extent such options are exercisable
as of the Employment Termination Date.
(d) Throughout the employment period (through the Employment Termination
Date), Wenich will be entitled, at his option, to continue his enrollment in the
H&R Block employee health care plan (including any medical, dental or vision
coverage thereunder) in which he is currently enrolled and Block will continue
to pay that portion of any premiums for such enrollment that Block customarily
pays under the provisions of the applicable plan; provided that, should Wenich
actually be covered under the health care plan of another employer on or before
August 31, 2000, the continuation of all plan coverage under the H&R Block
health care plan and Block's obligation to pay any premiums under this
Subparagraph 3(d) will immediately terminate as of the date such other coverage
commences. Wenich will pay the balance of any health care premium not paid by
Block, which balance Block may deduct from the salary payable to Wenich under
Paragraph 1 of this Agreement. Wenich agrees that the statutory period for the
continuation of group health plan coverages under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") begins as of the Employment
Termination Date.
(e) Under the terms of the discretionary incentive compensation program for
fiscal year 2000, twenty percent (20%) of Wenich's aggregate short-term target
incentive amount is discretionary, to be determined by Wenich's immediate
supervisor and approved by the compensation committee of the Board of Directors
of H&R Block, Inc. For the purposes of such discretionary bonus, the
discretionary payout will be based upon 100% of Wenich's discretionary target
incentive amount.
3
<PAGE> 4
(f) Wenich shall be entitled to continue all deductions or deferrals from
salary established by Wenich prior to February 21, 2000, throughout the period
from February 21, 2000 through the Employment Termination Date.
5. Confidential Information. Wenich agrees that, during and after the term of
this Agreement, he will not, without the prior written consent of Block,
directly or indirectly use for the benefit of any person or entity other than
Block, or make known, divulge or communicate to any person, firm, corporation or
other entity, any confidential or proprietary information or trade secrets
relating to Block, H&R Block, Inc. and Block's other affiliates revealed to,
acquired by or developed by Wenich during his employment with Block or any of
its affiliates including, but not limited to, information concerning business
plans; strategies; acquisitions; dispositions; customers; employees; litigation
or other disputes; financial results; financial matters; agreements with third
parties; budgets; forecasts; marketing programs; pricing; systems; and methods
of operations. Wenich will not retain after August 31, 2000, any document,
record, paper, disk, computer file, tape or compilation of information relating
to any of the foregoing.
6. Non-Competition Covenant. Wenich agrees that (a) during the term of this
Agreement he will not accept employment in any capacity, serve as a director or
officer of, or serve as a consultant to, any firm involved in any line of
business in which H&R Block, Inc. and/or any of its subsidiaries are involved,
and (b) during the term of this Agreement and for a period of one year following
the Employment Termination Date, he will not accept employment in any capacity
with, serve as a director or officer of, or serve as a consultant to, any firm
involved in the income tax return preparation business.
7. Non-solicitation of Block Employees. Wenich will not solicit any Block
employee or any employee of any Block parent, subsidiary or other affiliate, for
employment, consultation or any other purpose whatsoever during the term of this
Agreement and for the one-year period thereafter.
8. Injunctive Relief. Wenich acknowledges that, because of his employment
position with Block, his training and experience with Block, its parents,
subsidiaries and affiliates, and his access to confidential business and
financial information about Block, its parents, subsidiaries, and affiliates,
irreparable injury to Block, its parents, subsidiaries, and affiliates would
result from Wenich's violation of any of the provisions of the above Paragraphs
4, 5 and 6. Wenich therefore agrees that, in addition to and without limitation
of any rights Block has hereunder and under applicable law, if he violates any
of the provisions of Paragraphs 4, 5 and 6 of this Agreement, Block will be
entitled to specific performance and injunctive and other equitable relief.
Wenich acknowledges and agrees that H&R Block, Inc. and H&R Block Tax Services,
Inc. and all other affiliates of Block are third-party beneficiaries of this
Agreement.
9. Conduct.
(a). Wenich's Conduct. During the period February 21, 2000, through the
Employment Termination Date, Wenich will be reasonably and appropriately
responsive
4
<PAGE> 5
to, and fully supportive of the management of Block and its affiliates and will
be cooperative with such management in providing information regarding areas of
his expertise and experience with Block. As a continuing employee of Block
through the Employment Termination Date, Wenich will not (a) defame Block, its
affiliates or their respective employees, (b) make disparaging statements to the
media, to any employee or contractor of Block or its affiliates, or to any other
person or entity concerning Block or any of its affiliates, their respective
employees or any matter related to his employment or non-employment, or (c) do
any deliberate act designed primarily to injure the business or reputation of
Block or any of its affiliates.
(b) Block's Conduct. During the period February 21, 2000, through the
Employment Termination Date, Block will be respectful of and reasonably
responsive to and supportive of Wenich. Block will not (a) defame Wenich, (b)
make disparaging statements to the media, to any employee or contractor of Block
or its affiliates, or to any other person or entity regarding Wenich, his
performance, character, status or any other personal or professional matter, (c)
do any deliberate act designed in whole or in part to injure, embarrass or
damage Wenich's reputation
10. Contracts, Commitments and Expenses. During the period February 21, 2000,
through the Employment Termination Date and at all times thereafter, Wenich will
not initiate, make, renew, confirm or ratify any contracts or commitments for or
on behalf of Block or any of its affiliates, nor will Wenich incur any expenses
on behalf of Block without Block's prior written consent., except for such
expenses as Wenich is reasonably required to incur for projects, assignments or
testimony as described in Paragraph 1 above. Block shall promptly reimburse
Wenich for any such expenses paid by him.
11. Term and Termination. In all events, this Agreement shall terminate at the
close of business on the Employment Termination Date. Notwithstanding any
termination of this Agreement whatsoever, Wenich's obligations and agreements
under Paragraphs 5, 6, 7, 8, 10, 12, 13, 14, 17 and 18, Block's obligations
under Paragraphs 2, 3, 4 (to the extent they apply following such termination),
15, 16 and 18, and such other terms of this Agreement which by their nature
should survive, will survive such termination and continue indefinitely (unless
expressly limited in terms of time).
12. Release by Wenich. In consideration of Block's promise to Wenich of the
compensation and benefits specified in Paragraphs 1 and 3 of this Agreement and
Block's other promises and agreements set forth in this Agreement, Wenich for
himself and for his relations, heirs, legal representatives and assigns
unconditionally releases and forever discharges Block, H&R Block, Inc., and all
other affiliates of Block, their respective present and past directors,
officers, employees, agents, predecessors, successors, and assigns of and from
any and all claims, demands, actions, causes of action and suits of any kind
whatsoever, whether under federal or state statute, local regulation or at
common law or which thereafter arise from any matter, fact, circumstance, event,
happening or thing whatsoever occurring or failing to occur prior to the date of
this Agreement involving Wenich's employment by Block or any affiliate of Block
including, without limitation, Wenich's hiring, compensation earned as of or
before the date of this Agreement, the termination of Wenich's responsibilities
as an officer of
5
<PAGE> 6
H&R Block, Inc., and as a director and/or officer of each other affiliate of
Block, Wenich's termination as an employee of Block, other obligations of Block
or any other Block affiliate (except for those obligations expressly stated in
this Agreement or applicable benefit plans), and further including, but not
limited to, any claims for race, sex or age discrimination under the Age
Discrimination in Employment Act, as amended ("ADEA"), Title VII of the Civil
Rights Act of 1964, the 1991 amendments of such Civil Rights Act, the Americans
with Disabilities Act, as amended, and all other federal and state statutes and
common law doctrines.
13. Consideration of Release of ADEA Claims. With regard to the waiver/release
of rights or clams under the ADEA, Wenich acknowledges and understands that this
is a legal document and that he is legally entitled to, and has been offered, a
period of twenty-one (21) days (the "Consideration Period") to consider the
waiver/release of such rights or claims under this Agreement before signing it.
After signing this Agreement, Wenich may revoke the waiver/release of rights or
claims under the ADEA by giving written notice ("Revocation Notice") to Frank L.
Salizzoni, Chief Executive Officer of Block, 4400 Main Street, Kansas City,
Missouri 64111, within seven (7) days after the date of signing (such seven (7)
day period, the "Revocation Period" and such date of signing, the "Signing
Date"). For such revocation to be effective, the Revocation Notice must be
received no later than 5:00 p.m., Kansas City, Missouri time, on the seventh
(7th) day after the Signing Date. If Wenich provides the Revocation Notice to
Block this Agreement will be null, void and unenforceable by either party, and
Block will have no obligation to make any payments to Wenich hereunder.
14. Acknowledgements. Wenich acknowledges that Block has advised him to consult
with an attorney prior to signing this Agreement or before the expiration of the
Revocation Period. Wenich specifically acknowledges and agrees that either the
full twenty-one (21) day Consideration Period has lapsed or he has been offered
such twenty-one (21) day Consideration Period but has elected to waive and
forego all of the applicable days which have not yet lapsed in such twenty-one
(21) day Consideration Period. Wenich acknowledges and agrees that upon such
consideration he has decided to waive and release any claims that he may have
under the ADEA, pursuant to the terms of this Agreement.
