UNITED STATES
FORM 10-K
(Mark One)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: April 30, 2002
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
(State or other jurisdiction of incorporation or organization) |
44-0607856
(I.R.S. Employer Identification Number) |
4400 MAIN STREET, KANSAS CITY, MISSOURI 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
Securities registered pursuant to Section 12(b) of the Act
:
(Registrants telephone number, including area code)
Title of
each class
Common Stock, without par value
Name of each exchange on which registered
New York Stock
Exchange
Pacific 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 ü 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 registrants 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. o
The aggregate market value of the registrants Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on June 1, 2002, was $8,158,956,658.
Number of shares of registrants Common Stock, without par value, outstanding on June 1, 2002: 181,289,709.
Documents Incorporated by Reference
Certain specified portions of the registrants annual report to security holders for the fiscal year ended April 30, 2002, are incorporated herein by reference in response to Part I, Item 1, and Part II, Items 5 through Item 8, and certain specified portions of the registrants definitive proxy statement filed within 120 days after April 30, 2002, 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. (the Company) is a diversified company with subsidiaries
providing tax services and financial advice, investment and mortgage products
and services and business and consulting services. In fiscal year 2002, the
Companys tax subsidiaries and their franchisees served 19.4 million taxpayers
- more than any tax or accounting firm - through its nearly 10,400 offices
located in the United States, Canada, Australia and the United Kingdom. Another
3.4 million clients utilized the award-winning tax software program, TaxCut®
from H&R Block, and the online tax preparation service. Investment services
and securities products are offered through H&R Block Financial Advisors, Inc.
(HRBFA), member NYSE, SIPC. The Company is not a registered broker-dealer.
H&R Block Mortgage Corporation (H&R Block Mortgage) and Option One Mortgage
Corporation (Option One) offer a full range of home mortgage products and
services. RSM McGladrey, Inc. (RSM) is a national accounting, tax and
consulting firm primarily serving mid-sized businesses.
The Company is a corporation that was organized in 1955 under the laws of
the State of Missouri. It is the parent corporation in a two-tier holding
company structure with H&R Block Group, Inc., a Delaware corporation, as the
second-tier holding company and the direct or indirect owner of the operating
subsidiaries that provide tax and financial products and services to the
general public principally in the United States, but also in Canada, Australia
and the United Kingdom. Approximately 58% of the total revenues of the Company
in fiscal year 2002 were generated by subsidiaries involved in tax return
preparation, electronic filing of income tax returns and other tax-related
services. The Companys subsidiaries also originate, service and sell
mortgages, offer investment advice, brokerage services and investment planning,
offer personal productivity software, participate in refund anticipation loan
products offered by a third-party lending institution, and offer accounting,
tax and consulting services to business clients.
Developments during fiscal year 2002 within U.S. tax operations,
International tax operations, Mortgage operations, Investment services and
Business services are described in the section below entitled Description of
Business.
On September 12, 2001, the Companys Board of Directors approved the
repurchase of 15 million shares of its Common Stock, without par value. Such
authorization was in addition to a 12-million share repurchase that had been
authorized in March 2000 and was
completed in September 2001. The number of shares purchased under the
September 2001 authorization will depend upon a number of factors including the
price of the stock, availability of excess cash, the ability to maintain
financial flexibility, securities laws restrictions and other capital structure
and investment considerations.
After the conclusion of the fiscal year 2002, Frank L. Salizzoni announced
that he would retire as Chairman of the Board of Directors of the Company and
as a director at the adjournment of the annual meeting of shareholders in
September 2002. The Board of Directors on June 12, 2002 approved a reduction
the size of the Board from 10 to nine directors upon Mr. Salizzonis
retirement, and announced that it would review the role of Chairman as part of
its continuing governance responsibilities and governance best practices.
Accordingly, the Board of Directors did not name a successor to Mr. Salizzoni.
During the fiscal year ended April 30, 2002, 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.
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 managements 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 that the Company will achieve or exceed its revenue,
earnings, and earnings per share growth goals or expectations for fiscal year
2003 or any other fiscal year; 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 Companys subsidiaries are involved; unforeseen
compliance costs; changes in economic, political or regulatory environments;
changes in competition and the effects of such changes; changes in management
and management strategies; the inability to successfully implement the
Companys strategies; the Companys 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 its share repurchase program; 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 (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 Companys annual report to security
holders for the fiscal year ended April 30, 2002, and is hereby incorporated by
reference.
Number of Employees
The Company itself has no employees. Its direct and indirect wholly owned
subsidiaries have approximately 10,900 regular full-time employees. The highest
number of persons employed by the
2
subsidiaries during the fiscal year ended
April 30, 2002, including seasonal employees, was approximately 99,100.
Description of Business
U.S. Tax Operations
Generally. This 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,
participates in refund anticipation loan products offered by a third-party
lending institution, offers a wide range of online tax services including
online tax preparation and electronic filing 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 tax subsidiaries of H&R Block Services, Inc. (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 and an electronic
refund advance loan 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 17,148,000 taxpayers in
the United States during fiscal year 2002, compared to 16,883,000 taxpayers
served in fiscal year 2001 and 16,933,000 taxpayers served in fiscal year 2000.
Taxpayers served includes taxpayers for whom H&R Block prepared income tax
returns (both online and in H&R Block offices) as well as taxpayers for whom
H&R Block provided only electronic filing services.
Tax Return Preparation
. During fiscal year 2002, H&R Block offices in the
United States prepared approximately 16,899,000 individual income tax returns,
compared to the preparation of 16,442,000 returns in fiscal year 2001 and 16,276,000 returns in
fiscal year 2000. These returns constituted 14.3% of an Internal Revenue
Service (IRS) estimate of total individual income tax returns filed as of
April 30, 2002, compared to 13.9% in fiscal year 2001. The following table
shows the approximate number of income tax returns prepared at H&R Block
offices during the last five fiscal years:
Fiscal Year Ended April 30
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
3
been developed so that a tax return is prepared on a computer in the presence
of the client, in most instances in less than one hour, based on information
furnished by the client. Pursuant to the one-stop service offered at
company-owned offices, the return is reviewed for accuracy and presented to the
client for signature and filing during his or her initial visit to the office.
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 IRS, is mathematically accurate. If the client
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 client.
An eligible electronic filing client may also apply for a refund
anticipation loan (RAL) at an H&R Block office. Under the 2002 RAL program,
Tax Services electronic filing clients who met certain eligibility criteria
were offered the opportunity to apply for loans from Household Bank
(Household) in amounts based upon the clients 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 banks transaction fee and
H&R Blocks tax return preparation fee (and, where
applicable, electronic filing fee and/or other fees for client-selected services), is received by the RAL client. During the
2002 tax season for the first time, certain qualifying Tax Services electronic
filing clients were eligible to receive their RAL proceeds, less applicable
fees, in approximately one hour after electronic filing under a product known
as Instant Money. The IRS then directly deposits the participating clients
actual Federal income tax refund into a designated account at the bank in order
for the loan to be repaid. 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 also offers an electronic refund service pursuant to which an
eligible electronic filing service clients income tax refund is directly
deposited into an account at a bank (Tax Services used Household in 2002)
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 banks transaction fee and H&R Blocks tax return preparation fee.
H&R Block filed approximately 14,279,000 U.S. tax returns electronically
in fiscal year 2002 compared to 13,327,000 in fiscal year 2001 and 12,592,000
in fiscal year 2000. Approximately 5,151,000 RALs were processed in fiscal year
2002 by H&R Block, compared to 4,496,000 in fiscal year 2001 and 4,814,000 in
fiscal year 2000. Approximately 1,746,000 electronic refunds were processed in
fiscal year 2002 by H&R Block, compared to 1,935,000 in fiscal year 2001 and
1,499,000 in fiscal year 2000.
In fiscal years 2002 and 2001, H&R Block offered a service to transmit
state income tax returns electronically to state tax authorities in 41 states
and the District of Columbia (compared to 39 states and the District of
Columbia in fiscal year 2000) and plans to continue to expand this program as
more states make this filing alternative available to their taxpayers.
Express IRA
. In fiscal year 2002, H&R Block expanded the availability of
the Express IRA nationwide, compared to its availability in 14 states in fiscal
year 2001. With the Express IRA product, tax preparation clients can open an
IRA with HRBFA by using all or part of their tax refund, or by writing a
personal check for the amount deposited into the IRA. The Express IRA is
invested in an FDIC-Insured money market account through Reserve Management
Corporation at an insured depository institution paying competitive money
market interest rates. Clients funded approximately 130,000 Express IRAs in
fiscal year 2002, compared to 25,000 in fiscal year 2001.
4
Employer Solutions
. Under an expanded H&R Block Employer Solutions
program for fiscal year 2002, employers throughout the United States were able
to add H&R Block income tax return preparation to their employee benefits
packages and H&R Block was able to attract new, targeted clients.
Double Check Challenge
. During the 2002 tax season, H&R Block promoted its
Double Check Challenge, encouraging taxpayers to bring previously filed returns
to H&R Block for review at no charge. An H&R Block tax professional reviewed
the returns to see if the taxpayer should file an amended return for a tax
refund that otherwise would have been lost due to overlooked credits or
deductions or other reasons.
H&R Block Guarantee and Peace of Mind Program
. If an H&R Block tax
professional makes an error in the preparation of a clients 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.
Under the Peace of Mind program, in addition to H&R Blocks standard
guarantee to pay penalties and interest attributable to errors made by an H&R
Block tax professional, H&R Block agrees to pay additional taxes owed by the
client (for which liability would not ordinarily accrue) resulting from such
errors. The Peace of Mind program has a per client cumulative limit of $4,000
($5,000 at H&R Block Premium offices) in additional taxes assessed with respect
to the Federal, state and local tax returns prepared by H&R Block for the
taxable year covered by the program. There is an additional charge for the
Peace of Mind program, except at H&R Block Premium offices.
Income Tax Courses
. H&R Block offers income tax return preparation
courses to the public that teach taxpayers how to prepare their own income tax
returns, as well as to provide H&R Block with a source of trained tax
professionals. During the 2002 fiscal year, 202,800 students enrolled in H&R
Blocks basic and advanced income tax courses in the United States, compared to
165,600 students during fiscal year 2001 and 175,200 students during fiscal
year 2000.
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. Freestanding 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 clients throughout the entire year.
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 complex returns, H&R Block Premium stresses
the convenience of appointments, year-round tax service from the same tax
professional and private office interviews. The number of H&R Block Premium
offices decreased in fiscal year 2002 to 446, compared to 484 in fiscal year
2001 and 555 in fiscal year 2000. In fiscal year 2002, the number of H&R Block
Premium clients remained consistent with fiscal year 2001 at approximately
559,000. The number of H&R Block Premium clients in fiscal year 2000 was
approximately 619,000.
In fiscal year 2002, H&R Block also operated 738 offices in department
stores in the United States, including 729 offices in Sears stores operated as
H&R Block at Sears. During the 2002 tax season, the Sears facilities
constituted approximately 8.1% percent of the tax office locations of H&R
Block. Tax Services is a party to a license agreement with Sears relating to
Tax Services operation in Sears locations throughout the United States. Such
license agreement expires on December 31, 2004,
5
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 15, 2002, there were 9,015 H&R Block offices in operation in the
United States compared to 9,072 offices in operation on April 16, 2001 and
9,210 offices in operation on April 17, 2000. Of the 9,015 offices, 5,017 were
owned and operated by Tax Services (compared to 5,060 in fiscal year 2001 and
5,162 in fiscal year 2000) and 3,998 were owned and operated by independent
franchisees (compared to 4,012 in fiscal year 2001 and 4,048 in fiscal year
2000). Of such franchised offices in fiscal year 2002, 2,700 were operated by
franchisees of Tax Services (described below), 825 were operated by major
franchisees (described below) and 473 were operated by franchisees of major
franchisees.
The Company and its subsidiaries have principally granted two types of
franchises franchises (formerly called satellite franchises) and major
franchises. Major franchisees entered into agreements with the Company
(primarily in the Companys 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.
Franchises have been granted by Tax Services in smaller localities. A
franchisee receives from Tax Services signs, designated equipment, specialized
forms, local advertising, initial training, and supervisory services and,
consequently, pays Tax Services a higher percentage of his or her gross tax
return preparation and related service revenues as a franchise royalty than do
major franchisees. Many of the franchises of Tax Services are located in cities
with populations of 15,000 or less. Some major franchisees also grant
franchises to sub-franchisees in their respective areas.
It has always been the policy of Tax Services to grant tax return
preparation franchises to qualified persons without an initial franchise fee;
however, the policy of Tax Services is to require a deposit to secure
compliance with franchise contracts.
From time to time, Tax Services has acquired the operations of existing
franchisees and other tax return preparation businesses, and it will continue
to do so if future conditions warrant such acquisitions and satisfactory terms
can be negotiated. In fiscal year 2002, Tax Services acquired five franchise
offices.
E-Commerce Initiatives. The Companys subsidiaries offer a wide range of
online services, including online tax preparation, electronic filing of tax
returns, mortgage products and brokerage services, through their web site at
www.hrblock.com
. The web site is organized into three main areas: Taxes,
Mortgages and Investments.
In the Taxes area, Block Financial Corporation (BFC) offers a
comprehensive range of tax tools, from tax advice to complete professional tax
return preparation and electronic filing. The web site provides users with the
ability to prepare their income tax returns online using the Online Tax
Program, receive tax tips and tax-related news, subscribe to a tax newsletter
and use withholding and refund calculators for tax planning. The Online Tax
Program, designed for the do-it-yourself taxpayer, enables such taxpayers with
Internet access to input their income tax return information securely online,
and have
6
the program perform all the calculations and complete the appropriate
IRS forms. The fees charged in 2002 for the online preparation and electronic
filing of the federal return were $19.95 before April 1 and $29.95 on or after
April 1. Users could also prepare online one state return for an additional
$9.95.
In addition to the Online Tax Program, several other online tax products
and services are offered: Professional Review, Professional Tax Service and Ask
a Tax Advisor. With Professional Review, taxpayers who prepare their income tax
returns using the Online Tax Program can have their self-prepared return
reviewed and signed by an H&R Block tax professional and covered by the
standard H&R Block Guarantee. The $29.95 fee charged for this service in 2002
included the review of both the federal and resident state tax returns.
Taxpayers choosing Professional Tax Service can provide their tax information
online and have an H&R Block tax professional prepare and deliver a completed
tax return to the client. The $79.95 base fee for this service in 2002 covered
the preparation and electronic filing of the taxpayers Federal income tax
return. The Ask a Tax Advisor service allows a taxpayer to obtain customized
answers to individual tax questions from an H&R Block tax advisor. Ask a Tax
Advisor is available via e-mail, live chat, or telephone. A charge of $19.95
per question was assessed to the taxpayer in fiscal year 2002.
The Taxes area also offers a program called Electronic Refund Advance
(ERA), a loan product that allows a user to have a refund anticipation loan
in an amount up to $5,000 deposited directly into his or her bank account
usually within two days after the IRS accepts the taxpayers electronically
filed return. ERA is a loan and the lending institution, Household, charged a
fee ranging from $29.95 to $89.95 for each transaction during the 2002 tax
season. Household paid BFC a license fee from $7 to $9 for each approved ERA
for the sublicense of patent rights, the license of trademarks and certain
expenses incurred in connection with the making of ERAs.
The Mortgages area enables users to obtain information about loan products
offered by H&R Block Mortgage Corporation, find an H&R Block Mortgage loan
specialist, use interactive calculators and tools to estimate the tax
implications and benefits of home ownership, refinancing or debt consolidation
and determine the best loan type for a borrowers situation, and pre-qualify
for a home purchase loan or refinancing.
The Investments area provides online investment services through HRBFA, a
registered securities broker-dealer. Users may open a variety of accounts,
obtain research, create investment plans, execute trades in a variety of securities
including stocks, fixed-income products (including bonds, certificates of
deposit, and unit investment trusts), and a variety of mutual funds, as well as
view the status of their account on-line. See Integrated Online Services
under Investment Services, below.
Software Products. BFC develops and markets the income tax preparation
software TaxCut® from H&R Block and markets Home and Business Attorney and
Kiplingers WILLPower
SM
software products.
Refund Anticipation Loan Participations. BFC is a party to a July 1996
agreement with Household to participate in RALs provided by Household to H&R
Block tax clients. 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 year 1999, the
participation interest was increased to 49.9% in company-owned RALs, and BFC
participated in 25% of major franchise RALs. BFCs purchases of the
participation interests are financed through short-term borrowings. BFC bears
all of the risks associated with its interests in the RALs. BFCs total RAL
revenue in fiscal year 2002 was
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approximately $160.0 million (compared to
revenue of $133.7 million in fiscal year 2001 and $89.8 million in fiscal year
2000).
Seasonality of Business. Since most of the clients 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 tax professionals, rental and furnishing of
tax offices, and other costs and expenses relating to preparation for the
following tax season.
BFCs income tax return preparation software, online tax service 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:
In addition, HRB Royalty, Inc., claims ownership of the following
unregistered service marks and trademarks:
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:
8
BFC also claims ownership of the following unregistered service marks and
trademarks:
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 BFCs 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 2002, 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. and
Microsoft are dominant suppliers of personal
9
financial software. Intuit, Inc.
is also H&R Blocks primary competitor in the online tax preparation market.
BFC expects increased competition in this area as more competitors enter the
online 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. In addition, the
Gramm-Leach-Bliley Act and Federal Trade Commission regulations adopted
thereunder require income tax preparers to adopt and disclose consumer privacy
policies, and provide consumers a reasonable opportunity to opt out of having
personal information disclosed to unaffiliated third parties for marketing
purposes. Some states have adopted or proposed more strict opt-in
requirements in connection with use or disclosure of consumer information.
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 governments electronic filing program for U.S.
individual income tax returns. Individuals and businesses must, upon
application, be accepted into the electronic filing program. Once accepted,
electronic filers must comply with all publications and notices of the IRS
applicable to electronic filing, provide certain information to the taxpayer,
comply with advertising standards for electronic filers, and be subjected to
possible monitoring by the IRS, penalties for disclosure or use of income tax
return preparation and other preparer penalties, and suspension from the
electronic filing program.
The Federal statutes and regulations also regulate an electronic filers
involvement in refund anticipation loans. Electronic filers must clearly
explain that the refund anticipation loan is 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, RALs and the facilitation of refund anticipation
loans has not, and will not in the future have a material adverse effect on 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.
10
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 borrowers
Federal income tax refund. The failure of the IRS to make direct deposits of
refunds may impair the lenders ability to collect a RAL and result in a loss
to BFC in connection with its purchases of participation interests in RALs and
a loss to Tax Services for tax preparation fees not collected. However, the
Company believes that Federal policies, procedures and practices relating to
direct deposits by the IRS 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 statutes or the
adoption of new regulations, policies, procedures or practices relating to
direct deposits.
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 Companys
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.
Many of H&R Blocks income tax courses are regulated and licensed in
select states. Failure to obtain a tax school license could affect the
Companys revenues and limit its ability to develop interest in tax preparation
as a career or obtain qualified tax professionals.
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 Blocks business. The
immediate result of tax law changes has been an increase in complexity. The
transition from the current system to a new, untested system is likely to take
a number of years and, under most serious tax reform proposals, Americans will
still need to file Federal and state tax returns. The Company believes that
clients 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 Companys subsidiaries over time is
uncertain, and such legislation could have a material adverse effect on the
Companys business, financial position and results of operations.
International Tax Operations
Generally
.
This operating segment provides the preparation of tax
returns, electronic filing and related services to the general public
principally in Canada, Australia and the United Kingdom. Tax preparation of
U.S. tax returns and related services are offered by franchisees in eight
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 1,376 company-owned and franchised offices in
countries outside of the United States constituted 11.9% of the total returns
prepared by H&R Block in the last fiscal year (compared to 12.2% in fiscal year
2001 and 12.3% in fiscal year 2000).
11
Canadian Operations. H&R Block Canada, Inc. (Block Canada) and its
franchisees prepared approximately 1,721,000 Canadian regular and discounted
returns filed with Revenue Canada in fiscal year 2002, compared to 1,752,000 in
fiscal year 2001 and 1,805,000 in fiscal year 2000. Block Canada and its
franchisees operated 955 offices in fiscal year 2002, as compared to 944 in
fiscal year 2001 and 966 in fiscal year 2000. Of the 955 offices in Canada, 492
were owned and operated by Block Canada and 463 were owned and operated by
franchisees. Block Canada operated 121 offices in department stores in Canada
in fiscal year 2002, including 78 offices in Sears facilities. In fiscal years
2001 and 2000, respectively, Block Canada operated 122 and 142 offices in department
stores in Canada, including, respectively, 76 and 79 offices in Sears
facilities.
Block Canada and its franchisees offer a refund discount (CashBack)
program to their customers in Canada. Canadian law specifies the procedures
which Block Canada must follow in conducting the program. In accordance with
current Canadian regulations, if a customers tax return indicates that such
customer is entitled to a tax refund, a check is issued by Block Canada to the
client 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 client assigns to Block Canada the
full amount of the tax refund to be issued by Revenue Canada. The refund check
is then sent by Revenue Canada directly to Block Canada, which then deposits
the refund check into 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 in fiscal year 2002 was approximately 525,000, compared to 532,000 in
fiscal year 2001 and 547,000 in fiscal year 2000.
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.
During fiscal year 2002, Block Canada contracted with Dr. Tax-Ufile CA,
Inc. to provide online tax preparation services under the H&R Block brand to
Canadian consumers. Users could print and mail their return, or download their
return and file electronically.
Australian Operations. The number of returns prepared by H&R Block
Limited, the Companys indirect subsidiary in Australia, and by franchisees in
Australia, increased to approximately 489,000 from 486,000 in fiscal year 2001
and 455,000 in fiscal year 2000. The number of offices operated by H&R Block in
Australia in fiscal year 2002 was 362, compared to 350 offices in fiscal year
2001 and 349 offices operated in fiscal year 2000. Of the 362 offices, 263 were
owned and operated by H&R Block Limited and 99 were franchised offices.
United Kingdom Operations. The Tax Team Limited, an indirect subsidiary
of the Company, provides tax return preparation services in the United Kingdom.
The Tax Team Limited operated 6 offices in fiscal year 2002, compared to 23
offices operated in fiscal year 2001 and 26 in fiscal year 2000.
Seasonality of Business. Revenues in this segment are seasonal in nature
with peak revenues occurring during the applicable tax season (January through
April in Canada; July through October in Australia; and August through March in
the United Kingdom).
12
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 each 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.
Mortgage Operations
Generally. Mortgage operations originate, service, 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 and have substantial equity in the property which will be used
to secure the loan. Wholesale mortgage originations are offered by Option One
Mortgage Corporation (Option One) and retail mortgage originations are
offered by H&R Block Mortgage Corporation, a wholly owned subsidiary of Option
One.
Option One Mortgage Corporation. Option One, based in Irvine, California,
has a network of more than 16,000 mortgage brokers in 49 states. Option One
originated $11.5 billion in mortgage loans in fiscal year 2002, compared to
$6.5 billion in fiscal year 2001 and $5.7 billion in fiscal year 2000. The
average Option One loan during fiscal year 2002 had a $128,200 principal
balance (compared to $108,800 in fiscal year 2001 and $106,700 in fiscal year
2000), and was secured by a first lien on a single-family residence. During
fiscal 2002, Option One sold $11.4 billion of mortgage loans, compared to $6.0
billion sold in fiscal 2001 and $6.1 billion in fiscal 2000. At the end of
fiscal year 2002, Option Ones servicing portfolio was 209,600 loans totaling
more than $23.8 billion, compared to 173,900 loans totaling $18.2 billion at
the end of fiscal 2001 and 114,300 loans totaling $11.3 billion at the end of
fiscal 2000.
Wholesale originations represented the substantial majority of Option
Ones 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 borrowers 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 Ones branch office processes
and underwrites the loan. Based upon this review, Option One advises the broker
whether the loan application meets Option Ones 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 whole loan sales to a third-party trust as a part of its
off-balance financing arrangements described below.
The Company utilizes off-balance sheet arrangements to fund its nonprime
production. Option One has arranged commitments from two banks totaling $2
billion for external warehouse financing for
13
the third-party trust for its nonprime
mortgage production during most of fiscal year 2002, and it renewed these
commitments in April 2002 for a 12-month period.
H&R Block Mortgage Corporation. H&R Block Mortgage is a retail mortgage
lender for conventional, non-conventional and government loans and is licensed
to conduct business in 50 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 2002, H&R
Block Mortgage originated retail mortgage loans from various sales channels,
including 38 branch offices in 16 states, and three regional call centers
located in Philadelphia, Pennsylvania, Tampa, Florida and Pleasanton,
California. H&R Block Mortgage had 35 branch offices in 15 states and two
regional call centers in fiscal year 2001.
H&R Block Mortgage maintains a strategic alliance with Countrywide Home
Loans, Inc. (Countrywide) to sell 90% of its qualifying conforming mortgage
loans to Countrywide. The majority of mortgage loans sold to Countrywide are
underwritten through an automated system under which H&R Block Mortgages
representations and warranties relating to compliance with Countrywides
underwriting guidelines are assumed by Countrywide. This alliance allows H&R
Block Mortgage to achieve improved execution due to price, efficiencies in
delivery, and elimination of redundancies in operations.
Service Marks and Trademarks. Option One claims ownership of the
following service marks and trademarks registered on the principal register of
the United States Patent and Trademark Office:
Competitive Conditions. Both the conventional and nonprime 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. Residential mortgage volume is subject to
seasonal trends, with real estate sales being generally lower in the first
calendar quarter of the calendar year, peaking in the spring and summer
seasons, and then declining again in November and December. Accordingly, the
revenues of the mortgage operations reporting segment are
generally higher in the peak months, but the seasonal trends do not have a
material impact on overall results of the Company.
Government Regulation. The Company believes that Federal and state
statutes and regulations, as well as county and municipal regulations and
ordinances, governing mortgage lending have not had 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 state or Federal
statutes or municipal ordinances,
14
or the adoption of new Federal, state or
county regulations, particularly with respect to the regulation of High Cost
Loans as described below.
Applicable state laws generally regulate interest rates, other than first
mortgage loans which are subject to a Federal preemption of all state usury
laws, and other charges, require certain disclosures 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.
During fiscal years 2001 and 2002, there was a noticeable increase in
state, county and municipal statutes, ordinances and regulations which prohibit
or regulate so-called Predatory Lending practices. Predatory Lending statutes
regulate High-Cost Loans which are defined separately by each state, county
or municipal statute, regulation or ordinance, but generally include mortgage
loans that have interest rates that exceed a specified margin over the Treasury
Index for a comparable maturity, or exceed a designated percentage of points
and fees. Statutes, ordinances and regulations that regulate High-Cost Loans
generally prohibit mortgage lenders from engaging in certain defined practices,
or require mortgage lenders to implement certain practices, in connection with
any mortgage loans that fit within the definition of a High-Cost Loan. For
example, many such laws and regulations prohibit mortgage lenders from imposing
a prepayment penalty in connection with any mortgage loan that fits within the
definition of a High-Cost Loan or require mortgage lenders to demonstrate a
tangible net benefit to the Borrower as a result of the Borrowers entering
into the mortgage loan transaction involving a High-Cost Loan.
The mortgage loans purchased or originated by the Companys mortgage
subsidiaries are also subject to Federal laws and regulations, including,
without limitation, the Federal Truth-in-Lending Act, as amended, and
Regulation Z promulgated thereunder, the Equal Credit Opportunity Act, as
amended, and Regulation B promulgated thereunder, the Fair Credit Reporting
Act, as amended, the Federal Real Estate Settlement Procedures Act, as amended,
and Regulation X promulgated thereunder, the Soldiers and Sailors Civil
Relief Act of 1940, as amended, the Home Mortgage Disclosure Act and Regulation
C promulgated thereunder, the Federal Fair Housing Act, the Gramm-Leach-Bliley
Act and regulations adopted thereunder, 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.
Investment Services
Generally
.
The investment services operating segment provides investment
advice, brokerage services and investment planning primarily through H&R Block
Financial Advisors, Inc. (formerly OLDE Discount Corporation). In December
1999, the Company acquired OLDE Financial Corporation (OLDE Financial), a
Detroit-based financial services holding company that is the parent company of
HRBFA.
HRBFA is a registered broker-dealer with the SEC and is a member of the
New York Stock Exchange (NYSE), other national securities exchanges and the
National Association of Securities Dealers, Inc. (NASD). HRBFA is one of the
largest retail investment firms in the United States offering financial advice
and other financial services to retail clients at low commission rates and fees
through its network of financial advisors in HRBFA branch offices.
15
HRBFA, like other brokerage firms, continued to suffer from declining
activity by retail investors during the Companys 2002 fiscal year and a
corresponding decline in margin balances. Average trading volumes fell during
the year by more than 38.7% as measured by average trades per day. Impacted by
market performance, volatility and investor uncertainty, margin balances at
HRBFA had fallen from an average of $2.4 billion as of April 30, 2001 to an
average of $1.0 billion as of April 30, 2002.
In an effort to reduce expenses to counteract reduced revenues, HRBFA
reduced approximately 3.3% percent of its total workforce in non-advisor
positions in October 2001, following a reduction of 6% of its total workforce
at the end of fiscal year 2001. Several support functions at HRBFA were
eliminated or consolidated and aligned with corresponding departments within
other subsidiaries of the Company.
Despite the difficult financial and market environment, HRBFA expanded its
product line to offer clients the Wealth Management Account (a fee based
pricing alternative).
HRBFA Brokerage and Other Services. HRBFA is a full service securities
broker-dealer providing a full range of financial services to its clients in
the United States. It typically effects transactions for its clients at
commission rates lower than the rates full-commission brokerage firms charge.
Revenues from HRBFAs brokerage activities are generated through client
purchases and sales of stocks, investment-grade fixed income products, options,
mutual funds, investment trusts, annuities, and other financial products.
Commissions may be charged on both listed and over-the-counter (OTC)
transactions executed on an agency basis or customers may pay the firm a
quarterly fee through the Wealth Management Account. HRBFA also offers services
and products typically offered by traditional full-commission firms, such as
investment research with regard to individual securities and goal-oriented
investment planning. Other services and products offered include money market
funds with sweep provisions for settlement of client transactions; margin
accounts; checking privileges; option accounts; dividend reinvestment plans;
and individual retirement accounts (IRAs).
During the 2002 tax season, H&R Block tax clients nationwide were given
the opportunity to open an Express IRA through HRBFA as a part of the tax
return preparation process. Clients were able to open an Express IRA by simply using all or part
of their tax refund or by writing a personal check for the IRA amount. The
Express IRA is invested in an FDIC Insured money market account through Reserve
Management Corporation at an insured depository institution paying competitive
money market interest rates. Clients funded approximately 130,000 Express IRAs
in fiscal year 2002, an increase from 25,000 Express IRAs in fiscal year 2001.
The Express IRA program was offered in only 14 states in fiscal 2001.
HRBFA offers to account holders a service that makes it possible for
clients to handle all of their investment and banking activities from one
convenient, flexible brokerage account with cash management features. The cash
management features include no-minimum checking, unlimited check writing, a
credit interest program that allows interest to be earned on balances over
$100, a variety of money market fund options, a VISA® Gold ATM/check card with
a 1% cash rebate on card purchases and an airline miles program, one
consolidated monthly statement and a year-end account summary. HRBFA also
offers college savings products called 529 Plans through state-sponsored
investment programs that allow clients to make tax-free withdrawals for
qualified education expenses.
Dealer and Market Making Activities
.
Until April 2002, HRBFA was also a
dealer and engaged 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), and OTC markets. HRBFA also acted as a qualified dealer in certain
listed securities on
16
the Cincinnati Stock Exchange. HRBFA acts as a dealer in
fixed income markets including corporate and municipal bonds, various U.S.
Government and U.S. Government Agency securities and certificates of deposit.
Market declines that began in the Spring and Summer of 2000 continued through
fiscal year 2002, exacerbated by the September 11 tragedies which further
eroded investor confidence. Revenues derived from equity market making
activities declined as a result of reduced trading volume. In addition,
fractional trading for equity securities was replaced by decimalization. As a
result of decimalization, the market maker spread, the difference between bid
and asked prices, and overall reduced trading volumes, trading revenues
declined 29.1%. This decline in revenues along with a business strategy to move
the Company toward an advice-based model (in order to better serve a larger
population of clients) prompted HRBFA to withdraw from equity market making
activities in equity securities in April 2002.
Financial Advisor Compensation. Financial advisors receive compensation
in a combination of plans in the form of commissions on HRBFAs revenues from
customer transactions, a salary or draw against commissions, a percentage of
quarterly fees charged to clients, and/or may have received additional
compensation on customer transactions in securities recommended by HRBFA.
Tax Professional Financial Advisors. During fiscal year 2002, the
Companys subsidiaries further expanded the Tax Professional Financial Advisor
(TPFA) program, by which H&R Block tax professionals expand their roles to
provide financial services to tax clients. TPFAs have licenses to sell mutual
funds and/or insurance products and in some instances, equity securities
recommended by HRBFA. The number of TPFAs grew from 430 to over 600 during the
2002 fiscal year and they provided investment services to more than 6,100 tax
clients.
Integrated Online Services
.
HRBFA provides an online investment center
through the Companys web site located at
www.hrblock.com
. HRBFA provides
online users the opportunity to open accounts, obtain research, create
investment plans, buy and sell securities, and view the status of their
accounts online. The online investment planning service gives HRBFA clients the
ability to create and view a personal goal oriented investment while
simultaneously receiving advice by telephone from an H&R Block financial
advisor who is viewing the same information. Clients can create, view or edit a
financial plan for many different life-changing events such as retirement,
college, a new child or the purchase of a house. After developing a plan,
clients have the option to allow an advisor to execute the plan or they can do
it themselves at the investment center. Through April 2002, approximately
175,100 accounts had been web enabled, compared to approximately 96,000
accounts through April 2001, and, in April 2002, more than 15,600 securities
transactions were effected online (compared to more than 7,000 transactions
effected online in April 2001). Additional information regarding online
operations is provided under the E-Commerce Initiatives in the U.S. Tax
Operations section, above.
Advertising and Marketing
.
Advertising and marketing play a significant
role in the expansion of HRBFAs client base as well as the introduction of new
products and services. HRBFA may use a combination of media including
newspapers, magazines, the yellow pages, television, and its Internet home page
to advertise and market its products and services. When an investor contacts
HRBFA, the investor receives a package of information including an account
application and a brochure containing information on the services and products
offered by HRBFA. Additional detailed information is available upon request and
can be tailored to match the clients investment preferences.
Retail Branch Offices
.
HRBFA is authorized to do business as a
broker-dealer in all 50 states and the District of Columbia. At fiscal year
end, HRBFA operated over 600 offices as compared to 525 offices at the end of
fiscal year 2001 and 198 offices at the end of fiscal year 2000. Some HRBFA
offices offer, in addition to financial products and services, tax preparation
and mortgage services, year-round to clients. HRBFA believes that the existence
of branch offices contributes to its growth and client
17
satisfaction. The
existence of a branch office generally results in an increase in unsolicited
customer transactions in the geographic area near the office. Many clients
prefer to conduct business in person in local rather than in distant offices or
online. Clients may use branch offices to receive and deliver checks and
deliver securities.
Service Marks and Trademarks. HRBFA claims ownership of the following
service marks and trademarks registered on the principal register of the United
States Patent and Trademark Office:
Competitive Conditions. HRBFA competes directly with a broad range of
companies seeking to attract consumer financial assets, including full-service
brokerage firms, discount and online 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
HRBFA and offer certain additional financial products and services. In
addition, HRBFA expects competition from domestic and international commercial
banks and larger securities firms to continue to increase as a result of
legislative and regulatory initiatives in the U.S. (including the passage of
the Gramm-Leach-Bliley Act in November 1999 and the implementation of the
U.S.A. Patriot Act in April 2002) to remove or relieve certain restrictions on
mergers between commercial banks and other types of financial services
providers and extend privacy provisions and anti-money laundering procedures
across the financial services industry. HRBFA primarily competes with these
firms on quality of 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 HRBFA with respect to commission charges.
Full-commission brokerage firms also offer more product breadth, discounted
commissions and online 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.
Seasonality of Business. The investment services operating segment does
not, as a whole, experience significant seasonal fluctuations. However, the
securities business is cyclical and directly affected by national and world
economic and political conditions, trends in business and finance and changes
in the conditions of the securities markets in which HRBFAs clients trade.
Government Regulation. The securities industry is subject to extensive
regulation covering all aspects of the securities business, including
registration of HRBFAs offices and personnel, sales
18
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 of employees.
The various governmental authorities and industry self-regulatory organizations
which have supervisory and regulatory jurisdiction over the Companys
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. HRBFA is registered as
broker-dealer. Much of the regulation of broker-dealers has been delegated by
the SEC to self-regulatory organizations, principally the Municipal Securities
Rulemaking Board, the NASD Regulation, Inc. and the New York Stock Exchange
(NYSE), which has been designated as HRBFAs 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
HRBFAs 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, HRBFA 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.
HRBFA has elected to compute net capital under the alternative method of
computation permitted by Rule 15c3-1 which requires that net capital be not
less than the greater of $1,000,000 or 2% of combined 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 HRBFA to maintain the required minimum net capital may
subject HRBFA to suspension or revocation of registration or other limitations
on the firms activity by the SEC, and suspension or expulsion by the NYSE,
NASD or other regulatory bodies, and ultimately could require the
broker-dealers liquidation. HRBFA could also be prohibited from paying
dividends or redeeming stock. HRBFA 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. Under NYSE Rule 326, HRBFA 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 HRBFAs ability to engage in new activities and expansion, and
could restrict the Companys ability to withdraw capital from its brokerage
subsidiaries. Such a restriction in turn, could limit the Companys 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 HRBFAs ability to expand or
maintain its current levels of business. At April 30, 2002, HRBFAs net capital
of $143.5 million, which was 16.4% of aggregate debit items, exceeded by $126.0
million its minimum required net capital of $17.5 million. HRBFA made a capital
withdrawal and paid BFC a dividend of $50 million at fiscal year-end.
19
Business Services
Generally. The business services operating segment, which is conducted
primarily through RSM McGladrey, Inc., a direct subsidiary of HRB Business
Services, Inc. (HRBBS), provides accounting, tax, consulting, payroll,
employee benefits and capital market services to business clients, primarily
mid-sized companies, and tax, estate planning and financial planning services
to individuals in the United States. RSM was formed to acquire in August 1999
substantially all of the non-attest assets of McGladrey & Pullen, LLP
(McGladrey).
