H&R Block, Inc.

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H&R Block, Inc.

founded: 1955

Contact Information:

headquarters: 4410 main st.
kansas city, mo 64111 phone: (816)753-6900 fax: (816)753-5346 url: http://www.hrblock.com

OVERVIEW

H&R Block is probably best known for H&R Block Tax Services, the largest tax preparation service in the United States, handling approximately 1 in every 7 tax returns filed with the U.S. Internal Revenue Service (IRS). H&R Block operates and franchises about 9,700 tax preparation offices in the United States, Canada, Europe, and Australia. Founder Henry Bloch stated that, "Our biggest competitor is the person who does his own tax return."

H&R Block, Inc. diversified and experimented with products and services in many other areas. The company's subsidiary, Block Financial Corporation, develops and provides home mortgage loans, tax preparation software, temporary employment services, document processing, and sales of mutual funds, insurance, and annuities. In fiscal year 1998, H&R Block served more than 18 million taxpayers in more than 10,000 offices in the United States, Canada, and Australia. The company handled approximately 1 in every 7 regular returns and 51 percent of all electronic returns filed with the IRS that year.

COMPANY FINANCES

Despite losses incurred by the struggling CompuServe Corporation, which H&R Block eventually sold in January 1998, the company reported strong revenue growth in fiscal 1997 with net earnings of $47.8 million, or $.45 per share, and a 16.5-percent increase in revenues to $1.9 billion. H&R Block's previous year's earnings were $177.2 million, or $1.67 a share. The decline in earnings was due entirely to a $186.5-million pretax loss reported by CompuServe Corporation. Excluding the CompuServe results, Block's revenues rose nearly 26 percent from $871.5 million in 1996 to $1.1 billion in 1997. Pretax earnings grew 14 percent to $225.1 million, while earnings per share increased more than 15 percent from $1.18 to $1.36. For the third quarter ended January 31, 1998, the company reported revenues of $208.7 million, a 34.5-percent increase over the previous year. The company also gained $231.9 million on the sale of CompuServe Corporation. The company estimates pegged total earnings for the 1998 fiscal year at $173 million, an increase of 22 percent over 1997.

ANALYSTS' OPINIONS

With efforts to expand into other financial products and services, Joel Friedman, partner in the San Francisco office of Andersen Consulting, was quoted as saying, "They will have to invest heavily in consumer marketing to have customers make the link between what the brand has historically stood for—tax preparation—to other products." In spite of his break with the company, former H&R Block CEO Richard H. Brown said, "I've hung on to my Block stock." Standard and Poor rated the company a "market outperformer" in the spring of 1998.

HISTORY

H&R Block, Inc. was founded in 1955 by Henry and Richard Bloch, who were born and raised in Kansas City, Missouri. They decided to use the incorrectly spelled name in order to prevent people from mispronouncing the name as "Blotch." Henry first decided to start his own business while studying statistics at Harvard Business School, but his plans were put on hold while he served in the U.S. Air Force during World War II.

In 1946 Henry and Richard Bloch opened United Business Company in Kansas City. They offered small businesses bookkeeping, management, and collection, and prepared income tax returns without charge for their business clients. Later they began preparing tax returns separately for a small fee. By 1954 they realized that the time spent on tax preparation interfered with their bookkeeping business and decided they would either have to discontinue the service or make it their primary business. On January 25, 1955 the Blochs sold United Business Company and started H&R Block, Inc., specializing in income tax return preparation. During that tax season, the company grossed more than $20,000, a third of the annual volume of United Business Company.

One reason for the company's success was their unique pricing structure. H&R Block devised a method of charging related solely to the number and complexity of forms and schedules included within the return. The charge did not vary with the size of the tax refund, the client's income, or the time involved. With this same theory still applying to this day, the average charge for completing a return for U.S. customers was only about $70.

When the Blochs realized they could not operate all the offices personally, they began hiring qualified local people. They trained them and let them operate on a franchise or salary contract basis under the H&R Block banner.

In January 1957 the Blochs opened offices in Columbia, Missouri, and Topeka, Kansas. In 1958 they added Des Moines, Oklahoma City, and Little Rock. H&R Block went public in 1962. By 1969 Block had 3,286 offices throughout the United States, Canada, and Puerto Rico, with volume totaling more than $56 million. By 1978 H&R Block offices prepared more than 1 of every 9 tax returns filed in the United States.