15. Release by Block. In consideration of Wenich's covenants contained in this
Agreement and the release contained in Paragraph 11, above, Block, for itself
and its successors, assigns and affiliates, unconditionally releases and forever
discharges Wenich, his heirs, legal representatives and assigns of and from any
and all claims, demands, actions, causes of action, and suits of any kind
whatsoever, under federal or state statute, local regulation or at common law,
whether at law or in equity, which now exist or may hereafter arise from any
matter, fact, circumstance, event, happening, or thing whatsoever occurring or
failing to occur as of or prior to the date of this Agreement involving Wenich's
employment by Block or service as a director and/or officer of Block or any
affiliate of Block.
16. Indemnification by Block. To the fullest extent indemnification is
permitted and available to the officers of Block and the officers of H&R Block,
Inc., from time to time pursuant to Block's Articles of Incorporation, Block's
Bylaws, the Amended and
6
<PAGE> 7
Restated Articles of Incorporation of H&R Block, Inc., and the Bylaws of H&R
Block, Inc., during and after Wenich's employment by Block, and to the extent
not prohibited by law, Block shall indemnify Wenich from and against all loss,
costs, damages and expenses, including, without limitation, reasonable legal
expenses of counsel, incurred as a direct or indirect result of any actual or
threatened action, suit, proceeding or claim to which Wenich is or threatened to
be made a party, or which is otherwise made or brought against Wenich, whether
civil, criminal, administrative, investigative or other, by reason of the fact
that Wenich was a director, officer, employee or agent of Block, H&R Block,
Inc., or any other affiliate of Block, or a fiduciary within the meaning of the
Employee Retirement Security Act of 1974, as amended, with respect to any
employee benefit plan of Block, H&R Block, Inc., or any other affiliate of
Block.
17. Return of and Use of Block Property; Consideration. Wenich will return to
Block by August 31, 2000, any and all things in his possession or control
relating to Block and its affiliates, including but not limited to any equipment
issued to Wenich for his use offsite, all correspondence, reports, contracts,
financial or budget information, personnel files, office keys, manuals, and all
similar materials not specifically listed herein. Wenich will sign such officer
resignations, assignments and instruments and give such other cooperation, as
reasonably requested by Block or any Block affiliate and are consistent with the
intent of this Agreement.
18. Non-disclosure. Wenich will not disclose the terms of this Agreement to any
person or entity except to members of his immediate family and professional
advisors whom he agrees to advise of this confidentiality provision, and to the
extent required by a final court order, other compulsory process or other law.
Block, its parent and other affiliates and their officers agree not to disclose
the terms of this Agreement to any person or entity, except to its senior
management, personnel responsible for implementation of the provisions herein
relating to payroll and employment benefits, and professional advisors, with
whom it agrees to advise of this confidentiality provision, and to the extent
required by a final court order or other compulsory process, Securities and
Exchange Commission disclosure regulation, or other law.
19. Access to Company Communication Systems. During the period February 21,
2000, through the Employment Termination Date, Wenich will have reasonable
access at reasonable times to Block electronic mail and telephone voice mail
systems; however, during this period Wenich will immediately forward all
business related communications received on such systems to the Company for
appropriate processing.
20. Assignment. The rights and obligations of Block under this Agreement will
inure to the benefit of and will be binding upon the successors and assigns of
Block. Wenich will not assign this Agreement or any rights under this Agreement.
21. Entire Agreement. This Agreement expresses fully the understandings and
agreements by and between the Parties hereto, and all prior understandings,
agreements or commitments of any kind, oral or written, as to any matter covered
by this Agreement are hereby superseded and cancelled (except to the extent they
relate to employee benefits and are not inconsistent with the terms hereof),
with no further
7
<PAGE> 8
liabilities or obligations of the Parties with respect thereto except as to any
monies due and unpaid between the Parties on the date hereof.
22. Severability. It is expressly understood to be the intent of the Parties,
and mutually agreed, that the terms and provisions of this Agreement are
severable and, if for any reason any of the terms and provisions of this
Agreement are declared unenforceable, void, voidable or otherwise invalid, the
remaining terms and provisions all remain valid and enforceable as written.
23. Governing Law. It is agreed that this Agreement will be governed by,
construed and enforced in accordance with the laws (excluding conflicts rules)
of the State of Missouri.
24. Amendment. This Agreement may be amended at any time and from time to time,
but only by a written instrument duly authorized and executed by Block and
Wenich.
25. Waiver. The failure of either party to insist upon the performance of any
of the terms and conditions of this Agreement, or the waiver of any breach of
any of the terms and conditions of this Agreement will not be construed as
hereafter waiving any such terms and conditions, but the same will continue and
remain in force and effect as if no such forbearance or waiver occurred.
26. Notice. Any notices required or permitted by this Agreement must be in
writing to be effective, and shall be deemed made or given, if by certified or
registered mail, return receipt requested, three days after depositing such
notice in the United States mails, postage prepaid, addressed to the receiving
party or, if by hand delivery, when delivered personally to Wenich or to the
below-named representative of Block, as the case may be (with a copy
simultaneously mailed or delivered to the person identified below as the person
to whom copies are to be mailed or delivered) as follows:
If to Wenich:
To: Ozzie Wenich
3717 Marion Court
Independence, MO 64055
If to Block:
To: HRB Management, Inc.
Attention: President
4400 Main Street
Kansas City, MO 64111
8
<PAGE> 9
with a copy to:
James H. Ingraham, Esq.
H&R Block, Inc.
4400 Main Street
Kansas City, MO 64111
27. Paragraph Headings. Paragraph headings contained in this Agreement are for
convenience only and will not in any manner be construed as a part of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement effective as
of the day and year first above written, but, in the case of Wenich, on the
signing Date specified beneath his signature below.
HRB MANAGEMENT, INC.
/s/ Frank L. Salizzoni /s/ Ozzie Wenich
- ------------------------------------- --------------------------------------
Frank Salizzoni Ozzie Wenich
Chief Executive Officer
3-7-2000
--------------------------------------
Signing Date
9
<PAGE> 10
EXHIBIT A
Positions and Offices held by Ozzie Wenich
As of February 21, 2000
1. H&R BLOCK, INC., a Missouri corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
2. BLOCK INVESTMENT CORPORATION, a Delaware corporation
Ozzie Wenich Senior Vice President
3. HRB MANAGEMENT, INC., a Missouri corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
4. H&R BLOCK CANADA, INC., a corporation incorporated in Canada under the
Canada Business Corporations Act
Ozzie Wenich Chief Financial Officer
5. H&R BLOCK (NOVA SCOTIA), INCORPORATED, a Nova Scotia corporation
Ozzie Wenich Director and President
6. CASHPLAN SYSTEMS, INC., a British Columbia corporation
Ozzie Wenich Chief Financial Officer
7. BLOCK FINANCIAL CORPORATION, a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
8. FRANCHISE PARTNER, INC., a Nevada corporation
Ozzie Wenich President
9. H&R BLOCK FINANCIAL ADVISORS, INC., a Delaware corporation
Ozzie Wenich Senior Vice President, Chief Financial Officer
and Treasurer
10. H&R BLOCK INSURANCE SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President, Chief Financial Officer
and Treasurer
11. HRB BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Director, Senior Vice President and Chief
Financial Officer
12. C.W. AMOS BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
10
<PAGE> 11
13. DMJK BUSINESS SERVICES, INC., a Missouri corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
14. FERS BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
15. BLOCK HOLDINGS, INC., an Illinois corporation
Ozzie Wenich Senior Vice President, Chief Financial Officer
and Treasurer
16. FERS PERSONAL FINANCIAL SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President, Chief Financial Officer
and Treasurer
17. PRACTICE DEVELOPMENT INSTITUTE, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
18. FM BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
19. FREED MAXICK ABL SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
20. KSM BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
21. RP BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
22. RSM MCGLADREY, INC., a Delaware corporation
Ozzie Wenich Senior Vice President, Chief Financial Officer
and Treasurer
23. WS BUSINESS SERVICES, INC., a Delaware corporation
Ozzie Wenich Senior Vice President and Chief Financial Officer
24. COMPANION INSURANCE, LTD., a Bermuda corporation
Ozzie Wenich Director and Senior Vice President
25. H&R BLOCK TAX AND FINANCIAL SERVICES LIMITED, a United Kingdom corporation
Ozzie Wenich Director
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>7
<FILENAME>ex12.txt
<DESCRIPTION>COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
H&R BLOCK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS)
EXHIBIT 12
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Pretax income from continuing operations (a) $ 412,266 $ 383,541 $ 296,433 $ 232,083 $ 200,006
========= ========= ========= ========= =========
FIXED CHARGES:
Interest expense 153,500 69,338 38,899 608 -
Interest portion of net rent expense (b) 45,274 33,218 28,248 25,998 21,781
--------- --------- --------- --------- ---------
Total fixed charges 198,774 102,556 67,147 26,606 21,781
--------- --------- --------- --------- ---------
Earnings before income taxes and fixed charges $ 611,040 $ 486,097 $ 363,580 $ 258,689 $ 221,787
========= ========= ========= ========= =========
Ratio of earnings to fixed charges (c) 3.1 4.7 5.4 9.7 10.2
========= ========= ========= ========= =========
</TABLE>
(a) Pretax income from continuing operations is shown with CompuServe
Corporation and the Credit Card Segment as Discontinued Operations for
all years presented.