In addition to providing the aforementioned services to the public, RSM
and certain other subsidiaries involved in the business services segment
provide management and administrative services to certain public accounting
firms from which non-attest assets have been acquired. RSM receives fees from
the public accounting firms, which continue to provide attest services that
constitute the practice of public accounting which H&R Block and its
subsidiaries, by regulation, generally cannot provide.
RSM McGladrey, Inc. RSM has more than 100 offices and offers services in
18 of the top 25 U.S. markets. RSM is also linked with more
than 70 independently owned CPA firms in the United States and Puerto Rico
through the McGladrey Network. In addition, RSM is the U.S. member of RSM
International, the eighth largest accounting and consulting organization in the
world, with 600 offices in 64 countries.
On August 1, 2001, RSM acquired ORourke Sacher & Moulton Professional
Corporation, a leading professional service firm serving the credit union
industry with offices in Los Angeles and Brisbane, California (the San
Francisco Bay Area); Dallas, Texas; Boston, Massachusetts and Bellevue,
Washington. The acquired operations were combined with RSMs existing credit
union practice to create one of the nations largest credit union consulting
practices.
On September 1, 2001, RSM purchased the non-attest and non-tax related
assets of Knight Vale & Gregory PLLC (KVG), an accounting firm with offices
in Olympia, Renton, Seattle and Tacoma, Washington. This acquisition added a
staff of over 150 individuals to RSM.
Other acquisitions by RSM in fiscal year 2002 enabled it to strengthen its
presence in Cedar Rapids, Iowa; Chicago, Illinois; Dallas, Texas and Naples,
Florida and expand its operations to Stamford, Connecticut.
On December 6, 2001, HRBBS purchased approximately 44 percent of the
outstanding common shares of MyBenefitSource, Inc. (MBS), an Atlanta-based
firm that provides a wide range of payroll, benefit, enrollment and
administrative services. HRBBS has an option to acquire the remaining shares of
MBS. HRBBS also owns 100% of the outstanding preferred shares of MBS, each of
which is convertible into one share of MBS
common stock. In addition to its own client base, MBS interacts with RSM
to provide RSM clients payroll and benefit administration outsourcing services.
On December 14, 2001, HRBBS acquired EquiCo Resources, LLC, a business
valuation and investment banking firm that specializes in mergers and
acquisitions, divestitures and corporate finance services for middle-market
companies. The acquired business is operated through RSM EquiCo, Inc.
20
(RSM
EquiCo), a wholly owned subsidiary of HRBBS. RSM EquiCo works closely with RSM
to help middle-market companies evaluate, improve, grow and sell their
businesses.
McGladreys 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, accordingly, an entity separate from RSM and not an
affiliate of the Company.
Until last year, the SEC had no published rules on the application of the
auditor independence rules to firms such as McGladrey, whose partners are also
employed by RSM. On February 5, 2001, revised SEC auditor independence rules
that apply to the accounting firm and its associated entities became
effective. The SEC staff has advised McGladrey that it considers the Company
and all of its subsidiaries to be associated entities. Accordingly, any
financial interest or business relationship of the Company with a client of
McGladrey that is subject to the SECs auditor independence rules (an SEC Audit
Client) will be regarded by the SEC staff as a financial interest or business
relationship between McGladrey and the SEC Audit Client. Under the SECs
auditor independence rules, McGladrey and its partners are precluded from
holding certain financial interests in and entering into certain business
relationships with an SEC Audit Client for whom McGladrey performs audit
services.
In connection with the evaluation of the regulatory restrictions and
environment, the Company and McGladrey have had discussions with the staff of
the SEC regarding appropriate disclosure of the policy and procedures that have
been implemented by McGladrey, RSM and the Company to safeguard McGladreys
independence and integrity as an audit firm in compliance with applicable
regulations and professional responsibilities.
The Company, RSM and McGladrey have enacted certain policies and controls
to monitor and prevent violations by them of the SECs auditor independence
rules as interpreted by the SEC staff. These policies and controls include the
following:
21
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 interpreted by the SEC staff. Any
noncompliance by the Company, RSM or McGladrey with such rules may impair
McGladreys 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:
RSM claims ownership of the following unregistered service marks and
trademarks:
22
FERS Business Services, Inc. (FERS), 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:
FERS claims ownership of the following unregistered service mark and
trademark:
MBS claims ownership of the following unregistered service mark and
trademark:
Practice Development Institute, Inc. (PDI), a direct subsidiary of
HRBBS, claims ownership of the following service marks and trademarks
registered on the principal register of the United States Patent and Trademark
Office:
PDI claims ownership of the following unregistered service mark and
trademark:
RSM EquiCo claims ownership of the following service mark and trademark
registered on the principal register of the United States Patent and Trademark
Office:
RSM EquiCo claims ownership of the following unregistered service mark and
trademark:
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:
23
Competitive Conditions. The accounting and consulting business is highly
competitive. There are a substantial number of accounting firms offering
similar services at the international, national, 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 the
business services segment 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 tax professionals are. These accounting firms
are also subject to state and Federal regulations governing accountants,
auditors and financial planners. During the past year, numerous legislative and
regulatory proposals have been made relating to auditor independence and
accounting oversight, among others. Some of these proposals, if adopted, could
have an impact on RSMs operations. The Company believes that current state and
Federal regulations and known legislative and regulatory proposals 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 legislation,
regulations and proposals may be.
Item 2. Properties
The executive offices of the Company, H&R Block Services, Inc., Tax
Services, BFC and HRBBS are located at 4400 Main Street, Kansas City, Missouri,
in a multi-level building owned by H&R Block Tax Services, Inc. The building
was constructed in 1963 and expanded or redesigned in 1965, 1973, 1981, and
1996. In fiscal year 2000, H&R Block Tax Services, Inc. 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. The
Companys subsidiaries also lease other office space in Kansas City, Missouri.
Option Ones 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 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.
The executive offices of HRBFA and OLDE Financial are located at 751
Griswold, Detroit, Michigan in a building owned by OLDE Financial. Many branch
offices of HRBFA are located in facilities owned by various real estate
subsidiaries of OLDE Financial and leased primarily to HRBFA. Some branch
offices are operated in leased premises.
RSMs executive offices are located in leased offices located at 3600 West
80th Street, Bloomington, Minnesota. Its administrative offices are located in
leased offices at 220 North Main Street, Davenport, Iowa. RSM also leases
office space in 25 states.
Item 3. Legal Proceedings
CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the Company were named as defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio. All
suits alleged similar violations of the Securities Act of 1933 based on
assertions of omissions and misstatements of fact in connection with
CompuServes public filings
24
related to its initial public offering in April
1996. One state lawsuit brought by the Florida State Board of Administration
also alleged certain oral omissions and misstatements in connection with such
offering. Relief sought in the lawsuits is unspecified, but included pleas for
rescission and damages.
In the class action pending in state court, the court issued, in November
2000, its order approving a settlement pursuant to which the defendants agreed
to 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 were to be paid out of the gross settlement fund.
The gross settlement fund was paid in its entirety by the Companys insurance
carrier. The agreement to settle and the payment of the gross settlement fund
are not admissions of the validity of any claim or any fact alleged by the
plaintiffs and defendants continue to deny any wrongdoing and any liability.
The Florida State Board of Administration opted out of the class action
settlement and that litigation continued separately from the state court class
action. The parties reached a settlement that disposed of the case in its
entirety with the payment by the defendants of $500,000. Such settlement was
paid in its entirety by the Companys insurance carrier and is not an admission
of the validity of any claim or fact alleged by the Florida State Board of
Administration. With this settlement, the CompuServe litigation relating to the
1996 initial public offering is concluded.
The Company and its subsidiaries are involved in various litigation and
claims as both defendant and plaintiff relating to matters which arise in the
normal course of business. While the amounts claimed in these matters are
substantial in some instances and the ultimate liability with respect to such
litigation and claims is difficult to predict, management believes that
amounts, if any, required to be paid by the Company and its
subsidiaries in the discharge of liabilities or settlements will not have a
material adverse effect on the Companys consolidated results of operations or
financial position.
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, 2002.
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 as follows:
25
26
27
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(in thousands)
1998
1999
2000
2001
2002
14,838
15,761
16,276
16,442
16,899
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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
H&R Block & Design (4)
Americas Largest Tax Service
BlockBonus
Double Check Challenge
H&R Block in a Third Distinct Design (4)
H&R Block Just Plain Smart and Design (4)
H&R Block Rapid Refund and Design
Just Plain Smart (4)
Nations Largest Tax Service
Refund Rewards
Smart Solutions
We know. Do you?
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Audit Buster
Financial Finder
B and Design (2)
Names&dates
Block Financial (2)
Small Business Attorney
Block Financial and B Design
Tax Cut
Conductor
Tax Cut and Design
Conductor and Baton Design
Web
Conductor and Hand-Held Baton Design
Webbank
Conductor Card Review
Webcard
Fast Lane
Webpay
B Block Financial & Design
CONDUCTOR.COM
DittoCard
Download Depot
Home Legal Advisor
Netguard
Solve Your Everyday Business Problems
The Fastest and Easiest Way To Do Your Taxes
WebAccount
WebBroker
WebChecking
Will Power
Willpower
Your Complete Personal Legal Resource
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AppOne
CorOne
Highway 1
HouseKeeper
No Sweat 95!
Option One and Design
PartnerPlus
SumOne
The Big 2
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Chevron Design
SmartTrading
IRA United
SmartTravel
The OLDE Investors Account
SmartVest
SmartBroker
SmartVestor
SmartRetirement
SmartViews
SmartTrade
SmartWire
Netwealth
The Easy Way to Financial Success
Netwealth and Design
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The Company has informed the management of each of its business
units of the SEC staffs 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 McGladreys
independence as an auditor.
McGladreys Independence and Relationship Policies and the Code of
Professional Conduct promulgated by the American Institute of Certified
Public Accountants (AICPA), which address auditor independence
issues, have been distributed to all of the Companys executive
officers and directors.
McGladreys Prohibited Securities List, which lists securities of
McGladrey SEC Audit Clients, is distributed to the Companys executive
officers and directors on a
monthly basis so that they can monitor compliance by the business units
for which they are responsible.
McGladrey informs the audit committee of each SEC Audit Client, in
writing, of the SEC staffs interpretation regarding the attribution to
McGladrey, for purposes of McGladreys auditor independence of the
financial interests and business relationships of the Company with SEC
Audit Clients.
McGladrey informs the audit committee of each SEC Audit Client of
the SEC staffs interpretation that ownership of the Companys stock by
such SEC Audit Client or ownership of more than 5% of the Companys
stock by its officers or directors would affect McGladreys
independence as an auditor, and McGladrey obtains representations from
each SEC Audit Client that it owns no shares of the Company.
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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, which has been disbanded) and the SEC. This partner
periodically recommends corresponding modifications to McGladreys
Independence and Relationship Policies that become effective upon the
approval of McGladreys Board of Directors.
RSM has agreed to comply and cause its employees to comply with the
Independence and Relationship policies of McGladrey.
Employees of RSM and employees of McGladrey are informed of changes
to McGladreys 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 McGladreys National Office of Audit &
Accounting. All exceptions are reviewed by and approved by McGladreys
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
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
cooperate fully with McGladrey in the resolution of all exceptions and
the implementation of any remedial actions, including disciplinary
actions.
Business Recovery Planning System
Business Continuity Planning System
E-Accounting
McGladrey Network
Market Builder
PersonalProsperity
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Value Enhancement Solutions
We Can See It
We See It
Because Results Come First
Benelink
FERS Profit Edge
Tonelink
Pension Resources
MyBenefitSource
CPEC
PDI Practice Development Institute
Turning Your Firms Potential Into Profit
EquiCo
Buying Into America: Middle Market Mergers and Acquisitions
Solutions for Today. Strategies for Tomorrow.
The Local Firm with a National Reputation
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Name and age
Office(s)
Frank L. Salizzoni (64)
Chairman of the Board of Directors since
September 2000; Chief Executive Officer from
June 1996 through December 2000; President from
June 1996 through September 1999; Member of the
Board of Directors since 1988. See Note 1.
Mark A. Ernst (44)
Chief Executive Officer since January 2001;
President of the Company since September 1999;
Chief Operating Officer from September 1998
through December 2000; Executive Vice President
from September 1998 until
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September 1999. Member of the Board of Directors since
September 1999. See Note 2.
Jeffery W. Yabuki (42)
Chief Operating Officer since April 2002;
Executive Vice President since October 2000;
President, H&R Block Services, Inc. since
October 2000; President, H&R Block
International from September 1999 until October
2000. See Note 3.
Jeffery G. Brandmaier (43)
Senior Vice President and Chief Information
Officer since October 2001. See Note 4.
David F. Byers (40)
Senior Vice President and Chief Marketing
Officer since June 1999. See Note 5.
Frank J. Cotroneo (43)
Senior Vice President and Chief Financial
Officer since February 2000. See Note 6.
Robert E. Dubrish (50)
President and Chief Executive Officer, Option
One Mortgage Corporation, since March 1996. See
Note 7.
James H. Ingraham (48)
Senior Vice President and General Counsel since
September 2001; Secretary since June 1990; Vice
President and General Counsel from July 1999
until September 2001; Vice President, Legal
from October 1996 through June 1999.
Brian L. Nygaard (44)
President and Chief Executive Officer, H&R
Block Financial Advisors, Inc., since November
2001. See Note 8.
Stephanie R. Otto (41)
Senior Vice President, Human Resources since
July 2000; Vice President, Human Resources from
August 1999 through June 2000; Vice President,
National Director of Finance, HRB Business
Services, Inc., October 1998 until August 1999;
Director, Internal Audit, December 1995 until
October 1998.
Thomas G. Rotherham (52)
Chief Executive Officer, RSM McGladrey, Inc.,
since April 2000; President, RSM McGladrey,
Inc., since August 1999; Chief Operating
Officer, RSM McGladrey, Inc., from August 1999
to April 2000. See Note 9.
Thomas L. Zimmerman (51)
President, H&R Block Tax Services, Inc., since
June 1996. See Note 10.
Cheryl L. Givens (36)
Vice President and Corporate Controller since
July 1998; Assistant Vice President and
Assistant Controller from October 1996 until
July 1998. See Note 11.
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Linda M. McDougall (49)
Vice President, Communications since July 1999;
Assistant Vice President, Communications from
November 1995 through June 1999.
Timothy R. Mertz (51)
Vice President, Corporate Tax since October
2000. See Note 12.
Becky S. Shulman (38)
Vice President and Treasurer since September
2001. See Note 13.
Robert A. Weinberger (58)
Vice President, Government Relations, since
March 1996.
Bret G. Wilson (43)
Vice President, Corporate Development and Risk
Management since October 2000; Vice President,
Corporate Planning and Development from
September 1999 until October 2000; 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.
Note 1:
After the conclusion of fiscal year 2002, Mr. Salizzoni announced
that he would retire as Chairman of the Board of Directors of the
Company and as a director of the Company at the adjournment of
the annual meeting of shareholders in September 2002. He served
as Chairman of the Board of CompuServe Corporation from October
1996 until January 1998.
Note 2:
Mr. Ernst served as Senior Vice President, Third Party and
International Distribution for American Express Company,
Minneapolis, Minnesota, from July 1997 until June 1998; Senior
Vice President, WorkPlace Financial Services, American Express
Company, from November 1995 until July 1997.
Note 3:
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; and as Vice President, Mergers
and Acquisitions, American Express, Minneapolis, Minnesota, from
1996 to 1998.
Note 4:
Mr. Brandmaier was Chief Information Officer for The Money Store,
a subsidiary of First Union Bank from 1995 until 2001.
Note 5:
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 6:
Mr. Cotroneo served as the Chief Financial Officer of MasterCard
International, Inc., New York, New York, from 1996 to February
2000.
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Note 7:
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 8:
Mr. Nygaard was President, ING Advisors Network, ING Group,
Atlanta, Georgia, from October 2000 until October 2001; Chief
Operating Officer, Advisors Network, ING Advisors Network, from
October 1999 until October 2000; and Senior Vice President,
Strategic Marketing, ING Advisors Network, from May 1999 until
October 1999. He was Vice President, Retail, for Principal
Financial Group, Des Moines, Iowa from January 1995 through April
1999.
Note 9:
Mr. Rotherham served as a Member of the Office of the Managing
Partner of McGladrey & Pullen, LLP from 1997 through August 1999
and as the Managing Partner of Audit and Accounting for McGladrey
& Pullen LLP from 1995 to 1997. The Company acquired the
non-attest assets of McGladrey & Pullen, LLP on August 1, 1999,
at which time Mr. Rotherham became an employee of a subsidiary of
the Company.
Note 10:
Prior to year end, Mr. Zimmerman announced his retirement as
President, H&R Block Tax Services, Inc., effective July 1, 2002.
Note 11:
After the conclusion of fiscal year 2002, Ms. Givens announced
her resignation as Vice President and Corporate Controller,
effective July 12, 2002.
Note 12:
Mr. Mertz was Vice President of Treasury for Payless Cashways,
Inc., a full-line building material and finishing products
company, Lees Summit, Missouri, from September 1998 through
September 2000. He also served as Director of Taxes and Risk
Management for Payless Cashways, Inc. from October 1987 until
September 1998.
Note 13:
Ms. Shulman was Chief Investment Officer of U.S. Central Credit
Union, Overland Park, Kansas, from September 1998 until August
2001. She served as Vice President, Asset/Liability for U.S.
Central Credit Union from May 1997 until September 1998.
PART II
Item 5. Market for the Registrants Common Equity and Related Stockholder Matters.
The information called for by this item is contained in part in the
Companys annual report to security holders for the fiscal year ended April 30,
2002, under the heading Common Stock Data, and is hereby incorporated by
reference. The Companys Common Stock is traded principally on the New York
Stock Exchange. The Companys Common Stock is also traded on the Pacific
Exchange. On June 10, 2002, there were 30,946 shareholders of record of the
Company.
28
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Item 6. Selected Financial Data.
The information called for by this item is contained in the Companys
annual report to security holders for the fiscal year ended April 30, 2002,
under the heading Selected Financial Data, and is hereby incorporated by
reference.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The information called for by this item is contained in the Companys
annual report to security holders for the fiscal year ended April 30, 2002,
under the heading Managements 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, and which may be material, relate to:
The Company and its subsidiaries have market risk sensitive instruments
entered into for non-trading and trading purposes. The Companys
broker-dealer holds marketable fixed-income securities for resale to retail
clients.
Non-trading
Interest rates
. The Companys rate-sensitive assets and liabilities are
managed centrally by the office of the Chief Financial Officer of the Company.
The Finance Committee of the Companys Board of Directors approves the
Companys policies and procedures utilized to manage the Companys interest
rate risk.
The Company has established investment guidelines to help minimize the
market risk exposure of its non-residual available-for-sale securities
portfolio. These guidelines focus on managing liquidity, preservation of
principal, and earnings, which are primarily affected by credit quality and
movements in interest rates.
Nearly 61% of the Companys cash equivalents (CE) and available-for-sale
securities, which includes residual interests, (AFS) are classified as short term, compared to 51% last year. The
CE assets are primarily held for liquidity purposes and are comprised of high
quality, short-term investments, including qualified money market funds
(taxable and tax-exempt). As of April 30, 2002, the portfolio had a duration of
less than 0.1 years
29
with an average credit quality of AAA. With such a short
maturity, the portfolios market value is relatively insensitive to interest
rate changes.
The Companys residual interests in securitizations, the majority of AFS,
and MSRs are subject to prepayment risk, because a mortgage borrower has the
option to prepay a mortgage loan at any time. Prepayment risk tends to increase when interest
rates fall due to the benefits of refinancing. The expected income from these
residual interests and MSRs is sensitive to movements in interest rates due to
this sensitivity to mortgage prepayments. The prepayment risk is partially
offset with the collection of prepayment penalties, a feature on the majority
of originated loans.
Residual interests are recorded based on discounted cash flow models
utilizing prepayment, interest rate, credit losses and discount rate
assumptions. Prepayment and loss assumptions are based on evaluation of the
actual experience of the Companys servicing portfolio or on market rates on
new portfolios, taking into consideration the current and expected interest
rate environment and its expected impact on future prepayment and default
rates. At April 30, 2002, the sensitivity of the current fair value of the
residual interests to a 10% adverse change in prepayment rates would lower the
fair value of the residuals by $13.1 million.
Mortgage servicing rights are recorded based on the present value of
estimated future cash flows related to servicing loans utilizing market
discount rates and anticipated prepayment speeds. The prepayment speeds are
estimated using the Companys historical experience and third party market
sources for fixed-rate mortgages with similar coupons and prepayment reports
for comparable adjustable rate mortgage loans. At April 30, 2002, the
sensitivity of the current fair value of MSRs to a 10% adverse change in
prepayment rates would lower the fair value by $11.3 million.
Residual assets bear the interest rate risk embedded within the
securitization due to an initial fixed rate period on the loans versus the
floating rate funding cost, and the on-going basis risk between the indices of
the floating rate assets and liabilities, offset somewhat by interest rate caps
sometimes embedded within the securitization. An adverse change in interest
rates of 10% would impact the fair value of residuals by $35.0 million.
See Residual Interests in Securitizations and Mortgage Servicing Rights
in the Notes to Consolidated Financial Statements in the Companys annual
report to security holders for the fiscal year ended April 30, 2002 for further
sensitivity analysis of the other assumptions and detailed explanations of the
cash flow models used.
The Company is exposed to interest rate risk associated with its mortgage
loan origination and purchase commitments. These commitments to fund mortgage
loans consist of fixed and variable rate loans that will be sold in the
secondary market. The Company has commitments to fund mortgage loans of $1.7
billion at April 30, 2002, as long as there is no violation of any conditions established in the
contracts. External market forces impact the probability of commitments being
exercised, and therefore, total commitments outstanding do not necessarily
represent future cash requirements. The risk with these commitments to fund
mortgage loans is that interest rates might rise between the time the customer
locks in the interest rate on the loan and the time the loan is sold. In some
instances, the Company will utilize forward contracts on FNMA mortgage-backed
securities to reduce the interest rate risk related to its fixed rate
origination commitments. It is the Companys policy to utilize these financial
instruments only for the purpose of offsetting or reducing the risk of loss in
earnings 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 default risk. As the risk of
default depends on
30
the creditworthiness of the counterparty, the Companys 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.
Commercial paper is issued throughout the year primarily to fund
receivables associated with the Business Services segment, mortgage loans
held-for-sale, participation in RALs and seasonal working capital needs. At
April 30, 2002 and April 30, 2001, no commercial paper was outstanding. For
fiscal year 2002, the average issuance term was 22 days and average
outstandings were $635 million. This compares with 16 days and $764 million for
fiscal year 2001. As commercial paper borrowings are seasonal, interest rate
risk typically increases through February and declines to zero by fiscal
year-end. See Financial Condition under the heading Managements Discussion
and Analysis of Results of Operations and Financial Condition in the Companys
annual report to security holders for the fiscal year ended April 30, 2002.
At April 30, 2002, there were no hedges outstanding related to long-term
debt. The Companys long-term debt at April 30, 2002 consists primarily of
fixed-rate Senior notes; therefore, a change in interest rates would have no
impact on consolidated pretax earnings. See Long-Term Debt in the Notes to
Consolidated Financial Statements in the Companys annual report to security
holders for the fiscal year ended April 30, 2002.
The Companys broker-dealer holds interest bearing receivables from
customers, brokers, dealers and clearing organizations which consist primarily
of amounts due on margin transactions and are generally short-term in nature.
The Companys broker-dealer funds these short-term assets with short-term
variable rate liabilities from customers, brokers and dealers, including stock
loan activity. Although there may be differences in the timing of the
re-pricing related to these assets and liabilities, the Company believes it is
not significantly exposed to interest rate risk in this area. As a result, any
change in interest rates would not materially impact the Companys consolidated
pretax earnings.
Foreign Exchange Rates.
The operation of the Companys 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 1.0% of the Companys fiscal year 2002 consolidated pretax
earnings, compared to 1.3% in fiscal 2001. 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 translates revenues and expenses related to its international
operations at the average of exchange rates in effect during the period. The
sensitivity analysis of fluctuation in foreign currency exchange rates compares
the U.S. dollar variance in using the actual exchange rates and using rates
that have been adversely adjusted by 10%. The Company estimates that a 10%
change in foreign exchange rates by itself would impact reported pretax earnings from continuing operations by
approximately $806,000. Such impact represents approximately 11.4% of the
pretax earnings of International tax operations for fiscal year 2002 and
approximately .11% of the Companys pretax earnings for such year. In fiscal
2001, a 10% change in exchange rates would have impacted fiscal 2001 pretax
earnings by approximately $731,000 or 12.3% of International tax operations
pretax earnings and .15% of the Companys pretax earnings.
31
Trading
The Companys 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 Companys broker-dealer holds the
trading portfolio at quoted market prices and such portfolio represents .7% of
the Companys total assets. The market value of the Companys trading portfolio
at April 30, 2002 was approximately $28.4 million. The impact of a 10% change
in the market value of these investments would be approximately $2.8 million,
or about .4% of consolidated pretax earnings. With respect to its fixed-income
securities portfolio, the Company manages its market price risk exposure by
limiting concentration risk, maintaining minimum credit quality and limiting
inventory to anticipated retail demand and current market conditions.
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 Companys annual report to security holders for the fiscal
year ended April 30, 2002, and is hereby incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
interest rates on cash equivalents, available-for-sale
securities, residual interests in securitizations, mortgage servicing rights (MSRs), mortgage loan
origination and purchase commitments, investments in mortgage loans
held for sale, debt and margin lending activities, retail trading
volumes, commercial paper issuances and
foreign exchange rates, generating translation gains and losses
Table of Contents
Table of Contents
Table of Contents
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
Companys definitive proxy statement filed pursuant to Regulation 14A not later
than 120 days after April 30, 2002, 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 Companys
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2002, 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 and Related Stockholder Matters.
The information called for by this item is contained in the Companys
definitive proxy statement filed pursuant to Regulation 14A not later than 120
days after April 30, 2002, in the section titled
32
Election of Directors, in
the section titled Information Regarding Security Holders, and in the section
entitled ITEM 2 ON FORM OF PROXY Approvals of the 2003 Long-Term Executive
Compensation Plan and an Amendment to the 1993 Long-Term Executive Compensation
Plan, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
.
None.
Table of Contents
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
33
34
35
36
37
(a)
1.
Financial Statements
The following consolidated financial statements of H&R Block,
Inc., and subsidiaries are incorporated by reference from the
Companys annual report to security holders for the fiscal
year ended April 30, 2002:
Page
25
26
27
28
52
70
79
2.
Financial Statement Schedules
Report of PricewaterhouseCoopers LLP, Certified Public
Accountants on Financial Statement Schedule for H&R Block,
Inc.
Schedule II 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 3.2 to the Companys
quarterly report on Form 10-Q for the quarter ended October
31, 2001, file number 1-6089, are incorporated herein by
reference.
3.2
Certificate of Amendment of Articles of
Incorporation effective October 15, 2001, filed as Exhibit 3.1
to the Companys quarterly report on Form 10-Q for
Table of Contents
the quarter
ended October 31, 2001, file number 1-6089, is incorporated
herein by reference.
3.3
Amended and Restated Bylaws of H&R Block, Inc.,
as amended, filed as Exhibit 3.1 to the Companys quarterly
report on Form 10-Q for the quarter ended October 31, 1999,
file number 1-6089, 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 Companys
quarterly report on Form 10-Q for the quarter ended October
31, 1997, file number 1-6089, 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 Companys current report on Form 8-K dated
April 13, 2000, file number 1-6089, 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 Companys current report on Form 8-K, file number
1-6089, is incorporated herein by reference.
4.4
Form of 8 1/2% Senior Note due 2007 of Block
Financial Corporation, filed as Exhibit 4(b) to the Companys
current report on Form 8-K dated April 13, 2000, file number
1-6089, 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 Companys
Registration Statement on Form 8-A, file number 1-6089, 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 Companys annual report on
Form 10-K for the fiscal year ended April 30, 1995, file
number 1-6089, 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 Companys annual report on Form 10-K for the fiscal year
ended April 30, 1998, file number 1-6089, 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 Companys annual
report on Form 10-K for the fiscal year ended April 30, 1995,
file number 1-6089, is incorporated by reference.
10.1
The Companys 1993 Long-Term Executive
Compensation Plan, as amended August 1, 2001, filed as Exhibit
10.1 to the Companys quarterly report on Form
Table of Contents
10-Q for the
quarter ended October 31, 2001, file number 1-6089, is
incorporated herein by reference.
10.2
The H&R Block Deferred Compensation Plan for
Directors, as Amended and Restated effective July 1, 2002.
10.3
The H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated July 1, 2002.
10.4
The H&R Block Short-Term Incentive Plan, filed as
Exhibit 10.1 to the Companys quarterly report on Form 10-Q
for the quarter ended October 31, 2000, file number 1-6089, is
incorporated herein by reference.
10.5
The Companys 1989 Stock Option Plan for Outside
Directors, as amended September 12, 2001, filed as Exhibit
10.4 to the Companys quarterly report on Form 10-Q for the
quarter ended October 31, 2001, file number 1-6089, is
incorporated herein by reference.
10.6
The H&R Block Stock Plan for Non-Employee
Directors, as amended August 1, 2001, filed as Exhibit 10.3 to
the Companys quarterly report on Form 10-Q for the quarter
ended October 31, 2001, file number 1-6089, is incorporated
herein by reference.
10.7
The H&R Block, Inc. 2000 Employee Stock Purchase
Plan, as amended August 1, 2001, filed as Exhibit 10.2 to the
Companys quarterly report on Form 10-Q for the quarter ended
October 31, 2001, file number 1-6089, is incorporated herein
by reference.
10.8
The H&R Block, Inc. Executive Survivor Plan (as
Amended and Restated) filed as Exhibit 10.4 to the Companys
quarterly report on
Form 10-Q for the quarter ended October 31, 2000, file number
1-6089, is incorporated herein by reference.
10.9
First Amendment to the H&R Block, Inc. Executive
Survivor Plan (as Amended and Restated)
10.10
Employment Agreement dated October 11, 1996,
between the Company and Frank L. Salizzoni, filed as Exhibit
10(b) to the Companys quarterly report on Form 10-Q for the
quarter ended October 31, 1996, file number 1-6089, is
incorporated herein by reference.
10.11
Employment Agreement dated July 16, 1998,
between the Company and Mark A. Ernst, filed as Exhibit 10(a)
to the Companys quarterly report on Form 10-Q for the quarter
ended July 31, 1998, file number 1-6089, is incorporated
herein by reference.
10.12
Amendment to Employment Agreement dated June 30,
2000, between HRB Management, Inc. and Mark A. Ernst, filed as
Exhibit 10.1 to the Companys quarterly report on Form 10-Q
for the quarter ended July 31, 2000, file number 1-6089, is
incorporated herein by reference.
Table of Contents
10.13
Employment Agreement dated as of November 1,
2001, between H&R Block Services, Inc, and Thomas L.
Zimmerman, filed as Exhibit 10.6 to the Companys quarterly
report on Form 10-Q for the quarter ended January 31, 2002,
file number 1-6089, is incorporated herein by reference.
10.14
Employment Agreement dated September 7, 1999,
between HRB Management, Inc. and Jeffery W. Yabuki, filed as
Exhibit 10.4 to the Companys quarterly report on Form 10-Q
for the quarter ended January 31, 2000, file number 1-6089, is
incorporated herein by reference.
10.15
Employment Agreement dated January 26, 2000,
between HRB Management, Inc. and Frank J. Cotroneo, filed as
Exhibit 10.5 to the Companys quarterly report on Form 10-Q
for the quarter ended January 31, 2000, file number 1-6089, is
incorporated herein by reference.
10.16
Employment Agreement dated as of October 8,
2001, between HRB Management, Inc. and Jeffrey Brandmaier,
filed as Exhibit 10.6 to the Companys quarterly report on
Form 10-Q for the quarter ended October 31, 2001, file number
1-6089, is incorporated herein by reference.
10.17
Employment Agreement between HRB Management,
Inc. and David F. Byers, fully executed as of February 1,
2002, filed as Exhibit 10.1 to the Companys quarterly report
on Form 10-Q for the quarter
ended January 31, 2002, file number 1-6089, is incorporated
herein by reference.
10.18
Employment Agreement between Option One Mortgage
Corporation and Robert E. Dubrish, executed on February 9,
2002, filed as Exhibit 10.2 to the Companys quarterly report
on Form 10-Q for the quarter ended January 31, 2002, file
number 1-6089, is incorporated herein by reference.
10.19
Employment Agreement dated as of November 5,
2001, between H&R Block Financial Advisors, Inc. and Brian L.
Nygaard, filed as Exhibit 10.4 to the Companys quarterly
report on Form 10-Q for the quarter ended January 31, 2002,
file number 1-6089, is incorporated herein by reference.
10.20
Employment Agreement dated as of January 28,
2002, between HRB Management, Inc. and Stephanie R. Otto,
filed as Exhibit 10.5 to the Companys quarterly report on
Form 10-Q for the quarter ended January 31, 2002, file number
1-6089, is incorporated herein by reference.
10.21
Employment Agreement dated as of September 12,
2001 between HRB Management, Inc. and James H. Ingraham, filed
as Exhibit 10.3 to the Companys quarterly report on Form 10-Q
for the quarter ended January 31, 2002, file number 1-6089, is
incorporated herein by reference.
10.22
Senior Managing Director Agreement dated August
2, 1999, between RSM McGladrey, Inc. and Thomas G. Rotherham,
filed as Exhibit 10.23 to the Companys annual report on Form
10-K for the fiscal year ended April 30, 2001, file number
1-6089, is incorporated herein by reference.
Table of Contents
12
Computation of Ratio of Earnings to Fixed Charges
for the five years ended April 30, 2002.
13
That portion of the annual report to security
holders for the fiscal year ended April 30, 2002 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.
21
Subsidiaries of the Company.
23
Consent of PricewaterhouseCoopers LLP, Certified
Public Accountants.
(b)
Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the fourth quarter of the year ended April 30, 2002.
Table of Contents
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. | ||
June 12, 2002 |
By /s/ Mark A. Ernst
Mark A. Ernst President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature | Title | |
|
|
|
/s/ Mark A. Ernst
Mark A. Ernst |
President, Chief Executive Officer and
Director (principal executive officer) |
|
/s/ G. Kenneth Baum
G. Kenneth Baum |
Director | |
/s/ Thomas M. Bloch
Thomas M. Bloch |
Director | |
/s/ Donna R. Ecton
Donna R. Ecton |
Director | |
/s/ Henry F. Frigon
Henry F. Frigon |
Director | |
Roger W. Hale |
Director | |
/s/ Frank L. Salizzoni
Frank L. Salizzoni |
Director | |
/s/ Tom D. Seip
Tom D. Seip |
Director | |
/s/ Louis W. Smith
Louis W. Smith |
Director | |
/s/ Rayford Wilkins, Jr.
Rayford Wilkins, Jr. |
Director |
(Signed as to each on June 12, 2002)
38
/s/ Frank J. Cotroneo
Frank J. Cotroneo |
Senior Vice President and Chief Financial
Officer (principal financial officer) |
|
/s/ Cheryl L. Givens
Cheryl L. Givens |
Vice President and Corporate Controller
(principal accounting officer) |
(Signed as to each on June 12, 2002)
39
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 11, 2002 appearing in the 2002 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 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 set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Kansas City, Missouri
June 11, 2002
40
H&R BLOCK, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 2002, 2001 AND 2000
Additions | ||||||||||||||||||||||||
|
||||||||||||||||||||||||
Description |
Balance at Beginning
of Period |
Charged to Costs
and Expenses |
Charged to Other | Deductions |
Balance at End
of Period |
|||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Allowance for Doubtful Accounts - | ||||||||||||||||||||||||
deducted from accounts receivable | ||||||||||||||||||||||||
in the balance sheet | ||||||||||||||||||||||||
|
||||||||||||||||||||||||
2002
|
$ | 48,817,000 | $ | 76,804,000 | | $ | 59,779,000 | $ | 65,842,000 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
2001
|
$ | 50,361,000 | $ | 84,422,000 | | $ | 85,966,000 | $ | 48,817,000 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
2000
|
$ | 61,872,000 | $ | 51,719,000 | | $ | 63,230,000 | $ | 50,361,000 | |||||||||||||||
|
|
|
|
|
|
Exhibit 10.2
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
Amended and Restated
Effective July 1, 2002
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
TABLE OF CONTENTS
Page | ||||||||||
|
||||||||||
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT
|
1 | |||||||||
|
||||||||||
Section 1.1
|
Establishment of Account | 1 | ||||||||
Section 1.2
|
Property of Company and Participating Affiliates | 1 | ||||||||
|
||||||||||
ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER
|
1 | |||||||||
|
||||||||||
Section 2.1
|
Definitions | 1 | ||||||||
Section 2.2
|
Gender and Number | 3 | ||||||||
|
||||||||||
ARTICLE 3 PARTICIPATION
|
3 | |||||||||
|
||||||||||
Section 3.1
|
Who May Participate | 3 | ||||||||
Section 3.2
|
Time and Conditions of Participation | 3 | ||||||||
Section 3.3
|
Termination of Participation | 3 | ||||||||
Section 3.4
|
Missing Persons | 3 | ||||||||
Section 3.5
|
Relationship to Other Plans | 4 | ||||||||
|
||||||||||
ARTICLE 4 ENTRIES TO THE ACCOUNT
|
4 | |||||||||
|
||||||||||
Section 4.1
|
Deferrals | 4 | ||||||||
Section 4.2
|
Crediting Rate | 4 | ||||||||
|
||||||||||
ARTICLE 5 VESTING
|
6 | |||||||||
|
||||||||||
ARTICLE 6 DISTRIBUTION OF BENEFITS
|
6 | |||||||||
|
||||||||||
Section 6.1
|
Time of Payment | 6 | ||||||||
Section 6.2
|
Form of Benefits for Distributions Made On Account of Termination of Membership on all Boards of Directors | 6 | ||||||||
Section 6.3
|
Death Benefits | 8 | ||||||||
Section 6.4
|
Claims Procedure | 9 | ||||||||
Section 6.5
|
Alternate Forms of Benefit Distribution | 10 | ||||||||
Section 6.6
|
Distributions on Plan Termination | 10 | ||||||||
|
||||||||||
ARTICLE 7 FUNDING
|
10 | |||||||||
|
||||||||||
Section 7.1
|
Source of Benefits | 10 | ||||||||
Section 7.2
|
No Claim on Specific Assets | 10 |
ARTICLE 8 ADMINISTRATION AND FINANCES
|
10 | ||||||||
|
|||||||||
Section 8.1
|
Administration | 10 | |||||||
Section 8.2
|
Powers of the Committee | 10 | |||||||
Section 8.3
|
Actions of the Committee | 11 | |||||||
Section 8.4
|
Delegation | 11 | |||||||
Section 8.5
|
Reports and Records | 11 | |||||||
|
|||||||||
ARTICLE 9 AMENDMENTS AND TERMINATION
|
11 | ||||||||
|
|||||||||
Section 9.1
|
Amendments | 11 | |||||||
Section 9.2
|
Termination | 11 | |||||||
|
|||||||||
ARTICLE 10 MISCELLANEOUS
|
12 | ||||||||
|
|||||||||
Section 10.1
|
No Guarantee of Membership | 12 | |||||||
Section 10.2
|
Release | 12 | |||||||
Section 10.3
|
Notices | 12 | |||||||
Section 10.4
|
Non-Alienation | 12 | |||||||
Section 10.5
|
Tax Liability | 12 | |||||||
Section 10.6
|
Captions | 12 | |||||||
Section 10.7
|
Applicable Law | 12 | |||||||
|
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
H&R Block, Inc. (the Company) hereby amends and restates, effective July 1, 2002, the nonqualified deferred compensation plan for the benefit of specified Directors of the Company and such other entities as may be designated by the Company from time to time known as the H&R Block Deferred Compensation Plan for Directors (the Plan).