At the saturation point in the tax business, H&R Block began to diversify. In 1978 the company acquired Personnel Pool of America, a temporary personnel agency specializing in health care, for $22.5 million. CompuServe, Inc., purchased by H&R Block in 1980, provided Internet, business network, and Intranet access services. From 1980 to 1987 H&R Block's Block Management Company supplied marketing and administrative services for the nationwide expansion of Hyatt Legal Services, an Ohio chain of storefront legal clinics offering basic legal services at standardized fees. In 1985 H&R Block bought Path Management Industries, a business seminar company, which they sold in 1990 at a loss. In 1990 H&R Block acquired Interim Systems for $49.5 million, merged its assets with Personnel Pool of America, and renamed the subsidiary INTERIM Services. In early 1994 H&R Block announced plans to sell INTERIM through an initial public offering. Block Financial Corporation was started in 1993 and Block entered the credit card business with a MasterCard called the H&R Block ValueCard, and later with the CompuServe Visa affinity card and the Websource Visa card.

As the tax preparation business grew, it became apparent that the company needed a reliable source of trained income tax return preparers. It then established its H&R Block Income Tax Schools. H&R Block was one of the first companies to file tax forms electronically with their Rapid Refund service offered in conjunction with the IRS and Sears. In 1986 Block started by filing 22,000 tax returns electronically from two test areas, Cincinnati and Phoenix. In 1997 the company filed more than 8 million returns electronically in the United States and Canada.

On January 31, 1998 the Company finalized the sale of the CompuServe Corporation and received 30.1 million shares of WorldCom, Inc. stock. The transaction was completed with the receipt of $1.03 billion in net proceeds from the monetization of the WorldCom stock in a Block trade on February 2, 1998. The company planned to use the proceeds to grow its core tax and financial services businesses and to fund a stock repurchase plan.

STRATEGY

For years, H&R Block's biggest problem had been what to do with the more than 10,000 empty offices during the eight months of the year when people aren't worrying about taxes. In 1997, the company lost $83 million during the off season. The solution devised by Block CEO Frank Salizzoni, was to market other financial services directly to its tax customers. Though the company's subsidiary, Block Financial Corporation, was already offering a variety of services including mortgages and mutual funds, little had been done to integrate the services with those offered by H&R Block Tax Services. Creating a one-stop financial shopping mall targeted at the company's downscale customer base (a segment largely ignored by other financial service firms) seemed like a sure bet, given Block's international name recognition, extensive network of field offices, and the huge wad of cash it had pocketed following the sale of CompuServe.

FAST FACTS: About H&R Block, Inc.

Ownership: H&R Block, Inc. is a publicly owned company traded on the New York Stock Exchange, Boston Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange, Inc.

Ticker symbol: HRB

Officers: Henry W. Block, Chmn., 75; Frank L. Salizzoni, Pres. & CEO, 60 $1,035,608; Ozzie Wenich, Sr. VP & CFO, 55, $394,807; Thomas L. Zimmerman, Pres., H&R Block Tax Services, 48 $424,655

Employees: 1,200 (72,000 during tax season)

Principal Subsidiary Companies: The three major subsidiaries of H & R Block, Inc. are H & R Block Tax Services, H&R Block International, and Block Financial Corporation.

Chief Competitors: While H&R Block faces competition from innumerable small tax preparation services, independent accountants, and larger accounting firms, few pose a significant threat to its core business. The company's most prominent competitors include: Andersen Worldwide; Ernst & Young; and KPMG.

In 1998, Salazzoni began testing out the idea. Fourteen Block offices in 4 cities offered an expanded array of services and 14 financial planners were hired to offer investment advice for fees ranging from $10 for a simple plan to $250 for a combination tax preparation and financial plan. Mutual funds, annuities, stocks, and bonds were offered at these 14 offices and Block mortgages were offered in another 30 cities. At the rest of the company's stores, tax customers were asked questions about their non-tax needs. More than half gave the company permission to call them.

INFLUENCES

In 1997 H&R Block paid $250,000 to settle a dispute with the New York City Department of Consumer Affairs over wording in their advertising. Customers did not understand that their instant refunds were actually re-fund anticipation loans (RALs)—short-term high-interest loans using the future refund as collateral. After settling the disagreement, H&R Block continued to offer RALs in partnership with Beneficial Corporation, one of the leading RAL lenders. "The RAL agreement and the new mortgage business indicate that Block Financial is rapidly evolving into a strategic partner of our Tax Services business," said Block CEO Frank Salizzoni in a 1997 company press release. The success of Block Financial and RALs were soon to prompt the company to consider expanding its array of financial services and delivering them straight to a captive market, the millions of Americans who had their tax returns prepared by H&R Block every year.