(b) One-third of net rent expense is the portion deemed representative of
the interest factor.
(c) The decrease in the ratio of earnings to fixed charges in 1998 is
primarily attributable to the acquisition of Option One Mortgage
Corporation on June 17, 1997. Without the interest expense incurred on
the long-term debt issued to acquire Option One and the interest
expense on mortgage loan borrowings the ratio of earnings to fixed
charges would have been 10.0.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>8
<FILENAME>ex13.txt
<DESCRIPTION>PORITONS OF ANNUAL REPORT INCORPORATED BY REF.
<TEXT>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
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 Financial Corporation ("OLDE"),
parent of OLDE Discount Corporation, a leading discount broker in the United
States. OLDE Discount Corporation 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. 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, Inc.
("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 Business services
segment, new last year, which is primarily engaged in providing accounting, tax
and consulting services to business clients, and tax, estate planning and
financial planning services to individuals. The purchase 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. 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. During the year, the
Company also acquired several accounting firms with total purchase prices
aggregating $18.5 million. The acquisitions were all accounted for as purchases,
and accordingly, results for each acquisition are included since the date of
acquisition.
SIGNIFICANT EVENTS IN FISCAL 1999
On January 29, 1999, the Company completed the sale of its credit card
portfolio. The Company recorded a $20.9 million loss, net of taxes, on the
transaction. The consolidated statements of earnings for all periods presented
reflect the Company's Credit card operations segment as discontinued operations.
During fiscal year 1999, the Company acquired six regional accounting firms
and several smaller market firms, which are included in the Business services
segment. The initial purchase prices aggregated $102.3 million. Each acquisition
was accounted for as a purchase, and accordingly, results for each acquisition
are included since the date of acquisition.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 ("SFAS 133"),
effective for the Company's fiscal year ending April 30, 2001. However, in June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the
effective date of SFAS 133, which will now be effective for the Company's fiscal
year ending April 30, 2002. SFAS 133 requires companies to record derivative
instruments as assets or liabilities, measured at fair value. The recognition of
gains or losses resulting from changes in the values of those derivative
instruments is based on the use of each derivative instrument and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company does not anticipate that the
implementation of SFAS 133 will have a material impact on the consolidated
financial statements.
In March 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") was issued and is
effective July 1, 2000. FIN 44 clarifies the application of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
with respect to the definition of an employee, the criteria for noncompensatory
plans, the consequences of modifying previous awards and the exchange of stock
compensation awards in business combinations. The Company has not yet determined
the effect of FIN 44 on the consolidated financial statements.
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 effective date of SAB 101 was delayed and SAB 101 will be effective for the
Company in the fourth quarter of fiscal year 2001. The Company is reviewing the
requirements of SAB 101 and currently believes that its revenue recognition
policy is consistent with the guidance of SAB 101.
2000 COMPARED TO 1999
CONSOLIDATED RESULTS
Revenues increased 49.1% to $2.5 billion compared to $1.6 billion last year. 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 last year. Diluted net earnings per
share from continuing operations increased to $2.55 from $2.36 last year.
Earnings from continuing operations before interest (including interest expense
on acquisition debt, investment income and interest allocated to operating
business units), taxes, depreciation and amortization (EBITDA) increased 36.3%
to $598.0 million from $438.8 million last year.
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.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in the United States. Tax-related
service revenue includes fees from company-owned tax offices and royalties from
franchised offices. This segment also purchases participation interests in
refund anticipation loans made by a third-party
17
<PAGE> 2
lending institution which are offered to tax clients; provides tax preparation
and other personal productivity software to the general public; and provides
online tax preparation and other services to the general public through the
hrblock.com Web site.
Revenues increased 13.7% to $1.4 billion from $1.3 billion last year.
Combined tax preparation and electronic filing fees generated from clients
visiting a tax office increased $138.1 million, or 13.8%, due to pricing
increases and a 2.2% increase in clients served in company-owned offices. Fees
associated with participation interests in refund anticipation loans ("RALs")
decreased 0.4% to $89.8 million due to lower pricing as a result of the Internal
Revenue Service reinstatement 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 11.6% to $127.4 million due to pricing increases and a 2.6% increase
in clients served by franchises. Revenues from software and online tax services
increased $7.2 million, or 21.5%, due to an increase in electronic filing fees
generated through the clients' use of the Company's tax preparation software and
online filing through the Web site, 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
last year. 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 last year.
INTERNATIONAL TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing
and related services to the general public in Canada, Australia and the United
Kingdom. Tax-related service revenue includes fees from company-owned tax
offices and royalties from franchised offices.
Revenues increased 9.1% to $81.5 million from $74.7 million last year.
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% last year. The increase in
revenues and pretax earnings is due to better results in Australia and Canada.
EBITDA was $10.4 million, up from $8.3 million in 1999.
Australia's revenues increased 20.9% to $17.6 million from $14.5 million
last year. 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
pretax margins to 18.1% from 15.6% last year.
Canada's revenues increased 4.4% to $61.1 million from $58.5 million in
1999. Pretax earnings increased 26.0% to $3.0 million from $2.4 million last
year. 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 last year. Pretax losses decreased 23.5% to $2.0 million from $2.6
million last year. The improved results were primarily due to a March 1999
acquisition and increased revenue in existing tax offices, leveraged over
certain fixed costs.
FINANCIAL SERVICES
In the second quarter of fiscal year 2000, management redefined its Mortgage
operations segment to reflect a change in how the business is analyzed and
evaluated. The redefined segment, Financial services, includes all of the
Company's previous mortgage activity along with the start up of financial
services operations. The Financial services segment is engaged in the
origination, purchase, servicing, securitization and sale of nonconforming and
conforming mortgage loans, as well as offering full-service investment
opportunities to the general public in the United States. Mortgage origination
services are offered through a network of mortgage brokers in 48 states, through
18 H&R Block Financial Centers and through H&R Block Mortgage Corporation retail
offices in 48 states. Financial planning and investment advice are offered
through 93 H&R Block Financial Centers and 105 OLDE offices, and stocks, bonds,
mutual funds and other products and securities are offered through a nationwide
network of approximately 1,700 registered representatives.
Revenues increased 140.0% to $623.8 million from $259.9 million in 1999.
Pretax earnings increased 112.3% to $129.8 million from $61.1 million last year.
The increase in both revenues and pretax earnings is primarily due to the first
time inclusion of OLDE's financial results for the five months ended April 30,
2000, as well as favorable results from mortgage operations. EBITDA increased to
$175.8 million from $77.1 million in 1999.
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.
Option One reported revenues of $322.0 million, up 45.3% from $221.6
million last 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 last year, and sold or securitized $6.1 billion of
loans, up 73.7% from $3.5 billion last year. 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.
BUSINESS SERVICES
This segment is primarily engaged in providing accounting, tax and consulting
services to business clients and tax, estate planning and financial planning
services to individuals. Services are provided through 100 offices located
throughout the United States.
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 in fiscal 2000 of RSM McGladrey financial results for the nine months
ended April 30, 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.
INVESTMENT INCOME, NET
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
18
<PAGE> 3
investment due to business acquisitions and share repurchases throughout fiscal
2000. Intercompany interest increased $4.3 million to $9.2 million due to higher
funding required for the operating activities of the Financial services segment.
UNALLOCATED CORPORATE AND OTHER
The unallocated corporate pretax loss increased to $20.9 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.
INCOME TAX EXPENSE
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.
1999 COMPARED TO 1998
CONSOLIDATED RESULTS
Revenues increased 29.5% to $1.6 billion compared to $1.3 billion in 1998. Net
earnings from continuing operations increased 29.4% to $237.8 million from
$183.8 million in the prior year. Basic net earnings per share from continuing
operations increased to $2.38 from $1.75 in the prior year. Diluted net earnings
per share from continuing operations increased to $2.36 compared to $1.71 in
1998. The net effect of the share repurchase program in 1999 was to increase
earnings per share approximately $.05.
Additional information on each of the Company's reportable operating
segments follows.
U.S. TAX OPERATIONS
Revenues increased 20.1% to $1.3 billion from $1.0 billion in 1998. Combined tax
preparation and electronic filing fees increased $147.5 million, or 17.3%, due
to a 4.5% increase in the number of clients served, higher fees due to
complexity and price increases. Fees associated with participation interests in
RALs increased 69.1% over 1998 to $90.2 million reflecting a 40.4% increase in
the number of RAL participations over 1998 due to the increase in the Company's
participation percentage to 49.9% from 40% in 1998. Royalties increased by $12.0
million, or 11.7%, reflecting an increase in the number of clients served by
franchises as well as increases in pricing. Software revenues increased $14.2
million, or 74.0%, as a result of increased market penetration.
Operating earnings increased 24.5% to $314.1 million from $252.2 million in
1998. The pretax margin increased to 25.0% from 24.1%. The improved margin
resulted from higher revenues spread over a significant portion of fixed
operating expenses, such as occupancy expenses, a lower bad debt rate associated
with the RAL program and improved results from software sales.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 8.6% to $74.7 million from $81.8 million in 1998. Pretax
earnings declined 78.9% to $2.5 million from $11.9 million in the prior year,
and the pretax margin decreased to 3.4% from 14.6% in the prior year. The
downturn in both revenues and pretax earnings is due to disappointing results
from Canada.