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT
Section 1.1. Establishment of Account. The Company shall establish an Account for each Participant which shall be utilized solely as a device to measure and determine the amount of deferred Directors 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, 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 Directors 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 (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 years that have elapsed since the date of the Participants birth. | |
2.1.4. Assumed Interest Rate has the meaning specified in Section 6.2.3. |
2.1.5. Beneficiary or Beneficiaries means the persons or trusts designated by a Participant in writing pursuant to Section 6.3.4 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 6.3.5 of the Plan. | |
2.1.6. Board means the Board of Directors of the Company as constituted at the relevant time. |
1
2.1.7. Closing Price means the closing price of the Companys 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 Companys Common Stock as of the immediately preceding date for which a price is available. |
2.1.8. 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. |
2.1.9. Committee means the Compensation Committee of the Board. |
2.1.10. Common Stock means the common stock of the Company. | |
2.1.11. Company means H&R Block, Inc. |
2.1.12. Deferred Compensation Unit means a unit equal in value to one share of Common Stock and posted to a Participants Account for the purpose of measuring the benefits payable under the Plan. |
2.1.13. Director or Directors means a Non-Employee serving as a member on the Board of Directors of a Participating Affiliate. |
2.1.14. Directors Fees of a Director for any Plan Year means that individuals (a) quarterly retainer, (b) Board meeting fees, (c) committee meeting fees, and (d) any other retainer or fees for that Plan Year. | |
2.1.15. Enrollment Period for a Plan Year commencing January 1 means the immediately preceding period of October 1 through December 15, inclusive. |
2.1.16. Initial Payment Period has the meaning specified in Section 6.2.2. | |
2.1.17. Non-Employee means any person who is not classified as a common-law employee of an Affiliate by such Affiliate. |
2.1.18. Overall Payment Period has the meaning specified in Section 6.2.2. |
2.1.19. Participant means a Non-Employee Director who is eligible to participate in the Plan and has elected to participate in the Plan. |
2.1.20. Participating Affiliate or Participating Affiliates means the Company and the following indirect subsidiaries of the Company, each of which is an Affiliate: HRB Management, Inc., H&R Block Services, Inc., Block Financial Corporation, HRB Business Services, Inc., and the majority-owned U.S. subsidiaries of such indirect subsidiaries; and such other Affiliates as may be designated as such by the Committee from time to time. |
2
2.1.21. Permissible Deferral means a deferral in a Plan Year of one hundred percent (100%) of any one or more of the components of Directors Fees. |
Directors Fees deferrals shall be made in single sum deferrals at the time that the Directors Fees would otherwise be paid to the Director. |
2.1.22. Plan means the H&R Block Deferred Compensation Plan for Directors as set forth herein and as amended or restated from time to time. |
2.1.23. Plan Year means the calendar year for Permissible Deferrals of Participants elected to commence on January 1, 1998, or later. |
2.1.24. Plan Year Payment Period has the meaning specified in Section 6.2.2. |
2.1.25. Remainder Payment Period has the meaning specified in Section 6.2.2. | |
2.1.26. Standard Form of Benefit as to any Participant means semimonthly payments for a ten (10) year period. | |
2.1.27. 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 individuals completion of a Permissible Deferral election for the succeeding Plan Year 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 individuals participation in the Plan.
Section 3.4. Missing Persons. If the Company is unable to locate the Participant or his or her Beneficiary for purposes of making a distribution, the amount of a Participants benefits
3
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 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 benefit plan or program 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 and/or variable crediting rate option for measuring the performance of the Account under Section 4.2, the Company shall post to the Account of such Participant on the date the Directors Fees would otherwise be paid the amount of Directors Fees to be deferred as designated by the Participants Permissible Deferral election in effect for each 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 Directors Fees to be deferred as designated by the Participants Permissible Deferral election in effect for than Plan Year; (b) deferrals of Directors Fees (and the corresponding number of Deferred Compensation Units) shall be posted as of the date the Directors Fees would otherwise be paid the amount of Directors Fees to be deferred; and (c) the number of Deferred Compensation Units posted for each calendar month in which Directors Fees would otherwise be paid the amount of Directors 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 that month. A Participant may elect to allocate no more than twenty-five percent (25%) of his or her deferrals to the Common Stock crediting rate. In the event a Participant has previously elected to allocate more than twenty-five percent (25%) of his or her deferrals to the Common Stock crediting rate and such election has not been changed on or before June 30, 2002, effective July 1, 2002, the Participants allocation election will automatically be changed to reduce such allocation of deferrals to the Common Stock crediting rate to twenty-five percent (25%) and the amount previously allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) will automatically be allocated to the fixed rate crediting option.
Section 4.2. Crediting Rate. Gains or losses shall be posted to the Account on a daily basis in accordance with the Participants election of investment options 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 Participants election but reserves the right to do otherwise. Statements of Account balances shall be provided no less frequently than on a quarterly basis. The Participant shall elect from among 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 Participant may elect to allocate no more than twenty-five percent (25%) of his or her deferrals or Account to the Common Stock crediting rate. On a monthly basis, Participants may elect to reallocate all or any portion of their Account balances among the available investment options, including those funds selected by the Company for the variable rate investment option, provided said reallocations are in whole number increments and further provided that said reallocations will not result in an allocation of more than
4
twenty-five percent (25%) of their Account balances to the Common Stock crediting rate. If as of July 1, 2002, a Participants Account has an allocation of greater than twenty-five percent (25%) of the Account to the Common Stock crediting rate, the Participant will be given the opportunity to reallocate that portion of the Account allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) of the total Account balance to another crediting rate option as of July 1, 2002. If the Participant does not elect to reallocate such excess, such excess will automatically be reallocated to the fixed rate crediting option as of July 1, 2002. If as of January 1, 2003, or any January 1 thereafter, a Participants Account has an allocation of greater than twenty-five percent (25%) of the Account to the Common Stock crediting rate, the portion of the Account allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) of the total Account balance will automatically be reallocated to the fixed rate crediting option as of the January 1 of the year in which such reallocation was made.
Subject to the percentage limits in the preceding paragraph, Participants may change their crediting rate elections once each calendar month by giving the Company notice of such change in accordance with a method and/or procedures approved by the Company for that purpose. Upon receipt of such notice, the Committee will effect the change on the first day of the calendar month immediately following the month in which such notice was received. Such change will govern the Participants Account balance and future deferrals occurring on or after the effective date of such change.
Section 4.2.1. Fixed Rate. If a Participant elects a fixed rate, the interest will be compounded on a daily basis and posted to the Participants Account daily at an effective annual yield equal to the rate of ten-year United States Treasury notes in effect at the time as determined below. The rate will be determined four times each Plan Year and for each Plan Year quarter will be the rate in effect as of the last day of the calendar quarter immediately prior to the calendar quarter to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. |
Through July 1, 2002, for Permissible Deferrals elected under the Plan and commencing prior to January 1, 1995, the effective annual yield for the fixed rate crediting option was equal to one hundred twenty percent (120%) of the ten-year rolling average rate of ten-year United States Treasury notes. The ten-year rolling average rate was the rate in effect as of September 30 of the Plan Year immediately prior to the Plan Year to which it applied, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. Effective July 1, 2002, such effective annual yield for the fixed rate crediting option is eliminated and replaced with an effective annual yield equal to the rate of ten-year United States Treasury notes, as determined in accordance with the first paragraph of this Section 4.2.1. |
Section 4.2.2. Variable Rate. If a Participant elects a variable rate, the Participants 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. 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 whole number increments of the Account. |
5
Section 4.2.3. Common Stock Crediting Rate. If a Participant elects the Common Stock crediting rate, the Participants 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 Participants Account will vary with the value of the Companys Common Stock. The Participants 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 Companys Common Stock based on the number of Deferred Compensation Units posted to the Participants Account as of the record date with respect to the declaration of such dividend. As of any date of valuation, the value of a Participants 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. |
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 Participants membership on all Boards of Directors of all Participating Affiliates; or | |
(b) the Participants death. |
Except as otherwise provided, benefit payments shall commence in the first month of the first calendar quarter that begins at least forty-five days after the occurrence of the event described in the preceding sentence which results in benefit distribution.
Section 6.2. Form of Benefits for Distributions Made On Account of Termination of Membership on All Boards of Directors.
Section 6.2.1. For distributions made on account of the termination, voluntary or involuntary, of the Participants membership on all Boards of Directors of all Participating Affiliates, payments from the Account shall be made in accordance with the Standard Form of Benefit. The Participant in the Plan Year prior to payment of benefits may, however, petition the Committee for, and the Committee may approve at such time, one of the following forms of benefit: |
(a) semimonthly payments over a five (5) year period; or | |
(b) a single distribution paid within forty-five (45) days after the termination of the Participants membership on all Boards of Directors of all Participating Affiliates. |
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Section 6.2.2. Except for a single distribution, benefit payments shall be in the form of semimonthly cash installments paid during the applicable payment period (the Overall Payment Period). The amount of each installment payment shall be level during the portion of the Overall Payment Period ending on December 31 of the Plan Year in which benefit payments commence (the Initial Payment Period), during each complete Plan Year of the Overall Payment Period thereafter (a Plan Year Payment Period), and during any remaining period of the Overall Payment Period following the last Plan Year Payment Period (the Remainder Payment Period), but will vary from one such portion of the Overall Payment Period to the next. |
Section 6.2.3. The amount of each level payment for the Initial Payment Period, if any, shall be calculated using the balance in the Account as of the beginning of the Initial Payment Period and amortizing such balance over the remaining Overall Payment Period (a) using an assumed interest rate equal to the rate of one-year United States Treasury notes for each Participant receiving payments of benefits prior to December 8, 1999, said rate to be determined once each Plan Year and to be the rate in effect as of the September 30 immediately preceding the payment period to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company (the Assumed Interest Rate), and (b) using an assumed interest rate of zero percent (0%) for all other Participants. The amount of each level payment for each Plan Year Payment Period shall be calculated by taking the balance in the Account as of November 30 of the Plan Year immediately prior to such Plan Year Payment Period, subtracting the benefit payments made during the portion of such preceding Plan Year following November 30, and amortizing the difference over the remaining Overall Payment Period (x) using the Assumed Interest Rate for each participant receiving payments of benefits prior to December 8, 1999, and (y) using an assumed interest rate of zero percent (0%) for all other Participants. The amount of each level payment for the Remainder Payment Period, if any, shall be calculated by taking the balance in the Account as of November 30 of the Plan Year immediately prior to the Remainder Payment Period, subtracting the benefit payments made during the portion of such preceding Plan Year following November 30, and amortizing the difference over the Remainder Payment Period using an assumed interest rate of zero percent (0%) per annum. If the actual crediting rate for the Remainder Payment Period is more than zero percent, the additional gain resulting from the difference in crediting rates shall be paid to the Participant in a single payment within six months after the last day of the Remainder Payment Period. |
Section 6.2.4. The Account shall be credited during the Overall Payment Period with gains and losses as provided in Section 4.2. |
Section 6.2.5. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, (i) increase or reduce any assumed interest rate set forth in this Section 6.2 and any such assumed interest rate, as so adjusted, shall be effective for calculating level semimonthly installments for Participants whose benefit payments commence after the date of such adjustment, and (ii) change the date set forth in Section 6.2.3 on which the balance in the Participants Account is to be determined for purposes of |
7
calculating the amount of each level payment for each Plan Year Payment Period and each Remainder Payment Period, and any such revised date shall be effective for calculating level semimonthly installments for the Plan Year Payment Period or the Remainder Payment Period beginning on or after the effective date of such revision. |
Section 6.3. Death Benefits.
6.3.1. 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 Participants Beneficiary in the same manner such benefits were being paid to the Participant at the time of death and 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 Participants date of death through the end of the Overall Payment Period at an interest rate equal to the rate of one-year United States Treasury notes, said rate to be determined once each Plan Year and to be the rate in effect as of September 30 of the Plan Year immediately prior to the Plan Year to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. |
6.3.2. 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 Participants Beneficiary in the form of a lump sum payment, semimonthly payments over a five-year period, or semimonthly payments over a ten-year period, as selected by the Participant on a form and in a manner prescribed by the Committee. A Participant may change such election once each Plan Year. If the form of payment selected by the Participant is a lump sum, the amount of the pre-retirement death benefit shall be equal to the Participants Account as of the date of the Participants death. If the form of payment selected by the Participant is semimonthly payments over a five or ten-year period, the amount of the pre-retirement death benefit shall be equal to the Participants Account as of the date of the Participants death, annuitized over a five-year or ten-year period, respectively, at an interest rate equal to the rate of one-year United States Treasury notes in effect as of September 30 of the Plan Year immediately prior to the Plan Year in which payment of the pre-retirement death benefit commences, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. If a Participant fails to select the form of the pre-retirement death benefit, the pre-retirement death benefit shall be paid in the form of semimonthly payments over a ten-year period. |
6.3.3. 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 Participants death benefit payable to a surviving spouse which remains unpaid at the death of such spouse shall be paid to the spouses estate. |
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6.3.4. 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. In the event a Participant is married at the time he or she designates a beneficiary other than his or her spouse, such designation will not be valid unless the Participants spouse consents in writing to such designation. 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. |
6.3.5. 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 Participant shall be paid to the Participants spouse, if living; if the Participant does not leave a surviving spouse, to the Participants issue by right of representation; or, if there are no such issue then living, to the Participants 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 Participants spouse pursuant to 6.4.3, the remaining balance of such benefit shall be paid to the deceased Beneficiarys estate; or, if the deceased Beneficiary is one of multiple concurrent Beneficiaries, such remaining benefits shall be paid proportionally to the surviving Beneficiaries. |
Section 6.4. Claims Procedure. The Committee shall notify a Participant in writing within ninety (90) days of the Participants written application for benefits of his or her eligibility or non-eligibility 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 or her claim, and a description of why it is needed, and (d) an explanation of the Plans claims review procedure and other appropriate information as to the steps to be taken if the Participant wishes to have his or her 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 or she is entitled to greater or different benefits, he or she shall have the opportunity to have his or her claim reviewed by the Committee by filing a petition for review with the Committee within sixty (60) days after receipt by him or her of the notice issued by the Committee. Said petition shall state the specific reasons the Participant believes he or she is entitled to benefits or greater or different benefits. Within sixty (60) days after receipt by the Committee of said petition, the Committee shall afford the Participant (and his or her counsel, if any) an opportunity to present his or her position t the Committee orally or in writing, and said Participant (or his or her 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
9
period, stating specifically the basis of said decision written in a manner calculated to be under-stood 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 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 6.5. Alternate Forms of Benefit Distribution. Participants, no later than in the Plan Year prior to the Plan Year in which payment of benefits commence may petition the Committee to request methods of benefit distribution other than those provided pursuant to this Article 6.
Section 6.6. 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. Source of Benefits. All benefits under the Plan shall be paid when due by the Company out of its assets or 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 or her 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 |
(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
10
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 Participants 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, 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. Notwithstanding anything in this Section 9.1 to the contrary, the Committee may, in its discretion, (i) amend the Plan to increase or reduce any assumed interest rate set forth in Section 6.2, in accordance with the provisions of Section 6.2.5, or (ii) amend the Plan to change the date set forth in Section 6.2.3 on which the balance in the Participants Account is to be determined for purposes of calculating the amount of each level payment for each Plan Year Payment Period and each Remainder Payment Period, in accordance with provisions of Section 6.2.5.
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 Participants Account immediately before the effective date of such termination, and each such
11
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. Release. Any payment of benefits to or for the benefit of a Participant or a Participants Beneficiaries that is made in good faith by the Company in accordance with the Companys 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 10.3. 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 10.4. 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 10.5. 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 10.5 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 10.5.
Section 10.6. 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.
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Section 10.7. 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.
Dated: |
June 10, 2002
|
H&R BLOCK, INC. | ||
/s/ Mark A. Ernst
Mark A. Ernst President and Chief Executive Officer |
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Exhibit 10.3
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
July 1, 2002
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
TABLE OF CONTENTS
Page | |||||||||
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ARTICLE 1 DEFERRED COMPENSATION ACCOUNT
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1 | ||||||||
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Section 1.1
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Establishment of Account | 1 | |||||||
Section 1.2
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Property of Company and Participating Affiliates | 1 | |||||||
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ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER
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2 | ||||||||
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Section 2.1
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Definitions | 2 | |||||||
Section 2.2
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Gender and Number | 8 | |||||||
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ARTICLE 3 PARTICIPATION
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8 | ||||||||
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Section 3.1
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Who May Participate | 8 | |||||||
Section 3.2
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Time and Conditions of Participation | 8 | |||||||
Section 3.3
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Termination of Participation | 9 | |||||||
Section 3.4
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Missing Persons | 9 | |||||||
Section 3.5
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Relationship to Other Plans | 9 | |||||||
Section 3.6
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Changes in Employment Status | 9 | |||||||
Section 3.7
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Participation upon Reemployment | 9 | |||||||
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ARTICLE 4 ENTRIES TO THE ACCOUNT
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9 | ||||||||
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Section 4.1
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Contributions | 9 | |||||||
Section 4.2
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Crediting Rate | 11 | |||||||
Section 4.3
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Crediting Rate Upon Retirement, Disability, Continued Employment After Reaching the Age of 75, Death or Termination of Employment with all Affiliates as a Result of a Change in Control | 12 | |||||||
Section 4.4
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Crediting Rate Upon Resignation or Discharge | 13 | |||||||
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ARTICLE 5 VESTING
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13 | ||||||||
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Section 5.1
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Participant Deferrals and Vesting Schedule for Company Contributions | 13 | |||||||
Section 5.2
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Exceptions to Vesting Schedule | 14 | |||||||
Section 5.3
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Forfeiture of Nonvested Amounts | 14 | |||||||
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ARTICLE 6 DISTRIBUTION OF BENEFITS
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14 | ||||||||
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Section 6.1
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Payments After Termination of Employment | 14 | |||||||
Section 6.2
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Payments During Employment | 14 | |||||||
Section 6.3
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Form of Benefits Upon Retirement, Disability or Continued Employment After Reaching the Age of 75 | 15 | |||||||
Section 6.4
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Form of Benefits Upon Resignation or Discharge, or Termination of Employment with all Affiliates as Result of a Change in Control | 16 |
Section 6.5
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Amount of Benefit | 18 | |||||||
Section 6.6
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Time of Payment | 19 | |||||||
Section 6.7
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Death Benefits | 20 | |||||||
Section 6.8
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Hardships | 21 | |||||||
Section 6.9
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Claims Procedure | 22 | |||||||
Section 6.10
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Alternate Forms of Benefit Distribution | 22 | |||||||
Section 6.11
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Distributions on Plan Termination | 23 | |||||||
Section 6.12
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Cessation of Payments upon Reemployment | 23 | |||||||
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ARTICLE 7 FUNDING
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Section 7.1
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Source of Benefits | 23 | |||||||
Section 7.2
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No Claim on Specific Assets | 23 | |||||||
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ARTICLE 8 ADMINISTRATION AND FINANCES
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Section 8.1
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Administration | 23 | |||||||
Section 8.2
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Powers of the Compensation Committee | 23 | |||||||
Section 8.3
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Actions of the Compensation Committee | 24 | |||||||
Section 8.4
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Delegation | 24 | |||||||
Section 8.5
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Reports and Records | 24 | |||||||
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ARTICLE 9 AMENDMENTS AND TERMINATION
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Section 9.1
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Amendments | 24 | |||||||
Section 9.2
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Termination | 24 | |||||||
Section 9.3
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Accelerated Vesting | 25 | |||||||
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ARTICLE 10 ACCELERATED VESTING
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Section 10.1
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Accelerated Vesting | 25 | |||||||
Section 10.2
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Change in Control | 25 | |||||||
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ARTICLE 11 MISCELLANEOUS
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Section 11.1
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No Guarantee of Employment | 25 | |||||||
Section 11.2
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Individual Account Plan | 26 | |||||||
Section 11.3
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Release | 26 | |||||||
Section 11.4
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Notices | 26 | |||||||
Section 11.5
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Non-Alienation | 26 | |||||||
Section 11.6
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Tax Liability | 26 | |||||||
Section 11.7
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Captions | 26 | |||||||
Section 11.8
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Applicable Law | 26 |
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
H&R Block, Inc. (the Company) established, effective August 1, 1987, a nonqualified deferred compensation plan for the benefit of specified Executives of the Company, and specified affiliates of the Company. This plan became known as the H&R Block Deferred Compensation Plan for Executives (the DCP). The Company amended the DCP by Amendment No. 1 effective December 15, 1990; by Amendment No. 2 effective January 1, 1990; by Amendment No. 3 effective September 1, 1991; by Amendment No. 4 effective January 1, 1994; by Amendment No. 5 effective May 1, 1994; by Amendment No. 6 effective August 1, 1995; by Amendment No. 7 effective December 11, 1996; by Amendment No. 8 effective January 1, 1998; by Amendment No. 9 effective as of January 1, 1997; by Amendment No. 10 effective in part March 1, 1998 and in part April 1, 1998; and by Amendment No. 11 effective as of May 15, 1998.
The Company adopted the H&R Block Supplemental Deferred Compensation Plan for Executives (the Supplemental Plan) effective as of May 1, 1994. The Company amended said Supplemental Plan by Amendment No. 1 effective September 7, 1994; by Amendment No. 2 effective August 1, 1995; by Amendment No. 3 effective December 11, 1996; by Amendment No. 4 effective January 1, 1998; by Amendment No. 5 effective May 1, 1997; by Amendment No. 6 effective in part March 1, 1998 and in part April 1, 1998; and by Amendment No. 7 effective as of May 15, 1998.
The Company combined the DCP and the Supplemental Plan into one plan known as the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated (the Plan) and made other amendments to the Plan effective January 1, 1999. The Company amended the Plan by Amendment No. 1 effective January 1, 1999; by Amendment No. 2 effective January 1, 2000; by Amendment No. 3 effective September 8, 1999; by Amendment No. 4 effective December 31, 1999; and by Amendment No. 5 effective January 1, 2001.
The Company continues to retain the right to amend the Plan pursuant to action by the Companys Board of Directors. The Company hereby exercises that right by amending and restating the Plan. The Plan shall be amended and restated effective as of July 1, 2002.
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 for each Participant which shall be utilized solely as a device to measure and determine the amount of deferred compensation 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, except, and to the extent, of any assignment of such assets to an irrevocable trust.
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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 compensation 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 or by the Company pursuant to Section 4.1. | |
2.1.2 Accounting Firm means an accounting firm in which the Company has no direct or indirect ownership interest but with which an Accounting Subsidiary has a contractual relationship in respect of one or more employees who are employees of both such accounting firm and such Accounting Subsidiary. | |
2.1.3 Accounting Subsidiary means an indirect accounting firm subsidiary of the Company that is involved in the provision of non-attest accounting services, the management of one or more Accounting Firms, and/or the ownership of one or more other accounting firm subsidiaries of the Company. | |
2.1.4 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 (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.) | |
2.1.5 Age of a Participant means the number of whole years that have elapsed since the date of the Participants birth. | |
2.1.6 Assumed Interest Rate has the meaning specified in Section 6.5.3. | |
2.1.7 Base Salary of an Executive for any Deferral Period means the total salary and wages paid by all Affiliates to such individual during that Deferral Period, including any amount which would be included in the definition of Base Salary, but for the individuals election to defer some of his or her salary pursuant to this Plan or some other deferred compensation plan established by an Affiliate; but excluding any other remuneration paid by Affiliates, such as overtime, net commissions, bonuses, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses, and automobile allowances), and fringe benefits (cash or noncash). The Base Salary of a Production Executive for any Deferral Period means the total earnings and wages, including any and all commissions, incentives and bonuses, paid by all Affiliates to such individual during that Deferral Period, including any amount which would be included in the definition of Base Salary, but for the individuals election to defer some of his or her earnings pursuant to this Plan or some other deferred compensation plan established by an Affiliate; but excluding any other remuneration paid by Affiliates, such as overtime, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses, and automobile allowances), and fringe benefits payable in a form other than cash. In the case of an individual who is a |
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participant in a plan sponsored by an Affiliate which is described in Section 401(k) of the Code (401(k) plan), the term Base Salary shall include any amount which would be included in the definition of Base Salary, but for the individuals election to reduce his or her salary or earnings and have the amount of the reduction contributed to the 401(k) plan on his or her behalf. | |
2.1.8 Beneficiary or Beneficiaries means the persons or trusts designated by a Participant in writing pursuant to Section 6.7.2 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 6.7.3 of the Plan. | |
2.1.9 Board means the Board of Directors of the Company as constituted at the relevant time. | |
2.1.10 Bonus or Bonuses of an Executive for any Plan Year means the total remuneration paid under the various annual management bonus programs (annual bonuses) by Affiliates to such individual for that Plan Year including any amount which would be included in the definition of Bonus, but for the individuals election to defer some or all of his or her annual bonus pursuant to this Plan or some other deferred compensation plan established by an Affiliate; but excluding any other remuneration paid by Affiliates, such as Base Salary, overtime, net commissions, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses, and automobile allowances), and fringe benefits payable in a form other than cash. For purposes of this Plan, the terms Bonus and Bonuses specifically exclude any and all types of commissions, incentives or bonuses paid by any Affiliate to a Production Executive. | |
2.1.11 Change in Control has the meaning specified in Section 10.2 | |
2.1.12 Closing Price means the closing price of the Companys 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 Companys Common Stock as of the immediately preceding date for which a price is available. | |
2.1.13 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. | |
2.1.14 Common Stock means the common stock of the Company. | |
2.1.15 Company means H&R Block, Inc. | |
2.1.16 Company Contribution or Company Contributions means the sum of (i) the Company Matching Contributions described in Section 4.1.2, and (ii) the additional Company contributions described in Section 4.1.3. | |
2.1.17 Compensation Committee means the Compensation Committee of the Board. | |
2.1.18 DCP means the H&R Block Deferred Compensation Plan for Executives |
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initially adopted by the Company effective as of August 1, 1987, as subsequently amended effective prior to January 1, 1999. | |
2.1.19 Deferral Amount means (i) in the case of Base Salary, the amount of Base Salary that a Participant elects to defer each Deferral Period under a Permissible Deferral, and (ii) in the case of Bonus, the amount of Bonus that a Participant elects to defer during the Enrollment Period of October 1 through December 15, effective for the Deferral Periods of the succeeding Plan Years, under a Permissible Deferral. The amount of Base Salary included in the Deferral Amount shall be equal to a percentage of the Participants Base Salary that is not less than three percent (3%) and either (a) not greater than fifty percent (50%) for Permissible Deferrals of persons who are employed by a Group 1 Participating Affiliate, or (b) not greater than twenty percent (20%) for Permissible Deferrals of persons who are employed by a Group 2 Participating Affiliate. In the event a Participant who is employed by a Group 2 Participating Affiliate has completed a Permissible Deferral election to defer as of January 1, 2002, greater than twenty percent (20%) of Base Salary and such Participant does not reduce his or her Permissible Deferral election of Base Salary to twenty percent (20%) or less during the Enrollment Period of May 15, 2002 through June 14, 2002, the Participants Permissible Deferral election of Base Salary will automatically be reduced to twenty percent (20%) of Base Salary effective for the Deferral Period beginning July 1, 2002 and for all Deferral Periods thereafter, unless the Participant (i) loses eligibility to make deferrals under the Plan pursuant to Section 3.6, (ii) changes his or her Permissible Deferral election to a percentage less than twenty percent (20%) during a subsequent Enrollment Period, or (iii) terminates his or her Permissible Deferral election pursuant to Section 6.8. The amount of Bonus or Bonuses included in the Deferral Amount shall be equal to (i) a flat dollar amount (not greater than the maximum percentage of the Bonus specified in (ii), below), or (ii) a percentage of the Bonus or Bonuses paid during the Plan Year that is not less than five percent (5%) and either (A) not greater than fifty percent (50%) for Permissible Deferrals of persons who are employed by a Group 1 Participating Affiliate, or (B) not greater than twenty percent (20%) for Permissible Deferrals of persons who are employed by a Group 2 Participating Affiliate. In the event a Participant who is employed by a Group 2 Participating Affiliate has completed a Permissible Deferral election to defer as of January 1, 2002, greater than twenty percent (20%) of Bonus, such election will remain in effect for the remainder of the Plan Year that began January 1, 2002 (unless the Participant loses eligibility to make deferrals under the Plan pursuant to Section 3.6 or terminates his or her Permissible Deferral election pursuant to Section 6.8), after which Plan Year the Participants Permissible Deferral election of Bonus will automatically be reduced to twenty percent (20%) of Bonus for the 2003 Plan Year and all Plan Years thereafter, unless the Participant changes his or her Permissible Deferral election to a percentage less than twenty percent (20%) during a subsequent October 1 through December 15 Enrollment Period. In the case of a Participant who concurrently receives remuneration from both an Accounting Subsidiary and an Accounting Firm for providing services to each entity, the calculation of the amount of the Deferral Amount that the Participant is permitted to elect shall be made by taking into account the remuneration paid to such Participant by the Accounting Firm, but the actual deferral under the Plan shall only be made out of the Base Salary and/or Bonus or Bonuses paid by the Accounting Subsidiary and any other Affiliate. | |
2.1.20 Deferral Period means a six-month period either (i) beginning January 1 and ending June 30, or (ii) beginning July 1 and ending December 31. |
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2.1.21 Deferred Compensation Unit means a unit equal in value to one share of Common Stock and posted to a Participants Account for the purpose of measuring the benefits payable under the Plan. | |
2.1.22 Disabled or Disability with respect to a Participant shall have the same definition as in the then existing group long-term disability insurance program sponsored by HRB Management, Inc. | |
2.1.23 Early Retirement Date of a Participant means the first day of the first calendar month commencing on or after the date on which (i) the Participant has reached Age 55 while in the employ of an Affiliate and (ii) the Participant has completed at least ten (10) Years of Service. | |
2.1.24 Eligibility Committee means the Chief Executive Officer of the Company, the Chief Financial Officer of the Company, and the senior officer of the Company responsible for human resources. | |
2.1.25 Enrollment Period for a Deferral Period that begins January 1 means the immediately preceding period of October 1 through December 15, inclusive. Enrollment Period for a Deferral Period that begins July 1 means the immediately preceding period of May 1 through June 15, inclusive; provided, however, that for the Deferral Period that begins July 1, 2002, the Enrollment Period means the immediately preceding period of May 15 through June 14, inclusive. At its sole and absolute discretion, the Compensation Committee may grant to a person eligible to participate in the Plan an Enrollment Period consisting of the 30-day period immediately following the date on which such person is first employed by a Participating Affiliate. | |
2.1.26 Executive means a person other than a Production Executive with substantial responsibility in the management of a Participating Affiliate employed on a full-time basis by that Participating Affiliate. | |
2.1.27 5-year payout has the meaning specified in Section 6.4.2. | |
2.1.28 Group A Participant has the meaning specified in Section 3.1.1. | |
2.1.29 Group B Participant has the meaning specified in Section 3.1.2. | |
2.1.30 Group 1 Participating Affiliate means a Participating Affiliate other than a Group 2 Participating Affiliate. | |
2.1.31 Group 2 Participating Affiliate means RSM McGladrey, Inc., RSM EquiCo, Inc. and their respective U.S. subsidiaries, and such other Participating Affiliates as may be designated as a Group 2 Participating Affiliate by the Compensation Committee from time to time. | |
2.1.32 Hours of Service means hours of service determined in accordance with the provisions of the Qualified Plan. | |
2.1.33 Initial Payment Period has the meaning specified in Section 6.5.2. |
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2.1.34 Matching Contributions has the meaning specified in Section 4.1.2. | |
2.1.35 Normal Retirement Date of a Participant means the last day of the calendar month in which the Participant reaches the Age of 65 while in the employ of an Affiliate. | |
2.1.36 Overall Payment Period has the meaning specified in Section 6.5.1. | |
2.1.37 Participant means an Executive or a Production Executive who is eligible to participate in the Plan and (i) has elected to participate in the Plan or (ii) has a Matching Contribution posted to his or her Account pursuant to Section 2.1.37. | |
2.1.38 Participating Affiliate or Participating Affiliates means the Company and the following indirect subsidiaries of the Company, each of which is an Affiliate: HRB Management, Inc., H&R Block Services, Inc., Block Financial Corporation, HRB Business Services, Inc., and the majority-owned U.S. subsidiaries of such indirect subsidiaries; and such other Affiliates as may be designated as a Participating Affiliate by the Compensation Committee from time to time. | |
2.1.39 Permissible Deferral means, with respect to a Deferral Period, a deferral in that Deferral Period of a Deferral Amount. For all Participants, the aggregate of all deferrals made under the Plan, the DCP, and the Supplemental Plan may not exceed one million dollars ($1,000,000.00). | |
In the case of a Participant who concurrently receives remuneration from both an Accounting Subsidiary and an Accounting Firm for providing services to each entity, the calculation of the amount of the Permissible Deferral shall be made by taking into account the remuneration paid to such Participant by the Accounting Firm, but the actual deferral under the Plan shall only be made out of Base Salary and/or Bonus or Bonuses paid by the Accounting Subsidiary and any other Affiliate. | |
Deferrals may be made from Base Salary for a Deferral Period and/or from a Bonus or Bonuses applicable to the Plan Year. Deferrals from Base Salary during a Deferral Period are made in accordance with the most recent election made by the Participant applicable to Base Salary during an Enrollment Period. Deferrals from a Bonus or Bonuses are made in accordance with the most recent election made by the Participant applicable to Bonuses during an Enrollment Period of October 1 through December 15 of a Plan Year. Deferral elections must specify (i) the percentage (stated as an integer) of the deferral that is intended to be deducted from the Base Salary and, (ii) in the case of a deferral election made during an Enrollment Period of October 1 through December 15 of a prior Plan Year, the percentage (stated as an integer) or the flat dollar amount of the deferral that is intended to be deducted from the Bonus or Bonuses. Deferrals made from the Base Salary shall be made in installments, as instructed and approved by the Compensation Committee. Deferrals made from each Bonus shall be made at the time or times during the applicable Plan Year that the Bonus would otherwise be paid to the Participant (based upon the deferral election in effect for the Plan Year when the Bonus was earned without further contingency). Each installment of a deferral shall be rounded to the nearest whole dollar amount. | |
2.1.40 Plan means the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated, as set forth herein and as further amended |
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and/or restated from time to time thereafter. | |
2.1.41 Plan Year means the calendar year, except for (a) Permissible Deferrals of Participants elected during the Enrollment Period of the period between January 4, 1999 and January 31, 1999, (b) Permissible Deferrals elected to commence on March 1, 1998, (c) Permissible Deferrals elected during an Enrollment Period described in Section 2.1.25, and (d) Permissible Deferrals of Group A Participants elected to commence on or before May 1, 1990. For Permissible Deferrals of Group A Participants elected to commence on or before May 1, 1990, Plan Year means the 12-month period ending each April 30, through April 30, 1997, the period between May 1, 1997 and December 31, 1997, inclusive, and the calendar year thereafter. For Permissible Deferrals of Participants elected to commence on March 1, 1998, Plan Year means the 10-month period between March 1, 1998 and December 31, 1998, inclusive, and the calendar year thereafter. If the Compensation Committee grants to a person eligible to participate in the Plan a discretionary Enrollment Period in accordance with Section 2.1.25 and such person submits to the Company a Permissible Deferrable election during such Enrollment Period, such Participants first Plan Year shall be the period (i) beginning on the first day of the first calendar month commencing not less than 45 days after the date that such Participant is first employed by a Participating Affiliate, and (ii) ending on December 31 of the calendar year in which such calendar month falls. For Permissible Deferrals of Participants elected during the Enrollment Period consisting of the period between January 4, 1999 and January 31, 1999, inclusive, Plan Year means the 10-month period between March 1, 1999 and December 31, 1999, inclusive, and the calendar year thereafter. Plan Years under the DCP and Supplemental Plan shall constitute Plan Years under this Plan, provided that, for all purposes hereunder, a Participant that participated in both the DCP and the Supplemental Plan simultaneously shall be considered to have participated in this Plan for only one Plan Year for each Plan Year of simultaneous participation in the DCP and Supplemental Plan. | |
2.1.42 Plan Year Payment Period has the meaning specified in Section 6.5.2. | |
2.1.43 Production Executive means a person who is employed on a full-time basis by a Participating Affiliate, receives some part of his or her compensation in the form of commissions, and is responsible for managing, overseeing, directing or handling the accounts of clients of the Participating Affiliate. | |
2.1.44 Qualified Plan means the H&R Block Retirement Savings Plan or any successor plan that is intended to satisfy the requirements of section 401 of the Code. | |
2.1.45 Remainder Payment Period has the meaning specified in Section 6.5.2. | |
2.1.46 Standard Form of Benefit as to any Participant means semimonthly payments for a fifteen (15) year period. | |
2.1.47 Supplemental Plan means the H&R Block Supplemental Deferred Compensation Plan for Executives that was initially adopted by the Company effective as of May 1, 1994, subsequently amended thereafter, and combined with the DCP effective January 1, 1999. | |
2.1.48 10-year payout has the meaning specified in Section 6.4.2. |
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2.1.49 3-year payout has the meaning specified in Section 6.4.2. | |
2.1.50 Trust means the H&R Block, Inc. Deferred Compensation Trust Agreement. | |
2.1.51 Years of Service means the number of Plan Years (including years prior to August 1, 1987) for which the Participant had at least 1,000 Hours of Service. |
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 Group A and Group B Participants, described as follows:
3.1.1 Group A Participant is an Executive (i) serving as a Vice President or more senior officer of the Company, or (ii) who was eligible to participate in the DCP as a Group A Participant as of December 31, 1998, as such term was defined in the DCP as of such date, and was a participant in the DCP or Plan on or before January 1, 2001. | |
3.1.2 Group B Participant is an Executive or Production Executive who does not qualify as a Group A Participant, but who is designated by the Compensation Committee or the Eligibility Committee as eligible to participate in the Plan. The Eligibility Committee will report to the Compensation Committee not less frequently than annually the individuals whom the Eligibility Committee classifies as Group B Participants. |
Section 3.2 Time and Conditions of Participation. An eligible Executive or Production Executive shall become a Participant only upon (i) (A) the individuals completion of a Permissible Deferral election for the succeeding Deferral Period or Deferral Periods during an Enrollment Period, in accordance with a form established by the Company from time to time, or (B) in the case of an eligible Executive or Production Executive who has not completed a Permissible Deferral election, the Company posting a Matching Contribution to such individuals Account, and (ii) compliance with such terms and conditions as the Compensation Committee may from time to time establish for the implementation of the Plan, including, but not limited to, any condition the Compensation Committee may deem necessary or appropriate for the Company to meet its obligations under the Plan. An individual may make a Permissible Deferral election for any succeeding Deferral Period during an Enrollment Period provided the total Permissible Deferral elections do not exceed the limitation set forth in Section 2.1.39. A Permissible Deferral election made during an Enrollment Period for a succeeding Deferral Period shall remain in effect for each Deferral Period subsequent to such succeeding Deferral Period unless (a) the Participant changes his or her Permissible Deferral election during a subsequent Enrollment Period (in which case such changed Permissible Deferral election shall apply to the next succeeding Deferral Period and subsequent Deferral Periods unless and until the Permissible Deferral election is properly changed again), (b) the Compensation Committee permits the Participant to terminate future deferrals or withdraw his or her total Account pursuant to Section 6.8, (c) total Permissible Deferrals reach the limitation set forth in Section 2.1.39, or (d) the Participant elects to receive a payment pursuant to Section 6.2.1.