CURRENT TRENDS

H&R Block continued to enjoy revenue growth in 1997 and 1998, and the number of clients served worldwide with tax preparation and electronic filing services rose to a record 18.2 million. However, the company's margins were slipping due to bad debt associated with electronic filing, marketing expenses, and costs connected to a new, computerized bookkeeping and management reporting system. Though it seemed unlikely the government would ever fulfill its promises to simplify the tax system, the market for tax preparation services had little room left to expand. To maintain its growth, H&R Block began experimenting an expanded array of services offered right in the tax office. Revenues at offices that offered additional products were more than double those offering only tax services, suggesting that the company was moving in the right direction. Salazzoni, a former airline executive who had already experienced the dangers of expanding too quickly, however, was in no hurry. After all, taxes are one of only two things in life that everyone can count on.

CHRONOLOGY: Key Dates for H&R Block, Inc.

1946:: Henry and Richard Bloch form United Business
1955:: Reincorporate under the name H&R Block, deliberately misspelling last name
1956:: Opened seven storefront offices in New York City
1962:: Company goes public
1964:: Initiates legal action against New York franchisees because of unscrupulous practices
1966:: Settles out of court with New York franchisees and bought back franchises for more than $1 million
1967:: Gain 5,000 new employees who were trained in company's tax school
1972:: Opens outlets in 147 Sears department stores
1978:: Acquires Personnel Pool of America for $22.5 million
1980:: Acquires CompuServe; Bloch brothers enter into joint venture with Ohio attorney and entrepreneur Joel Hyatt
1985:: Acquires Path Management Industries
1990:: Sells Path Management to American Management Association
1991:: Purchases Interim Systems for $49.5 million and merges its assets with those of Personnel Pool of America, renaming subsidiary INTERIM Services
1993:: Starts Block Financial Corporation
1994:: Announces plans to sell INTERIM through initial public offering
1998:: Finalizes sale of CompuServe Corporation and receives 30.1 million shares of WorldCom, Inc. stock

PRODUCTS

Block Premium offices markets financial planning products and services aimed at more upscale clients, which also allows the company to use some of its offices year-round. To reach other customers who are not coming to them, H&R Block makes tax preparers available for house calls from the 4,300 company-owned offices. They also market a simple kit for writing a will at home, as well as the software programs, Home Legal Adviser, Small Business Attorney, and Kiplinger TaxCut.

Block Financial's new Conductor program offers community banks the means of providing a wide variety of financial services to their customers through CompuServe and the Internet. Using software provided by Jack Henry & Associates, Conductor enables banks to offer such services as bill payment and account access to their customers online.

GLOBAL PRESENCE

With expansion in tax preparation reaching its limits in the United States, growth in Britain allowed H&R Block to increase the number of offices in order to take advantage of changes in their tax laws. These tax laws doubled the number of people who are required to file tax returns. In addition, there are no geographical limits on the financial services that are being marketed through H&R Block's Internet web site.

Aside from the recent expansion of offices in Great Britain, there are more than 1,000 H&R Block offices in Canada, handling over 10 percent of their tax returns, and more than 300 offices in Australia handling 75 percent of the professionally prepared tax returns there. H&R Block, Inc. also owns subsidiaries in Bermuda, Canada, Nova Scotia, Guam, New Zealand, United Kingdom, Germany, Switzerland, France, Sweden, Netherlands, Australia, and Singapore.

EMPLOYMENT

Since April 15 is the deadline each year to file tax returns, the vast majority of H&R Block employees, 79,000 seasonal hired, work only during the first four months of the year. While many of these employees return from year to year, H&R Block's Basic Tax Preparation course supplies new recruits. Every year 60,000 to 100,000 people pay a fee to enroll in the course. The basic course involves 69 hours of classroom instruction and training provided, not only to potential H&R Block employees, but also to employees of other financial institutions, including major banks, mutual fund companies, and brokerage firms. Senior preparers with the company go on to study five different levels of courses.

SOURCES OF INFORMATION

Bibliography

"Compuserve to be Sold to Worldcom." H&R Block Press Release, 8 September 1997. Available at http://www.hrblock.com.

Feder, Barnaby J. "From Storefronts to Supermarkets." New York Times, 9 February 1997.

"H&R Block Delivers Tax Tips and Tools on the Internet." H&R Block, Inc. Press Release, 13 February 1997. Available at http://www.hrblock.com/press_releases/taxchecklist.html.

"H&R Block Reports Fiscal Year Earnings." H&R Block, Inc. Press Release, 18 June 1997. Available at http://www.hrblock.com.

"H&R Block Reports Third Quarter Results and Gain On Sale of Compuserve." H&R Block, Inc. Press Release, 23 February 1998. Available at http://www.hrblock.com.

"H&R Block to Spin off CompuServe." The Daily Reporter, 21 February 1996.

Hoffer, William. "Bloch the IRS Return." Nation's Business, March 1987.

Palmeri, Christopher. " Watch Out, Merrill Lynch." Forbes Magazine, 4 May 1998.