As compared to 1998, Canada's revenues declined 9.6% to $58.5 million and
pretax earnings declined 77.6% to $2.4 million. Results were affected by several
factors. The number of customers served in company-owned offices declined 6.1%,
resulting in the revenue decline. The Canadian government's expanded efforts to
provide free assistance to low-income Canadians contributed to the decrease in
clients served. In addition, operating expenses, such as depreciation,
advertising and rent, increased significantly due to continued office expansion.
A weaker Australian dollar also affected international results when
translated into U.S. currency. In U.S. dollars, Australia's revenues declined
7.4% to $14.5 million and pretax earnings increased 1.7% to $2.3 million.
However, in Australian dollars, pretax earnings increased 33.2% to $4.0 million,
while revenues were up 11.6% to $24.2 million. The increase in Australian dollar
revenues and pretax earnings is due to a 5.2% increase in clients served.
In the United Kingdom, the cost of operating 20 company-owned offices for a
full year compared with a partial year in 1998 resulted in a pretax loss of $2.6
million, up 62.8% from the prior year. The Company is continuing its efforts to
build a customer base in the U.K.
FINANCIAL SERVICES
In 1999, this segment was defined as Mortgage operations. In fiscal 2000 it was
redefined, as previously discussed. Revenues increased 91.4% over 1998 to $259.9
million. Pretax earnings increased 109.4% to $61.1 million from $29.2 million in
1998. The increase in both revenues and pretax earnings is largely due to Option
One, which reported revenues of $221.6 million and pretax earnings of $63.4
million. Option One originated $3.6 billion of loans in fiscal 1999, up 74.8%
from 1998. At April 30, 1999, Option One's servicing portfolio was 65,300 loans
totaling $6.5 billion.
BUSINESS SERVICES
A new segment in 1999, Business services reported revenues of $47.3 million and
pretax earnings of $7.1 million. During fiscal year 1999, six regional
accounting firms and several smaller market firms were acquired.
INVESTMENT INCOME, NET
Net investment income increased 25.9% to $32.2 million from $25.6 million in
1998, primarily as a result of an increase in the amount of cash available for
investment throughout fiscal 1999.
UNALLOCATED CORPORATE AND OTHER
The unallocated corporate and administrative pretax loss, including intercompany
interest, increased to $15.8 million from $8.8 million in the prior year,
largely due to increased charitable contributions, increased wages and employee
benefits, and lower earnings from the Company's captive insurance subsidiary.
Interest expense on long-term debt increased 29.3% to $17.8 million, reflecting
twelve months of expense in fiscal 1999 versus ten months in fiscal 1998.
INCOME TAX EXPENSE
The effective tax rate in fiscal 1999 of 38.0% remained unchanged from 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities, excluding trading securities, were $573.3
million at April 30, 2000, compared to $420.6 million at the end of 1999.
Working capital decreased to $343.1 million at April 30, 2000 from $533.6
million last year and the working capital ratio declined to
19
<PAGE> 4
1.10 to 1 from 1.96 to 1 last year. The decline in working capital primarily
resulted from an increase in short-term borrowings related to the OLDE
acquisition.
The Company maintains lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
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, 2000 and 1999 include amounts due from Revenue Canada of $17.1 million and
$11.3 million, respectively.
The Company incurs short-term borrowings throughout the year to fund
receivables associated with its mortgage loans and other financial services
programs, and generated by the Business services segment. The Company also used
short-term borrowings in January through April to purchase a participation
interest ranging from 25% to 49.9% in certain RALs through its agreement with
Household Bank. These short-term borrowings in the U.S. are supported by a $1.89
billion back-up credit facility through November 2000, subject to renewal.
Short-term borrowings at April 30, 2000 totaled $283.8 million, up from $71.9
million last year. In addition to mortgage loans, the borrowings at year-end
primarily relate to a portion of the financing for the OLDE acquisition. The
OLDE acquisition was initially funded through short-term borrowings, a portion
of which were subsequently paid down through the issuance of Senior Notes.
Historically, short-term borrowings primarily represented funding of
mortgage loans. In April 2000, the Company entered into off-balance sheet
financing arrangements and whole-loan sale arrangements for Option One. This
financing lowered short-term borrowings by approximately $1.2 billion and
included a $1.0 billion loan securitization, of which $780 million was delivered
in April, and the transfer of $424 million of loans to an unconsolidated special
purpose entity.
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, 2000 was comprised of the $750 million of
Senior Notes described above, future payments related to the acquisitions of RSM
McGladrey and other accounting firms and capital lease obligations. The current
portion of long-term debt was $68.0 million, up from $4.7 million last year, and
represents payments to be made during fiscal 2001 for accounting firm
acquisitions and capital lease obligations. Stockholders' equity at April 30,
2000 and 1999 was $1.2 billion and $1.1 billion, respectively. The Company's
debt to equity ratio at April 30, 2000 was 1 to 1, compared with .3 to 1 last
year.
Utilizing the U.S. commercial paper program and off-balance sheet financing
arrangements described above, the Company originates and purchases mortgage
loans. As part of its risk management strategy prior to securitization or sale,
the Company may choose to hedge its interest rate risk related to its fixed rate
mortgage portfolio by selling short FNMA mortgage-backed securities and
utilizing forward loan sale commitments. The Company purchases these financial
instruments from certain broker-dealer counterparties. The Company's policy is
to utilize such financial instruments only for the purpose of offsetting or
reducing the risk of loss associated with a defined or quantified exposure. As a
matter of practice, the Company limits the counterparties to major banks and
financial institutions.
Management anticipates a higher level of capital expenditures in 2001,
exclusive of acquisitions, than in fiscal 2000. Capital expenditures are
expected to increase largely due to the full-year effect of significant
acquisitions during fiscal 2000, along with deployment of the Company's business
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.
The Company announced in March 2000 its intention to repurchase from time
to time up to 12 million of its shares on the open market. At April 30, 2000,
415.5 thousand shares had been repurchased under this authorization. The Company
intends 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,
availability of excess cash, the ability to maintain financial flexibility,
securities laws restrictions and other investment opportunities available.
OTHER ISSUES
The Notes to Consolidated Financial Statements, as well as other information
contained in this Annual Report to Shareholders may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such statements are based
upon current information, expectations, estimates and projections regarding the
Company, the industry and the markets in which the Company operates and
management's assumptions and beliefs relating thereto. Words such as "will,"
"expect," "intend," "plan," "wish," "estimate," "approximate," and variations
thereof and similar expressions are intended to identify such forward-looking
statements. These statements speak only as of the date on which they are made,
are not guarantees of future performance, and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results could materially differ from what is expressed, implied or
forecast in such forward-looking statements. Such differences could be caused by
a number of factors including, but not limited to, the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
government and self-regulatory authorities and their impact on the lines of
business in which the Company's subsidiaries are involved; unforeseen compliance
costs; changes in economic, political or regulatory environments; changes in
competition and the effects of such changes; the 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; litigation involving the Company; and risks
described from time to time in reports and registration statements filed by the
Company and its subsidiaries with the Securities and Exchange Commission.
Readers should take these factors 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.