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Section 3.3 Termination of Participation. Once an individual has become a Participant in the Plan, participation shall continue until the first to occur of (i) payment in full of all benefits to which the Participant or Beneficiary is entitled under the Plan (unless the Participant has elected to receive payment in full pursuant to Section 6.2.1) or (ii) 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 individuals participation in the Plan.
Section 3.4 Missing Persons. If the Company is unable to locate the Participant or his or her Beneficiary for purposes of making a distribution, the amount of a Participants benefits under this Plan that would otherwise be considered as non-forfeitable shall be forfeited effective four (4) years after (i) the last date a payment of said benefit was made, if at least one such payment was made, or (ii) 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 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.
Section 3.6 Changes in Employment Status. If a Participant has a change in his or her employment responsibilities, title, compensation, and/or performance, such that the Participant would not qualify for initial participation in the Plan as a Group A Participant or Group B Participant, as determined by the Compensation Committee or the Eligibility Committee, (i) the Participant shall continue to make deferrals in accordance with the Participants Permissible Deferral election for the Deferral Period during which the change in employment responsibilities, title, compensation, and/or performance occurs, (ii) the Participant shall not be eligible to make Permissible Deferrals in Deferral Periods following the Deferral Period during which the change in employment responsibilities, title, compensation, and/or performance occurs unless and until the Participant again qualifies for initial participation as a Group A Participant or a Group B Participant, as determined by the Compensation Committee or the Eligibility Committee, and (iii) the Participant shall otherwise continue to participate in the Plan.
Section 3.7 Participation upon Reemployment. If a Participant terminates employment with all Affiliates and later becomes reemployed by an Affiliate, (i) the Participant shall not be eligible to make Permissible Deferrals unless and until the Participant again qualifies for initial participation as a Group A Participant or a Group B Participant, as determined by the Compensation Committee or the Eligibility Committee, and (ii) the Participant shall otherwise continue to participate in the Plan.
ARTICLE 4 ENTRIES TO THE ACCOUNT
Section 4.1 Contributions.
4.1.1 Deferrals. During each Deferral Period, if the Participant elects the fixed rate and/or variable crediting rate option for measuring the performance of the Account under Section 4.2, the Company shall post to the Account of such Participant the dollar amount of Base Salary and Bonuses to be deferred as designated by the Participants |
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Permissible Deferral election in effect for that Deferral Period. Deferrals from Base Salary each calendar month shall be posted as of the first day of such month and deferrals from Bonuses shall be posted as of the first day of the calendar month in which the Bonus would otherwise have been paid to the Participant. | |
During each Deferral Period, if the Participant elects the Common Stock crediting rate option for measuring the performance of the Account under Section 4.2, the Company shall post to the Account of such Participant a number of Deferred Compensation Units equivalent to the amount of Base Salary and Bonuses to be deferred as designated by the Participants Permissible Deferral election in effect for that Deferral Period. Deferrals from Base Salary each calendar month (and the corresponding number of Deferred Compensation Units) shall be posted as of the first day of such month and deferrals from Bonuses shall be posted as of the first day of the calendar month in which the Bonus would otherwise have been paid to the Participant. The number of Deferred Compensation Units posted for each calendar month shall be calculated by dividing: (i) the dollar amount deferred during that month; by (ii) the Closing Price on the first business day (i.e., a day on which the Common Stock is traded on the New York Stock Exchange) of that month. A Participant may elect to allocate no more than twenty-five percent (25%) of his or her deferrals to the Common Stock crediting rate. In the event a Participant has previously elected to allocate more than twenty-five percent (25%) of his or her deferrals to the Common Stock crediting rate and such election has not been changed on or before June 30, 2002, effective July 1, 2002, the Participants allocation election will automatically be changed to reduce such allocation of deferrals to the Common Stock crediting rate to twenty-five percent (25%) and the amount previously allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) will automatically be allocated to the fixed rate crediting option. | |
4.1.2 Company Matching Contributions. Beginning January 1, 2003, the Company shall post once each Plan Year to the Account of each Participant (including an eligible Executive or Production Executive who becomes a Participant by virtue of such posting) Matching Contributions equal to one hundred percent (100%) of the first five percent (5%) of a Participants Base Salary and Bonus deferred to the Qualified Plan, the Option One Mortgage Corporation Retirement Plus Plan, or the Plan during the immediately preceding Plan Year while employed by a Group 1 Participating Affiliate less any employer matching contribution made to the Qualified Plan or the Option One Mortgage Corporation Retirement Plus Plan during the immediately preceding Plan Year; provided, however, that Matching Contributions posted in 2003 shall be determined by considering only the Participants Base Salary and Bonus deferred to the Qualified Plan, the Option One Mortgage Corporation Retirement Plus Plan, or the Plan during the period of July 1, 2002 through December 31, 2002 less any employer matching contribution made to the Qualified Plan or the Option One Mortgage Corporation Retirement Plus Plan during the period of July 1, 2002 through December 31, 2002. | |
If the Participant elects the Common Stock crediting rate option for measuring the performance of the Account under Section 4.2, the Company shall post to the Account of such Participant for each calendar month a number of Deferred Compensation Units equal to (i) the dollar amount of Matching Contributions posted to the Account during such month; divided by (ii) the Closing Price on the first business day of that month. Deferred Compensation Units attributable to Matching |
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Contributions shall be posted as of the same time as the corresponding Matching Contributions. | |
4.1.3 Additional Company Contributions. Prior to July 1, 2002, the Company posted once each Plan Year to the Account of each Participant who was also a participant in the Qualified Plan the difference, if any, between (a) the amount for that Plan Year which would have been contributed on behalf of the Participant to the Qualified Plan as an employer discretionary profit sharing contribution if the Participant had not made a Permissible Deferral election under the Plan; and (b) the actual amount for that Plan Year that was contributed on behalf of the Participant to the Qualified Plan as an employer discretionary profit sharing contribution. | |
4.1.4 Disability. During the first 90-day period in which a Participant is Disabled, deferrals and Matching Contributions (and, if applicable, the corresponding number of Deferred Compensation Units) shall continue to be posted as described in Sections 4.1.1 and 4.1.2. If a Participant continues to be Disabled after such 90-day period, deferrals will cease but Matching Contributions will continue for the balance of the Plan Year during which the Participant became Disabled as if the Participants deferrals had continued. A Participant may resume deferrals upon his or her return to work. |
Section 4.2 Crediting Rate. Gains or losses shall be posted to the Account on a daily basis in accordance with the Participants election of investment options which will be a reference for measuring the performance of the Account, as modified, if applicable, by Section 4.3 or Section 4.4. The Company intends to measure the performance of the Account in accordance with the Participants election but reserves the right to do otherwise. Statements of Account balances shall be provided no less frequently than on a quarterly basis. The Participant shall elect from among 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 Participant may elect to allocate no more than twenty-five percent (25%) of his or her deferrals or Account to the Common Stock crediting rate. On a monthly basis, Participants may elect to reallocate all or any portion of their Account balances among the available investment options, including those funds selected by the Company for the variable rate investment option, provided said reallocations are in whole number increments, and further provided that said reallocations will not result in an allocation of more than twenty-five percent (25%) of their Account balances to the Common Stock crediting rate. If as of July 1, 2002, a Participants Account has an allocation of greater than twenty-five percent (25%) of the Account to the Common Stock crediting rate, the Participant will be given the opportunity to reallocate that portion of the Account allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) of the total Account balance to another crediting rate option as of July 1, 2002. If the Participant does not elect to reallocate such excess, such excess will automatically be reallocated to the fixed rate crediting option as of July 1, 2002. If as of January 1, 2003, or any January 1 thereafter, a Participants Account has an allocation of greater than twenty-five percent (25%) of the Account to the Common Stock crediting rate, the portion of the Account allocated to the Common Stock crediting rate that exceeds twenty-five percent (25%) of the total Account balance will automatically be reallocated to the fixed rate crediting option as of the January 1 of the year in which such reallocation was made.
Participants may change their crediting rate elections during an Enrollment Period or once each calendar month by giving the Company notice of such change in accordance with a method and/or procedures approved by the Company for that purpose. Upon receipt of such
11
notice submitted with enrollment materials during an Enrollment Period, the crediting rate change shall be made as of the first day of the Deferral Period to which the Enrollment Period relates. Upon receipt of such notice other than in connection with enrollment materials, the Company will effect the change on the first day of the calendar month immediately following the month in which such notice was received. Any change in crediting rate made in accordance with such notice procedures will govern the Participants Account balance and future deferrals occurring after the effective date of such change.
4.2.1 Fixed Rate. If a Participant elects a fixed rate, the interest will be compounded on a daily basis and posted to the Participants Account daily at an effective annual yield equal to the rate of ten-year United States Treasury notes in effect at the time as determined below. The rate will be determined four times each Plan Year and for each Plan Year quarter will be the rate in effect as of the last day of the calendar quarter immediately prior to the calendar quarter to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. | |
Through July 1, 2002, for Permissible Deferrals elected under the DCP and commencing prior to January 1, 1995, the effective annual yield for the fixed rate crediting option was equal to one hundred twenty percent (120%) of the ten-year rolling average rate of ten-year United States Treasury notes. The ten-year rolling average rate was the rate in effect as of September 30 of the Plan Year immediately prior to the Plan Year to which it applied, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. Effective July 1, 2002, such effective annual yield for the fixed rate crediting option is eliminated and replaced with an effective annual yield equal to the rate of ten-year United States Treasury notes, as determined in accordance with the first paragraph of this Section 4.2.1. | |
4.2.2 Variable Rate. If a Participant elects a variable rate, the Participants 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. 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 whole number increments of the Account. | |
4.2.3 Common Stock Crediting Rate. If a Participant elects the Common Stock crediting rate, the Participants 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 Participants Account will vary with the value of the Companys Common Stock. The Participants 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 Companys Common Stock based on the number of Deferred Compensation Units posted to the Participants Account as of the record date with respect to the declaration of such dividend. As of any date of valuation, the value of a Participants 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 4.3 Crediting Rate Upon Retirement, Disability, Continued Employment After Reaching the Age of 75, Death or Termination of Employment with all Affiliates as a Result of a Change in Control. If a Participant (i) terminates employment with all Affiliates at or after Normal Retirement Date or Early Retirement Date, (ii) is Disabled, or (iii) continues
12
employment after reaching the Age of 75 and has completed ten (10) Years of Service, gains and losses shall be credited as described in Section 4.2 to that Participants Accounts. If a Participant dies prior to termination of employment with all Affiliates, gains and losses shall be credited, to date of death, as described in Section 4.2 to that Participants Accounts. If a Participant terminates employment with all Affiliates before Normal Retirement Date or Early Retirement Date as a result of a Change in Control, gains and losses to that Participants Accounts shall be credited as described in Section 4.2 up to, but not after, the date of the Change in Control.
Section 4.4 Crediting Rate Upon Resignation or Discharge.
4.4.1 For a Participant whose employment with all Affiliates terminates on or after August 1, 1995, but before the Normal Retirement Date or the Early Retirement Date, for reasons other than death, Disability or a Change in Control, gains and losses shall be credited to that Participants Account as described in Section 4.2 up to the date of termination of employment, and the crediting shall continue after such date for those Participants who elected a 10-year payout, a 5-year payout, or a 3-year payout, as such terms are defined in Section 6.4.2. If a Participant elected to be paid in a lump sum, there shall be no further crediting to the Participants Account following the date of termination of employment. | |
4.4.2 For a Participant whose employment with all Affiliates terminated prior to August 1, 1995, and before the Normal Retirement Date or the Early Retirement Date, for reasons other than death, Disability or a Change in Control, gains and losses to that Participants Accounts that represent completed deferral cycles shall be credited as described in Section 4.2 up to the date of termination of employment. Gains and losses to that Participants Accounts that do not represent completed deferral cycles and gains and losses after the date of termination of employment shall be credited at an interest rate equal to the average of (i) the interest rate set by the Chief Financial Officer of the Company in his or her discretion for the Plan Year in which the termination of employment occurs, which rate shall not be less than the rate then payable on Investment Savings Accounts of $1,000 or less at Commerce Bank of Kansas City, N.A., Kansas City, Missouri, or any successor thereto, and (ii) the respective interest rates so set by the Chief Financial Officer of the Company for each of the two Plan Years immediately prior to the Plan Year in which the termination of employment occurs. |
ARTICLE 5 VESTING
Section 5.1 Participant Deferrals and Vesting Schedule for Company Contributions. Participant deferrals pursuant to Section 4.1.1 are fully vested immediately. The Participants interest in the Company Matching Contributions under Section 4.1.2 and the Company Contributions described in Section 4.1.3 shall vest according to the following schedule:
Percentage of | ||||||
Company Contributions | ||||||
Years of Service | Vested | |||||
|
|
|||||
Less than 2
|
None | |||||
2
|
20% | |||||
3
|
30% | |||||
4
|
40% |
13
50
%
60
%
70
%
80
%
90
%
100
%
For purposes of crediting Years of Service under the foregoing Schedule, Participants will be credited with Years of Service beginning with the year in which the Participant began participation in the Plan. A Disabled Participant will be credited with any Hours of Service with which he or she would have been credited but for the Disability.
Section 5.2 Exceptions to Vesting Schedule. Company Contributions are fully vested upon a Participants death prior to termination of employment, and upon a Change in Control as defined in Section 10.2. Participants who have attained Age 65 prior to the date on which they first became a Participant in the Plan and who have completed ten (10) Years of Service are fully vested. Participants who have attained Age 55 (but are less than Age 65) prior to the date on which they first became a Participant in the Plan and who have completed ten (10) Years of Service, vest according to the following formula:
Years of Service since initial Plan participation date
65 minus Participants Age on initial Plan participation date.
Section 5.3 Forfeiture of Nonvested Amounts. Upon a Participants termination of employment with all Affiliates for any reason other than death, the nonvested portion of the Participants Account shall be forfeited to the Company. If such Participant becomes reemployed by an Affiliate, the forfeited benefits shall not be reinstated.
ARTICLE 6 DISTRIBUTION OF BENEFITS
Section 6.1 Payments After Termination of Employment. Generally, payments of benefits to a Participant shall be made by the Company only upon termination, voluntary or involuntary, of the Participants employment with all Affiliates, except to the extent, (i) the provisions of Section 6.2.1 or Section 6.2.2 apply, (ii) a Participant is disabled, (iii) the provisions of Section 6.3.2 apply, or (iv) the provisions of Section 6.8 apply.
Section 6.2 Payments During Employment.
6.2.1 On-Demand Payment. Prior to termination, voluntary or involuntary, of a Participants employment with all Affiliates, the Participant may elect, on a form provided by the Compensation Committee and delivered by the Participant to the Company, to receive an immediate lump-sum payment of all or a portion of the one hundred percent (100%) vested balance of said Participants Account valued as of the day immediately prior to the day such election is approved, reduced by a penalty equal to ten percent (10%) of the elected payment amount, which penalty shall be forfeited to the Company. If a Participant elects to receive a payment under this Section 6.2.1, the Participants deferrals of Base Salary and Bonus will cease immediately and the Participant may not enter into a new Permissible Deferral election until the beginning of the second Plan Year following the Plan Year in which such election was made. Any payment elected under this Section 6.2.1 will be made to the Participant in cash as soon as administratively practicable. |
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6.2.2 In-Service Payments. A Participant as of January 1, 2001 may elect during the Enrollment Period for the 2001 Plan Year, and an individual who becomes a Participant as of any date after January 1, 2001 may elect during the Enrollment Period immediately prior to such individuals first day of participation in the Plan, to receive payment on one or more selected future dates of all or a portion (stated in whole number percentages or dollar amounts) of the one hundred percent (100%) vested balance of such Participants Account attributable to deferrals and Matching Contributions made after January 1, 2001. Any such payments stated in whole number dollar amounts must be no less than $500. A Participant may make an election under this Section 6.2.2 only on a form provided by the Compensation Committee and delivered by the Participant to the Company. Any such future payment(s) may begin no earlier than during the fourth Plan Year after the Plan Year during which the election was made, and only one such payment may be made in any Plan Year. A Participant may cancel or postpone a scheduled payment elected under this Section 6.2.2 provided that such cancellation or postponement is made on a form provided by the Compensation Committee and delivered by the Participant to the Company and is made no later than the end of the second Plan Year prior to the Plan Year during which such payment is scheduled to be made. A scheduled payment under this Section 6.2.2 may be postponed only one time. A scheduled payment that is postponed may subsequently be cancelled in accordance with this Section 6.2.2. The actual distribution amount of any payment under this Section 6.2.2 shall be determined as of the first day of the month preceding or coincident with the applicable payment date and shall be paid to the Participant in cash as soon as administratively practicable after such determination. The actual distribution amount of a payment elected under this Section 6.2.2 may be less than the amount elected. An election under this Section 6.2.2 shall only be honored by the Compensation Committee while the Participant is an active employee of the Company or its Affiliates and shall not be reinstated upon the Participants reemployment by an Affiliate after termination of employment with all Affiliates. |
Section 6.3 Form of Benefits Upon Retirement, Disability or Continued Employment After Reaching the Age of 75.
6.3.1 Retirement or Disability. Payments from the Account shall be made in accordance with the Standard Form of Benefit for Participants who terminate employment on or after Normal Retirement Date or Early Retirement Date or are Disabled. However, no less than 12 months prior to such termination of employment, the Participant may petition the Compensation Committee for, and the Compensation Committee may approve at such time, an optional form of benefit. | |
6.3.2 Continued Employment After Reaching the Age of 75. If a Participant reaches the Age of 75 while in the employ of an Affiliate, and has completed ten (10) Years of Service, payment of benefits shall commence in the first pay period of the first calendar quarter that begins at least forty-five (45) days after the date on which the Participant reaches the Age of 75. Payments from the Account shall be made in accordance with the Standard Form of Benefit. However, no less than 12 months prior to the date on which the Participant reaches the Age of 75, the Participant may petition the Compensation Committee for, and the Compensation Committee may approve at such time, an optional form of benefit. |
15
6.3.3 Lump-Sum Payment. Notwithstanding any other provisions of the Plan, a Participant who terminates employment on or after Normal Retirement Date or Early Retirement Date, and a Participant who reaches the Age of 75 while in the employ of an Affiliate may, at any time before or after a Change in Control, as defined in Section 10.2, elect to receive an immediate lump-sum payment of the aggregate of the balances of said Participants Accounts reduced by a penalty, which shall be forfeited to the Company, in lieu of payments in accordance with the Standard Form of Benefit or such optional form of benefit as may have previously been approved by the Compensation Committee under this Section 6.3. The penalty shall be equal to ten percent (10%) of the aggregate of the balances of such Accounts if the election is made before a Change in Control and shall be equal to five percent (5%) of the aggregate of the balances of such Accounts if the election is made after a Change in Control. However, the penalty shall not apply if the Compensation Committee determines, based on advice of counsel or a final determination or ruling by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the provisions of this paragraph any Participant has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to the Participant of Plan benefits. The Company shall notify all Participants of any such determination by the Compensation Committee and shall thereafter refund all penalties which were imposed hereunder in connection with any lump-sum payments made at any time during or after the first year to which the Compensation Committees determination applies (i.e., the first year for which, by reasons of the provisions of this paragraph, gross income under this Plan is recognized for federal income tax purposes in advance of payment of benefits). Interest compounded annually shall be paid by the Company to the Participant (or the Participants Beneficiary if the Participant is deceased) on any such refund from the date of the Companys payment of the lump sum at an annual rate equal to the rate of one-year United States Treasury notes in effect as of September 30 of the Plan Year immediately prior to the Plan Year in which such refund is paid, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. The Compensation Committee may also reduce or eliminate the penalty if it determines that the right to elect an immediate lump-sum payment under this paragraph, with the reduced penalty or with no penalty, as the case may be, will not cause any Participant to recognize gross income for federal income tax purposes under this Plan in advance of payment to the Participant of Plan benefits. |
Section 6.4 Form of Benefits Upon Resignation or Discharge, or Termination of Employment with all Affiliates as a Result of a Change in Control.
6.4.1 Upon a Participants termination of employment with all Affiliates before Normal Retirement Date or Early Retirement Date, but following a Change in Control, payments from the Account shall be paid in a lump sum within forty-five (45) days after the date of the termination of employment. | |
6.4.2 If a Change in Control has not occurred, for Participants who terminate employment with all Affiliates on or after August 1, 1995, but before the Normal Retirement Date or the Early Retirement Date, for reasons other than Disability or death, payment(s) from the Account shall be in the form of (a) semimonthly payments over a three-year period (a 3-year payout), or (b) a lump sum, as elected by the Participant in accordance with Section 6.4.4, provided that, for such Participants in the Plan as of September 8, 1999, who (i) had elected to receive payments from the Account in the form of (x) semimonthly payments over a 10-year period (a 10-year payout), or |
16
(y) semimonthly payments over a five-year period (a 5-year payout), pursuant to Section 6.4.2 (as in effect immediately prior to September 8, 1999), and (ii) do not make a different election after September 8, 1999, pursuant to Section 6.4.4, payments from the Account shall be in the form of such elected 10-year payout or 5-year payout, as the case may be. | |
6.4.3 If a Change in Control has not occurred, for Participants who terminated employment with all Affiliates prior to August 1, 1995, but before the Normal Retirement Date or the Early Retirement Date, for reasons other than Disability or death, payment(s) from the Account shall be in the form of (a) semi-monthly payments over a three-year period for all Permissible Deferrals that satisfy a completed deferral cycle, or (b) a lump sum for all Permissible Deferrals that do not satisfy a completed deferral cycle. | |
6.4.4 An election under Section 6.4.2 for a 3-year payout or a lump-sum payout shall be made by the Participant at the time of the Participants first Permissible Deferral election, and may be changed by the Participant no more than once in every 12-consecutive-month period thereafter. If no election under Section 6.4.2 is made by a Participant eligible to make such an election, payment from the Account shall be in the form of a lump sum. If a Participant participated in the Plan prior to September 8, 1999, and made an election for a 10-year payout or a 5-year payout pursuant to Section 6.4.2, as such Section existed prior to September 8, 1999, such Participant may elect a 3-year payout or a lump-sum payout during or after the first Enrollment Period commencing after September 8, 1999, provided that any such Participant may not change such election more than once in every 12-consecutive-month period after such new election, and, provided further, that once any such Participant has elected a 3-year payout or a lump-sum payout pursuant to this Section 6.4.4, such Participant may not again elect a 10-year payout or a 5-year payout. Upon termination of employment before the Normal Retirement Date or the Early Retirement Date for reasons other than death or disability, payouts from the Account (with respect to all Permissible Deferral elections made by the Participant) shall be in accordance with the most recent election made pursuant to this Section 6.4.4 (or, if applicable, pursuant to Section 6.4.2, as such Section existed prior to September 8, 1999) not less than 12 months prior to such termination of employment. | |
6.4.5 If an eligible Participant has elected a 10-year payout or a 5-year payout pursuant to Section 6.4.2 (as such Section 6.4.2 (then Section 6.3.2) existed prior to September 8, 1999), or if an eligible Participant has elected a 3-year payout pursuant to Section 6.4.4, and the amount of each semimonthly installment, as initially calculated, is less than $500 (such calculation to be accomplished by amortizing the aggregate of the Participants Account balances over the payment period using no crediting rate), the form of payment(s) for such Participant shall be a 5-year payout in lieu of an elected 10-year payout (unless the amount of each semimonthly installment under a 5-year payout, as so calculated, is also less than $500, in which case the form of payment will be a single lump sum), or a lump sum in lieu of an elected 5-year payout, or a lump sum in lieu of an elected 3-year payout, as the case may be. | |
6.4.6 Notwithstanding any other provisions of the Plan, an eligible Participant who (1) elects a 10-year payout, a 5-year payout, or a 3-year payout, and any such payout is not automatically converted to a lump sum pursuant to Section 6.4.5, and (2) terminates employment before the Normal Retirement Date or the Early Retirement |
17
Date may, at any time before or after a Change in Control, as defined in Section 10.2, elect to receive an immediate lump-sum payment of the aggregate of the balances of said Participants Accounts reduced by a penalty, which shall be forfeited to the Company, in lieu of payments in accordance with the 10-year payout or the 5-year payout, whichever is applicable. The penalty shall be equal to ten percent (10%) of the aggregate of the balances of such Accounts if the election is made before a Change in Control and shall be equal to five percent (5%) of the aggregate of the balances of such Accounts if the election is made after a Change in Control. However, the penalty shall not apply if the Compensation Committee determines, based on advice of counsel or a final determination or ruling by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the provisions of this paragraph any Participant has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to the Participant of Plan benefits. The Company shall notify all Participants of any such determination by the Compensation Committee and shall thereafter refund all penalties which were imposed hereunder in connection with any lump-sum payments made at any time during or after the first year to which the Compensation Committees determination applies (i.e., the first year for which, by reasons of the provisions of this paragraph, gross income under this Plan is recognized for federal income tax purposes in advance of payment of benefits). Interest compounded annually shall be paid by the Company to the Participant (or the Participants Beneficiary if the Participant is deceased) on any such refund from the date of the Companys payment of the lump sum at an annual rate equal to the rate of one-year United States Treasury notes in effect as of September 30 of the Plan Year immediately prior to the Plan Year in which such refund is paid, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. The Compensation Committee may also reduce or eliminate the penalty if it determines that the right to elect an immediate lump-sum payment under this paragraph, with the reduced penalty or with no penalty, as the case may be, will not cause any Participant to recognize gross income for federal income tax purposes under this Plan in advance of payment to the Participant of Plan benefits. |
Section 6.5 Amount of Benefit.
6.5.1 Except for distributions in the form of a lump sum, benefit payments shall be in the form of semimonthly cash installments paid during the applicable payment period (the Overall Payment Period). | |
6.5.2 Except as provided in Section 6.5.4, the amount of each installment payment shall be level during the portion of the Overall Payment Period ending on December 31 of the Plan Year in which benefit payments commence (the Initial Payment Period), during each complete Plan Year of the Overall Payment Period thereafter (a Plan Year Payment Period), and during any remaining period of the Overall Payment Period following the last Plan Year Payment Period (the Remainder Payment Period), but will vary from one such portion of the Overall Payment Period to the next. If a Participant was receiving benefits pursuant to Section 6.3 (then Section 6.2) as of August 1, 1995, payments due on and after January 1, 1996 shall be made in accordance with this Section 6.5.2 and with Section 6.5.3. | |
6.5.3 The amount of each level payment for the Initial Payment Period, if any, shall be calculated using the balance in the Account as of the beginning of the Initial Payment Period and amortizing such balance over the remaining Overall Payment |
18
Period (a) using an assumed interest rate equal to the rate of one-year United States Treasury notes for each Participant receiving payments of benefits pursuant to Section 6.3 (then Section 6.2) prior to September 8, 1999, said rate to be determined once each Plan Year and to be the rate in effect as of the September 30 immediately preceding the payment period to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company (the Assumed Interest Rate), and (b) using an assumed interest rate of zero percent (0%) for all other Participants. The amount of each level payment for each Plan Year Payment Period shall be calculated by taking the balance in the Account as of November 30 of the Plan Year immediately prior to such Plan Year Payment Period, subtracting the benefit payments made during the portion of such preceding Plan Year following November 30, and amortizing the difference over the remaining Overall Payment Period (x) using the Assumed Interest Rate for each Participant receiving payments of benefits pursuant to Section 6.3 (then Section 6.2) prior to September 8, 1999, and (y) using an assumed interest rate of zero percent (0%) for all other Participants. The amount of each level payment for the Remainder Payment Period, if any, shall be calculated by taking the balance in the Account as of November 30 of the Plan Year immediately prior to the Remainder Payment Period, subtracting the benefit payments made during the portion of such preceding Plan Year following November 30, and amortizing the difference over the Remainder Payment Period using an assumed interest rate of zero percent (0%) per annum. If the actual crediting rate for the Remainder Payment Period is more than zero percent, the additional gain resulting from the difference in crediting rates shall be paid to the Participant in a single payment within six months after the last day of the Remainder Payment Period. | |
6.5.4 If the Participant terminates employment with all Affiliates prior to August 1, 1995, and receives benefits pursuant to Section 6.4.3, semimonthly payments for Permissible Deferrals that satisfy a completed deferral cycle shall be level during the entire Overall Payment Period and shall be calculated using the balance in the Account at the commencement of benefit payments, and amortizing such balance over three years at the crediting rate determined in accordance with Section 4.4.2. | |
6.5.5 Generally, the Account shall continue to be credited during the Overall Payment Period with gains and losses as provided in Section 4.3. However, if a Participant receives benefits pursuant to Section 6.4 (other than pursuant to Section 6.4.1), the Account shall be credited with gains and losses as provided in Section 4.4. Except as provided otherwise, if a Participant dies, Section 6.7 shall apply. | |
6.5.6 Notwithstanding anything in this Plan to the contrary, the Compensation Committee may, in its sole discretion, (i) increase or reduce any assumed interest rate set forth in this Section 6.5 and any such assumed interest rate, as so adjusted, shall be effective for calculating level semimonthly installments for Participants whose benefit payments commence after the date of such adjustment, and (ii) change the date set forth in Section 6.5.3 on which the balance in the Participants Account is to be determined for purposes of calculating the amount of each level payment for each Plan Year Payment Period and each Remainder Payment Period, and any such revised date shall be effective for calculating level semimonthly installments for the Plan Year Payment Period or the Remainder Payment Period beginning on or after the effective date of such revision. |
19
Section 6.6 Time of Payment. Generally, benefit payments to a Participant shall commence in the first pay period of the calendar quarter that begins at least forty-five (45) days after the date of termination of employment. Notwithstanding the preceding sentence, if a Participant elected to be paid in a lump sum, the benefit payment shall be made within forty-five (45) days after the date of termination of employment. In the case of a Disabled Participant, benefits shall commence no later than six (6) months after the Participants Early Retirement Date.
With respect to Permissible Deferral elections made under the DCP prior to January 1, 1997, a Participant was permitted to elect at the time of each Permissible Deferral election to defer commencement of the payment of benefits after termination of employment with respect to such Permissible Deferral election until the earlier of: (a) five (5) years after termination of employment; or (b) Age 70. If the Participant made such an election and did not revoke such election pursuant to a one-time opportunity during the Enrollment Period prior to the Plan Year commencing January 1, 1998, the Participant shall receive benefit payments in accordance with said election, provided that the Compensation Committee, upon written petition of the Participant, may begin benefit payments at an earlier time after termination if it determines that compelling reasons exist for such earlier payments. No elections to defer commencement of benefits shall be permitted under this Plan with respect to Permissible Deferrals commencing on or after January 1, 1998.
Section 6.7 Death Benefits. In the event a Participant dies after benefit payments have commenced (other than payments made pursuant to Section 6.2 or 6.8), the remaining payments, if any, shall be paid to the Participants Beneficiary in the same manner such benefits were being paid to the Participant at the time of death and would have been paid to the Participant had the Participant survived. In the event a Participant dies before benefit payments have commenced (other than payments made pursuant to Section 6.2 or 6.8), benefit payments shall be paid to the Participants Beneficiary in the same manner described in Section 6.4.1, if a Change in Control occurred prior to the Participants death, or in the manner described in Section 6.4.2 (subject to Section 6.4.5), if a Change in Control did not occur prior to the Participants death, in either case without regard to the Age of the Participant at the time of death and the number of Years of Service completed by the Participant at the time of death or whether the Participant was Disabled at the time of death, and notwithstanding the death of the Participant. The Account shall be credited from the Participants date of death through the end of the Overall Payment Period at a rate equal to the rate of one-year United States Treasury notes, said rate to be determined once each Plan Year and to be the rate in effect as of September 30 of the Plan Year immediately prior to the Plan Year to which it applies, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. A Beneficiary may petition the Compensation Committee for an alternative method of payment. The Participants Beneficiary may make the election to receive an immediate lump-sum payment of the balance of said Participants Account in accordance with the provisions of Section 6.3.3 or Section 6.4.6, whichever is applicable, and all provisions set forth therein relating to penalties shall apply to any such election.
In addition, if a Participant dies on or after such Participants Normal Retirement Date or Early Retirement Date after having retired, or after benefits have commenced because of the Participants Disability, an annuity shall be paid to the Participants surviving spouse, if any (to whom he or she has been married at least one (1) year prior to the date of death). The annuity shall be for the life of the Participants surviving spouse with each semimonthly payment equal to fifty percent (50%) of the average amount which would have been payable to the Participant and his or her Beneficiary if, on the date benefits commenced, the Participant had received the
20
Standard Form of Benefit payment. If the Participants surviving spouse is more than thirty-six (36) months younger than the Participant, the survivor life annuity payable to such spouse shall be reduced by one-half of one percent (.5%) for each month the spouse is more than thirty-six (36) months younger than the Participant. Payment shall commence on the first day of the month following the completion of the benefits payable under the first paragraph of this Section 6.7.
6.7.1 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 Participants death benefit payable to a surviving spouse which remains unpaid at the death of such spouse shall be paid to the spouses estate. | |
6.7.2 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 Compensation Committee and shall only be effective upon delivery to the Company. In the event a Participant is married at the time he or she designates a beneficiary other than his or her spouse, such designation will not be valid unless the Participants spouse consents in writing to such designation. 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. | |
6.7.3 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 Participant shall be paid to the Participants spouse, if living; if the Participant does not leave a surviving spouse, to the Participants issue by right of representation; or, if there are no such issue then living, to the Participants 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 Participants spouse pursuant to 6.7.1, the remaining balance of such benefit shall be paid to the deceased Beneficiarys estate; or, if the deceased Beneficiary is one of multiple concurrent Beneficiaries, such remaining benefits shall be paid proportionally to the surviving Beneficiaries. |
Section 6.8 Hardships. Upon the application of any Participant, the Compensation Committee, in accordance with its uniform, non-discriminatory policy, may permit such Participant to terminate future deferrals or to withdraw his or her vested Account. A Participant must give a written petition of the termination of his or her Permissible Deferral election at least thirty (30) days prior to the next periodic (for Base Salary) or single sum (for Bonuses) deferral. A Participant must give a written petition of the intent to withdraw the Account at least sixty (60) days (or such shorter time as permitted by the Compensation Committee) prior to the date of withdrawal. No termination or withdrawal shall be made under the provisions of this Section except for the purpose of enabling a Participant to meet immediate needs created by a financial hardship for which the Participant does not have other reasonably available sources of funds, as determined by the Compensation Committee in accordance with uniform rules. The term financial hardship shall include the need for funds to:
21
meet uninsured medical expenses for the Participant or his or her dependents, meet a significant uninsured casualty loss for the Participant or his or her dependents, and meet other catastrophes of a sudden and serious nature.
The Compensation Committee may permit a withdrawal of any deferrals. If a withdrawal is permitted, a Participants deferrals shall be credited at the lesser of (a) the amount as described in Section 4.2; or (b) an interest rate equal to the rate of one-year United States Treasury notes in effect as of September 30 of the Plan Year immediately prior to the Plan Year in which application for such withdrawal is made, as published in the Wall Street Journal or as determined by the Chief Financial Officer of the Company. Withdrawals shall be distributed in the form of a lump sum as soon as is reasonably convenient.
If a termination of deferrals or a withdrawal is made under this Section, the Participant may not enter into a new Permissible Deferral election for two (2) complete Plan Years after the date of the termination or withdrawal.