20
<PAGE> 5
CONSOLIDATED STATEMENTS OF EARNINGS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Service revenues $1,924,911 $1,324,494 $1,047,181
Product sales 271,896 174,124 103,717
Royalties 137,162 123,201 111,142
Other 117,974 22,846 7,941
---------- ---------- ----------
2,451,943 1,644,665 1,269,981
---------- ---------- ----------
EXPENSES:
Employee compensation and benefits 963,536 610,866 483,951
Occupancy and equipment 253,171 182,701 157,995
Interest 153,500 69,338 38,899
Depreciation and amortization 147,218 74,605 54,972
Marketing and advertising 140,683 90,056 71,594
Supplies, freight and postage 64,599 57,157 51,705
Bad debt 51,719 71,662 53,736
Other 273,902 133,206 85,612
---------- ---------- ----------
2,048,328 1,289,591 998,464
---------- ---------- ----------
Operating earnings 403,615 355,074 271,517
OTHER INCOME:
Investment income, net 8,313 32,234 25,596
Other, net 338 (3,767) (680)
---------- ---------- ----------
8,651 28,467 24,916
---------- ---------- ----------
Earnings from continuing operations before income taxes 412,266 383,541 296,433
Taxes on earnings 160,371 145,746 112,645
---------- ---------- ----------
NET EARNINGS FROM CONTINUING OPERATIONS 251,895 237,795 183,788
Net loss from discontinued operations (less applicable
income tax benefit of ($953) and ($13,183)) - (1,490) (23,525)
Net gain (loss) on sale of discontinued operations (less
applicable income taxes (benefit) of ($13,387) and
$251,701) - (20,939) 231,867
---------- ---------- ----------
NET EARNINGS $ 251,895 $ 215,366 $ 392,130
========== ========== ==========
BASIC NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 2.57 $ 2.38 $ 1.75
Net earnings (loss) from discontinued operations - (.22) 1.99
---------- ---------- ----------
Net earnings $ 2.57 $ 2.16 $ 3.74
========== ========== ==========
DILUTED NET EARNINGS PER SHARE:
Net earnings from continuing operations $ 2.55 $ 2.36 $ 1.71
Net earnings (loss) from discontinued operations - (.22) 1.94
---------- ---------- ----------
Net earnings $ 2.55 $ 2.14 $ 3.65
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
April 30 2000 1999
- ---------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 379,901 $ 193,240
Marketable securities - available-for-sale 16,966 56,881
Marketable securities - trading 45,403 -
Receivables from customers, brokers, dealers and clearing organizations,
less allowance for doubtful accounts of $759 2,857,379 -
Receivables, less allowance for doubtful accounts of $49,602 and $61,872 434,722 743,301
Prepaid expenses and other current assets 129,172 94,000
------------ ------------
Total current assets 3,863,543 1,087,422
INVESTMENTS AND OTHER ASSETS:
Investments in available-for-sale marketable securities 176,395 170,528
Excess of cost over fair value of net tangible assets acquired,
less accumulated amortization of $130,305 and $64,414 1,095,074 405,534
Other 303,672 132,470
------------ ------------
1,575,141 708,532
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $214,145 and $193,549 260,666 114,222
------------ ------------
$ 5,699,350 $ 1,910,176
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 283,797 $ 71,939
Accounts payable to customers, brokers and dealers 2,570,200 -
Accounts payable, accrued expenses and deposits 222,362 163,911
Accrued salaries, wages and payroll taxes 173,333 161,590
Accrued taxes on earnings 202,779 151,659
Current portion of long-term debt 67,978 4,730
------------ ------------
Total current liabilities 3,520,449 553,829
LONG-TERM DEBT 872,396 249,725
OTHER NONCURRENT LIABILITIES 87,916 44,635
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share,
authorized 400,000,000 shares 1,089 1,089
Convertible preferred stock, no par, stated
value $.01 per share, authorized 500,000 shares - -
Additional paid-in capital 420,594 420,658
Accumulated other comprehensive income (loss) (26,241) (23,400)
Retained earnings 1,277,324 1,130,909
------------ ------------
1,672,766 1,529,256
Less cost of common stock in treasury 454,177 467,269
------------ ------------
1,218,589 1,061,987
------------ ------------
$ 5,699,350 $ 1,910,176
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 251,895 $ 215,366 $ 392,130
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 147,218 74,605 54,972
Provision for bad debt 51,719 71,662 53,736
Accretion of acquisition liabilities 10,641 - -
Provision for deferred taxes on earnings (15,767) 1,739 (15,639)
Net (gain) loss on sales of operating units 14,501 20,939 (231,867)
Net gain on sales of available-for-sale securities (11,697) (4,124) (1,720)
Changes in assets and liabilities, net of acquisitions:
Receivables from customers, brokers, dealers and clearing organizations (893,435) - -
Receivables (409,690) 112,073 (98,463)
Mortgage loans held for sale:
Originations and purchases (5,967,895) (4,290,207) (2,330,349)
Sales and principal repayments 6,442,094 4,201,187 2,443,725
Marketable securities - trading 6,899 - -
Prepaid expenses and other current assets (34,117) (27,952) (27,618)
Accounts payable to customers, brokers and dealers 868,012 - -
Accounts payable, accrued expenses and deposits 3,732 46,029 (82,469)
Accrued salaries, wages and payroll taxes 13,683 55,178 (10,965)
Accrued taxes on earnings 54,797 (260,458) 28,118
Other, net (27,314) 16,757 21,609
------------ ----------- -----------
Net cash provided by operating activities 505,276 232,794 195,200
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (14,281) (251,627) (882,378)
Maturities of available-for-sale securities 57,416 211,239 38,961
Sales of available-for-sale securities 211,836 522,252 1,321,716
Purchases of property and equipment, net (113,032) (78,823) (46,326)
Payments made for business acquisitions, net of cash acquired (971,802) (123,657) (265,683)
Other, net (42,918) (28,441) (41,508)
------------ ----------- -----------
Net cash provided by (used in) investing activities (872,781) 250,943 124,782
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (50,800,661) (17,276,595) (11,090,798)
Proceeds from issuance of notes payable 51,012,519 16,593,978 11,008,018
Proceeds from issuance of long-term debt 495,800 - 249,650
Dividends paid (105,480) (95,004) (83,635)
Payments to acquire treasury shares (50,654) (492,945) (18,351)
Proceeds from stock options exercised 36,958 79,961 58,881
Other, net (34,316) (748) 30
------------ ----------- -----------
Net cash provided by (used in) financing activities 554,166 (1,191,353) 123,795
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 186,661 (707,616) 443,777
Cash and cash equivalents at beginning of the year 193,240 900,856 457,079
------------ ----------- -----------
Cash and cash equivalents at end of the year $ 379,901 $ 193,240 $ 900,856
============ =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 122,447 $ 394,273 $ 102,396
------------ ----------- -----------
Interest paid 141,577 71,431 50,302
------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Convertible Additional Other
Common Stock Preferred Stock Paid-in Retained Treasury Stock Comprehensive Total
------------ --------------- --------------------
Shares Amount Shares Amount Capital Earnings Shares Amount Income (loss) Equity
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at May 1, 1997 108,973 $ 1,089 407 $ 4 $ 502,308 $ 702,098 (4,905) $ (188,375) $ (18,027) $ 999,097
Net earnings for the year - - - - - 392,130 - - - -
Unrealized loss on translation - - - - - - - - (5,290) -
Change in net unrealized gain
on marketable securities - - - - - - - - (1,200) -
Comprehensive income - - - - - - - - - 385,640
Stock options exercised - - 32 - (1,832) - 1,578 60,882 - 59,050
Conversion of Convertible
Preferred Stock - - (436) (4) (68,018) - 1,744 68,022 - -
Cancellation of Convertible
Preferred Stock - - (1) - (123) (46) - - - (169)
Acquisition of treasury shares - - - - - - (409) (18,351) - (18,351)
Cash dividends paid-
$.80 per share - - - - - (83,635) - - - (83,635)
------------------------------------------------------------------------------------------------------
Balances at April 30, 1998 108,973 1,089 2 - 432,335 1,010,547 (1,992) (77,822) (24,517) 1,341,632
Net earnings for the year - - - - - 215,366 - - - -
Unrealized loss on translation - - - - - - - - (1,525) -
Change in net unrealized gain
on marketable securities - - - - - - - - 2,642 -
Comprehensive income - - - - - - - - 216,483
Stock options exercised - - - - (12,042) - 2,175 90,462 - 78,420
Restricted stock granted - - - - (81) - 37 1,544 - 1,463
Stock issued for acquisition - - - - 807 - 268 11,053 - 11,860
Conversion of Convertible
Preferred Stock - - (2) - (361) - 11 439 - 78
Acquisition of treasury shares - - - - - - (11,843) (492,945) - (492,945)
Cash dividends paid -
$.95 per share - - - - - (95,004) - - - (95,004)
------------------------------------------------------------------------------------------------------
Balances at April 30, 1999 108,973 1,089 - - 420,658 1,130,909 (11,344) (467,269) (23,400) 1,061,987
Net earnings for the year - - - - - 251,895 - - - -
Unrealized loss on translation - - - - - - - - (2,647) -
Change in net unrealized gain
on marketable securities - - - - - - - - (194) -
Comprehensive income - - - - - - - - - 249,054
Stock options exercised - - - - (1,567) - 1,023 42,268 - 40,701
Restricted stock granted - - - - 200 - 43 1,781 - 1,981
Stock issued for acquisition - - - - 1,306 - 475 19,694 - 21,000
Conversion of Convertible
Preferred Stock - - - - (3) - 1 3 - -
Acquisition of treasury shares - - - - - - (1,136) (50,654) - (50,654)
Cash dividends paid -
$1.075 per share - - - - - (105,480) - - - (105,480)
------------------------------------------------------------------------------------------------------
Balances at April 30, 2000 108,973 $ 1,089 - $- $ 420,594 $1,277,324 (10,938) $ (454,177) $ (26,241) $1,218,589
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The operating subsidiaries of H&R Block, Inc. provide a
variety of services to the general public, principally in the United States, but
also in Canada, Australia and other foreign countries. Approximately 62% of
total revenues for the year ended April 30, 2000 were generated from tax return
preparation, electronic filing of tax returns and other tax-related services.
Certain of these subsidiaries also originate, purchase, service, sell and
securitize nonconforming and conforming mortgages, offer investment services
through broker-dealers, offer personal productivity software, purchase
participation interests in refund anticipation loans made by a third-party
lending institution, and offer accounting, tax and consulting services to
business clients.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of H&R Block, Inc. (the "Company"), all majority-owned subsidiaries
and companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise. All material intercompany transactions and
balances have been eliminated.
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, securities purchased under agreements to resell and
short-term highly liquid investments with maturities of three months or less
when purchased. For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
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 stockholders' equity.
Residual interests in securitizations of real estate mortgage investment
conduits 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 a discounted cash flow model, with unrealized gains and losses
included in other comprehensive income. The residual interests are amortized
over the estimated lives of the loans to which they relate.
The cost of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected in earnings.
MARKETABLE SECURITIES - TRADING: All marketable securities-trading 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.
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, on deposit with or
receivable 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 mortgage loans held for sale
and business services accounts receivable. 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.
25
<PAGE> 10
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 15 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 2000, 1999, or 1998.
DEPRECIATION AND AMORTIZATION: 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.
NOTES PAYABLE: The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
The weighted average interest rates of notes payable at April 30, 2000 and 1999
were 6.2% and 4.9%, respectively.
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 mortgage loans
and customer accounts. Service revenues are recorded in the period in which
service is performed. Commissions revenue is recognized on a trade-date 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. 125, "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.
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 deferred
compensation, accrued expenses, depreciation and mortgage servicing rights.
The Company has a Tax Sharing Agreement with CompuServe Corporation
("CompuServe"), pursuant to which CompuServe generally is obligated to pay the
Company (or the Company is obligated to pay CompuServe) for CompuServe's
liability (or tax benefits) related to Federal, state, and local income taxes
for any taxable period during which CompuServe was a subsidiary of the Company.
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.
HEDGING AND FORWARD COMMITMENTS: As a part of its interest rate risk
management strategy, the Company may choose to hedge its interest rate risk
related to its fixed rate mortgage portfolio and debt by selling short
securities and utilizing forward commitments. The Company classifies these
instruments as hedges of specific loan receivables or debt. The gains and losses
derived from these instruments are deferred and included in the carrying amounts
of the related hedged items and ultimately recognized in earnings.
STOCK PLANS: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), allows companies to
continue under the approach set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the provisions of SFAS 123 based on the estimated fair value
of employee stock options. Companies electing to retain the approach under APB
25 are required to disclose pro forma net earnings and net earnings per share in
the notes to the financial statements, as if they had adopted the fair value
accounting method under SFAS 123. The Company has elected to retain its current
accounting approach under APB 25.
26
<PAGE> 11
NEW ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended in
June 2000 ("SFAS 133"), effective for the Company's fiscal year ending April 30,
2001. However, in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- -- Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS
137 delays the effective date of SFAS 133, which will now be effective for the
Company's fiscal year ending April 30, 2002. SFAS 133 requires companies to
record derivative instruments as assets or liabilities, measured at fair value.
The recognition of gains or losses resulting from changes in the values of those
derivative instruments is based on the use of each derivative instrument and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. The Company does not
anticipate that the implementation of SFAS 133 will have a material impact on
the consolidated financial statements.
In March 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") was issued and is
effective July 1, 2000. FIN 44 clarifies the application of APB 25, "Accounting
for Stock Issued to Employees," with respect to the definition of an employee,
the criteria for noncompensatory plans, the consequences of modifying previous
awards and the exchange of stock compensation awards in business combinations.
The Company has not yet determined the effect of FIN 44 on the consolidated
financial statements.
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 effective date of SAB 101 was delayed and SAB 101 will be effective for the
Company in the fourth quarter of fiscal year 2001. The Company is reviewing the
requirements of SAB 101 and currently believes that its revenue recognition
policy is consistent with the guidance of SAB 101.
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):
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings from continuing operations $ 251,895 $ 237,795 $ 183,788
-----------------------------------------
Basic weighted average shares 98,033 99,761 104,829
Effect of dilutive securities:
Common and convertible preferred stock options 895 1,058 1,229
Convertible preferred stock 1 2 1,515
-----------------------------------------
Dilutive potential common shares 98,929 100,821 107,573
=========================================
Net earnings per share from continuing operations:
Basic $ 2.57 $ 2.38 $ 1.75
Diluted 2.55 2.36 1.71
-----------------------------------------
</TABLE>
Diluted net earnings per share excludes the impact of common stock options
of 3,039,195, 149,370 and 244,071 shares for 2000, 1999 and 1998, respectively,
because the options' exercise prices were greater than the average market price
of the common shares and therefore, the effect would be antidilutive.
27
<PAGE> 12
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
<TABLE>
<CAPTION>
April 30 2000 1999
- ---------------------------------------------------------------------------
<S> <C> <C>
Cash and interest-bearing deposits $ 162,363 $ 110,831
Other interest-bearing securities 183,144 2,525
Securities purchased under agreements to resell 32,000 -
Certificates of deposit 2,394 2,384
Municipal bonds - 77,500
-------------------------
$ 379,901 $ 193,240
=========================
</TABLE>
MARKETABLE SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and market value of marketable securities classified as
available-for-sale at April 30, 2000 and 1999 are summarized below:
<TABLE>
<CAPTION>
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current:
Asset-backed securities $ - $ - $ - $ - $ 45,038 $ 1 $ 28 $ 45,011
Corporate bonds - - - - 9,300 - - 9,300
Municipal bonds and notes 17,021 - 55 16,966 2,564 6 - 2,570
----------------------------------------------------------------------------------------------------
17,021 - 55 16,966 56,902 7 28 56,881
----------------------------------------------------------------------------------------------------
Noncurrent:
Residual interests 118,977 5,236 1,169 123,044 90,566 2,326 219 92,673
Municipal bonds 49,566 2 645 48,923 72,902 274 88 73,088
Common stock 4,025 571 168 4,428 2,419 2,362 14 4,767
----------------------------------------------------------------------------------------------------
172,568 5,809 1,982 176,385 165,887 4,962 321 170,528
----------------------------------------------------------------------------------------------------
$ 189,589 $ 5,809 $ 2,037 $ 193,361 $ 222,789 $ 4,969 $ 349 $ 227,409
====================================================================================================
</TABLE>
Proceeds from the sales of available-for-sale securities were $211,836,
$522,252 and $1,321,716 during 2000, 1999 and 1998, respectively. Gross realized
gains on those sales during 2000, 1999 and 1998 were $12,177, $4,711 and $1,826,
respectively; gross realized losses were $480, $587 and $106, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
2000 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.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 17,021 $ 16,966
After one year through five years 40,359 39,875
After five years through 10 years 9,207 9,048
-------------------------
$ 66,587 $ 65,889
=========================
</TABLE>
The Company securitized $3,767,010 and $2,456,910 in mortgage loans during
the years ended April 30, 2000 and 1999, resulting in residual interests with an
allocated carrying value of $245,801 and $158,485, respectively. In fiscal 2000,
the Company securitized $248,555 of these residual interests in net interest
margin transactions. The remaining residual interests from the securitizations
during fiscal year 2000 of $28,042 were treated as noncash investing activities
in the consolidated statement of cash flows for the year ended
28
<PAGE> 13
April 30, 2000. In fiscal 1999, the Company securitized $91,355 of these
residual interests in a net interest margin transaction. The remaining residual
interests from the securitizations during 1999 of $39,782 were treated as
noncash investing activities in the consolidated statement of cash flows for the
year ended April 30, 1999.
RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
April 30 2000 1999
- ------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans held for sale $ 163,033 $ 636,687
Business services accounts receivable 148,109 40,609
Participation in refund anticipation loans 47,581 51,074
Software receivables 31,721 25,484
Other 93,880 51,319
-----------------------
484,324 805,173
Allowance for doubtful accounts 49,602 61,872
-----------------------
$ 434,722 $ 743,301
=======================
</TABLE>
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:
<TABLE>
<CAPTION>
April 30 2000 1999
- ------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 636,350 $ 423,521
Customer relationships 387,775 23,486
Assembled workforce 104,044 13,765
Trade names 55,638 -
Management infrastructure 29,147 -
Noncompete agreements 12,425 9,176
-----------------------
1,225,379 469,948
Less accumulated amortization 130,305 64,414
-----------------------
$1,095,074 $ 405,534
=======================
</TABLE>
Amortization expense for 2000, 1999 and 1998 amounted to $66,346, $24,378 and
$17,334, respectively.
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
April 30 2000 1999
- ------------------------------------------------------------------------
<S> <C> <C>
Land $ 42,338 $ 3,060
Buildings 74,260 24,292
Computers and other equipment 290,386 226,388
Leasehold improvements 67,827 54,031
-----------------------
474,811 307,771
Less accumulated depreciation and amortization 214,145 193,549
-----------------------
$ 260,666 $ 114,222
=======================
</TABLE>
Depreciation and amortization expense for 2000, 1999 and 1998 amounted to
$74,866, $49,302 and $37,197, respectively.
29
<PAGE> 14
The Company has an agreement to lease real estate and buildings under a
noncancelable capital lease for the next 20 years with an option to purchase
after seven 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 has obligations related to acquisitions of accounting firms of
$169,103 and $4,730 at April 30, 2000 and 1999, 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 May 2001 to
January 2005. These payments represent additional purchase price and do not
carry an interest rate.
The Company has mortgage notes and capitalized lease obligations of $25,671
at April 30, 2000 that are collateralized by land, buildings and equipment with
a cost of $31,040 at April 30, 2000. The obligations are due at varying dates
for up to 20 years.
The aggregate payments required to retire long-term debt are $67,978,
$39,698, $38,352, $34,392, $253,572 and $506,382 in 2001, 2002, 2003, 2004, 2005
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 $896,894 and $256,750 at April 30, 2000 and 1999, 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 $39,862
and $33,628 at April 30, 2000 and 1999, respectively, to reflect the liability
under these plans. The Company purchased whole-life insurance contracts on
certain related directors and employees to recover distributions made or to be
made under the plans and has recorded the cash surrender value of the policies
in other assets. If all the assumptions regarding mortality, earnings, policy
dividends and other factors are realized, the Company will ultimately realize
its investment plus a factor for the use of its money.