Section 6.9 Claims Procedure. The Compensation Committee shall notify a Participant in writing within ninety (90) days of the Participants written application for benefits of his or her eligibility or non-eligibility for benefits under the Plan. If the Compensation 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 or her claim, and a description of why it is needed, and (d) an explanation of the Plans claims review procedure and other appropriate information as to the steps to be taken if the Participant wishes to have his or her claim reviewed. If the Compensation Committee determines that there are special circumstances requiring additional time to make a decision, the Compensation 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 Compensation Committee to be not eligible for benefits, or if the Participant believes that he or she is entitled to greater or different benefits, he or she shall have the opportunity to have his or her claim reviewed by the Compensation Committee by filing a petition for review with the Compensation Committee within sixty (60) days after receipt by him or her of the notice issued by the Compensation Committee. Said petition shall state the specific reasons the Participant believes he or she is entitled to benefits or greater or different benefits. Within sixty (60) days after receipt by the Compensation Committee of said petition, the Compensation Committee shall afford the Participant (and his or her counsel, if any) an opportunity to present his or her position to the Compensation Committee orally or in writing, and said Participant (or his or her counsel) shall have the right to review the pertinent documents, and the Compensation 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 decision may be deferred for up to another sixty (60) day period at the election of the Compensation Committee, but notice of this deferral shall be given to the Participant.
Section 6.10 Alternate Forms of Benefit Distribution. Participants shall have the right to petition the Compensation Committee to request methods of benefit distribution other than those provided to Participants pursuant to this Article 6.
22
Section 6.11 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.
Section 6.12 Cessation of Payments upon Reemployment. If a Participant who is receiving semi-monthly installment payments pursuant to Section 6.3.1 or 6.4 (or is due to receive a lump sum payment pursuant to Section 6.3.3 or 6.4) becomes re-employed by an Affiliate, such semi-monthly installments shall cease immediately (or such lump sum payment shall be cancelled) upon re-employment and no payments shall restart until the next termination, voluntarily or involuntarily, of the Participants employment with all Affiliates, except to the extent, (i) the provisions of Section 6.2.1 or Section 6.2.2 apply, (ii) a Participant is disabled, (iii) the provisions of Section 6.3.2 apply, or (iv) the provisions of Section 6.8 apply. Upon the next termination, voluntarily or involuntarily, of the Participants employment with all Affiliates, payments shall begin again, not taking into account any period before re-employment during which the Participant received payments for the purpose of determining the Overall Payment Period.
ARTICLE 7 FUNDING
Section 7.1 Source of Benefits. All benefits under the Plan shall be paid when due by the Company out of its assets or 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 or her 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 Compensation 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 the Compensation Committee. In addition to the other powers granted under the Plan, the Compensation 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 | |
(c) to establish rules for the administration of the Plan and to prescribe any forms required to administer the Plan. |
23
Not in limitation, but in amplification of the foregoing and of the authority conferred upon the Compensation Committee in Section 8.1, the Company specifically intends that the Compensation 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 Compensation 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 Compensation Committee.
Section 8.3 Actions of the Compensation Committee. Except as modified by the Company, all determinations, interpretations, rules, and decisions of the Compensation 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 Compensation Committee, or any officer designated by the Compensation 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 Compensation 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 Compensation Committee and those to whom the Compensation 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 vested portion of the benefits, if any, in any active Participants 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 Compensation Committee may, in its discretion, amend the Plan to reduce the rates set forth in Section 4.2 effective for crediting of Accounts from the date of any such amendment. Notwithstanding anything in this Section 9.1 to the contrary, the Compensation Committee may, in its discretion, (i) amend the Plan to reduce or eliminate the penalty described in Section 6.3.3 and/or the penalty described in Section 6.4.6, in accordance with the provisions of such Section 6.3.3 and/or such Section 6.4.6, (ii) amend the Plan to increase or reduce any assumed interest rate set forth in Section 6.5, in accordance with the provisions of Section 6.5.6, or (iii) amend the Plan to change the date set forth in Section 6.5.3 on which the balance in the Participants Account is to be determined for purposes of calculating the amount of each level payment for each Plan Year Payment Period and each Remainder Payment Period, in accordance with the provisions of Section 6.5.6.
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 action
24
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 and Company Contributions will cease and no future deferrals or Company Contributions 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. Active Participants shall become vested in their accrued benefits to the extent and in the manner provided in Section 9.3 as of the effective date of such termination and each account of an active Participant shall be credited, to the date of distribution of all benefits in each 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 is 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 Compensation 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.
Section 9.3 Accelerated Vesting. Notwithstanding Article 5, upon termination of the Plan a Participant shall vest in Company Contributions according to the following schedule:
Percentage of Company | |||||
Years of Service | Contributions Vested | ||||
|
|
||||
Less than 1
|
None | ||||
1
|
20% | ||||
2
|
40% | ||||
3
|
60% | ||||
4
|
80% | ||||
5 or more
|
100% |
Years of Service shall be credited in accordance with Section 5.1.
ARTICLE 10 ACCELERATED VESTING
Section 10.1 Accelerated Vesting. Notwithstanding Article 5, upon a Change in Control as defined in Section 10.2, a Participant shall be fully vested in Company Contributions.
Section 10.2 Change in Control. A Change in Control for any Participant shall occur if there is a Change in Control of the Company as defined in Section 1.01-2 of the Trust or there is a Change in Control of a Participating Subsidiary, as defined in Section 1.01-2 of the Trust, of the Participating Affiliate by whom the Participant is employed.
ARTICLE 11 MISCELLANEOUS
Section 11.1 No Guarantee of Employment. Neither the adoption and maintenance of the Plan nor the execution by the Company of a Permissible Deferral agreement with any Participant shall be deemed to be a contract of employment between the Company and any Participant. Nothing contained herein shall give any Participant the right to be retained in the
25
employ of the Company or to interfere with the right of the Company to discharge any Participant at any time, nor shall it give the Company the right to require any Participant to remain in its employ or to interfere with the Participants right to terminate his or her employment at any time.
Section 11.2 Individual Account Plan. If it is determined that the Plan is not an unfunded deferred compensation 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 and the vesting schedule set forth in Article 5 shall be replaced by the vesting schedule set forth in Section 9.3.
Section 11.3 Release. Any payment of benefits to or for the benefit of a Participant or a Participants Beneficiaries that is made in good faith by the Company in accordance with the Companys 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 11.4 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 11.5 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 11.6 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 11.6 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 11.6.
Section 11.7 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 11.8 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.
26
Dated: | June 10, 2002 | H&R BLOCK, INC. | |||||
|
|||||||
/s/ Mark A. Ernst | |||||||
|
|||||||
Mark A. Ernst | |||||||
President and Chief Executive Officer |
27
Exhibit 10.9
FIRST AMENDMENT
TO THE
H&R BLOCK, INC. EXECUTIVE SURVIVOR PLAN
H&R Block, Inc. (the Company) adopted the amended and restated H&R Block, Inc. Executive Survivor Plan (the Plan), effective as of January 1, 2001. Section 4.1 of the Plan provides that the Company may amend the Plan from time to time. In accordance with the provisions of that Section, effective July 1, 2002, the Plan is amended as follows:
1. The following definition is added to Article 1 immediately after the definition of Designated Subsidiary and immediately before the definition of Entry Date:
Eligibility Committee . Eligibility Committee means the Chief Executive Officer of the Company, the Chief Financial Officer of the Company, and the senior officer of the Company responsible for human resources.
2. The definition of Participant in Article 1 is amended by (A) deleting the words or the Affiliate in clause (i) thereof, and (B) inserting the words or the Eligibility Committee immediately after the words Board of Directors and immediately before the words as eligible to in clause (v) thereof.
3. Section 2.9.1 is amended by deleting clause (e) in its entirety and replacing it with the following new clause (e):
(e) a change in the Participants employment responsibilities, title, compensation, and/or performance such that he or she is no longer a Participant, as defined in Article 1 of the Plan, or selected as eligible to participate in the Plan by the Compensation Committee of the Companys Board of Directors or the Eligibility Committee,.
4. Except as modified in this First Amendment, the Plan shall remain in full force and effect, including the Companys right to amend or terminate the Plan as set forth in Section 4.1 of the Plan.
H&R BLOCK, INC. | ||
Dated: |
June 10, 2002
|
By: /s/ Mark A. Ernst |
|
|
|
Mark A. Ernst | ||
President and Chief Executive Officer |
EXHIBIT 12
H&R BLOCK, INC.
(AMOUNTS IN THOUSANDS)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
2002
2001
2000
1999
1998
$
716,840
$
473,078
$
412,266
$
383,541
$
296,433
116,141
242,551
155,027
69,338
38,899
55,896
52,108
45,274
33,218
28,248
172,037
294,659
200,301
102,556
67,147
$
888,877
$
767,737
$
612,567
$
486,097
$
363,580
5.2
2.6
3.1
4.7
5.4
(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. |
Exhibit 13
CONSOLIDATED STATEMENTS OF EARNINGS
Amounts in thousands, except per share amounts
Year Ended April 30
2002
2001
2000
$
2,333,064
$
2,179,896
$
1,831,141
456,958
244,789
189,607
206,433
279,833
193,129
127,226
101,489
64,344
164,615
149,683
138,903
29,440
25,647
8,561
3,317,736
2,981,337
2,425,685
1,308,705
1,192,294
963,536
305,387
283,181
253,171
24,629
125,604
106,349
91,512
116,947
48,678
155,386
205,608
147,218
155,729
110,973
105,369
75,710
70,440
64,599
76,804
84,422
51,719
408,446
326,802
282,958
2,602,308
2,516,271
2,023,597
715,428
465,066
402,088
3,097
5,977
9,840
(1,685
)
2,035
338
1,412
8,012
10,178
716,840
473,078
412,266
282,435
196,330
160,371
434,405
276,748
251,895
-
4,414
-
$
434,405
$
281,162
$
251,895
$
2.38
$
1.50
$
1.28
-
.03
-
$
2.38
$
1.53
$
1.28
$
2.31
$
1.49
$
1.27
-
.03
-
$
2.31
$
1.52
$
1.27
See notes to consolidated financial statements on pages 52-78.
25
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share
and per share amounts
April 30
2002
2001
$
436,145
$
187,616
152,173
84,197
-
8,266
28,370
46,158
844,538
1,310,804
368,345
365,304
415,572
260,942
2,245,143
2,263,287
15,260
31,559
365,371
238,600
383,085
402,209
723,856
649,617
286,500
288,847
211,576
239,586
$
4,230,791
$
4,113,705
$
903,201
$
1,058,000
410,622
353,291
253,401
221,830
252,822
295,599
59,656
51,763
1,879,702
1,980,483
868,387
870,974
113,282
88,507
2,179
2,179
-
-
468,052
419,957
44,128
(42,767
)
1,767,702
1,449,022
(912,641
)
(654,650
)
1,369,420
1,173,741
$
4,230,791
$
4,113,705
See notes to consolidated financial statements on pages 52-78.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands
Year Ended April 30
2002
2001
2000
$
434,405
$
281,162
$
251,895
155,386
205,608
147,218
76,804
84,422
51,719
11,700
11,863
10,641
30,136
(38,870
)
(30,098
)
1,666
(2,040
)
14,501
-
(4,414
)
-
(423
)
(17,744
)
(11,697
)
(50,583
)
(21,824
)
(25,176
)
30,987
9,467
14,186
57,809
2,235
3,736
(67,976
)
(51,014
)
(33,183
)
465,926
1,544,640
(893,435
)
(132,548
)
(480,032
)
(416,160
)
(11,771,688
)
(7,254,552
)
(5,967,895
)
11,780,758
7,336,659
6,442,094
17,788
(755
)
6,899
(179,694
)
(88,515
)
(52,551
)
(154,799
)
(1,512,200
)
868,012
57,608
133,695
10,202
31,751
48,901
13,683
(42,777
)
66,465
68,316
(10,790
)
(4,806
)
(19,920
)
741,446
248,351
452,987
(7,241
)
(10,636
)
(14,281
)
75,320
21,524
68,261
23,173
356,192
211,836
(111,775
)
(92,411
)
(145,753
)
(46,738
)
(21,143
)
(971,802
)
121
23,200
-
8,107
(21,969
)
1,800
(59,033
)
254,757
(849,939
)
(10,622,011
)
(18,219,741
)
(50,800,661
)
10,622,011
17,935,944
51,012,519
-
-
495,800
(50,594
)
(68,743
)
(4,730
)
(115,725
)
(108,374
)
(105,480
)
(462,938
)
(222,895
)
(50,654
)
195,233
19,550
33,222
140
2,049
(29,586
)
(433,884
)
(662,210
)
550,430
248,529
(159,102
)
153,478
187,616
346,718
193,240
$
436,145
$
187,616
$
346,718
$
236,784
$
150,784
$
122,447
105,072
230,448
141,577
See notes to consolidated financial statements on pages 52-78.
27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Amounts in thousands, except per share amounts
Convertible
Common Stock
Preferred Stock
Additional
Paid-in
Shares
Amount
Shares
Amount
Capital
217,945
$
2,179
-
$
-
$
420,658
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,567
)
-
-
-
-
200
-
-
-
-
1,306
-
-
-
-
(3
)
-
-
-
-
-
-
-
-
-
-
217,945
2,179
-
-
420,594
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(68
)
-
-
-
-
(382
)
-
-
-
-
(187
)
-
-
-
-
-
-
-
-
-
-
217,945
2,179
-
-
419,957
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
47,590
-
-
-
-
237
-
-
-
-
268
-
-
-
-
-
-
-
-
-
-
217,945
$
2,179
-
$
-
$
468,052
[Additional columns below]
[Continued from above table, first column(s) repeated]
Accumulated
Other
Treasury Stock
Comprehensive
Retained
Total
Income (loss)
Earnings
Shares
Amount
Equity
$
(23,400
)
$
1,129,819
(22,687
)
$
(467,269
)
$
1,061,987
-
251,895
-
-
-
(2,647
)
-
-
-
-
(194
)
-
-
-
-
-
-
-
-
249,054
-
-
2,047
42,268
40,701
-
-
86
1,781
1,981
-
-
951
19,694
21,000
-
-
1
3
-
-
-
(2,273
)
(50,654
)
(50,654
)
-
(105,480
)
-
-
(105,480
)
(26,241
)
1,276,234
(21,875
)
(454,177
)
1,218,589
-
281,162
-
-
-
(11,864
)
-
-
-
-
(4,662
)
-
-
-
-
-
-
-
-
264,636
-
-
1,001
19,121
19,053
-
-
114
2,252
1,870
-
-
55
1,049
862
-
-
(13,632
)
(222,895
)
(222,895
)
-
(108,374
)
-
-
(108,374
)
(42,767
)
1,449,022
(34,337
)
(654,650
)
1,173,741
-
434,405
-
-
-
(875
)
-
-
-
-
87,770
-
-
-
-
-
-
-
-
521,300
-
-
9,662
202,500
250,090
-
-
17
400
637
-
-
97
2,047
2,315
-
-
(12,259
)
(462,938
)
(462,938
)
-
(115,725
)
-
-
(115,725
)
$
44,128
$
1,767,702
(36,820
)
$
(912,641
)
$
1,369,420
See notes to consolidated financial statements on pages 52-78.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
H&R Block, Inc. is a diversified company with subsidiaries that deliver tax services and financial advice, investment and mortgage products and services, and business, accounting and consulting services. For nearly 50 years, the Company has been developing relationships with millions of tax clients and its strategy is to expand on these relationships.
H&R BLOCKS MISSION
To help our clients achieve their financial objectives
by serving as their tax and financial partner.
H&R BLOCKS VISION
To be the worlds leading provider of financial services
through tax and accounting based advisory relationships.
Overview
The principal business activity of the Companys operating subsidiaries is
providing tax and financial services to the general public.
The Company does business in the following reportable operating segments:
U.S. tax operations: This segment primarily consists of the Companys tax businesses - which served 17.1 million and 16.9 million taxpayers in its retail tax offices in fiscal year 2002 and 2001, respectively - more than any other tax services company.
International tax operations: This segment is primarily engaged in providing local tax return preparation, filing and related services in Canada, Australia and the United Kingdom.
Mortgage operations: This segment is primarily engaged in the origination, servicing, and sale of a broad range of mortgage products.
Investment services: This segment is primarily engaged in offering investment advice and related financial services and securities products.
Business services: This segment is primarily engaged in providing accounting, tax, consulting, payroll, employee benefits and capital markets services to business clients and tax, estate planning, financial planning, wealth management and insurance services to individuals.
New accounting standards
In May 2001, the Company elected early adoption of Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (SFAS 141 and SFAS 142). SFAS 141 addresses financial accounting and reporting for business combinations and replaces APB Opinion No. 16, Business Combinations (APB 16). SFAS 141 no longer allows the pooling of interests method of accounting for acquisitions, provides new recognition criteria for intangible assets and carries forward without reconsideration the guidance in APB 16 related to the application of the purchase method of accounting. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and replaces APB Opinion No. 17, Intangible Assets. SFAS 142 addresses how intangible assets should be accounted for upon their acquisition and after they have been initially recognized in the financial statements. Additionally, the new standard provides specific guidance on measuring goodwill for impairment at least annually. The adoption of SFAS 141 and 142 has had a significant effect on the consolidated statement of earnings for fiscal year 2002, due to the cessation of amortization of goodwill beginning May 1, 2001.
29
Had the provisions of SFAS 141 and 142 been applied for the years ended
April 30, 2001 and 2000, the Companys net earnings and net earnings per basic
and diluted share would have been as follows:
Year Ended April 30
2001
2000
Net earnings
Basic per share
Diluted per share
Net earnings
Basic per share
Diluted per share
$281,162
$1.53
$1.52
$251,895
$1.28
$1.27
29,509
.16
.16
22,859
.12
.12
15,733
.09
.09
7,813
.04
.04
902
-
-
677
-
-
1,722
.01
.01
1,291
.01
.01
$329,028
$1.79
$1.78
$284,535
$1.45
$1.44
In May 2001, the Company adopted Emerging Issues Task Force Issue 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF 99-20 addresses how the holder of beneficial interests should recognize cash flows on the date of a securitization transaction, how interest income is recognized over the life of the interests and when securities must be written down to fair value due to other than temporary impairments. The adoption of EITF 99-20 did not have a material impact on the consolidated financial statements.
On February 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products) (EITF 01-9). EITF 01-9 addresses sales incentives such as discounts, coupons or rebates offered to customers of retailers or other distributors and the income statement classifications of these items. Based on EITF 01-9, these items are recorded as a reduction of revenues. The Company has historically recorded these items as expenses in its U.S. and international tax operations. The adoption of EITF 01-9 had no impact on net earnings. All years presented have been restated to reflect the adoption of this guidance. Revenues and expenses were reduced by $43.5 million, $32.6 million and $35.3 million for fiscal years 2002, 2001 and 2000, respectively, due to the adoption of EITF 01-9.
On February 1, 2002, the Company adopted Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14). EITF 01-14 establishes requirements that must be met to record out-of-pocket expenses as either net in revenues or as expenses. The Company has out-of-pocket expenses associated with its Business services segment and has historically recorded them net in revenues. Based on EITF 01-14, the Company now records these as gross revenues and expenses. There is no impact to net earnings as a result of adoption of EITF 01-14. All years presented have been restated to reflect the adoption of this guidance. Revenues and expenses were increased by $17.8 million, $12.3 million and $9.1 million for fiscal years 2002, 2001 and 2000, respectively, due to the adoption of EITF 01-14.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), effective for the Companys fiscal year beginning May 1, 2002. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The adoption of SFAS 144 will not have a material effect on the consolidated financial statements.
RESULTS OF OPERATIONS
The analysis that follows should be read in conjunction with the tables below and the consolidated statements of earnings. All amounts in the following tables are in thousands, except as noted.
On May 1, 2001, the Company adopted a new methodology for allocation of corporate services and support costs to business units. The change was made to more accurately reflect the costs attributable to each business segment. Fiscal year 2001 segment results have been adjusted to reflect this allocation methodology. Fiscal year 2000 has not been adjusted, as the effects of the new methodology were not material to segment pretax earnings or operating margins.
30
CONSOLIDATED H&R BLOCK, INC.
Year Ended April 30
2002
2001
2000
$
1,830,752
$
1,622,636
$
1,397,475
78,710
78,469
79,814
734,890
415,802
355,429
250,685
472,425
268,376
416,926
386,168
319,923
5,773
5,837
4,668
$
3,317,736
$
2,981,337
$
2,425,685
$
533,468
$
434,067
$
319,992
7,093
6,024
4,869
339,388
137,992
88,574
(54,862
)
9,298
41,226
22,716
15,953
17,111
(56,133
)
(30,899
)
(22,476
)
(79,002
)
(98,759
)
(56,118
)
3,097
5,977
9,840
1,075
(6,575
)
9,248
716,840
473,078
412,266
282,435
196,330
160,371
434,405
276,748
251,895
-
4,414
-
$
434,405
$
281,162
$
251,895
$
2.38
$
1.53
$
1.28
$
2.31
$
1.52
$
1.27
Fiscal 2002 compared to fiscal 2001
Consolidated revenues for fiscal year 2002 increased 11.3% primarily due to increases in Mortgage operations and U.S. tax operations. Mortgage operations and U.S. tax operations increased revenues by $319.1 million and $208.1 million, respectively. Also contributing to the increase was Business services, which reported an 8.0% increase over the prior year. These increases were partially offset by a decline in Investment services revenues of $221.7 million.
The Company reported pretax earnings of $716.8 million for fiscal year 2002 compared to $473.1 million in the prior year. The improvement over the prior year is primarily from the Mortgage operations segment that reported earnings of $339.4 million, a $201.4 million improvement over last year. In addition, U.S. tax operations reported an improvement of 22.9% or $99.4 million over the prior year. Somewhat offsetting these improvements was a decline of $64.2 million from fiscal 2001 for Investment services. In addition, the adoption of SFAS 141 and 142 positively impacted the year-over-year pretax earnings increase by $62.4 million.
The effective income tax rate decreased from 41.5% last year to 39.4% this year. The decrease in the effective tax rate is primarily due to tax planning initiatives and the reduction in non-deductible goodwill and other intangible asset amortization related to the adoption of SFAS 141 and 142.
Net earnings were $434.4 million, or $2.31 per diluted share compared to earnings of $281.2 million, or $1.52 per diluted share for the year ended April 30, 2001. The adoption of SFAS 141 and 142 improved net earnings over the prior year by $47.9 million, or $.26 per diluted share.
31
The Companys performance as measured by earnings before interest (including interest expense on acquisition debt, investment income and interest allocated to operating business units), taxes, depreciation and amortization (EBITDA) improved $165.2 million to $952.4 million compared to $787.2 million in the prior year. Management utilizes EBITDA to evaluate the performance of its operating segments as an approximate measure of cash flow generation. The Companys operations have not historically been capital intensive, and EBITDA also removes the effects of purchase accounting. The calculation of EBITDA may not be comparable to the calculation of EBITDA by other companies, and it is a non-GAAP financial measure.
In addition, the Company continues to measure its performance based on the calculation of earnings excluding the after-tax impact of amortization of acquired intangible assets. Net earnings, excluding the after-tax impact of this expense, were $474.3 million, or $2.52 per diluted share in fiscal 2002, compared to $366.6 million, or $1.98 per diluted share last year. This calculation is a non-GAAP financial measure.
Fiscal 2001 compared to fiscal 2000
Consolidated revenues for fiscal year 2001 increased 22.9% to $3.0 billion compared to $2.4 billion in the previous year due primarily to increases in U.S. tax operations, Mortgage operations and Investment services. The increase related to Investment services is due to the inclusion of a full twelve months of operations in fiscal 2001 compared to only five months in fiscal 2000.
Pretax earnings of $473.1 million increased 14.8% compared to fiscal 2000 due to improved performance within U.S. tax operations and Mortgage operations, which were partially offset by lesser performance within Investment services and higher interest expense on acquisition debt.
The effective tax rate increased from 38.9% to 41.5% in fiscal 2001 as a result of a full year of non-deductible intangible asset and goodwill amortization resulting from the acquisition of OLDE Financial Corporation, compared with five months of amortization in fiscal year 2000.
Net earnings increased 11.6% to $281.2 million, or $1.52 per diluted share, from $251.9 million, or $1.27 per diluted share in fiscal 2000. The Companys fiscal 2001 results include two one-time items - the implementation of SFAS 133, an additional $.03 per diluted share, and an accrual for settlement of litigation brought against the Company, a reduction of $.05 per diluted share. Excluding the effects of these one-time items, diluted earnings per share was $1.54, a 21.3% increase over fiscal 2000.
The Companys performance as measured by EBITDA improved $189.2 million to $787.2 million compared to $598.0 million in fiscal 2000. Net earnings from continuing operations before change in accounting principle, excluding the after-tax impact of amortization of acquired intangible assets, were $362.2 million, or $1.96 per diluted share in 2001, compared to $304.4 million, or $1.54 per diluted share in the prior year, increases of 19.0% and 27.3%, respectively.
U.S. TAX OPERATIONS
This segment is primarily engaged in providing tax return preparation, filing, and related services in the United States. Tax-related service revenues include fees from company-owned tax offices and royalties from franchised offices. This segment also includes the Companys tax preparation software TaxCut® from H&R Block, other personal productivity software, online tax preparation through a tax professional (whereby the client fills out an online tax organizer and sends it to a tax professional for preparation), online do-it-yourself tax preparation, online professional tax review and online tax advice through the hrblock.com website.
32
In addition, the Company offers Refund Anticipation Loan (RAL) products to its tax clients through a relationship with Household Bank, f.s.b. (Household). The Company buys participation interests in RALs made by Household (49.9% and 25.0% for RALs facilitated at company-owned offices and in major franchise offices, respectively). Revenue from participation is calculated as the Companys percentage participation multiplied by the fee the customer pays Household for the RAL. The fee the customer pays for the RAL is set by Household and is based on the dollar amount of the RAL.
This tax season, U.S. tax operations began offering new products to bring additional value to H&R Blocks client base. For the first time, tax offices offered a new RAL product an instant RAL. With an instant RAL, clients who qualify receive a check for loan proceeds upon the completion of their tax return and do not need to return to the office a second time to pick up their check. In its initial tax season, 193 thousand instant RALs were provided. In addition, tax offices offered a new product to those clients whose tax returns reflect a balance due the Internal Revenue Service (IRS). Clients who qualify can receive a line of credit from Household that can be used to pay a balance due the IRS. This line of credit has same as cash terms for 90 days. Unlike the traditional RAL products, the Company does not have a participation interest in these lines of credit. Twenty-two thousand of these balance due products were provided in fiscal 2002.
The e-commerce business also offered new tax and advice products to its
clients. This year, both software and online users had the opportunity to have
an H&R Block tax professional review their return and provide feedback to them
prior to filing. In addition, all software and online clients had the
opportunity to open an Express IRA account and to receive a free financial plan
through H&R Block Financial Advisors, Inc.
Year Ended April 30
U.S. Tax Operations - Operating Statistics
2002
2001
2000
(in 000s except average fee and offices)
10,431
10,275
10,230
6,468
6,167
6,046
16,899
16,442
16,276
10,513
10,425
10,479
6,635
6,458
6,454
1,489
1,264
821
18,637
18,147
17,754
9,057
8,635
8,292
5,222
4,693
4,300
1,361
1,196
817
15,640
14,524
13,409
$
129.61
$
118.19
$
106.08
109.51
101.11
93.80
$
121.83
$
111.65
$
101.40
5,017
5,060
5,162
3,998
4,012
4,048
9,015
9,072
9,210
* Includes on-line completed and paid returns and e-filings for software clients. |
33
Year Ended April 30
U.S. Tax Operations - Financial Results
2002
2001
2000
$
1,364,673
$
1,237,622
$
1,108,666
154,780
140,146
128,870
159,965
133,710
89,761
54,301
44,138
26,161
97,033
67,020
44,017
1,830,752
1,622,636
1,397,475
598,355
561,962
517,968
186,998
172,572
173,656
39,871
55,346
55,814
19,425
17,549
12,202
38,235
55,391
32,540
35,989
32,520
34,806
145,525
121,478
137,643
232,886
171,751
112,854
1,297,284
1,188,569
1,077,483
$
533,468
$
434,067
$
319,992
29.1%
26.8%
22.9%
$
592,726
$
503,958
$
386,515
Fiscal 2002 compared to fiscal 2001
Tax preparation and related fees generated by company-owned offices increased 10.3% to $1.4 billion during fiscal year 2002 compared to fiscal year 2001. This increase is primarily attributable to a 1.5% increase in returns prepared in company-owned offices combined with the 9.7% increase in the average fee on those returns. The average fee earned during 2002 was $129.61 compared to $118.19 earned last year. The average fee benefited from the first time inclusion of a federal rebate credit form, increased usage of the child tax credit form and other overall increases in client complexity.
Royalties from franchises of $154.8 million increased proportionately with the increase in total tax preparation and related fees generated from company-owned offices. Franchise offices experienced a 4.9% increase in tax returns prepared to 6.5 million during fiscal 2002 compared to last year. The average fee in franchise offices increased 8.3% to $109.51 as compared to the prior year.
The total number of clients served in company-owned and franchise offices and in e-commerce operations was 18.6 million compared to 18.1 million in fiscal 2001. The average fee per client served was $121.83, up 9.1% over the prior year.
Revenues from participation in RALs increased $26.3 million, or 19.6%, to $160.0 million compared to the prior year. This increase is attributable to a 16.6% increase in the number of RALs in which the Company participated to 4.7 million and a 2.6% increase in pricing. The increased price was driven by an increase in the average refund amount and favorable changes in product mix resulting in a gross revenue per RAL of $33.67, which is up 2.8% over last year.
Software revenues increased 23.0% over last year to $54.3 million. The increase is primarily due to an increase in the number of units sold and an increase in electronic filing charges. Software units sold increased 6.6%, from 2.9 million to 3.0 million units, primarily due to TaxCut State, TaxCut Home & Business and legal products.
During the tax season, revenues from the Companys e-commerce initiatives improved over the prior year with increases in the number of Online Tax Preparation (OTP), Professional Tax Service (PTS) and Review clients. Revenues from these initiatives are included in other revenues.
34
In addition, revenues of $44.4 million from the Peace of Mind warranty program, which increased $10.9 million, helped drive the increase in other revenues due to the increase in the number of warranties sold compared to last year. The increase in the number of warranties sold is due to both an increase in the number of returns prepared, as well as an increase in the percent of clients that purchased the warranty from 21.9% in the prior year, to 26.6% in fiscal 2002.
Total expenses increased 9.1% to $1.3 billion during the year ended April 30, 2002 compared to the year ended April 30, 2001. This increase is due to a 35.6% increase in allocated and shared costs primarily related to marketing and technology development, which increased $39.2 million and $16.8 million, respectively. The higher marketing costs are due to the Companys increased advertising initiatives this year. In addition, compensation and benefits and occupancy and equipment increased as a direct result of the increase in revenues. Offsetting these increases was lower bad debt expense associated with participation in RALs which declined $15.2 million to $9.4 million due to a more favorable collection rate in the current year. A problem with the IRS debt indicator last tax season increased bad debt expense in fiscal 2001. The IRS debt indicator identifies outstanding debts owed by the borrower to the IRS or other government entities. In addition, depreciation and amortization expense decreased by 28.0% to $39.9 million primarily due to lower goodwill amortization of $11.0 million related to the adoption of SFAS No. 141 and 142 and certain assets becoming fully depreciated at the end of the prior fiscal year.
Pretax earnings for fiscal year 2002 were $533.5 million, an increase of 22.9% compared to $434.1 million for fiscal year 2001. The segments operating margin improved to 29.1% in fiscal 2002 compared to 26.8% in fiscal 2001.
Fiscal 2001 compared to fiscal 2000
Tax preparation and related fees increased 11.6% to $1.2 billion during fiscal year 2001 compared to fiscal year 2000. This increase is primarily due to a .4% increase in tax returns prepared in company-owned offices combined with an 11.4% increase in the average fee on those returns. The increase in the average fee was due to a planned price increase, a shift in customer mix to those with more complex returns and the reduction of price discounting at the point of sale.
The number of clients served by company-owned operations increased 3.4% to 11.7 million due principally to increases in e-commerce clients. In addition, the number of tax returns filed electronically increased 7.9% in company-owned operations, resulting in the electronic filing of 84.1% of all returns processed in company-owned operations.
Royalties from franchises of $140.1 million increased 8.8% during fiscal year 2001 compared to fiscal year 2000. Franchise offices experienced a 2.0% increase in tax returns prepared to 6.2 million during fiscal 2001 compared to the prior year. The average fee earned during fiscal 2001 was $101.11, an increase of 7.8% compared to the prior year.
Revenues from participations in RALs increased $43.9 million over fiscal year 2000. This increase is a result of both increases in the average revenue per RAL by 43.9% and the number of RALs by 2.7%. The increase in pricing is due to adjustments made to offset the increased risk of bad debt resulting from the IRSs heightened review of returns containing earned income tax credits.
Also contributing to the increase in revenues were software sales, which increased 68.7% due mainly to a change in our pricing strategy that lowered our retail price per federal unit, but included an additional fee for state products.
Pretax earnings increased 35.7% to $434.1 million compared to $320.0 million in fiscal 2000. The increase is largely due to the increase in revenues as well as effective expense control. As a result of expense control, the segments operating margin improved to 26.8% in fiscal 2001 compared to 22.9% in fiscal 2000.
INTERNATIONAL TAX OPERATIONS
This segment is primarily engaged in providing local tax return preparation, filing and related services in Canada, Australia and the United Kingdom. In addition, Overseas operations include company-owned and franchise offices in eight countries that prepare U.S. tax returns for U.S. citizens living abroad. This segment served 2.3 million taxpayers in fiscal 2002 and 2001. Tax-related service revenues include fees from company-owned tax offices and royalties from franchise offices.
The Companys operations in this segment are transacted in the local currencies of the countries in which it operates, therefore the results can be affected by the translation into U.S. dollars. The continued strength of the U.S. dollar during the year had the impact of lowering reported revenues and reducing earnings and losses.
35
Year Ended April 30
International Tax Operations - Financial Results
2002
2001
2000
$
55,753
$
56,075
$
59,398
17,701
17,939
17,573
1,112
1,763
1,595
4,144
2,692
1,248
78,710
78,469
79,814
7,728
5,556
3,291
2,912
3,472
3,189
(2,536
)
(1,602
)
(1,958
)
1,682
846
347
(2,693
)
(2,248
)
$
7,093
$
6,024
$
4,869
$
11,947
$
11,453
$
10,363
Fiscal 2002 compared to fiscal 2001
International revenues totaled $78.7 million in fiscal 2002 compared to $78.5 million last year. Overseas revenues improved by 53.9% primarily from strong revenues in Puerto Rico. The increase was partially offset by unfavorable currency exchange rates in Australia and Canada.
Pretax earnings increased 17.7% to $7.1 million from $6.0 million last year.
The improvement in pretax earnings for Canada of 39.1% is primarily attributed to lower real estate and occupancy costs, lower bad debt expense and other cost control. Although revenue in local currency increased compared to last year, the number of regular and discounted tax returns prepared declined 1.8%.
Australian results were negatively affected by an unfavorable currency exchange rate, as well as additional costs attributed to the opening of thirteen new offices in July 2001. The number of tax returns prepared remained constant with the prior year.
The United Kingdoms pretax loss increased by 58.3% to $2.5 million compared to last year, driven primarily by business restructuring and the write-off of intangible assets of $800 thousand.
The improvement in pretax earnings for Overseas is attributed to a 28.4% increase in tax returns prepared, primarily in Puerto Rico.
Fiscal 2001 compared to fiscal 2000
International revenues decreased by 1.7% to $78.5 million from $79.8 million in fiscal year 2000. The decrease was driven primarily by unfavorable changes in currency exchange rates and managements decision to reduce the non-profitable early discounted return business in Canada.
Pretax earnings increased 23.7% to $6.0 million from $4.9 million in fiscal 2000, in spite of the unfavorable changes in currency exchange rates.
The improved performance in Canada is primarily attributable to business management and effective cost control mainly in marketing, labor and supplies.
The Australian results were negatively affected by the unfavorable change in the currency exchange rates as the pretax results improved by 26.6% in Australian currency. These results were driven primarily by a 6.7% increase in the number of returns processed.
The United Kingdom pretax loss decreased by 18.2% primarily reflecting ongoing efforts to close non-profitable offices while increasing business volume.
The Overseas improvement of 143.8% is attributable to a 51% increase in return volume, primarily in Puerto Rico, as a child tax credit program was introduced in fiscal 2001.
36
MORTGAGE OPERATIONS
Through Option One Mortgage Corporation and H&R Block Mortgage Corporation, this segment offers a wide range of home mortgage products. This segment is primarily engaged in the origination, servicing and sale of nonconforming and conforming mortgage loans. This segment offers a flexible product line to borrowers who are creditworthy but do not meet traditional underwriting criteria, through a network of mortgage brokers. Conforming mortgage loan products, as well as the same flexible product line available through brokers, are offered through some H&R Block Financial Advisors branch offices and H&R Block Mortgage Corporation retail offices.
A primary source of revenue for this segment is the recognition of gains on sales of mortgage loans. This segment also holds residual interests in securitized mortgage loans in which cash flows are received over the life of the loans. The subsequent securitization of these residual interests in the form of a net interest margin bond (NIM) results in the receipt of a substantial portion of the cash from the residual at the closing of the NIM transaction, rather than over the actual life of the loans.
During fiscal 2002, the Companys residual interests performed better than expected primarily due to lower interest rates, as well as lower loan losses and prepayments to date than originally projected in the valuation models. The lower rates reduced the interest payments to the bondholders, thereby allowing the bondholders and residual interest holders to receive cash related to principal and interest payments, respectively, earlier than expected in the valuation models. As a result of these items and in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company recorded pretax mark-to-market write-up adjustments in the fair value of its residual interest of $151.1 million during fiscal 2002. These write-ups are recorded, net of deferred taxes, in other comprehensive income and are then accreted into income throughout the remaining life of those residual interests. Future changes in interest rates or other assumptions could cause additional adjustments to the fair value of the residual interests and would cause changes to the accretion of these residual interests in future periods.