In connection with the Company's acquisition of the non-attest assets of
McGladrey & Pullen, LLP ("McGladrey"), 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, 2000 is $36,128 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, 2000, the Company had 5,560,833 shares of authorized but
unissued Preferred Stock. Of the unissued shares, 600,000 shares have been
designated as Participating Preferred Stock in connection with the Company's
shareholder rights plan.
On March 8, 1995, the Board of Directors authorized the issuance of a
series of 500,000 shares of nonvoting Preferred Stock designated as Convertible
Preferred Stock, without par value. In April 1995, 401,768 shares of Convertible
Preferred Stock were issued in connection with an acquisition. In addition,
options to purchase 51,828 shares of Convertible Preferred Stock were issued as
a part of the acquisition and 37,399 shares of Convertible Preferred Stock were
issued in connection with these options. Each share of Convertible Preferred
Stock became convertible on April 5, 1998 into four shares of Common Stock of
the Company, subject to adjustment upon certain events. The holders of the
Convertible Preferred Stock are not entitled to receive dividends paid in cash,
property or securities and, in the event of any dissolution, liquidation or
winding-up of the Company, will share ratably with the holders of Common Stock
then outstanding in the assets of the Company after any distribution or payments
are made to the holders of Participating Preferred Stock or the holders of any
other class or series of stock of the Company with preference over the Common
Stock. In fiscal 2000, the Company issued 84 shares of its Common Stock upon
conversion of 21 shares of the Convertible Preferred Stock.
30
<PAGE> 15
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, 2000 and 1999, the net unrealized holding gain on
available-for-sale securities was $2,574 and $2,768, respectively, and the
foreign currency translation adjustment was $(28,815) and $(26,168),
respectively.
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 251,895 $ 215,366 $ 392,130
Unrealized gains on securities (less applicable taxes (benefit)
of ($124), $1,619 and ($736)):
Unrealized holding gains (losses) arising during period
(less applicable taxes (benefit) of $4,426, $3,186 and ($82)) 6,953 5,199 (134)
Less: Reclassification adjustment for gains included in
earnings (less applicable taxes of $4,550, $1,567 and $654) (7,147) (2,557) (1,066)
Foreign currency translation adjustments (2,647) (1,525) (5,290)
-----------------------------------------
Comprehensive income $ 249,054 $ 216,483 $ 385,640
=========================================
</TABLE>
STOCK OPTION PLANS
The Company has three stock option plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors and a plan
for eligible seasonal employees. The 1993 plan was approved by the shareholders
in September 1993 to replace the 1984 Long-Term Executive Compensation Plan,
which terminated at that time except with respect to outstanding awards
thereunder. Under the 1993 and 1989 plans, options may be granted to selected
employees and outside directors to purchase the Company's Common Stock for
periods not exceeding 10 years at a price that is not less than 100% of fair
market value on the date of the grant. The options are exercisable either
starting one year 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 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.
The 1999 Stock Option Plan for Seasonal Employees was approved by the
shareholders in September 1999 to replace the previous plan for seasonal
employees which had expired in December 1998, except for options outstanding
thereunder. These plans provided for the grant of options on June 30, 1999, 1998
and 1997 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, 2000, 1999 and 1998 under these
plans were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 5,726,494 $ 38.03 5,110,392 $ 32.71 6,217,699 $ 35.78
Options granted 5,059,802 50.16 4,127,742 42.20 3,784,925 32.28
Options exercised (1,032,251) 36.12 (2,196,673) 32.67 (1,608,233) 33.63
Options which expired (1,313,431) 46.50 (1,314,967) 39.40 (3,283,999) 37.58
Options outstanding, end of year 8,440,614 44.22 5,726,494 38.03 5,110,392 32.71
Shares exercisable, end of year 5,206,457 42.70 3,505,737 37.62 3,428,615 32.87
Shares reserved for future grants, end of year 11,037,281 2,966,135 13,159,852
--------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 16
A summary of stock options outstanding and exercisable at April 30, 2000
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$13.2813 - 21.25 15,900 1 year $ 21.25 15,900 $ 21.25
$27.50 - 33.75 1,271,038 7 years 31.26 983,649 30.97
$34.00 - 43.8125 3,299,765 5 years 41.72 2,179,932 41.47
$44.00 - 52.00 3,217,611 5 years 49.76 2,026,976 49.89
$55.0625 - 55.625 636,300 10 years 55.62 - -
----------------------------------------------------------------------------------------
8,440,614 5,206,457
========================================================================================
</TABLE>
The Company applies APB 25 in accounting for its stock option plans, under
which no compensation cost has been recognized for stock option awards. Had
compensation cost for the stock option plans been determined in accordance with
the fair value accounting method prescribed under SFAS 123, the Company's net
earnings and net earnings per share on a pro forma basis would have been as
follows:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $ 251,895 $ 215,366 $ 392,130
Pro forma 237,544 202,421 379,985
Basic net earnings per share:
As reported $ 2.57 $ 2.16 $ 3.74
Pro forma 2.42 2.03 3.62
Diluted net earnings per share:
As reported $ 2.55 $ 2.14 $ 3.65
Pro forma 2.41 2.01 3.55
----------------------------------------------
</TABLE>
For the purposes of computing the pro forma effects of stock option grants
under the fair value accounting method, the fair value of each stock option
grant was estimated on the date of the grant using the Black-Scholes option
pricing model. The weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $9.09, $5.84 and $5.91, respectively. The following
weighted-average assumptions were used for grants during the following periods:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.75% 5.41% 6.21%
Expected life 3 years 3 years 3 years
Expected volatility 30.67% 21.86% 31.99%
Dividend yield 2.20% 2.36% 2.48%
----------------------------------------------
</TABLE>
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
32
<PAGE> 17
announcement of an intent to commence, a tender offer that would result in an
Unapproved Stock Acquisition. The Company may, prior to any Unapproved Stock
Acquisition, amend the plan to lower such 15% threshold to not less than the
greater of (1) any percentage greater than the largest percentage of beneficial
ownership by any person or group of persons then known by the Company, and (2)
10% (in which case the acquisition of such lower percentage of beneficial
ownership then constitutes an Unapproved Stock Acquisition and the Rights become
exercisable). When exercisable, the registered holder of each Right may purchase
from the Company one one-hundredth of a share of a class of the Company's
Participating Preferred Stock, without par value, at a price of $215.00, subject
to adjustment. The registered holder of each Right then also has the right (the
"Subscription Right") to purchase for the exercise price of the Right, in lieu
of shares of Participating Preferred Stock, a number of shares of the Company's
Common Stock having a market value equal to twice the exercise price of the
Right. Following an Unapproved Stock Acquisition, if the Company is involved in
a merger, or 50% or more of the Company's assets or earning power are sold, the
registered holder of each Right has the right (the "Merger Right") to purchase
for the exercise price of the Right a number of shares of the common stock of
the surviving or purchasing company having a market value equal to twice the
exercise price of the Right.
After an Unapproved Stock Acquisition, but before any person or group of
persons acquires 50% or more of the outstanding shares of the Company's Common
Stock, the Board of Directors may exchange all or part of the then outstanding
and exercisable Rights for Common Stock at an exchange ratio of one share of
Common Stock per Right (the "Exchange"). Upon any such Exchange, the right of
any holder to exercise a Right terminates. Upon the occurrence of any of the
events giving rise to the exercisability of the Subscription Right or the Merger
Right or the ability of the Board of Directors to effect the Exchange, the
Rights held by the acquiring person or group under the new plan will become void
as they relate to the Subscription Right, the Merger Right or the Exchange.
The Company may redeem the Rights under the 1998 plan at a price of $.00125
per Right at any time prior to the earlier of (i) an Unapproved Stock
Acquisition, or (ii) the expiration of the rights. The Rights under the new plan
will expire on March 25, 2008, unless extended by the Board of Directors. Until
a Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including the right to vote or to receive dividends.
The issuance of the Rights alone has no dilutive effect and does not affect
reported net earnings per share.
OTHER EXPENSES
Included in other expenses are the following:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Legal and professional $ 47,934 $ 13,164 $ 5,890
Refund anticipation loan servicing fees 28,820 15,028 7,889
Travel and entertainment 26,695 15,094 11,548
Purchased services 25,245 18,653 10,460
Taxes and licenses 17,469 14,531 11,392
Loan servicing 15,821 11,158 5,851
Brokerage commissions and trading fees 15,639 3,137 39
----------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 408,024 $ 381,443 $ 285,100
Foreign 4,242 2,098 11,333
----------------------------------------------
$ 412,266 $ 383,541 $ 296,433
==============================================
</TABLE>
33
<PAGE> 18
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:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 152,570 $ 123,035 $ 107,595
State 21,492 16,128 14,402
Foreign 2,888 1,553 5,483
-------------------------------------------
176,950 140,716 127,480
-------------------------------------------
Deferred:
Federal (13,447) 5,114 (12,047)
State (1,894) 670 (1,613)
Foreign (1,238) (754) (1,175)
-------------------------------------------
(16,579) 5,030 (14,835)
-------------------------------------------
$ 160,371 $ 145,746 $ 112,645
===========================================
</TABLE>
Provision is not made for possible income taxes payable upon distribution
of unremitted earnings of foreign subsidiaries. Such unremitted earnings
aggregated $61,202 at December 31, 1999. Management believes the cost to
repatriate these earnings would not be material.