One of the Companys core strategic objectives is creating a financial partnership with its tax clients through delivery of advice, coupled with the products and services needed to act on that advice. The Companys initiative to serve the mortgage needs of its tax clients through its retail mortgage operations resulted in 43.2% of all retail loans, and 7.3% of all loans originated during fiscal year 2002, coming from H&R Block tax clients, compared to 29.4% and 5.0%, respectively, in fiscal year 2001.
Management utilizes
operating profit margin to evaluate this segments performance. Operating
profit margin is defined as pretax earnings before goodwill amortization
divided by volume of loans originated.
Year Ended April 30
Mortgage Operations - Operating Statistics
2002
2001
2000
(in 000s except # of loans originated and average servicing portfolio)
74,208
49,805
47,390
15,125
10,254
6,702
89,333
60,059
54,092
$
9,457,331
$
5,289,715
$
4,903,459
1,995,842
1,235,186
794,202
$
11,453,173
$
6,524,901
$
5,697,661
$
11,440,190
$
6,009,544
$
6,080,162
209.6
173.9
114.4
$
19.9
$
15.9
$
8.8
37
Year Ended April 30
Mortgage Operations - Financial Results
2002
2001
2000
$
456,958
$
244,789
$
189,607
147,162
110,222
62,510
127,860
57,517
102,156
2,910
3,274
1,156
734,890
415,802
355,429
181,630
128,683
103,049
86,146
34,620
20,338
30,700
23,683
15,462
4,955
13,727
56,988
25,442
16,153
8,808
13,577
13,760
63,509
45,465
48,450
3,120
1,902
395,502
277,810
266,855
$
339,388
$
137,992
$
88,574
2.96%
2.32%
1.80%
$
354,141
$
160,805
$
108,885
* Operating profit margin is pretax earnings before goodwill amortization divided by volume of loans originated. |
Fiscal 2002 compared to fiscal 2001
Revenues increased by $319.1 million or 76.7%, to $734.9 million, for the year ended April 30, 2002 compared to the previous year. The increase is primarily due to an increase in production volume, higher interest income, a favorable secondary market environment and a larger servicing portfolio.
Revenues related to the sale of mortgage loans increased by $212.2 million or 86.7% to $457.0 million over the prior year resulting from a significant increase in loan origination volume and better pricing execution on mortgage loan sales. During fiscal year 2002, the Companys loan origination volume increased 75.5% over last year. The increase in loan production is a result of an increase in the average loan size, an increase in the size of the sales force, an improvement in the closing ratio and to a lesser extent, the declining interest rate environment. The average loan size increased to $128 thousand from $109 thousand in fiscal 2001 and the closing ratio improved to 50.3% from 44.9% in the prior year. The total execution price for fiscal year 2002 was 4.30% compared to 3.71% for last year. The execution price is defined as the total premium received divided by the total balance of loans sold. The better execution price is partially attributable to the declining interest rate environment that has the effect of widening spreads on mortgage loan sales, as well as better structuring of the deals. Somewhat offsetting the increase in the gain on sale were losses of $31.0 million that were recorded in 2002 related to adverse changes in the timing and amount of cash flows on certain residual interests.
Servicing revenues increased $36.9 million to $147.2 million for the year ended April 30, 2002 as compared to the same period last year. The increase reflects a higher average loan servicing portfolio balance. The average servicing portfolio for the twelve-month period increased 25.2% compared to the same period last year.
Interest income for the year ended April 30, 2002 was $127.9 million, an increase of $70.3 million or 122.3% over the prior year. This increase is primarily the result of the declining interest rate environment, which improves the excess retained interest spread earned. The excess retained interest spread for fiscal year 2002 was 5.58% compared to 2.65% for last year. Also contributing to the increase in interest income is higher accretion income on residual interests during fiscal year 2002.
Pretax earnings increased $201.4 million or 146.0%, to $339.4 million for the year ended April 30, 2002. The improved performance is primarily due to the increase in revenues as discussed above. In addition to higher loan volumes, improved closing ratios and focus on operating efficiencies helped drive a decline in the net cost of origination. The increase in compensation and benefits is due to an
38
increase in the number of employees supporting the increase in volumes. The increase in variable servicing and processing expense is due to the increase in the size of the servicing portfolio and a $11.6 million write-down of mortgage servicing rights (MSRs) and other servicing related assets recorded in fiscal 2002 to reflect a change in the assumptions underlying the related loan portfolios. The year ended April 30, 2002 also benefited by $13.6 million in reduced goodwill amortization compared to the prior year from the adoption of SFAS 141 and 142.
Fiscal 2001 compared to fiscal 2000
Revenues increased 17.0% to $415.8 million in fiscal year 2001 compared with fiscal 2000. The increase was primarily due to an increase in production volume, a favorable secondary market environment and a larger servicing portfolio, which was partially offset by lower interest income.
Revenues related to the sale of mortgage loans increased $55.2 million over fiscal 2000 resulting from favorable secondary market pricing on mortgage loan sales. During fiscal 2001, the Company originated $6.5 billion in mortgage loans compared to $5.7 billion in fiscal year 2000. The total execution price representing gain on sale of mortgage loans for the fiscal year ended April 30, 2001 was 3.71% compared to 3.73% for the fiscal year ended April 30, 2000.
Servicing revenues increased 76.3% to $110.2 million over fiscal 2000. The increase was principally attributable to a higher average loan servicing portfolio balance, increased servicing operations efficiencies and an increase in the collection of borrower late fees. The average loan servicing portfolio for the year of $15.9 billion compared to $8.8 billion in fiscal 2000. These increases in revenues were partially offset by the winding down of certain mortgage activities during fiscal year 2001.
Pretax earnings increased $49.4 million or 55.8% to $138.0 million for the year ended April 30, 2001. The improved performance was primarily due to the increased revenues discussed above. The decrease in both interest income and interest expense was a result of a move to off-balance sheet arrangements for the funding of mortgage loans. Utilizing the off-balance sheet arrangements, the Company essentially no longer incurs short-term borrowings to fund its mortgage loans. Also see Mortgage operations discussion in the Financial Condition section which discusses the off-balance sheet arrangements.
INVESTMENT SERVICES
This segment is primarily engaged in offering investment advice and services through H&R Block Financial Advisors, Inc. (HRBFA), a full-service securities broker. Financial planning, investment advice, related financial services and securities products are offered through approximately 1,600 financial advisors at over 600 branch offices located throughout the United States. Some HRBFA offices are co-located with tax and mortgage offices to offer customers one location for their financial service needs.
The Companys Express IRA product allows clients to use all or part of their income tax refund to fund an IRA account. The Express IRA is funded initially with an FDIC insured money market fund. Clients then have the option of moving the funds to an HRBFA brokerage account, where they can receive advice about financial planning and other financial vehicles including mutual funds, stocks, bonds and annuities. During the 2002 tax season, Express IRA was launched in all tax services regions whereas in the 2001 tax season, this product was only offered in a portion of the country. One hundred and twenty-nine thousand five hundred and seventy-six Express IRA accounts were opened during fiscal 2002. Another key cross-organizational initiative is the creation and testing of the Tax Professional / Financial Advisor (TPFA) program, whereby tax professionals are trained and become licensed financial advisors in order to provide clients with financial advice. In fiscal 2001, the pilot year, 430 TPFAs generated 4,846 investment-related accounts (accounts opened). In fiscal 2002, 654 TPFAs have helped clients open 6,160 investment-related accounts.
Several other new products were introduced or expanded during fiscal year 2002. Annuities were added to the product line in January 2001. The Company currently conducts annuity business in twenty-one states, but is licensed in forty states, and will continue to add additional states to distribute the product. In the fall of 2000, the Company began offering online accounts to its customers. The number of online trades represents 8.5% of total trades for the year ended April 30, 2002. Accounts with cash management features including an ATM/Check card were offered for the first time in July 2001. In the third quarter of fiscal 2002, the Company launched fee-based accounts. The Investment services segment has yet to experience significant revenues from the majority of these initiatives due to the early stages of their introduction.
39
Year Ended April 30
Investment Services - Operating Statistics
2002
2001
2000*
(actual amounts, except as indicated)
1,447,513
2,361,809
1,855,038
5,767
9,410
17,500
$
62.03
$
67.38
$
61.84
695,355
619,846
658,343
2.08
3.81
2.82
$
25.5
$
31.5
$
44.0
$
36,672
$
50,817
$
66,765
$
801,000
$
1,299,600
$
2,843,300
$
825,100
$
824,000
$
990,300
* Fiscal year 2000 includes statistics from the date of acquisition of OLDE Financial Corporation on December 1, 1999. |
Year Ended April 30 | |||||||||||||
|
|||||||||||||
Investment Services - Financial Results | 2002 | 2001 | 2000 | ||||||||||
|
|
|
|
||||||||||
Margin interest income
|
$ | 67,849 | $ | 211,128 | $ | 83,955 | |||||||
Less: interest expense
|
(14,744 | ) | (106,265 | ) | (41,563 | ) | |||||||
|
|
|
|
||||||||||
Net interest income
|
53,105 | 104,863 | 42,392 | ||||||||||
Commission income
|
103,976 | 166,362 | 125,689 | ||||||||||
Fee income
|
25,257 | 26,271 | 11,692 | ||||||||||
Firm trading income
|
44,861 | 63,298 | 46,566 | ||||||||||
Other
|
8,742 | 5,366 | 474 | ||||||||||
|
|
|
|
||||||||||
Total revenues**
|
235,941 | 366,160 | 226,813 | ||||||||||
|
|
|
|
||||||||||
Commissions
|
46,490 | 68,099 | 55,327 | ||||||||||
Other variable expenses
|
9,266 | 16,342 | 12,743 | ||||||||||
|
|
|
|
||||||||||
Total variable expenses
|
55,756 | 84,441 | 68,070 | ||||||||||
|
|
|
|
||||||||||
Operating margin
|
180,185 | 281,719 | 158,743 | ||||||||||
Compensation and benefits
|
93,314 | 93,592 | 43,842 | ||||||||||
Occupancy and equipment
|
29,106 | 28,804 | 12,551 | ||||||||||
Depreciation and amortization
|
20,416 | 17,840 | 6,058 | ||||||||||
Amortization of acquisition intangibles
|
29,450 | 47,530 | 19,605 | ||||||||||
Other
|
48,067 | 58,834 | 35,461 | ||||||||||
Allocated corporate and shared costs
|
14,694 | 25,821 | | ||||||||||
|
|
|
|
||||||||||
Total fixed expenses
|
235,047 | 272,421 | 117,517 | ||||||||||
|
|
|
|
||||||||||
Pretax earnings (loss)
|
$ | (54,862 | ) | $ | 9,298 | $ | 41,226 | ||||||
|
|
|
|
||||||||||
EBITDA
|
$ | (2,680 | ) | $ | 76,587 | $ | 66,889 |
** | Total revenues, less interest expense. |
40
Fiscal 2002 compared to fiscal 2001
Investment services revenues, net of interest expense, for the year ended April 30, 2002 compared to the same period last year decreased 35.6% to $235.9 million from $366.2 million. Operating results for Investment services have declined primarily due to weakening trading activity and poor investor sentiment. The economic slow-down that began in the summer of 2000 continued through fiscal year 2002. The events of September 11th and notable business failures disrupted the market and exacerbated the decline in investor confidence. As a result, Investment services has been experiencing a steep decline in trading volumes. Concurrently, customer margin balances have significantly declined throughout fiscal 2002. The Company measures the profitability of margin lending activities through the net interest margin. Net interest margin is defined as interest earned on the average margin loan balance, less the cost of funding these loans. Related to the declining margin balances, interest expense, which is mainly comprised of interest paid on customer credit balances and interest paid for securities lending which is used to finance customer margin balances, has declined in fiscal 2002. Revenues are closely linked with the overall performance of market indices and management believes that when investors are once again confident in the market, margin lending and stock transactions will increase, which will positively affect this segments results.
Net interest income. Margin interest income declined $143.3 million to $67.8 million for fiscal year 2002. The decrease in margin interest income was primarily attributed to the decline in margin balances and to a lesser extent, lower interest rates. Customer margin balances have declined from an average of $2.4 billion for the year ended April 30, 2001 to an average of $1 billion in fiscal 2002. Total interest expense decreased $91.5 million or 86.1% to $14.7 million from $106.3 million for fiscal year 2002. Interest paid on customer credit balances decreased 65.1% to $11.0 million. The decrease is due to lower interest rates. Balances fell from an average of $900 million in fiscal 2001 to an average of $807 million for fiscal 2002, a decline of 10.3%. Interest paid on securities lending decreased 95% to $3.7 million. In addition to a decline in interest rates, the lower expense is attributable to the decline in customer margin balances. Because stock loans are used to finance the margin-lending portfolio, the decline in the portfolio has reduced the need for this financing. Net interest margin declined from 2.9% for fiscal year 2001 to 1.06% for 2002.
Trading Volume. Total customer trades for fiscal year 2002 were 1.4 million, a decline of 38.7% from the previous year of 2.4 million customer trades. As a result, commission income decreased $62.4 million or 37.5% to $104.0 million from $166.4 million. The average commission per trade declined 7.9% reflecting lower dollar volume trades as compared to the previous year.
Firm Trading. Overall principal trading revenue, including equities, fixed income trading, underwriting, and unit investment trusts, decreased 29.1% to $44.9 million. Equity unit investment trusts (UITs) decreased 87.1% or $15.6 million and equity trading declined 78.2% or $18.7 million. Client demand for equity UITs fell as many equity UITs have substantially declined from initial offering prices in late fiscal 2000 and early fiscal 2001. Partially offsetting these declines, underwriting revenues increased by $11.5 million or 195.3% from fiscal year 2001, primarily due to increased demand for Trust Preferred Debt Securities. More clients have shown a greater interest in fixed rate capital securities due to the current equity market conditions. Firm trading revenues also reflect the negative impact of decimalization and the closing down of the principal equity trading operations. Decimalization replaced fractional trading for listed equities on January 29, 2001 and for NASDAQ equities on April 9, 2001. The impact of decimalization reduced the spread between the bid and ask prices, reducing revenue opportunities. As a consequence, the principal equity trading operations of HRBFA were closed in April 2002. Exit costs of approximately $1 million were recorded in fiscal year 2002 as a result of this action.
Pretax results for Investment services for fiscal year 2002 compared to the prior year decreased $64.2 million to a loss of $54.9 million from pretax earnings of $9.3 million. The decrease is primarily attributed to the decline in customer trading and customer margin activity. Total expenses decreased by 18.5% to $290.8 million from $356.9 million due primarily to a decrease in commission expense, litigation settlements, and the amortization of intangible assets. The decrease in commission expense paid to financial advisors was due to the decline in trading. At the end of fiscal year 2001, HRBFA agreed to settle a class action lawsuit filed against OLDE Discount Corporation (OLDE), predecessor to HRBFA. HRBFA denied liability with respect to these claims, but determined to settle the matter to avoid the costs, expenses, and distractions of further litigation. HRBFA distributed $21 million to a claims administrator agreed upon by the parties for distribution to class members, after satisfaction of attorneys fees and administrative expenses. The Company accrued $16.8 million related to this settlement in fiscal 2001. As a result of the adoption of SFAS 141 and 142, Investment services amortization of acquired intangible assets declined by $18.1 million from 2001 to 2002.
41
Investment services has been undergoing process re-engineering and consolidation efforts to streamline certain activities and related cost structures. As a result of these efforts, a reduction in workforce occurred in April 2001, October 2001 and April 2002. The Company incurred related severance charges of approximately $3 million and $1.6 million in fiscal 2002 and 2001, respectively.
Key to Investment services future success is retention of its financial advisors. As a result of meeting certain three-year production goals set at the time of acquisition, certain long-term advisors are eligible to receive a one-time retention payment. The accrual of this payment negatively impacted fourth quarter 2002 results by $6.4 million. The retention period is through December 31, 2002 with a payment to be made at the beginning of calendar year 2003.
Fiscal 2001 compared to fiscal 2000
Investment services revenues, net of interest expense, for fiscal 2001 increased 61.4% to $366.2 million from $226.8 million. The increase is attributable primarily to the acquisition of OLDE Financial Corporation on December 1, 1999, and reflects a full twelve months of revenues and expenses for the acquired companies in fiscal year 2001 as compared with only five months for fiscal year 2000.
Net interest income. Customer margin interest income increased for fiscal year 2001. The increase is due to twelve months of revenue for 2001 compared to five months of revenue for 2000. Margin balances had fallen dramatically from $2.8 billion at the end of fiscal 2000 to $1.3 billion at the end of fiscal 2001. However, average margin balances for the five months of fiscal 2000 compared to the twelve months of fiscal year 2001 were similar, $2.5 billion compared with $2.4 billion. Interest expense increased $64.7 million or 155.7% to $106.3 million from $41.6 million. Interest expense paid on customer credit balances was $31.6 million for 2001 and $16.5 million for the five months of 2000. Customer credit balances averaged $900 million for 2001 and averaged $1.1 billion for 2000. Interest expense on securities loaned was $74.6 million for 2001 and $25.0 million for the five months of 2000. Net interest margin improved from 2.5% to 2.9% as reliance on higher-cost funding sources decreased.
Trading Volume. In line with the markets general decline for the period, the Companys average trading volumes fell by more than 46% as measured by average trades per day. However, the average commission per trade rose reflecting a general increase in commission charges.
Pretax earnings for this segment decreased by 77.4% to $9.3 million from $41.2 million earned in fiscal 2000. The decrease in pretax earnings is primarily attributable to lower trading volume, an increase in the amortization of acquired intangible assets and a litigation settlement. In the former case, there were twelve months of acquired intangible asset amortization in fiscal year 2001, whereas in fiscal 2000 there were only five months. In the latter case, HRBFA agreed to settle a class action lawsuit filed against OLDE. HRBFA denied liability with respect to these claims, but determined to settle the matter to avoid the costs, expenses, and distractions of further litigation. HRBFA distributed $21 million to a claims administrator agreed upon by the parties for distribution to class members, after satisfaction of attorneys fees and administrative expenses. The Company accrued $16.8 million related to this settlement in fiscal 2001.
In an effort to improve profitability due to weak market conditions, in April 2001 Investment services reduced its workforce by 6%, which resulted in a one-time charge of $1.6 million related to severance costs.
BUSINESS SERVICES
This segment is primarily engaged in providing accounting, tax, consulting, payroll, employee benefits and capital markets services to business clients and tax, estate planning, financial planning, wealth management and insurance services to individuals.
In December 2001, the Company made two acquisitions that provide opportunities to capitalize on existing client relationships by providing value-added services. The Company acquired a controlling interest in MyBenefitSource Inc., an integrated payroll and benefits processing company, with an option to acquire the remaining shares. The Company also acquired 100% of Equico Resources, LLC (Equico), a valuation, merger and acquisition consulting firm. These acquisitions were accounted for as purchases, and the results of operations for these businesses have been consolidated in the segments financial results since acquisition. Cash payments related to these acquisitions totaled $28.5 million, with expected additional cash payments of $31.0 million to be made over the next five years. The purchase agreements also provide for possible future contingent consideration based on achieving certain revenue, profitability and working capital targets over the next six years, and such consideration will be treated as purchase price if paid.
42
In addition, the Company has acquired several accounting firms during
fiscal year 2002 which have initiated a geographic presence in the Seattle and
San Francisco metropolitan areas and expanded its existing presence in the New
York City and Dallas metropolitan areas.
Year Ended April 30
Business Services - Financial Results
2002
2001
2000
$
368,593
$
332,099
$
277,624
19,062
20,960
16,533
11,700
11,467
17,341
17,571
21,642
8,425
416,926
386,168
319,923
265,960
240,660
182,592
19,957
24,792
28,444
7,063
7,208
6,286
6,285
5,485
4,758
11,353
9,164
5,598
14,276
31,576
22,786
67,738
49,814
52,348
1,578
1,516
-
394,210
370,215
302,812
$
22,716
$
15,953
$
17,111
5.4%
4.1%
5.3%
$
44,106
$
54,774
$
46,171
Fiscal 2002 compared to fiscal 2001
Business services revenues of $416.9 million increased 8.0% from $386.2 million in the prior year. This increase was due to the addition of new firms and revenue from tax consulting and wealth management services. The effect of acquisitions completed in fiscal year 2002 plus the full year for mergers completed in fiscal year 2001, net of the sale of the businesses in fiscal year 2001, was to increase revenue for the year by $24.8 million. Growth from tax consulting and wealth management services was $8.3 million. Billed out-of-pocket expenses that are presented as revenues and expenses under EITF 01-14, were $5.4 million higher in fiscal 2002 than in the prior year. Partially offsetting these increases, revenue from core tax services and general business consulting services declined $9.8 million from the prior year. A recession in manufacturing and a continuing cautious business environment have contributed to weakness in the segments business consulting services in the current fiscal year.
Pretax earnings improved 42.2% from $16.0 million in the prior year to $22.7 million in fiscal 2002. The improvement in pretax earnings is largely related to the adoption of SFAS 141 and 142, representing an improvement to the year-over-year comparison of $19.3 million. This increase was partly offset by $6.7 million relating to operating losses for MyBenefitSource and Equico during the year. In addition, fiscal 2001 included a gain on the sale of the assets of KSM Business Services, Inc. of $2.0 million.
Fiscal 2001 compared to fiscal 2000
Business services revenues of $386.2 million increased 20.7% from $319.9 million in fiscal year 2000. The increase in revenues over the prior year is primarily attributable to the inclusion of RSM McGladrey for twelve months as compared to nine months for the previous year, contributing $43.8 million to the increase, and growth in services of $44.7 million. The growth in services includes extended tax consulting services and insurance alliance revenues. In addition, newly acquired firms, net of the revenues lost from sold offices contributed to the increase. These increases were partially offset by a decrease in revenue from technology consulting fees associated with year 2000 engagements, the decision to close certain unprofitable technology consulting practices, and the change in organizational structure that affected attest revenues discussed in the next paragraph.
43
As of April 30, 2001, the operations of five of the original regional accounting firms acquired were merged into RSM McGladrey, the national accounting firm that acquired substantially all of the non-attest assets of McGladrey & Pullen, LLP on August 2, 1999. Prior to the mergers, for certain of the regional accounting firms, the Company was required, in accordance with Emerging Issues Task Force Issue No. 97-2, Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements, to consolidate revenues and expenses from the non-attest business that the Company owned and the attest business of firms located in Kansas City, Chicago, Baltimore and Philadelphia that the Company did not own, but for whom it performed management services. Revenues are no longer consolidated in fiscal 2001 as a result of the change in organizational structure.
Pretax earnings for fiscal 2001 declined $1.2 million, or 6.8%, from fiscal 2000. This is primarily due to a $3.5 million loss from RSM McGladrey during the first quarter of fiscal 2001 that was not experienced in the prior year due to the timing of the acquisition. Earnings from newly acquired firms and net growth from the core business offset this loss.
CORPORATE OPERATIONS
This segment consists primarily of corporate support departments which provide services to the Companys operating segments. These support departments consist of marketing, information technology, facilities, human resources, supply, executive, legal, finance and corporate communications. These support department costs are largely allocated to the Companys operating segments. The Companys captive insurance and franchise financing subsidiaries are also included within this segment.
As previously discussed, the Company adopted a new methodology for
allocation of corporate services and support costs to business units. The
change was made to more accurately reflect each business segments performance.
Fiscal year 2001 segment results have been restated based on this allocation
methodology.
Year Ended April 30
Corporate Operations & Interest Expense
2002
2001
2000
$
5,773
$
5,837
$
4,668
89,552
69,597
38,895
23,676
17,576
7,098
25,130
18,375
10,987
102,896
68,691
41,229
89,308
90,060
56,688
(268,656
)
(227,563
)
(127,753
)
61,906
36,736
27,144
$
(56,133
)
$
(30,899
)
$
(22,476
)
$
79,002
$
98,759
$
56,118
Fiscal 2002 compared to fiscal 2001
The pretax loss for fiscal 2002 increased $25.2 million to $56.1 million compared to fiscal 2001. The increase is primarily due to higher employee benefit expenses and an increase in unallocated research and development activity. The decrease in interest expense on acquisition debt is attributable to lower financing costs and payment of a portion of the acquisition debt in fiscal 2002.
Fiscal 2001 compared to fiscal 2000
The pretax loss for fiscal 2001 increased 37.5% to $30.9 million from $22.5 million in the prior year. The increase is primarily a result of higher employee costs and interest expense related to borrowings for funding of operations, including share repurchases. Interest expense on acquisition debt increased $42.6 million in fiscal 2001 compared to fiscal 2000. The increase is primarily attributable to a full year of financing costs associated with the acquisition of OLDE in December 1999 compared with only five months in fiscal 2000.
44
FINANCIAL CONDITION
The Companys liquidity needs are met through a combination of operational cash flows, commercial paper (CP) issuance, HRBFA client account assets and stock loans, and for the Mortgage segment, a mix of whole loan sales and residual securitizations.
OPERATING NET CASH INFLOWS
Operating cash flows totaled $741.4 million, $248.4 million and $453.0 million in fiscal years 2002, 2001 and 2000, respectively. These net cash inflows from operations are generated by the various segments, the largest provider of which is U.S. tax operations. While annual operating cash flows are positive, the seasonal nature of U.S. tax operations results in a negative operating cash flow through the first three quarters of the fiscal year and then a large positive operating cash flow in the fourth quarter. Management views these cash flows as stable.
The following table calculates net operating free cash flow,
which reflects the strong cash flows generated by the Companys business. In
addition, the table highlights managements capital allocation decisions.
COMMERCIAL PAPER ISSUANCE
The Company participates in the $1.4 trillion United States commercial paper
market to meet operating cash needs and to fund its RAL participation. This
participation is executed through Block Financial Corporation (BFC), a wholly
owned subsidiary of the Company. The following chart provides the debt ratings
for BFC as of April 30, 2002:
Year Ended April 30
2002
2001
2000
$
434,405
$
281,162
$
251,895
155,386
205,608
147,218
(111,775
)
(92,411
)
(145,753
)
(55,845
)
(72,579
)
(4,730
)
(16,833
)
(5,145
)
198,717
133,542
288,168
604,055
450,177
536,798
(283,797
)
211,858
495,800
(29,905
)
(15,998
)
(971,802
)
195,233
19,550
33,222
57,809
2,235
3,736
(462,938
)
(222,895
)
(50,654
)
(115,725
)
(108,374
)
(105,480
)
(355,526
)
(609,279
)
(383,320
)
$
248,529
$
(159,102
)
$
153,478
Short-Term
Long-Term
A-2
BBB+
P-2
A3
F-1
A
R-1 (low)
A
* | Dominion Bond Rating Service of Canada used for Canadian commercial paper issuance. |
45
The Company incurs short-term borrowings throughout the year primarily to fund receivables associated with its Business services segment, mortgage loans held for sale, participation in RALs and seasonal working capital needs. Because of the seasonality of U.S. tax operations, the Company has had intra-year short-term borrowings, which peaked at $2.2 billion in February 2002 primarily due to RALs. No commercial paper was outstanding at fiscal year-end 2002 and 2001.
The Companys commercial paper issuances are supported by unsecured committed lines of credit (CLOCs). The United States issuances are supported by a $1.93 billion CLOC from a consortium of twenty banks. The $1.93 billion CLOC is subject to annual renewal in October of 2002, and has a one-year term-out provision with a maturity date of October 2003. The Canadian issuances are supported by a $125 million credit facility provided by one bank. This line is subject to a minimum net worth covenant. The Canadian CLOC is subject to annual renewal in December of 2002. There are no rating contingencies under the CLOCs. In addition, the Company entered into a $500 million CLOC during the peak RAL season, which expired in February 2002. An additional CLOC for $500 million was also in place for RAL season in fiscal 2001. These CLOCs remain undrawn at April 30, 2002.
Management believes the commercial paper market to be stable. Risks to the stability of the Companys commercial paper market participation would be a short-term rating downgrade below A2/P2/F2, resulting from adverse changes in the Companys financial performance, non-renewal of the $1.93 billion CLOC in October 2003, and operational risk within the commercial paper market such as the events on September 11. Management believes if any of these events were to occur, the CLOCs, to the extent available, could be used for an orderly exit from the commercial paper market, though at a higher cost to the Company. Additionally, the Company could turn to its other sources of liquidity, including cash, other uncommitted bank borrowings, medium- and long-term debt issuance and asset securitization.
OTHER OBLIGATIONS AND COMMITMENTS
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 Financial Corporation 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 that initially funded the acquisition of Option One Mortgage Corporation (Option One).
As of April 30, 2002, the Company had $250 million remaining under its shelf registration of debt securities for additional debt issuance.
Long-term debt at April 30, 2002 was comprised of the $750 million of Senior Notes described above, future payments related to the acquisitions of RSM McGladrey and other accounting firms, capital lease obligations and mortgage notes. The Companys debt to total capital ratio was 40.4% at April 30, 2002, compared with 44.0% at April 30, 2001.
Business services has commitments to fund certain attest entities, that are not consolidated, related to accounting firms it has acquired. Commitments also exist to loan up to $40 million to McGladrey & Pullen, LLP on a revolving basis through July 31, 2004, subject to certain termination clauses. This revolving facility bears interest at the 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.
In connection with the Companys acquisition of the non-attest assets of McGladrey & Pullen, LLP (McGladrey) in August 1999, the Company assumed certain pension liabilities related to McGladreys retired partners. The Company makes payments in varying amounts on a monthly basis. Included in other noncurrent liabilities at April 30, 2002 and 2001 are $25,655 and $31,360, respectively, related to this liability.
In connection with the Companys Business services acquisitions, the purchase agreements provide for possible future contingent consideration which is based on achieving certain revenue, profitibility and working capital requirements over the next six years.
46
A summary of the Companys obligations and commitments to make future payments
is as follows:
Contractual Obligations
Total
Less than 1 year
1-3 years
4-5 years
After 5 years
$
749,859
$
1,123
$
252,311
$
496,425
$
13,942
940
926
1,035
11,041
525,201
170,959
219,440
73,410
61,392
164,242
57,593
74,752
31,897
$
1,453,244
$
230,615
$
547,429
$
602,767
$
72,433
LIQUIDITY BY STRATEGIC BUSINESS UNIT
U.S. tax operations:
U.S. tax operations is the largest provider of operating cash flows to the Company. Free cash flow, defined as U.S. tax operations net earnings plus amortization and depreciation expense, was $382.5 million in fiscal 2002 and $323.8 million in fiscal 2001. Relative to revenues of $1.8 billion and $1.6 billion in fiscal 2002 and 2001, free cash flow represents 20.9% and 20.0% of revenues, respectively. Management believes these cash flows to be predictable and recurring in nature.
RAL participation funding totaled $4.6 billion in fiscal 2002, compared with $3.6 billion in fiscal 2001. The peak RAL-related receivable balance was $1.6 billion in fiscal 2002. These participation interests were funded by operating cash flows and commercial paper borrowings. Interest expense related to the RAL product was $3.9 million and $3.3 million in fiscal years 2002 and 2001, respectively.
International tax operations:
International tax operations are generally self-funded. Cash flows are held in Canada, Australia and the United Kingdom independently and in local currencies and are not repatriated. H&R Block Canada has a $125 million commercial paper program. At April 30, 2002, there was no commercial paper outstanding. The peak borrowing during fiscal year 2002 was $43.0 million.
Mortgage operations:
Through Option One and H&R Block Mortgage Corporation, this segment primarily originates, services, and sells non-conforming and conforming mortgage loans. In an effort to reduce the Companys capital investment in its mortgage operations, the Company entered into third-party off-balance sheet arrangements beginning in April 2000, renewable annually. The arrangements, which are not guaranteed by the Company, have freed up cash and short-term borrowing capacity ($1.1 billion at April 30, 2002), improved liquidity and flexibility, and reduced balance sheet risk, while providing stability and access to liquidity in the secondary market for mortgage loans. See note 5 in the consolidated financial statements for additional information on the Companys residuals.
The Company originates mortgage loans and sells most loans the same day in a whole-loan sale to a third-party trust (Trust). The sale is recorded in accordance with Statement of Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Trust purchases the loans from the Company utilizing warehouse facilities the Company has not guaranteed. The warehouse facilities are provided by two third-party financial institutions that have each provided $1 billion. These facilities are subject to various performance triggers and limits, and financial covenants including tangible net worth and leverage ratios. Option One is well within the range of these triggers. The Trust is solely responsible for paying principal and interest on the warehouse financing arrangement. As a result of the whole-loan sale to the Trust, the Company records a receivable from the Trust for the present value of the portion of the net spread (the difference between the note rate on the loans and the financing cost of the trust) plus prepayment penalty income. This receivable is included in prepaid and other current assets on the consolidated balance sheets. The Company then pledges its receivable and the Trust pledges the related mortgage loans to a securitization trust to reconstitute the loans. The securitization trust then securitizes the reconstituted mortgage loans. At this point, the Companys receivable is recharacterized as a residual interest from the securitized mortgage loans. These residual interests are classified as trading and are included in marketable securities-trading on the consolidated balance sheets.
47
To enable the Company to accelerate a significant portion of the cash flow from residual interests rather than over the life of the securitization, the Company securitizes its residual interests in a net interest margin (NIM) transaction. From the NIM transaction, the Company receives cash and retains a much smaller residual interest. Generally, these residuals do not begin to receive cash collections for two to three years. These residual interests are classified as available-for-sale.
The Company began receiving cash collections from its residual interests in fiscal 2002 which reduces the outstanding balance of the residuals. Cash received on these residual interests for fiscal 2002 was $67.1 million.
The Company has commitments to fund mortgage loans of $1.7 billion at April 30, 2002, subject to contract verification. External market forces impact the probability of loan commitments being closed, and therefore, total commitments outstanding do not necessarily represent future cash requirements. If the loan commitments are exercised, they will be funded in the manner described above.
The mortgage segment regularly sells whole loans as a source of liquidity for its prime and non-prime mortgages. Whole loan sales in fiscal year 2002 were $11.4 billion compared with $6.0 billion in 2001. Additionally, the Company provides the mortgage division a $150 million line of credit for working capital needs.
Management believes the sources of liquidity available to the mortgage operations segment are predictable and sufficient for its needs. Risks to the stability of these sources include external events impacting the asset-backed securities market. The liquidity available from the NIM transactions is also subject to external events impacting this market. These external events include but are not limited to spread widening, adverse changes in the perception of the non-prime industry or in the regulation of non-prime lending and reduction in the availability of third parties that provide credit enhancement. Performance of the NIM transactions will also impact the segments future participation in these markets. The warehouse facilities used by the Trust are subject to annual renewal in April and any of the above events could lead to difficulty in renewing the lines. These risks are mitigated by the availability of whole-loan sales and financing provided by the Company.
Investment services:
Liquidity needs relating to client trading and margin-borrowing activities are met primarily through cash balances in brokerage client accounts and working capital. Management believes these sources of funds will continue to be the primary sources of liquidity for HRBFA. Stock loans are often used as a secondary source of funding as well.
HRBFA is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers.
HRBFA is required to maintain minimum net capital as defined under Rule 15c3-1 of the Securities Exchange Act of 1934 and has elected to comply with the alternative capital requirement, which requires a broker-dealer to maintain net capital equal to the greater of $1 million or 2% of the combined aggregate debit balances arising from customer transactions. The net capital rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than the greater of 5% of combined aggregate debit items or $1 million. At April 30, 2002, HRBFAs net capital of $143.5 million, which was 16.42% of aggregate debit items, exceeded its minimum required net capital of $17.5 million by $126.0 million.
To manage short-term liquidity, HRBFA maintains a $300 million unsecured credit facility with BFC, its immediate corporate parent. Additionally, HRBFA maintains a $50 million uncommitted, collateralized pledge facility for settlement purposes with the clearing organizations. As of April 30, 2002 and 2001, there were no outstanding balances on these facilities.
Securities borrowed and securities loaned transactions are generally reported as collateralized financings. These transactions require the Company to deposit cash and/or collateral with the lender. Securities loaned consist of securities owned by customers, which were purchased on margin. When loaning securities, the Company receives cash collateral approximately equal to the value of the securities loaned. The amount of cash collateral is adjusted, as required, for market fluctuations in the value of the securities loaned. Interest rates paid on the cash collateral fluctuate as short-term interest rates change.
To satisfy the margin deposit requirement of client option transactions with the Options Clearing Corporation (OCC), HRBFA pledges customers margined securities. Pledged securities at April 30, 2002 totaled $42.8 million, an excess of $4.0 million over the
48
margin requirement. In April 2001, HRBFA provided the OCC with letters of credit of $68.0 million to satisfy the $63.8 million margin requirement. The letters of credit were collateralized by customers margined securities.
Management believes the funding sources for HRBFA are stable. Liquidity risk within HRBFA is primarily limited to maintaining sufficient capital levels to obtain securities lending liquidity to support margin borrowing by customers.
Business services:
Business services funding requirements are largely related to work in process. A line of credit is available from the Company sufficient to cover this units working capital needs.
Business services has commitments to fund certain attest entities, that are not consolidated, related to accounting firms it has acquired. Commitments also exist to loan up to $40 million to McGladrey & Pullen, LLP on a revolving basis through July 31, 2004, subject to certain termination clauses. This revolving facility bears interest at the 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.
Business services also has future obligations that are summarized in the table above under Other Obligations and Commitments.
CAPITAL RESOURCES
Cash provided by operations totaled to $741.4 million during fiscal 2002 as compared to $248.4 million in the prior year. Cash provided by operations was impacted by the net profits from operations of $434.4 million for fiscal 2002 compared to a net profit of $281.2 million in fiscal 2001.
Cash expenditures during fiscal year 2002 relating to investing and financing activities include the purchase of property and equipment ($111.8 million), business acquisitions ($46.7 million), payments on acquisition debt ($50.6 million), payment of dividends ($115.7 million) and the acquisition of treasury shares ($267.7 million net of the proceeds from issuance of common stock).
Cash and cash equivalents, including restricted balances, totaled $588.3 million at April 30, 2002. HRBFA held $256.8 million of the $588.3 million, of which $108.0 million was segregated in a special reserve account for the exclusive benefit of customers pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934 (restricted cash). The HRBFA restricted cash balance has grown from $16.0 million at the beginning of fiscal 2002 to $108.0 million at April 30, 2002. Customer credit balances have become larger than customer debit balances due to the significant decline in margin loan balances resulting from the slowing economy, while customer credit balances have increased slightly during the period. The remaining cash and cash equivalents held by HRBFA reflect excess cash remaining from the firm and clients after funding margin debits and security settlements. Restricted cash held by Mortgage operations totaled $32.1 million at April 30, 2002 as a result of cash held for outstanding commitments to fund mortgage loans. Restricted cash of $12.0 million at April 30, 2002 held by Business services is related to funds held to pay payroll taxes on behalf of their customers. The remaining balance of cash and cash equivalents held reflects net operational cash flow.
Working capital increased to $365.4 million at April 30, 2002 from $282.8 million at April 30, 2001. The working capital ratio at April 30, 2002 is 1.19 to 1, compared to 1.14 to 1 at April 30, 2001. Historically, a large portion of tax return preparation occurs in the fourth quarter and has the effect of increasing certain assets and liabilities during the fourth quarter, including cash and cash equivalents, receivables, accrued salaries, wages and payroll taxes and accrued taxes on earnings.
In March 2000, the Companys Board of Directors approved an authorization to repurchase up to 12 million shares of its common stock. Repurchases under the March 2000 authorization were completed in September 2001. On September 12, 2001, the Companys Board of Directors authorized the repurchase of an additional 15 million shares of common stock. During fiscal 2002, the Company repurchased 12.2 million shares (split-adjusted) pursuant to these authorizations at an aggregate price of $462.5 million or an average price of $37.76 per share. There are approximately 8.5 million shares remaining under the September 2001 authorization. The Company plans to continue to purchase its shares on the open market in accordance with this authorization, subject to various factors including the price of the stock, the ability to maintain progress toward a financial and capital structure that will support a mid single A rating (Moodys - A2; Standard & Poors - A; and Fitch - A), the availability of excess cash, the ability to maintain liquidity and financial flexibility, securities laws restrictions and other investment opportunities available.
49
FORWARD-LOOKING INFORMATION
The Notes to the Consolidated Financial Statements, as well as other information contained in this Annual Report to Shareholders may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based upon current information, expectations, estimates and projections regarding the Company, the industries and markets in which the Company operates, and managements assumptions and beliefs relating thereto. Words such as will, plan, expect, remain, intend, estimate, approximate, and variations thereof and similar expressions are intended to identify such forward-looking statements. These statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such forward-looking statements. Such differences could be caused by a number of factors including, but not limited to, the uncertainty of laws, legislation, regulations, supervision and licensing by Federal, state and local authorities and their impact on any lines of business in which the Companys 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 Companys strategies; changes in management and management strategies; the Companys inability to successfully design, create, modify and operate its computer systems and networks; the uncertainty of the continued availability of sources of liquidity; the uncertainty of the assumptions used in determining the fair values of residual interests and mortgage servicing rights; litigation involving the Company; the uncertainty of the impact of any share repurchases on earnings per share; and risks described from time to time in reports and registration statements filed by the Company and its subsidiaries with the Securities and Exchange Commission. Readers should take these factors into account in evaluating any such forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
The policies discussed below are considered by management to be critical to an understanding of the Companys financial statements because their application places the most significant demands on managements judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop as forecast, and estimates routinely require adjustment and may require material adjustment.
Valuation of long-lived assets: The Company reviews long-lived assets, mainly intangible assets arising from business combinations, whenever events or circumstances indicate the carrying amounts may not be fully recoverable. The first step in the review is to compare the carrying value of the assets with estimated future undiscounted cash flows. If this comparison indicates impairment, the impairment loss is measured as the difference between the carrying value and the fair value of the asset. Management estimates future discounted and undiscounted cash flows and fair values based upon historical performance, trends, leading indicators and various other factors. A significant change in the assumptions underlying the cash flows or fair values could result in a different determination of impairment loss and/or the amount of any impairment.
Valuation of goodwill: The Company tests goodwill for impairment annually or more frequently whenever events occur or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is an operating segment or one level below an operating segment. The first step of the impairment test is to compare the estimated fair value of the reporting unit to carrying value. If the carrying value is less than fair value, no impairment exists. If the carrying value is greater than fair value, a second step is performed to determine the fair value of goodwill and the amount of impairment loss, if any. In estimating each reporting units fair value using discounted cash flow projections, management makes assumptions, including discount rates, growth rates and terminal values. Changes in the projections or assumptions could materially affect fair values. The initial and annual assessment in fiscal 2002 resulted in the fair value of each reporting unit exceeding the carrying value.
Gain on sale of mortgage loans: The Company sells, in whole-loan sales, substantially all of the mortgage loans it originates to a third-party trust (Trust). Following the whole loan sales to the Trust, the Company retains mortgage servicing rights (MSRs) and
50
a receivable from the Trust for a portion of the net interest income that the trust earns while holding the mortgage loans (similar to an interest only strip). The Company reports gain on sale as the difference between cash proceeds and the allocated cost of loans sold.
The Company determines the allocated cost of loans sold based on the relative fair values of loans sold, the receivable from the Trust and MSRs. The relative fair values of the receivable from the Trust and the MSRs are determined using discounted cash flow models which require various management assumptions (see discussion below in Valuation of residual interests and Valuation of mortgage servicing rights). Variations in these assumptions affect the estimated fair values, which would affect the reported gain on sale.
Ultimately, the Trust and the Company pledge the mortgage loans and the receivable to a securitization trust to reconstitute the loans so they can be securitized. The securitization trust then securitizes the mortgage loans, and the Companys receivable from the Trust is recharacterized as a residual interest from the securitized mortgage loans. The Company securitizes these residual interests in net interest margin (NIM) transactions, and receives cash and much smaller residual interests. These NIM transactions require management to make various assumptions that may materially affect the gain on securitization.
Valuation of residual interests: The Company uses discounted cash flow models to arrive at the initial estimated fair values of its residual interests. The fair value of residual interests is estimated by computing the present value of the excess of the weighted average coupon on the loans sold over the sum of (1) the coupon on the senior interests, (2) a base servicing fee paid to the servicer of the loans (usually the Company), (3) expected losses to be incurred on the portfolio of the loans sold (as projected to occur) over the lives of the loans, (4) fees payable to the trustee and insurer, (5) estimated collections of prepayment penalty fees, (6) other fees, and (7) payments made to investors on NIM bonds. The weighted average coupon on the loans sold and the coupon on the senior interests take into consideration the current and expected interest rate environment, including projected changes in future interest rates and the timing of such changes. Prepayment and loss assumptions used in estimating the cash flows are based on evaluations of the actual experience of the Companys servicing portfolio or on market rates on new portfolios, also taking into consideration the current interest rate environment and its expected impact on future prepayment rates. The estimated cash flows expected to be received by the Company are discounted at an interest rate the Company believes an unaffiliated third-party purchaser would require as a rate of return on such a financial instrument. The Company evaluates the fair values of residual interests quarterly by updating the actual and expected assumptions in the discounted cash flow models. Variations in the above assumptions, as well as the discount rate and interest rate assumptions, could materially affect the estimated fair values, which may require the Company to record impairments. In addition, variations will also affect the amount of residual interest accretion recorded on a monthly basis. See note 5 to the consolidated financial statements for current assumptions.
Valuation of mortgage servicing rights: The Company sells mortgage loans with servicing retained. MSRs are recorded at allocated carrying amounts based on relative fair values when the loans are sold (see discussion above in Gain on sale of mortgage loans). Relative fair values of MSRs are determined based on present values of estimated future servicing cash flows. Assumptions used in estimating the value of MSRs include discount rates and prepayment rates. Prepayment rates are estimated using the Companys historical experience and third party market sources. Variations in these assumptions could materially affect the carrying value of the MSRs.
MSRs are periodically reviewed for impairment by management. Impairment is assessed based on the fair value of each risk stratum. Fair values take into account the historical prepayment activity of the related loans and managements estimates of the remaining future cash flows to be generated by the underlying mortgage loans. If actual prepayment rates prove to be higher than the estimate made by management, impairment of the MSRs could occur.
Other significant accounting policies: Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. These policies require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in the Companys accounting policies, outcomes cannot be predicted with confidence. Also see note 1 to the consolidated financial statements which discusses accounting policies that must be selected by management when there are acceptable alternatives.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations:
The operating subsidiaries of H&R Block, Inc. provide a
variety of services to the general public, principally in the United States,
but also in Canada, Australia and other foreign countries. Approximately $1.9
billion, or 57.6% of total revenues for the year ended April 30, 2002 were
generated from tax return preparation, electronic filing of tax returns and
other tax-related services. Certain of these subsidiaries also originate,
service, and sell nonconforming and conforming mortgages, offer investment
services through broker-dealers, offer personal productivity software,
participate in refund anticipation loan products offered by a third-party
lending institution, and offer accounting, tax and consulting services to
business clients.
Principles of consolidation:
The consolidated financial statements include
the accounts of H&R Block, Inc. (the Company), all majority-owned
subsidiaries and companies that are directly or indirectly controlled by the
Company through majority ownership or otherwise. All material intercompany
transactions and balances have been eliminated.
Some of the Companys 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. Restricted
cash of $84,197 and $33,183 was reclassified from cash and cash equivalents in
fiscal years 2001 and 2000, respectively. This reclassification reduced cash
flows from operating activities in the consolidated statements of cash flows
for the years ended April 30, 2001 and 2000 by $51,014 and $33,183,
respectively.
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,
cash due from banks and securities purchased under agreements to resell. For
purposes of the consolidated balance sheets and consolidated statements of cash
flows, the Company considers all non-restricted highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
The Companys 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
amount specified in the contracts.
Cash and cash equivalents restricted:
Cash
and cash equivalents restricted consists primarily of securities purchased
under agreements to resell and cash that have been segregated in a special
reserve account for the exclusive benefit of customers pursuant to federal
regulations under Rule 15c3-3 of the Securities Exchange Act of 1934. Also
included are cash held for outstanding commitments to fund mortgage loans and
funds held to pay payroll taxes on behalf of customers.
Marketable securities available-for-sale:
Certain marketable debt and
equity securities are classified as available-for-sale, based on managements
intentions, and are carried at market value, based on quoted prices, with
unrealized gains and losses included in other comprehensive income. The cost of
marketable securities sold is determined on the specific identification method
and realized gains and losses are reflected in earnings.
Residual interests in
securitizations:
Certain residual interests in securitizations of real estate
mortgage investment conduits (REMICs) and in net interest margin (NIM)
transactions are recorded as a result of the Companys securitization of
mortgage loans through various special-purpose trust vehicles. These residual
interests are classified as available-for-sale securities, and are carried at
market value, based on discounted cash flow models, with unrealized gains and
losses included in other comprehensive income. The residual interests are
amortized over the estimated life of the related loans cash flows. If losses
are determined to be other-than-temporary, the residual is written down to fair
value with the realized loss, net of any unrealized gain in other comprehensive
income, included in the consolidated statements of earnings.
52
Marketable securities trading:
Certain marketable debt and equity
securities are classified as trading, and are held by the Companys
broker-dealers. Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities is not
applicable to broker-dealers. These securities are carried at market value,
based on quoted prices, with unrealized gains and losses included in earnings.
Certain residual interests in securitizations of REMICs are classified as
trading, based on managements intentions and criteria as established by the
Company, and are carried at market value, based on discounted cash flow models,
with unrealized gains and losses included in earnings.
Receivables from customers, brokers, dealers and clearing organizations
and accounts payable to customers, brokers and dealers:
Customer receivables
and payables consist primarily of amounts due on margin and cash transactions.
These receivables are collateralized by customers securities held, which are
not reflected in the accompanying consolidated financial statements.
Receivables from brokers are generally collected within 30 days and are
collateralized by securities in physical possession of or on deposit with the
Company or receivables from customers or other brokers. The allowance for
doubtful accounts represents an amount considered by management to be adequate
to cover potential losses.
Securities borrowed and securities loaned transactions are generally
reported as collateralized financing. Securities borrowed and loaned
transactions require the Company to deposit cash and/or collateral with the
lender. Securities loaned consists of securities owned by customers which were
purchased on margin. When loaning securities, the Company receives cash
collateral approximately equal to the value of the securities loaned. The
amount of cash collateral is adjusted, as required, for market fluctuations in
the value of the securities loaned. Interest rates paid on the cash collateral
fluctuates as short-term interest rates change.
Receivables:
Receivables consist primarily of Business services accounts
receivable and mortgage loans held for sale. Mortgage loans held for sale are
carried at the lower of cost or market value. The allowance for doubtful
accounts represents an amount considered by management to be adequate to cover
potential losses.
Foreign currency translation:
Assets and liabilities of the Companys
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.
Intangible assets and goodwill:
In May 2001, the Company elected early
adoption of Statement of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets (SFAS 141
and 142). See New accounting standards below.
As of May 1, 2001, the Company identified those intangible assets that
remain separable under the provisions of SFAS 141 and those that are to be
included in goodwill. In applying SFAS 142, the Company re-evaluated the useful
lives of these separable intangible assets. The weighted average life of the
remaining intangible assets with finite lives is 10 years. In accordance with
SFAS 141, on the date of adoption, the previously identified intangible assets
of assembled workforce and management infrastructure were subsumed into
goodwill.
On the date of adoption and at least annually, SFAS 142 requires
testing of goodwill for impairment. No indications of goodwill impairment were
found during fiscal year 2002.
In addition, the Company assesses long-lived
assets, including intangible assets, for impairment whenever events or
circumstances indicate that the carrying value may not be fully recoverable 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. No material
impairment adjustments to other intangible assets or other long-lived assets
were made during fiscal year 2002, 2001, or 2000.
Mortgage servicing rights:
Mortgage servicing rights (MSRs) are retained
in the sale of mortgage loans and are recorded based on the present value of
estimated future cash flows related to servicing loans. The MSRs are amortized
to earnings in proportion to, and over the period of, estimated net future
servicing income. MSRs are periodically reviewed for impairment. Impairment is
assessed based on the fair value of each risk stratum. The Company stratifies
MSRs using the following risk characteristics: loan sale date (which
approximates date of origination); and loan type (6-month adjustable, 2 to
3-year adjustable and 30-year fixed). Fair values take into account the
historical prepayment activity of the related loans and managements estimates
of the remaining future cash flows to be generated by the underlying mortgage
loans. When MSRs are reviewed, management makes an estimate of the future
prepayment
53
rates and other key variables of the underlying mortgage loans, and if actual
performance proves to be worse than the estimate, impairment of MSRs could
occur. At April 30, 2002 and 2001, impairment did not exist in any stratum.
Property and equipment:
Buildings and equipment are stated at cost and are
depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are stated at cost and are
amortized over the lesser of the term of the respective lease or the estimated
useful life, using the straight-line method. Estimated useful lives are 15 to
40 years for buildings, 3 to 5 years for computers and other equipment and up
to 8 years for leasehold improvements.
The Company capitalizes certain costs
associated with software developed or obtained for internal use. These costs
are amortized over 36 months using the straight-line method.
Notes payable:
The Company uses short-term borrowings to finance temporary
liquidity needs and various financial activities conducted by its subsidiaries.
There were no notes payable outstanding at April 30, 2002 and 2001.
Revenue recognition:
Service revenues consist primarily of fees for
preparation of tax returns, participations in refund anticipation loans,
consulting services, and brokerage commissions. Generally, service revenues are
recorded in the period in which the service is performed. Commissions revenue
is recognized on a trade-date basis. Revenues for services rendered in
connection with the Companys Business services segment are recognized on a
time and materials basis.
Interest income consists primarily of interest earned
on customer margin loan balances and mortgage loans. Interest income on
customer margin loan balances is recognized daily as earned based on current
rates charged to customers for their margin balance.
Gains on loan sales are recognized in accordance with Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and extinguishments of Liabilities, utilizing the
financial-components approach which focuses on control of assets and
liabilities being transferred.
Product sales consist mainly of tax preparation software, other personal
productivity software, online do-it-yourself tax preparation and the Peace of
Mind warranty program. Sales of tax preparation software are recognized when
the product is ultimately sold to the end user and all other software sales are
recognized when the product is shipped. A portion of Peace of Mind revenues
representing the cost of the product is recognized when the product is sold.
The remaining revenues are recognized monthly over the warranty period.
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 deductible
goodwill, residual interests, accrued expenses, deferred compensation, mortgage
servicing rights and allowances for credit losses. The Company has a Tax
Sharing Agreement with its former subsidiary, CompuServe Corporation
(CompuServe), pursuant to which CompuServe generally is obligated to pay the
Company (or the Company is obligated to pay CompuServe) for CompuServes
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, all
accounts payable, accrued liabilities and the current portion of long-term debt
approximate fair market value due to the relatively short-term nature of the
respective instruments.
Stock compensation plans:
The Company accounts for its stock compensation
plans in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), as allowed under
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Derivative activities:
In fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended in June 2000 (SFAS 133) and Statement of
Financial Accounting Standards No. 138, Accounting for Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133 (SFAS
138). SFAS 133 and 138 established accounting and reporting standards for
derivative and hedging activities, and requires
54
companies to record derivative instruments as assets
or liabilities, measured at fair value. The recognition of gains or losses
resulting from changes in the values of those derivative instruments is based
on the use of each derivative instrument and whether it qualifies for hedge
accounting. The Company has identified derivative instruments related to
certain of its commitments to originate residential mortgage loans. The Company
had no embedded derivative instruments requiring separate accounting treatment.
The Company originates residential mortgage loans with the intention of
selling these loans. These commitments to fund loans are freestanding
derivative instruments and do not qualify for hedge accounting treatment and,
therefore, the fair value adjustments are recorded in the consolidated
statement of earnings. The commitments that qualify as derivative instruments
totaled $252,593 at April 30, 2001. The transition adjustment for adoption of
SFAS 133 and SFAS 138 of $4,414, net of taxes, is shown as the cumulative
effect of a change in accounting principle in the consolidated statement of
earnings for the year ended April 30, 2001.
New accounting standards:
In May 2001, the Company elected early adoption
of SFAS 141 and 142, as noted above. SFAS 141 addresses financial accounting
and reporting for business combinations and replaces APB Opinion No. 16,
Business Combinations (APB 16). SFAS 141 no longer allows the pooling of
interests method of accounting for acquisitions, provides new recognition
criteria for intangible assets and carries forward without reconsideration the
guidance in APB 16 related to the application of the purchase method of
accounting. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and replaces APB Opinion No. 17,
Intangible Assets. SFAS 142 addresses how intangible assets should be
accounted for upon their acquisition and after they have been initially
recognized in the financial statements. Additionally, the new standard provides
specific guidance on measuring goodwill for impairment annually using a
two-step process.
In the year of adoption, SFAS 142 requires the first step of the goodwill
impairment test to be completed within the first six months and the final step
to be completed within twelve months of adoption. The first step of the test
was completed during the quarter ended October 31, 2001 and no indications of
goodwill impairment were found; therefore, step two of the goodwill impairment
test is not applicable.
The adoption of SFAS 141 and 142 has had a significant
effect on the consolidated statement of earnings for fiscal year 2002, due to
the cessation of goodwill amortization beginning May 1, 2001. Had the
provisions of SFAS 141 and 142 been applied for the years ended April 30, 2001
and 2000, the Companys net earnings and net earnings per basic and diluted
share would have been as follows:
In May 2001, the Company adopted Emerging Issues Task Force Issue 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 addresses how the holder of beneficial interests should recognize cash
flows on the date of the transaction, how interest income is recognized over
the life of the interests and when securities must be written down to fair
value due to other than temporary impairments. EITF 99-20 requires adverse
changes in the timing of cash flows to be treated as impairments when the
carrying value of the residual interest exceeds the fair value and requires
positive changes to cash flows to be accreted into earnings over the remaining
life of the underlying loans using the effective yield method. The adoption of
EITF 99-20 did not have a material impact on the consolidated financial
statements.
On February 1, 2002, the Company adopted Emerging Issues Task Force Issue
No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products) (EITF 01-9). EITF 01-9
addresses sales incentives such as
55
discounts, coupons or rebates offered to customers of retailers or other
distributors and the income statement classifications of these items. Based on
EITF 01-9, these items are recorded as a reduction of revenues. The Company has
historically recorded these items as expenses in its U.S. and international tax
operations. The adoption of EITF 01-9 had no impact on net earnings. All years
presented have been restated to reflect the adoption of this guidance. Revenues
and expenses were reduced by $43,528, $32,586 and $35,314 for fiscal years
2002, 2001 and 2000, respectively, due to the adoption of EITF 01-9.
On February 1, 2002, the Company adopted Emerging Issues Task Force Issue
No. 01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (EITF 01-14). EITF 01-14 establishes
requirements that must be met to record out-of-pocket expenses as either net in
revenues or as an expense. The Company has out-of-pocket expenses associated
with its Business services segment and has historically recorded them net in
revenues. Based on EITF 01-14, the Company now records these as gross revenues
and expenses. There is no impact to net earnings as a result of adoption of
EITF 01-14. All years presented have been restated to reflect the adoption of
this guidance. Revenues and expenses were increased by $17,751, $12,348 and
$9,056 for fiscal years 2002, 2001 and 2000, respectively, due to the adoption
of EITF 01-14.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), effective for the Companys fiscal
year beginning May 1, 2002. This statement supercedes Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, (SFAS 121) and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. SFAS 144
establishes a single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale. The adoption of SFAS
144 will not have a material effect on the consolidated financial statements.
NOTE 2: 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 before change in accounting principle
are as follows (shares in thousands):
Diluted net earnings per share excludes the impact of weighted average
shares issuable upon the exercise of stock options of 682,802, 13,906,602, and
6,078,390 shares for 2002, 2001 and 2000, respectively, because the options
exercise prices were greater than the average market price of the common shares
and therefore, the effect would be antidilutive.
56
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents is comprised of the following:
NOTE 4: MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The amortized cost and market value of marketable securities classified as
available-for-sale at April 30, 2002 and 2001 are summarized below:
Proceeds from the sales of available-for-sale securities were $23,173,
$356,192 and $211,836 during 2002, 2001 and 2000, respectively. Gross realized
gains on those sales during 2002, 2001 and 2000 were $635, $17,936 and $12,177,
respectively; gross realized losses were $212, $192 and $480, respectively.
Contractual maturities of available-for-sale debt securities at April 30,
2002 are presented below. Since expected maturities differ from contractual
maturities due to the issuers rights to prepay certain obligations or the
sellers 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.
NOTE 5: RESIDUAL INTERESTS IN SECURITIZATIONS AND MORTGAGE SERVICING RIGHTS
Beginning in April 2000, the Company entered into off-balance sheet
arrangements under which the Company originates mortgage loans and sells the
mortgage loans the same day the loans are funded to a third-party trust
(Trust). As a result of the whole-loan sale to the Trust, the Company records
a receivable from the Trust for a portion of the net spread that the Trust has
earned while holding the mortgage loans. This receivable is included in prepaid
and other current assets on the consolidated balance sheet. The Company
57
then pledges its receivable to a securitization trust (qualified special
purpose entity) and the Trust pledges the related mortgage loans to the
securitization trust to reconstitute the loans. The securitization trust then
securitizes the mortgage loans. At this point, the Companys receivable is
recharacterized as a residual interest from the securitized loans. The residual
interest is classified as either an available-for-sale security or a trading
security depending on certain criteria as established by the Company. The
Company then securitizes these residual interests in net interest margin
(NIM) transactions. The Company securitized $809,226 and $380,267 of these
residual interests in NIM transactions during fiscal year 2002 and 2001,
respectively. The receivable from whole-loan sales of $26,057 and the pledge of
this receivable of $19,960, were treated as noncash investing activities in the
consolidated statement of cash flows for the year ended April 30, 2002. The
receivable from the whole-loan sales of $66,587 and the pledge of this
receivable of $14,206, were treated as noncash investing activities in the
consolidated statement of cash flows for the year ended April 30, 2001. The
Company received proceeds from NIM securitizations of $783,171 and cash flows
from interest-only strips of $67,070 from the securitization trusts in fiscal
2002. The Company received proceeds from NIM securitizations of $319,620 and
cash flows from interest-only strips of $16,024 from the securitization trusts
in fiscal 2001. Cash received on the interest-only strips is included in
maturities of available-for-sale securities on the consolidated statements of
cash flows.
In connection with these off-balance sheet arrangements, the Company
entered into forward loan sale commitments whereby the Company was obligated to
sell, during fiscal 2001, a minimum of $2,000,000 and a maximum of $6,000,000
in mortgage loans. There was no commitment fee and the commitments are
renewable annually. For fiscal 2002, the forward loan sale commitments were not
renewed.
The Company securitized $3,767,010 in mortgage loans during the year
ended April 30, 2000, resulting in residual interests with an allocated
carrying value of $245,801. The Company securitized $248,555 of residual
interests through NIM transactions. The remaining residual interests from the
securitizations during 2000 of $28,042 were treated as noncash investing
activities in the consolidated statement of cash flows for the year ended April
30, 2000.
The Company estimates future cash flows from these residuals and values
them utilizing assumptions that it believes are consistent with those that
would be utilized by an unaffiliated third-party purchaser.
The fair value of residuals are determined by computing the present value
of the excess of the weighted average coupon on the loans sold over the sum of
(1) the coupon on the senior interests, (2) a base servicing fee paid to the
servicer of the loans (which is usually the Company), (3) expected losses to be
incurred on the portfolio of the loans sold (as projected to occur) over the
lives of the loans, (4) fees payable to the trustee and insurer, (5) estimated
collections of prepayment penalty fees, (6) other fees, and (7) payments made
to investors on NIM bonds. The weighted average coupon on the loans sold and
the coupon on the senior interests take into consideration the current and
expected interest rate environment, including projected changes in future
interest rates and the timing of such changes. Prepayment and loss assumptions
used in estimating the cash flows are based on evaluation of the actual
experience of the Companys servicing portfolio or on market rates on new
portfolios, also taking into consideration the current and expected interest
rate environment and its expected impact on future prepayment and default
rates. The estimated cash flows expected to be received by the Company are
discounted at an interest rate the Company believes an unaffiliated third-party
purchaser would require as a rate of return on such a financial instrument. To
the extent that actual future excess cash flows are different from estimated
excess cash flows, the fair value of the Companys residual could increase or
decrease.
Mortgage servicing rights are included in other assets on the consolidated
balance sheet. Assumptions used in estimating the value of MSRs includes market
discount rates and anticipated prepayment speeds. The prepayment speeds are
estimated using the Companys historical experience and third party market
sources for fixed-rated mortgages with similar coupons and prepayment reports
for comparable adjustable rate mortgage loans. The fair value of MSRs at April
30, 2002, 2001 and 2000 was $81,893, $61,796 and $42,282, respectively.
Additions to and amortization of MSRs for fiscal 2002 were $65,630 and $33,890,
respectively. An $11,643 write-down of MSRs was taken in the third quarter of
fiscal 2002 to reflect a change in the assumptions underlying the related loan
portfolio. Additions to and amortization of MSRs for fiscal 2001 were $37,661
and $18,147, respectively.
58
Activity related to residual interests in securitizations consists of the
following:
The key assumptions the Company utilizes to estimate the cash flows of the
residual interests and MSRs are as follows:
At April 30, 2002, the sensitivity of the current fair value of the
residuals and MSRs to 10% and 20% adverse changes in the above key assumptions
are as follows:
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also in
this table, the effect of a variation of a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumptions; in reality, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
59
NOTE 6: RECEIVABLES
Receivables consist of the following:
NOTE 7: INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of the following:
Amortization of intangible assets for the year ended April 30, 2002, 2001
and 2000 was $43,435, $104,276 and $66,346, respectively. Estimated
amortization of intangible assets for fiscal years 2003, 2004, 2005, 2006 and
2007 is $44,709, $44,432, $44,082, $43,452 and $40,549, respectively.
Changes
in the carrying amount of goodwill by segment for the year ended April 30,
2002, are as follows:
60
NOTE 8: PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
Depreciation and amortization expense for 2002, 2001 and 2000 amounted to
$110,860, $101,332 and $80,872, respectively. Included in depreciation and
amortization expense is amortization of capitalized software of $25,426,
$16,122 and $6,006 for fiscal 2002, 2001 and 2000, respectively. As of April
30, 2002 and 2001, the Company has property and equipment under capital lease
with a cost of $27,386 and $45,913, respectively, and accumulated depreciation
of $4,088 and $4,563, respectively. The Company has an agreement to lease real
estate and buildings under a noncancelable capital lease for the next 18 years
with an option to purchase after five years. The real estate, building and
long-term debt of $14,075 related to this lease were treated as a noncash
investing activity on the consolidated statement of cash flows for the year
ended on April 30, 2000.
NOTE 9: LONG-TERM DEBT
On April 13, 2000, the Company issued $500,000 of 8 1/2% Senior Notes under a
shelf registration statement. The Senior Notes are due April 15, 2007, and are
not redeemable prior to maturity. The net proceeds of this transaction were
used to repay a portion of the short-term borrowings which initially funded the
acquisition of OLDE Financial Corporation and Financial Marketing Services,
Inc. (collectively, OLDE).
On October 21, 1997, the Company issued $250,000 of 6 3/4% Senior Notes
under a shelf registration statement. The Senior Notes are due November 1,
2004, and are not redeemable prior to maturity. The net proceeds of this
transaction were used to repay short-term borrowings, which initially funded
the acquisition of Option One Mortgage Corporation (Option One).
The Company had obligations related to acquisitions of accounting firms of
$164,242 and $154,110 at April 30, 2002 and 2001, respectively. The current
portion of these amounts is included in the current portion of long-term debt
on the consolidated balance sheet. The long-term portions are due from August
2003 to December 2006.
The Company had mortgage notes and capitalized lease obligations of
$16,901 at April 30, 2002 that are collateralized by land, buildings and
equipment. The obligations are due at varying dates for up to 18 years.
The
aggregate payments required to retire long-term debt are $59,656, $51,735,
$276,254, $21,248, $508,109 and $11,041 in 2003, 2004, 2005, 2006, 2007 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 $938,920 and $907,115 at April 30, 2002 and 2001, respectively.
NOTE 10: 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
$54,174 and $44,490 at April 30, 2002 and 2001, respectively, to reflect the
liability under these plans. The Company purchases whole-life insurance
contracts on certain related
61
directors and employees to recover distributions made or to be made under the
plans and records the cash surrender value of the policies in other assets. If
all the assumptions regarding mortality, earnings, policy dividends and other
factors are realized, the Company will ultimately realize its investment plus a
factor for the use of its money.
In connection with the Companys acquisition of the non-attest assets of
McGladrey & Pullen, LLP (McGladrey) in August 1999, the Company assumed
certain pension liabilities related to McGladreys retired partners. The
Company makes payments in varying amounts on a monthly basis. Included in other
noncurrent liabilities at April 30, 2002 and 2001 are $25,655 and $31,360,
respectively, related to this liability.
NOTE 11: STOCKHOLDERS EQUITY
On June 20, 2001, the Companys Board of Directors declared a two-for-one stock
split of its Common Stock in the form of a 100% stock distribution effective
August 1, 2001, to shareholders of record as of the close of business on July
10, 2001. All share and per share amounts have been adjusted to reflect the
retroactive effect of the stock split.
The Company is authorized to issue 6,000,000 shares of Preferred Stock,
without par value. At April 30, 2002, 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
Companys 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 (eight shares after the August 1, 2001 stock split),
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.
NOTE 12: COMPREHENSIVE INCOME
The Companys 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, 2002 and 2001, the net unrealized holding gain (loss) on
available-for-sale securities was $85,682 and $(2,088), respectively, and the
foreign currency translation adjustment was $(41,554) and $(40,679),
respectively.
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NOTE 13: EMPLOYEE BENEFIT PLANS
The Company has four stock compensation plans: the 1993 Long-Term Executive
Compensation Plan, the 1989 Stock Option Plan for Outside Directors, the 1999
Stock Option Plan for Seasonal Employees, and the 2000 Employee Stock Purchase
Plan (ESPP). All of the Companys Stock compensation plans have been approved
by the shareholders.
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 Companys Common Stock for periods not exceeding 10
years at a price that is not less than 100% of fair market value on the date of
the grant. The options are exercisable either (1) starting one year after the
date of the grant, (2) starting one year or three years after the date of the
grant on a cumulative basis at the annual rate of
33 1/3% of the total number of option shares, or (3) starting three years after
the date of the grant on a cumulative basis at the rate of 40%, 30%, and 30%
over the following three years. In addition, certain option grants have
accelerated vesting provisions based on the Companys stock price reaching
specified levels.
The 1999 Stock Option Plan for Seasonal Employees provided for the grant
of options on June 30, 2001, 2000 and 1999 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, subject to
certain conditions.
Changes during the years ended April 30, 2002, 2001 and
2000 under the stock option plans were as follows:
A summary of stock options outstanding and exercisable at April 30, 2002
follows:
The 2000 ESPP provides the option to purchase shares of the Companys
Common Stock through payroll deductions to a majority of the employees of
subsidiaries of the Company. The purchase price of the stock is 90% of the
lower of either the fair market value of the Companys Common Stock on the
first trading day within the Option Period or on the last trading day within
the Option Period. The Option Periods are six-month periods beginning January 1
and July 1 each year. During fiscal 2002 and 2001, 97,052 and 27,345 shares,
respectively, were purchased under the ESPP out of a total authorized 6,000,000
shares.
63
The Company applies APB 25 in accounting for its stock compensation plans,
under which no compensation cost has been recognized. Had compensation cost for
the stock compensation plans been determined in accordance with the fair value
accounting method prescribed under SFAS 123, the Companys net earnings and net
earnings per share would have been as follows:
For the purposes of computing the pro forma effects of stock compensation
plans under the fair value accounting method, the fair value of each stock
option grant or purchase right grant was estimated on the date of the grant
using the Black-Scholes option pricing model. The weighted-average fair value
of stock options granted during 2002, 2001 and 2000 was $5.77, $9.34 and $9.09,
respectively. The weighted-average fair value of purchase rights granted during
2002 and 2001 was $5.88 and $4.58, respectively. The following weighted-average
assumptions were used for stock option grants and purchase right grants during
the following periods:
The Company has defined contribution plans covering all employees
following the completion of an eligibility period. Expenses related to these
plans were $15,547, $22,213 and $10,386 for fiscal 2002, 2001 and 2000,
respectively.
NOTE 14: 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
Companys 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 Companys stockholders. Under the 1998
plan, a dividend of one right (a Right) per share was declared and paid on
each share of the Companys 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 Companys Common Stock without the prior written approval of the
Companys Board of Directors
64
(an Unapproved Stock Acquisition), and at the close of business on the tenth
business day following the commencement of, or the public announcement of an
intent to commence, a tender offer that would result in an Unapproved Stock
Acquisition. The Company may, prior to any Unapproved Stock Acquisition, amend
the plan to lower such 15% threshold to not less than the greater of (1) any
percentage greater than the largest percentage of beneficial ownership by any
person or group of persons then known by the Company, and (2) 10% (in which
case the acquisition of such lower percentage of beneficial ownership then
constitutes an Unapproved Stock Acquisition and the Rights become exercisable).
When exercisable, the registered holder of each Right may purchase from the
Company one two-hundredth of a share of a class of the Companys Participating
Preferred Stock, without par value, at a price of $107.50, subject to
adjustment. The registered holder of each Right then also has the right (the
Subscription Right) to purchase for the exercise price of the Right, in lieu
of shares of Participating Preferred Stock, a number of shares of the Companys
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 Companys 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 Companys 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 at a price of $.000625 per Right at any
time prior to the earlier of (i) an Unapproved Stock Acquisition, or (ii) the
expiration of the rights. The Rights under the 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.
NOTE 15: OTHER EXPENSES AND OPERATING INTEREST EXPENSE
Included in other expenses are the following:
Included in operating interest expense are the following:
65
NOTE 16: TAXES ON EARNINGS
The components of earnings from continuing operations before income taxes upon
which domestic and foreign income taxes have been provided are as follows:
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:
Unremitted earnings of foreign subsidiaries aggregated $82,913 at April
30, 2002. Management intends to indefinitely reinvest foreign earnings,
therefore, a provision has not been made for income taxes which might be
payable upon remittance of such earnings. Moreover, due to the availability of
foreign income tax credits, management believes the amount of federal income
taxes would be immaterial in the event foreign earnings were repatriated.
The following table reconciles the U.S. Federal income tax rate to the
Companys effective tax rate:
66
A summary of deferred taxes follows:
NOTE 17: ACQUISITIONS
In December 2001, the Company acquired a controlling interest in
MyBenefitSource, Inc., an integrated payroll and benefits processing company,
with an option to acquire the remaining shares. The Company also acquired 100%
of Equico Resources, LLC (Equico), a valuation, merger and acquisition
consulting company. These acquisitions were accounted for as purchases, and the
results of operations for these businesses have been consolidated in the
segments financial results since acquisition. Cash payments related to these
acquisitions totaled $28,510 with additional cash payments of $31,000 over the
next five years. The purchase agreements also provide for possible future
contingent consideration of approximately $45,000 and is based on achieving
certain revenue, profitability and working capital targets over the next six
years, and such consideration will be treated as purchase price if paid. The
following intangible assets were valued in the acquisitions: customer
relationships of $4,126, noncompete agreements of $5,892 and trade names of
$2,428. The weighted average life of the intangible assets is five years.
Goodwill recognized in these transactions was $40,312, which is not deductible
for tax purposes. The goodwill is included in the Business services segment.
During fiscal year 2002, the Company acquired six accounting firms, giving
the Business services segment a geographic presence in Seattle and San
Francisco, as well as expanding its existing presence in New York City and
Dallas. Cash payments related to these acquisitions totaled $6,899, with
additional cash payments of $26,125 over the next five years. Each acquisition
was accounted for as a purchase and, accordingly, results for each acquisition
are included since the date of acquisition. The purchase agreements also
provide for possible future contingent consideration of approximately $6,567
and is based on achieving certain revenue and profitability over the next five
years, and such consideration will be treated as purchase price if paid. The
following intangible assets were valued in the acquisition: customer
relationships of $9,314 and noncompete agreements of $3,584. The weighted
average life of the intangible assets is eleven years. Goodwill recognized in
these transactions was $15,842, of which $8,834 is expected to be fully
deductible for tax purposes. The goodwill is included in the Business services
segment.
During fiscal year 2001, the Company acquired several accounting firms.
The purchase prices aggregated $54,443. Each acquisition was accounted for as a
purchase and, accordingly, results for each acquisition are included since the
date of acquisition. The excess of cost over fair value of net tangible assets
acquired was $54,322.