The following table reconciles the U.S. Federal income tax rate to the
Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended April 30 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
-------------------------------------------
Increases (reductions) in income taxes resulting from:
State income taxes, net of Federal income tax benefit 3.1% 2.9% 2.8%
Foreign income taxes, net of Federal income tax benefit 0.1% 0.2% .5%
Amortization of intangibles 2.6% 0.3% 0.4%
Nontaxable Federal income (0.3%) (0.7%) (0.1%)
Other (1.6%) 0.3% (0.6%)
-------------------------------------------
Effective rate 38.9% 38.0% 38.0%
===========================================
</TABLE>
34
<PAGE> 19
A summary of deferred taxes follows:
<TABLE>
<CAPTION>
April 30 2000 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Accrued expenses $ (17,729) $ (17,999)
Allowance for credit losses (8,800) (12,144)
Mark-to-market adjustments - (2,909)
-------------------------------
Current (26,529) (33,052)
-------------------------------
Deferred compensation (18,509) (14,577)
Depreciation (12,879) (5,222)
Residual interest income (6,809) -
-------------------------------
Noncurrent (38,197) (19,799)
-------------------------------
Gross deferred tax liabilities:
Mark-to-market adjustments 6,572 -
Accrued income 198 630
-------------------------------
Current 6,770 630
-------------------------------
Mortgage servicing rights 12,608 4,910
Depreciation 1,329 597
Deferred gain on sale of residual interests - 12,103
Residual interest income - 6,359
-------------------------------
Noncurrent 13,937 23,969
-------------------------------
Net deferred tax assets $ (44,019) $ (28,252)
===============================
</TABLE>
ACQUISITIONS
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. 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.
<TABLE>
<CAPTION>
Year Ended April 30 (unaudited) 2000 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
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
-------------------------------
</TABLE>
35
<PAGE> 20
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.
On June 17, 1997, the Company acquired Option One, a company primarily
engaged in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans. The cash purchase price was $218,083, consisting
of $28,083 in adjusted stockholder's equity and a premium of $190,000. In
addition, the Company made cash payments of $456,163 to Option One's former
parent to eliminate intercompany loans made to Option One to finance its
mortgage loan operations. The $456,163 payment was recorded as an intercompany
loan and was repaid to the Company by the end of June 1997 after Option One sold
the mortgage loans to a third party in the ordinary course of business. The
acquisition was accounted for as a purchase and, accordingly, Option One's
results are included since the date of acquisition. The fair value of tangible
assets acquired, including cash, and liabilities assumed was $683,777 and
$463,877, respectively. Liabilities assumed were treated as a noncash investing
activity in the consolidated statement of cash flows for the year ended April
30, 1998. The excess of cost over fair value of net tangible assets acquired was
$183,077 and is being amortized on a straight-line basis over 15 years. The
acquisition was ultimately financed with the issuance of $250,000 in Senior
Notes during the second quarter of fiscal 1998.
During fiscal 2000, 1999 and 1998, 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
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.
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.
36
<PAGE> 21
On January 31, 1998, the Company completed the sale of its 80.1% interest
in CompuServe to a subsidiary of WorldCom, Inc. ("WorldCom"). The Company
recorded a $231,867 gain, net of taxes, on the transaction. The sale was
structured as a stock-for-stock transaction in which the Company received
30,108,610 shares of WorldCom stock in exchange for its 80.1% ownership interest
(74,200,000 shares) in CompuServe stock. The Company completed the transaction
through its receipt of $1,032,699 in net proceeds from the monetization of 100%
of its WorldCom stock in a block trade on February 2, 1998. As a part of the
CompuServe transaction, the Company has agreed to indemnify WorldCom and
CompuServe against 80.1% of any losses and expenses incurred by them with
respect to litigation and claims brought against CompuServe, any of its current
or former officers, directors, employees, agents or underwriters relating to
CompuServe's initial public offering in April 1996. The shares of WorldCom stock
received in the stock-for-stock transaction were treated as a noncash investing
activity in the consolidated statement of cash flows for the year ended April
30, 1998. The consolidated financial statements for the year ended April 30,
1998 reflect CompuServe as discontinued operations.
Revenues from discontinued operations for the years ended April 30, 1999,
and 1998 were $24,143 and $665,649, respectively.
COMMITMENTS AND CONTINGENCIES
Substantially all of the operations of the Company's subsidiaries are conducted
in leased premises. Most of the operating leases are for a one-year period with
renewal options of one to three years and provide for fixed monthly rentals.
Lease commitments at April 30, 2000, for fiscal 2001, 2002, 2003, 2004 and 2005
aggregated $141,385, $106,383, $70,728, $34,627 and $12,805, respectively, with
no significant commitments extending beyond that period of time. The Company's
rent expense for the years 2000, 1999 and 1998 aggregated $135,823, $99,654 and
$84,743, 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 $546,473 and $416,323 at April 30, 2000
and 1999, 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, 2000, the Company maintained a $1,890,000 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 is responsible for servicing mortgage loans for others of
$8,733,158, subservicing loans of $2,569,332, and the master servicing of
$757,034 previously securitized mortgage loans held in trust at April 30, 2000.
Fiduciary bank accounts that are maintained on behalf of investors and for
impounded collections were $197,191 at April 30, 2000. These bank accounts are
not assets of the Company and are not reflected in the accompanying consolidated
financial statements.
As of April 30, 2000, the Company had provided clearing organizations with
bank letters of credit totaling $131,000 that satisfied margin deposit
requirements of $123,500. 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.
At April 30, 2000 the Company has provided for the pending settlement of
class action lawsuits involving refund anticipation loans. The Company has not
had any final judgments rendered against it in any of the suits filed on this
issue and, in the settlement agreement, the Company admits to no wrongdoing.
37
<PAGE> 22
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 have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits allege similar
violations of the Securities Act of 1933 based on assertions of omissions and
misstatements of fact in connection with CompuServe's public filings related to
its initial public offering in April 1996. One state lawsuit also alleges
certain oral omissions and misstatements in connection with such offering.
Relief sought in the lawsuits is unspecified, but includes pleas for rescission
and damages. One Federal lawsuit names the lead underwriters of CompuServe's
initial public offering as additional defendants and as representatives of a
defendant class consisting of all underwriters who participated in such
offering. The Federal suits were consolidated, the defendants filed a motion to
dismiss the consolidated suits, the district court stayed all proceedings
pending the outcome of the state court suits, and the United States Court of
Appeals for the Sixth Circuit affirmed such stay. The four state court lawsuits
also allege violations of various state statutes and common law of negligent
misrepresentation in addition to the 1933 Act claims. The state lawsuits were
consolidated for discovery purposes and defendants filed a motion for summary
judgment covering all four state lawsuits. As a part of the sale of its interest
in CompuServe, the Company agreed to indemnify WorldCom and CompuServe against
80.1% of any losses and expenses incurred by them with respect to these
lawsuits. The defendants are vigorously defending these lawsuits. In the opinion
of management, the ultimate resolution of these suits will not have a material
adverse impact on the Company's consolidated financial position or results of
operations.
FINANCIAL INSTRUMENTS
The Company sells short FNMA mortgage-backed securities to certain broker-dealer
counterparties. The position on certain or all of the fixed rate mortgages is
closed, on standard Public Securities Association ("PSA") settlement dates, when
the Company enters into a forward commitment to sell those mortgages or decides
to securitize the mortgages. The effectiveness of the hedge is measured by a
historical and probable future high correlation of changes in the fair value of
the hedging instruments with changes in the value of the hedged item. If
correlation ceases to exist, hedge accounting is terminated and the gains or
losses are recorded in revenues. Deferred gains on the FNMA securities hedging
instrument amounted to $135 at April 30, 2000. The contract value and market
value of this hedging instrument as of April 30, 2000 were $18,706 and $18,584,
respectively. The contract value and market value of the forward commitment as
of April 30, 2000 were $200,000 and $199,863, respectively.
The Company purchases these instruments from certain broker-dealer
counterparties. In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty. It is the Company's policy to review, as
necessary, the credit standing of each counterparty.
The Company is exposed to on-balance sheet credit risk related to its
receivables. Mortgage loans made to subprime borrowers present a higher level of
risk of default than conforming loans. These loans also involve additional
liquidity risk due to a more limited secondary market than conforming loans.
While the Company believes that the underwriting procedures and appraisal
processes it employs enable it to mitigate these risks, no assurance can be
given that such procedures or processes will be adequate protection against
these risks. The Company is exposed to off-balance sheet credit risk related to
mortgage loan receivables which the Company has committed to fund.
38
<PAGE> 23
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 2000 Quarter Ended Fiscal 1999 Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
2000 2000 1999 1999 1999 1999 1998 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,607,930 $ 512,507 $ 209,946 $ 121,560 $ 1,196,997 $ 291,482 $ 85,613 $ 70,573