67
On December 1, 1999, the Company completed the purchase of all the issued
and outstanding shares of capital stock of OLDE for $850,000 in cash plus net
tangible book value payments of $48,472. The purchase agreement also provides
for possible future consideration payable for up to five years after the
acquisition based upon revenues generated from certain online brokerage
services and such consideration will be treated as purchase price when paid.
The transaction was accounted for as a purchase and, accordingly, OLDEs
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.
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, 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 that date.
In addition, the pro forma information is not intended to be a projection of
future results.
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 McGladreys
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.
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.
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.
During fiscal 2002, 2001 and 2000, the Company made other acquisitions
which were accounted for as purchases with cash payments totaling $1,579,
$2,897 and $3,591, respectively. Their operations, which are not material, are
included in the consolidated statements of earnings since the date of
acquisition.
NOTE 18: SALE OF SUBSIDIARIES
On December 31, 2000, the Company completed the sale of the assets of KSM
Business Services, part of the Companys Business services segment. The Company
recorded a gain before taxes of $2,040 on the transaction.
68
In March 2000, the Company sold certain assets related to its Mortgage
operations segment. The Company recorded a pretax loss of $14,501 on the
transaction, included in other expenses on the consolidated statements of
earnings for the year ended April 30, 2000.
NOTE 19: COMMITMENTS AND CONTINGENCIES
Substantially all of the operations of the Companys 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, 2002, for fiscal 2003, 2004, 2005, 2006, 2007
and beyond aggregated $170,959, $132,026, $87,414, $44,785, $28,625 and $61,392
respectively. The Companys rent expense for the years 2002, 2001 and 2000
aggregated $167,687, $156,325 and $135,823, respectively.
The Company has commitments to fund mortgage loans to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The
commitments to fund loans amounted to $1,726,620 and $1,518,456 at April 30,
2002 and 2001, 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, 2002, the Company maintained a $1,930,000 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 Companys indebtedness.
The Company maintains a revolving credit facility in Canada to support a
commercial paper program with varying borrowing levels throughout the year,
reaching its peak during January through April for the Canadian tax season.
The Company is responsible for servicing mortgage loans for others of
$19,464,912, subservicing loans of $4,296,760, and the master servicing of
$350,133 previously securitized mortgage loans held in trust at April 30, 2002.
Fiduciary bank accounts that are maintained on behalf of investors and for
impounded collections were $519,687 at April 30, 2002. These bank accounts are
not assets of the Company and are not reflected in the accompanying
consolidated financial statements.
As of April 30, 2002, the Company had pledged securities totaling $42,767
that satisfied margin deposit requirements of $38,761.
The Company is required,
in the event of non-delivery of customers securities owed to it by other
broker-dealers or by its customers, to purchase identical securities in the
open market. Such purchases could result in losses not reflected in the
accompanying consolidated financial statements.
The Company monitors the credit
standing of brokers and dealers and customers with whom it does business. In
addition, the Company monitors the market value of collateral held and the
market value of securities receivable from others, and seeks to obtain
additional collateral if insufficient protection against loss exists.
The Company has commitments to fund certain attest entities, that are not
consolidated, related to accounting firms it has acquired. The Company is also
committed to loan up to $40,000 to McGladrey & Pullen, LLP on a revolving basis
through July 31, 2004, subject to certain termination clauses. This revolving
facility bears interest at prime rate plus four and one-half percent on the
outstanding amount and a commitment fee of one-half percent per annum on the
unused portion of the commitment.
The Company is involved in various legal proceedings which are ordinary
routine litigation incident to its business, many of which are covered in whole
or in part by insurance. It is the Companys policy to accrue for amounts
related to these legal matters if it is probable that a liability has been
incurred and an amount is reasonably estimable.
Under the Companys Guarantee and Peace of Mind warranty programs, the
Company may be liable for certain interest, penalties and/or additional taxes
due. The Company is effectively self-insured related to these risks and claims
made in excess of self-insurance levels are fully insured by a third-party
carrier.
In the regular course of business, the Company is subject to routine
examinations by Federal, state and local taxing authorities. In managements
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
Companys consolidated financial position or results of operations.
CompuServe, certain current and former officers and directors of
CompuServe and the Company were named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits alleged
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServes public
filings related to its initial public
69
offering in April 1996. One state lawsuit brought by the Florida State Board of
Administration also alleged certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits was unspecified,
but included pleas for rescission and damages.
In the class action pending in
state court, the court issued, in November 2000 its order approving the
settlement pursuant to which the defendants agreed to pay a gross settlement
amount of $9,500. Payment of plaintiffs attorneys fees and expenses were to
be paid out of the gross settlement fund. The gross settlement fund was paid in
its entirety by the Companys insurance carrier. The agreement to settle and
payment of the gross settlement fund are not admissions of the validity of any
claim or any fact alleged by the plaintiffs and defendants continue to deny any
wrongdoing and any liability.
The Florida State Board of Administration opted out of the class action
settlement and that litigation continued separately from the state court class
action. The parties reached a settlement that disposed of the case in its
entirety with the payment by the defendants of $500. Such settlement was paid
in its entirety by the Companys insurance carrier and is not an admission of
the validity of any claim or fact alleged by the Florida State Board of
Administration. With this settlement, the CompuServe litigation relating to the
1996 initial public offering is concluded.
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 for 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.
NOTE 20: QUARTERLY FINANCIAL DATA (UNAUDITED)
[Additional columns below]
[Continued from above table, first column(s) repeated]
The accumulation of four quarters in fiscal 2002 and 2001 for net earnings
per share may not equal the related per share amounts for the years ended April
30, 2002 and 2001 due to the repurchase of treasury shares, the timing of the
exercise of stock options, and the antidilutive effect of stock options in the
first two quarters.
70
NOTE 21: SEGMENT INFORMATION
The principal business activity of the Companys operating subsidiaries is
providing tax and financial services to the general public. Management has
determined the reportable segments identified below according to differences in
types of services, geographic locations, and how operational decisions are
made. Geographical information is presented within the segment data below. A
majority of the foreign countries in which subsidiaries of the Company operate,
which are individually immaterial, are included in International tax
operations. Included below is the financial information on each segment that is
used by management to evaluate the segments results.
On May 1, 2001, the
Company adopted a new methodology for allocation of corporate services and
support costs to business units. The change was made to more accurately reflect
each business segments performance. Fiscal year 2001 segment results have been
adjusted to reflect this allocation methodology. Fiscal year 2000 has not been
adjusted as the effects of the new methodology was not material to segment
pretax earnings or operating margins. The Company operates in the following
reportable segments:
U.S. tax operations:
This segment is primarily engaged in
providing tax return preparation, filing, and related services to the general
public in the United States. Tax-related service revenues include fees from
company-owned tax offices and royalties from franchised offices. This segment
also participates in the refund anticipation loan products offered by a
third-party lending institution to tax clients. This segment includes the
Companys tax preparation software TaxCut® from H&R Block, and other personal
productivity software offered to the general public, and offers online tax
preparation through a tax professional (whereby the client fills out an online
tax organizer and sends it to a tax professional for preparation), online
do-it-yourself-tax preparation, online professional tax review and online tax
advice to the general public through the hrblock.com website. Revenues of this
segment are seasonal in nature.
International tax operations:
This segment is primarily engaged in
providing local tax return preparation, filing, and related services to the
general public in Canada, Australia and the United Kingdom. In addition,
International tax operations has company-owned and franchise offices in eight
countries that prepare U.S. tax returns for U.S. citizens living abroad.
Tax-related service revenues include fees from company-owned tax offices and
royalties from franchised offices. Revenues of this segment are seasonal in
nature.
Mortgage operations:
This segment is primarily engaged in the origination,
servicing, and sale of a broad range of mortgage products to the general public
in the United States. This segment mainly offers, through a network of mortgage
brokers, a flexible product line to borrowers who are creditworthy but do not
meet traditional underwriting criteria. Conforming mortgage loan products, as
well as the same flexible product line available through brokers, are offered
through some H&R Block Financial Advisor branch offices and H&R Block Mortgage
Corporation retail offices.
Investment services:
This segment is primarily engaged in offering
investment advice and related investment services and securities products
through H&R Block Financial Advisors, Inc., a full-service securities broker,
to the general public. Financial planning and investment advice are offered
through H&R Block Financial Advisors branch offices and stocks, bonds, mutual
funds and other products and securities are offered through a nationwide
network of registered representatives, at the same locations.
Business services:
This segment is primarily engaged in providing
accounting, tax, consulting, payroll, employee benefits and capital markets
services to business clients and tax, estate planning, financial planning,
wealth management and insurance services to individuals. This segment offers
services through offices located throughout the United States. Revenues of this
segment are seasonal in nature.
Corporate operations:
This segment consists primarily of corporate support
departments which provide services to the Companys operating segments. These
support departments consist of marketing, information technology, facilities,
human resources, supply, executive, legal, finance and corporate
communications. These support department costs are largely allocated to the
Companys operating segments. The Companys captive insurance and franchise
financing subsidiaries are also included within this segment.
Identifiable assets:
Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated with
each reportable segment. The remaining assets are classified as corporate
assets and consist primarily of cash, marketable securities and corporate
equipment.
71
Information concerning the Companys operations by reportable segment as
of and for the years ended April 30, 2002, 2001 and 2000 is as follows:
72
NOTE 22: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial Corporation (BFC) is an indirect, wholly owned subsidiary of
the Company. BFC is the Issuer and the Company is the Guarantor of the $250,000
6 3/4% Senior Notes issued on October 21, 1997 and of the $500,000 8 1/2% Senior
Notes issued on April 13, 2000. The Companys guarantee is full and
unconditional. The following condensed consolidating financial statements
present separate information for BFC, the Company and for the Companys other
subsidiaries, and should be read in conjunction with the consolidated financial
statements of the Company.
These condensed consolidating financial statements
have been prepared using the equity method of accounting. Earnings of
subsidiaries are, therefore, reflected in the Companys investment in
subsidiaries account. The elimination entries eliminate investments in
subsidiaries, related stockholders equity and other intercompany balances and
transactions.
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
73
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
CONDENSED CONSOLIDATING BALANCE SHEET
74
CONDENSED CONSOLIDATING BALANCE SHEET
75
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
76
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
77
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
78
Dollars in thousands, except share data
Year Ended April 30
2001
2000
Net earnings
Basic per share
Diluted per share
Net earnings
Basic per share
Diluted per share
$
281,162
$
1.53
$
1.52
$
251,895
$
1.28
$
1.27
29,509
.16
.16
22,859
.12
.12
15,733
.09
.09
7,813
04
.04
902
677
1,722
.01
.01
1,291
.01
.01
$
329,028
$
1.79
$
1.78
$
284,535
$
1.45
$
1.44
Year Ended April 30
2002
2001
2000
$
434,405
$
276,748
$
251,895
182,903
183,893
196,067
5,423
1,241
1,790
1
1
1
188,327
185,135
197,858
$
2.38
$
1.50
$
1.28
2.31
1.49
1.27
April 30
2002
2001
$
118,382
$
150,273
315,845
26,013
9,000
1,918
2,330
$
436,145
$
187,616
2002
2001
Gross
Gross
Gross
Gross
Amortized
Unrealized
Unrealized
Market
Amortized
Unrealized
Unrealized
Market
Cost
Gains
Losses
Value
Cost
Gains
Losses
Value
$
$
$
$
$
8,260
$
6
$
$
8,266
8,260
6
8,266
9,402
333
33
9,702
26,654
352
58
26,948
6,699
270
1,411
5,558
4,946
500
835
4,611
16,101
603
1,444
15,260
31,600
852
893
31,559
225,879
139,492
365,371
243,840
7,571
12,811
238,600
$
241,980
$
140,095
$
1,444
$
380,631
$
283,700
$
8,429
$
13,704
$
278,425
Amortized Cost
Market Value
$
1,014
$
1,081
8,388
8,621
$
9,402
$
9,702
April 30
2002
2001
$
238,600
$
185,945
26,057
66,587
(67,070
)
(16,024
)
50,583
21,824
(30,987
)
(9,467
)
148,188
(10,265
)
$
365,371
$
238,600
23% to 90%
2.5% to 6.25%
12% to 37%
12.8
%
Residential Mortgage Loans
Cross-collateralized
NIM Residuals
Servicing Assets
$
65,514
$
299,857
$
81,893
2.8
2.2
1.7
$
69
$
(13,141
)
$
(11,287
)
92
(20,562
)
(22,908
)
$
(1,397
)
$
(28,224
)
Not applicable
(2,919
)
(55,980
)
Not applicable
$
(1,906
)
$
(8,139
)
$
(1,351
)
(3,823
)
(17,410
)
(2,659
)
$
109
$
(35,149
)
Not applicable
(51
)
(72,755
)
Not applicable
April 30
2002
2001
$
177,321
$
188,041
71,855
80,925
33,530
38,824
34,679
25,537
31,055
28,716
83,962
50,386
432,402
412,429
64,057
47,125
$
368,345
$
365,304
April 30
2002
2001
Gross
Gross
Carrying
Accumulated
Carrying
Accumulated
Amount
Amortization
Amount
Amortization
$
409,814
$
(102,689
)
$
397,049
$
(61,036
)
26,387
(3,624
)
17,269
(1,842
)
2,428
55,637
(4,868
)
55,637
(4,868
)
$
494,266
$
(111,181
)
$
469,955
$
(67,746
)
2001
Acquisitions
Other
2002
$
126,829
$
1,916
$
$
128,745
5,755
(468
)
5,287
152,467
152,467
169,732
169,732
194,834
72,791
267,625
$
649,617
$
74,707
$
(468
)
$
723,856
April 30
2002
2001
$
41,637
$
42,420
89,220
83,855
386,546
338,271
93,664
67,636
86,318
80,952
697,385
613,134
410,885
324,287
$
286,500
$
288,847
Year Ended April 30
2002
2001
2000
$
434,405
$
281,162
$
251,895
of $56,156, ($3,307) and ($124)):
(less applicable taxes of $58,248, $4,057, and $4,426)
92,629
5,718
6,953
(less applicable taxes of $2,092, $7,364, and $4,550)
(4,859
)
(10,380
)
(7,147
)
(875
)
(11,864
)
(2,647
)
$
521,300
$
264,636
$
249,054
2002
2001
2000
Weighted-
Weighted-
Weighted-
Average
Average
Average
Shares
Exercise Price
Shares
Exercise Price
Shares
Exercise Price
18,908,062
$
20.40
16,881,228
$
22.11
11,452,988
$
19.02
8,816,071
32.85
8,611,034
16.26
10,119,604
25.08
(9,659,116
)
19.82
(1,020,916
)
17.04
(2,064,502
)
18.06
(2,155,080
)
30.21
(5,563,284
)
19.78
(2,626,862
)
23.25
15,909,937
26.33
18,908,062
20.40
16,881,228
22.11
6,410,311
20.46
8,673,714
21.17
10,412,914
21.35
19,523,123
8,055,518
11,037,281
Outstanding
Exercisable
Number
Weighted-Average
Number
Outstanding
Remaining
Weighted-Average
Exercisable at
Weighted-Average
Range of Exercise Prices
at April 30
Contractual Life
Exercise Price
April 30
Exercise Price
3,703,795
7 years
$
16.13
3,552,945
$
16.06
4,778,761
8 years
23.89
1,739,476
21.20
7,379,381
7 years
32.90
1,117,391
33.30
48,000
10 years
44.43
499
46.26
15,909,937
6,410,311
Year Ended April 30
2002
2001
2000
$
434,405
$
281,162
$
251,895
400,360
262,701
237,544
$
2.38
$
1.53
$
1.28
2.19
1.43
1.21
$
2.31
$
1.52
$
1.27
2.13
1.42
1.20
Year Ended April 30
2002
2001
2000
4.48%
6.25%
5.75%
3 years
3 years
3 years
28.81%
61.21%
30.67%
1.84%
3.39%
2.20%
2.70%
6.05%
not applicable
6 months
4 months
not applicable
33.07%
26.37%
not applicable
1.60%
3.38%
not applicable
Year Ended April 30
2002
2001
2000
$
76,630
$
76,232
$
47,934
74,850
55,985
33,347
78,516
29,396
15,821
27,312
27,315
28,820
35,982
26,668
26,695
14,669
13,250
17,469
27,418
20,705
14,824
Year Ended April 30
2002
2001
2000
$
14,744
$
106,265
$
41,563
4,955
13,727
56,988
3,902
3,338
5,587
950
2,044
1,609
78
230
602
$
24,629
$
125,604
$
106,349
Year Ended April 30
2002
2001
2000
$
709,940
$
466,437
$
408,024
6,900
6,641
4,242
$
716,840
$
473,078
$
412,266
Year Ended April 30
2002
2001
2000
$
227,185
$
204,060
$
163,535
22,453
27,701
23,036
2,661
3,439
3,898
252,299
235,200
190,469
26,973
(33,724
)
(24,412
)
2,828
(4,578
)
(3,438
)
335
(568
)
(2,248
)
30,136
(38,870
)
(30,098
)
$
282,435
$
196,330
$
160,371
Year Ended April 30
2002
2001
2000
35.0
%
35.0
%
35.0
%
2.3
%
3.2
%
3.1
%
1.5
%
3.6
%
2.6
%
0.6
%
(0.3
%)
(1.8
%)
39.4
%
41.5
%
38.9
%
April 30
2002
2001
$
19,114
$
31,923
7,422
18,406
26,536
50,329
34,747
42,048
21,585
20,439
6,375
8,128
28
3,258
62,735
73,873
(7,002
)
(3,886
)
(1,098
)
(964
)
(8,100
)
(4,850
)
(30,002
)
(22,944
)
(51,047
)
(81,049
)
(22,944
)
$
122
$
96,408
(Unaudited)
Year Ended April 30, 2000
$
2,678,022
218,275
$1.11
1.10
Fiscal 2002 Quarter Ended
April 30,
Jan. 31,
Oct. 31,
July 31,
2002
2002
2001
2001
$
1,881,327
$
733,532
$
373,896
$
328,981
765,881
49,774
(47,077
)
(51,738
)
302,297
20,158
(19,066
)
(20,954
)
463,584
29,616
(28,011
)
(30,784
)
$
463,584
$
29,616
$
(28,011
)
$
(30,784
)
$
2.54
$
.16
$
(.15
)
$
(.17
)
$
2.54
$
.16
$
(.15
)
$
(.17
)
$
2.46
$
.16
$
(.15
)
$
(.17
)
$
2.46
$
.16
$
(.15
)
$
(.17
)
Fiscal 2001 Quarter Ended
April 30,
Jan. 31,
Oct. 31,
July 31,
2001
2001
2000
2000
$
1,683,851
$
648,170
$
338,308
$
311,008
641,635
7,792
(86,356
)
(89,993
)
267,946
3,332
(36,701
)
(38,247
)
373,689
4,460
(49,655
)
(51,746
)
4,414
$
378,103
$
4,460
$
(49,655
)
$
(51,746
)
$
2.04
$
.02
$
(.27
)
$
(.28
)
$
2.06
$
.02
$
(.27
)
$
(.28
)
$
2.00
$
.02
$
(.27
)
$
(.28
)
$
2.02
$
.02
$
(.27
)
$
(.28
)
2002
2001
2000
$
1,830,752
$
1,622,636
$
1,397,475
78,710
78,469
79,814
734,890
415,802
355,429
250,685
472,425
268,376
416,926
386,168
319,923
5,773
5,837
4,668
$
3,317,736
$
2,981,337
$
2,425,685
$
533,468
$
434,067
$
319,992
7,093
6,024
4,869
339,388
137,992
88,574
(54,862
)
9,298
41,226
22,716
15,953
17,111
(56,133
)
(30,899
)
(22,476
)
(79,002
)
(98,759
)
(56,118
)
712,668
473,676
393,178
3,097
5,977
9,840
1,075
(6,575
)
9,248
$
716,840
$
473,078
$
412,266
$
59,258
$
69,891
$
66,523
4,854
5,429
5,494
14,753
22,813
20,311
52,182
67,289
25,663
21,390
38,821
29,060
2,949
1,365
167
$
155,386
$
205,608
$
147,218
$
324,037
$
326,111
$
348,726
47,820
42,627
59,725
1,233,925
938,379
685,292
1,656,469
2,011,517
3,678,614
665,018
575,998
517,134
303,522
219,073
423,378
$
4,230,791
$
4,113,705
$
5,712,869
$
58,683
$
42,260
$
95,338
4,407
2,328
3,641
23,087
34,423
15,915
10,268
3,557
21,582
10,676
9,762
9,065
4,654
81
212
$
111,775
$
92,411
$
145,753
Year Ended April 30, 2002
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
$
1,219,990
$
2,112,438
$
(14,692
)
$
3,317,736
334,146
974,622
(63
)
1,308,705
65,305
240,015
67
305,387
100,800
15,341
116,141
69,497
85,889
155,386
20,642
136,342
(1,255
)
155,729
15,000
60,804
(94
)
75,710
313,475
184,993
(13,218
)
485,250
918,865
1,698,006
(14,563
)
2,602,308
301,125
414,432
(129
)
715,428
716,840
(2,028
)
3,440
(716,840
)
1,412
716,840
299,097
417,872
(716,969
)
716,840
282,435
123,884
158,602
(282,486
)
282,435
$
434,405
$
175,213
$
259,270
$
(434,483
)
$
434,405
Year Ended April 30, 2001
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
$
1,072,855
$
1,920,398
$
(11,916
)
$
2,981,337
299,263
893,031
1,192,294
56,093
227,088
283,181
223,816
18,735
242,551
90,660
114,948
205,608
30,824
80,606
(457
)
110,973
20,949
49,491
70,440
240,474
182,434
(11,684
)
411,224
962,079
1,566,333
(12,141
)
2,516,271
110,776
354,065
225
465,066
480,209
(29
)
8,041
(480,209
)
8,012
480,209
110,747
362,106
(479,984
)
473,078
199,047
61,814
134,430
(198,961
)
196,330
281,162
48,933
227,676
(281,023
)
276,748
4,414
4,414
$
281,162
$
53,347
$
227,676
$
(281,023
)
$
281,162
Year Ended April 30, 2000
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
$
748,523
$
1,688,452
$
(11,290
)
$
2,425,685
199,124
764,412
963,536
29,264
223,907
253,171
156,123
(1,096
)
155,027
47,510
99,708
147,218
35,714
69,655
105,369
11,490
53,109
64,599
158,200
187,767
(11,290
)
334,677
637,425
1,397,462
(11,290
)
2,023,597
111,098
290,990
402,088
412,266
113
10,065
(412,266
)
10,178
412,266
111,211
301,055
(412,266
)
412,266
160,371
52,494
107,877
(160,371
)
160,371
$
251,895
$
58,717
$
193,178
$
(251,895
)
$
251,895
April 30, 2002
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
$
197,959
$
238,186
$
$
436,145
140,180
11,993
152,173
844,538
844,538
151
157,747
210,447
368,345
544,391
562,550
1,106,941
2,973,936
215
1,609
(2,973,936
)
1,824
1,006,531
314,381
(87
)
1,320,825
$
2,974,087
$
2,891,561
$
1,339,166
$
(2,974,023
)
$
4,230,791
$
$
903,201
$
$
$
903,201
746,900
121,487
868,387
6,032
335,687
748,347
(283
)
1,089,783
1,598,635
373,975
(1,972,935
)
325
1,369,420
531,798
2,442,267
(2,974,065
)
1,369,420
$
2,974,087
$
2,891,561
$
1,339,166
$
(2,974,023
)
$
4,230,791
April 30, 2001
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
$
82,942
$
104,674
$
$
187,616
84,197
84,197
1,310,804
1,310,804
164,490
200,814
365,304
573,691
478,135
1,051,826
2,452,643
215
262
(2,452,643
)
477
720,004
394,431
(954
)
1,113,481
$
2,452,643
$
2,936,343
$
1,178,316
$
(2,453,597
)
$
4,113,705
$
$
1,058,000
$
$
$
1,058,000
746,250
124,724
870,974
4,763
220,928
782,058
3,241
1,010,990
1,274,139
637,487
(1,907,206
)
(4,420
)
1,173,741
273,678
2,178,740
(2,452,418
)
1,173,741
$
2,452,643
$
2,936,343
$
1,178,316
$
(2,453,597
)
$
4,113,705
Year Ended April 30, 2002
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
58,927
$
357,698
$
324,821
$
$
741,446
(7,241
)
(7,241
)
67,070
8,250
75,320
23,173
23,173
(36,434
)
(75,341
)
(111,775
)
(46,738
)
(46,738
)
121
121
324,503
(269,248
)
(55,255
)
(4,069
)
12,176
8,107
324,503
(242,681
)
(140,855
)
(59,033
)
(10,622,011
)
(10,622,011
)
10,622,011
10,622,011
(50,594
)
(50,594
)
(115,725
)
(115,725
)
(462,938
)
(462,938
)
195,233
195,233
140
140
(383,430
)
(50,454
)
(433,884
)
115,017
133,512
248,529
82,942
104,674
187,616
$
$
197,959
$
238,186
$
$
436,145
Year Ended April 30, 2001
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
2,235
$
(237,185
)
$
483,301
$
$
248,351
(10,636
)
(10,636
)
16,024
5,500
21,524
319,620
36,572
356,192
(47,462
)
(44,949
)
(92,411
)
(21,143
)
(21,143
)
23,200
23,200
308,656
77,644
(386,300
)
14,458
(36,427
)
(21,969
)
308,656
380,284
(434,183
)
254,757
(18,219,741
)
(18,219,741
)
17,935,944
17,935,944
(68,743
)
(68,743
)
(108,374
)
(108,374
)
(222,895
)
(222,895
)
19,550
19,550
828
1,221
2,049
(310,891
)
(283,797
)
(67,522
)
(662,210
)
(140,698
)
(18,404
)
(159,102
)
223,640
123,078
346,718
$
$
82,942
$
104,674
$
$
187,616
Year Ended April 30, 2000
H&R Block, Inc.
BFC
Other
Consolidated
(Guarantor)
(Subsidiary Issuer)
Subsidiaries
Eliminations
H&R Block
$
3,736
$
143,334
$
305,917
$
$
452,987
(14,281
)
(14,281
)
10,845
57,416
68,261
191,839
19,997
211,836
(42,624
)
(103,129
)
(145,753
)
(817,587
)
(154,215
)
(971,802
)
119,697
8,081
(127,778
)
6,068
(4,268
)
1,800
119,697
(643,378
)
(326,258
)
(849,939
)
(50,800,661
)
(50,800,661
)
51,012,519
51,012,519
495,800
495,800
(4,730
)
(4,730
)
(105,480
)
(105,480
)
(50,654
)
(50,654
)
33,222
33,222
(521
)
(29,065
)
(29,586
)
(123,433
)
707,658
(33,795
)
550,430
207,614
(54,136
)
153,478
16,026
177,214
193,240
$
$
223,640
$
123,078
$
$
346,718
MANAGEMENTS REPORT & REPORT OF INDEPENDENT ACCOUNTANTS
MANAGEMENTS REPORT
The financial information in this
Annual Report, including the
consolidated financial statements, has
been prepared by the management of H&R
Block, Inc. Management believes the
information presented in the Annual
Report is consistent with the financial
statements, the financial statements
are prepared in accordance with
generally accepted accounting
principles, and the financial
statements do not contain material
misstatements due to fraud or error.
Where appropriate, the financial
statements reflect managements best
estimates and judgments.
Management also is responsible for
maintaining a system of internal
accounting controls with the objectives
of providing reasonable assurance that
the Companys assets are safeguarded
against material loss from unauthorized
use or disposition, and that authorized
transactions are properly recorded to
permit the preparation of accurate
financial data. However, limitations
exist in any system of internal
controls based on recognition that the
cost of the system should not exceed
its benefits. The Company believes its
system of accounting controls, of which
its internal auditing function is an
integral part, accomplishes the stated
objectives.
PricewaterhouseCoopers LLP,
independent accountants, audited H&R
Blocks 2002, 2001 and 2000
consolidated financial statements and
issued opinions thereon. Their audits
were made in accordance with generally
accepted auditing standards and
included an objective, independent
review of the system of internal
controls to the extent necessary to
express an opinion on the financial
statements.
The Audit Committee of the Board
of Directors, composed of outside
directors, meets periodically with
management, the independent accountants
and the internal auditor to review
matters relating to the Companys
annual financial statements, internal
audit activities, internal accounting
controls and non-audit services
provided by the independent
accountants. The independent
accountants and the internal auditor
have full access to the Audit Committee
and meet with it, both with and without
management present, to discuss the
scope and results of their audits
including internal controls, audit and
financial matters.
/s/ Mark A. Ernst
/s/ Frank J. Cotroneo
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of cash flows and of stockholders equity
appearing on pages 25-28 and 52-78 present fairly, in all material respects,
the financial position of H&R Block, Inc. and its subsidiaries (the Company)
at April 30, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended April 30, 2002 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
79
COMMON STOCK DATA
Traded on the New York Stock Exchange; Ticker Symbol: HRB
82
SELECTED FINANCIAL DATA
Amounts in thousands, except per share amounts and number of shareholders
Mark A. Ernst
President and Chief Executive Officer
Frank J. Cotroneo
Senior Vice President and Chief Financial Officer
H&R Block, Inc.
June 11, 2002
Stock Price
Cash Dividend
High
Low
Paid per Share
$
21.28
$
13.47
$
.14
18.69
15.66
.15
22.03
16.41
.15
27.50
20.90
.15
$
35.69
$
26.50
$
.15
41.10
32.78
.16
46.26
34.48
.16
50.78
39.23
.16
April 30
2002
2001
2000
1999
1998
$
3,317,736
$
2,981,337
$
2,425,685
$
1,619,577
$
1,244,267
$
434,405
$
276,748
$
251,895
$
237,795
$
183,788
$
434,405
$
281,162
$
251,895
$
215,366
$
392,130
$
4,230,791
$
4,113,705
$
5,700,146
$
1,903,923
$
2,899,108
$
868,387
$
870,974
$
872,396
$
249,725
$
249,675
$
1,369,420
$
1,173,741
$
1,218,589
$
1,061,987
$
1,341,632
181,126
183,608
196,070
195,258
213,961
31,094
31,523
33,557
34,624
31,177
$
2.38
$
1.50
$
1.28
$
1.19
$
0.88
$
2.38
$
1.53
$
1.28
$
1.08
$
1.87
$
2.31
$
1.49
$
1.27
$
1.18
$
0.85
$
2.31
$
1.52
$
1.27
$
1.07
$
1.82
$
0.63
$
0.59
$
0.54
$
0.48
$
0.40
$
7.56
$
6.39
$
6.22
$
5.44
$
6.27
13.1
%
9.3
%
10.4
%
14.7
%
14.8
%
41.1
%
29.7
%
25.1
%
22.0
%
38.1
%
*
Revenues for the years ended April 30, 2001, 2000, 1999 and 1998 have
been restated to reflect the adoption of Emerging Issues Task Force Nos.
01-9 and 01-14.
EXHIBIT 21
SUBSIDIARIES OF H&R BLOCK, INC.
The following is a list of the direct and indirect subsidiaries of
H&R Block, Inc., a Missouri corporation. All active subsidiaries do
business under their corporate names listed below or close derivatives
thereof:
Jurisdiction in
Name
which organized
1)
Block Investment Corporation
Delaware (1)
2)
H&R Block Group, Inc.
Delaware (1)
3)
HRB Management, Inc.
Missouri (2)
4)
H&R Block Tax and Financial Services Limited
United Kingdom (3)
5)
Companion Insurance, Ltd.
Bermuda (3)
6)
H&R Block Services, Inc.
Missouri (2)
7)
H&R Block Tax Services, Inc.
Missouri (4)
8)
H&R Block of Dallas, Inc.
Texas (5)
9)
HRB Partners, Inc.
Delaware (6)
10)
HRB Texas Enterprises, Inc.
Missouri (5)
11)
H&R Block and Associates, L.P.
Delaware (7)
12)
H&R Block Texas Tax Company, LP
Delaware (8)
13)
H&R Block Texas Support Services, LP
Delaware (8)
14)
BWA Advertising, Inc.
Missouri (5)
15)
H&R Block (Guam), Inc.
Guam (5)
16)
H&R Block Enterprises (Guam), Inc.
Guam (9)
17)
H&R Block Canada, Inc.
Canada (5)
18)
H&R Block (Nova Scotia), Incorporated
Nova Scotia (10)
19)
Cashplan Systems, Inc.
British Columbia (10)
20)
H&R Block Enterprises, Inc.
Missouri (5)
21)
H&R Block Tax Company, LLC
Missouri (11)
22)
H&R Block Support Services, LLC
Missouri (11)
23)
H&R Block Tax Company
California (5)
24)
H&R Block Eastern Tax Services, Inc.
Missouri (4)
25)
H&R Block Eastern Enterprises, Inc.
Missouri (12)
26)
H&R Block Indiana Tax Company, LP
Delaware (13)
27)
H&R Block Indiana Support Services, LP
Delaware (14)
28)
H&R Block Eastern Tax Company, LLC
Missouri (15)
29)
H&R Block Eastern Support Services, LLC
Missouri (15)
30)
HRB Royalty, Inc.
Delaware (4)
31)
H&R Block Limited
New South Wales (16)
32)
Block Financial Corporation
Delaware (2)
33)
Option One Mortgage Corporation
California (17)
34)
Option One Mortgage Acceptance Corporation
Delaware (18)
35)
Option One Mortgage Securities Corp.
Delaware (18)
36)
Premier Trust Deed Services, Inc.
California (18)
37)
Premier Mortgage Services of Washington, Inc.
Washington (18)
38)
H&R Block Mortgage Corporation
Ontario (18)
39)
H&R Block Mortgage Corporation
Massachusetts (18)
40)
Option One Direct Insurance Agency, Inc.
California (18)
41)
Woodbridge Mortgage Acceptance Corporation
Delaware (18)
42)
Option One Loan Warehouse Corporation
Delaware (18)
43)
Companion Mortgage Corporation
Delaware (17)
44)
Franchise Partner, Inc.
Nevada (17)
2
Jurisdiction in
Name
which organized
98)
Equico Limited
United Kingdom (35)
99)
RSM Equico Canada, Inc.
Canada (35)
100)
MyBenefitSource, Inc.
Georgia (36)
101)
HRB Retail Services, Inc.
Delaware (2)
Notes to Subsidiaries of H&R Block, Inc.:
(1) | Wholly owned subsidiary of H&R Block, Inc. | |
(2) | Wholly owned subsidiary of H&R Block Group, Inc. | |
(3) | Wholly owned subsidiary of HRB Management, Inc. | |
(4) | Wholly owned subsidiary of H&R Block Services, Inc. | |
(5) | Wholly owned subsidiary of H&R Block Tax Services, Inc. | |
(6) | Wholly owned subsidiary of H&R Block of Dallas, Inc. | |
(7) | Limited partnership in which HRB Texas Enterprises, Inc. is a 1% general partner and HRB Partners, Inc. is a 99% limited partner | |
(8) | Limited partnership in which HRB Texas Enterprises, Inc. is a 1% general partner and H&R Block and Associates, L.P. is a 99% limited partner | |
(9) | Wholly owned subsidiary of H&R Block (Guam), Inc. | |
(10) | Wholly owned subsidiary of H&R Block Canada, Inc. | |
(11) | Limited liability company in which H&R Block Tax Services, Inc. has a 100% membership interest | |
(12) | Wholly owned subsidiary of H&R Block Eastern Tax Services, Inc. | |
(13) | Limited partnership in which H&R Block Eastern Enterprises, Inc. is a 1% general partner and H&R Block Eastern Tax Company, LLC is a 99% limited partner. | |
(14) | Limited partnership in which H&R Block Eastern Enterprises, Inc. is a 1% general partner and H&R Block Eastern Support Services, LLC is a 99% limited partner. | |
(15) | Limited liability company in which H&R Block Eastern Tax Services, Inc. has a 100% membership interest | |
(16) | Wholly owned subsidiary of HRB Royalty, Inc. | |
(17) | Wholly owned subsidiary of Block Financial Corporation | |
(18) | Wholly owned subsidiary of Option One Mortgage Corporation | |
(19) | Limited liability company in which Block Financial Corporation has a 96.25% membership interest and Companion Mortgage Corporation has a 3.75% membership interest | |
(20) | Wholly owned subsidiary of OLDE Financial Corporation | |
(21) | Wholly owned subsidiary of H&R Block Financial Advisors, Inc. | |
(22) | Wholly owned subsidiary of OLDE Realty Corporation | |
(23) | Wholly owned subsidiary of Financial Marketing Services, Inc. | |
(24) | Wholly owned subsidiary of HRB Business Services, Inc. | |
(25) | Wholly owned subsidiary of RSM McGladrey, Inc. | |
(26) | Limited liability company in which RSM McGladrey, Inc. has a 100% membership interest | |
(27) | Limited liability company in which RSM McGladrey, Inc. owns a 50% membership interest and the California Credit Union League owns a 50% membership interest | |
(28) | Wholly owned subsidiary of Birchtree Financial Services, Inc. | |
(29) | Wholly owned subsidiary of FERS Business Services, Inc. | |
(30) | Wholly owned subsidiary of WS Business Services, Inc. | |
(31) | Limited liability company in which WS Business Services, Inc. has a 100% membership interest | |
(32) | Limited partnership in which W-1 Holdings, L.L.C. has a 1% general partnership interest and WSB-NEV, L.L.C. has a 99% limited partnership interest | |
(33) | Limited liability company in which C.W. Amos Business Services, Inc. has a 100% membership interest | |
(34) | Limited liability company in which RSM Equico, Inc. has 100% membership interest. | |
(35) | Wholly owned subsidiary of RSM Equico, Inc. | |
(36) | Company in which HRB Business Services, Inc. owns approximately 44% of the issued and outstanding common stock and 100% of the outstanding preferred stock. |
3
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-33655) of Block Financial Corporation and in the
Registration Statements on Form S-3 (No. 333-33655-01) and Form S-8 (Nos.
33-185, 33-64147, 333-42143, 333-42736,
333-42740, 333-56400, 333-70400, 333-70402) of H&R Block, Inc. of our report dated June 11, 2002
relating to the financial statements of H&R Block, Inc., which appears in the
2002 Annual Report to Shareholders, which is incorporated by reference in this
Annual Report on Form 10-K. We also consent
to the incorporation by reference of our report dated June 11,
2002 relating to
the financial statement schedule, which appears in this Annual Report on Form
10-K.
PricewaterhouseCoopers LLP
Kansas City, Missouri
July 29, 2002