SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4410 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, without par
value, at September 8, 1994 was 104,285,210 shares.
TABLE OF CONTENTS
PART I Financial Information
Consolidated Balance Sheets
July 31, 1994 and April 30, 1994
Consolidated Statements of Operations
Three Months Ended July 31, 1994 and 1993
Consolidated Statements of Cash Flows
Three Months Ended July 31, 1994 and 1993
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II Other Information
SIGNATURES
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited, amounts in thousands, except share amounts
July 31, April 30,
1994 1994
ASSETS ------------- -------------
CURRENT ASSETS
Cash (including certificates of deposit of $7,540 and $23,519) $ 32,054 $ 41,343
Marketable securities 339,573 473,043
Receivables, less allowance for doubtful accounts of $12,709 and
$12,744 141,459 165,858
Prepaid expenses 26,400 19,551
------------- -------------
TOTAL CURRENT ASSETS 539,486 699,795
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 107,015 105,705
Excess of cost over fair value of net tangible assets acquired,
net of amortization 65,056 67,679
Other 37,940 36,301
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210,011 209,685
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 167,937 165,224
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$ 917,434 $ 1,074,704
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 47,132 $ -
Accounts payable, accrued expenses and deposits 119,951 160,592
Accrued salaries, wages and payroll taxes 16,186 55,195
Accrued taxes on income 80,538 120,425
------------- -------------
TOTAL CURRENT LIABILITIES 263,807 336,212
OTHER NONCURRENT LIABILITIES 34,382 30,617
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 91,318 90,552
Retained earnings 691,272 719,724
------------- -------------
783,679 811,365
Less cost of 4,313,539 and 2,823,605 shares of common stock
in treasury 164,434 103,490
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619,245 707,875
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$ 917,434 $ 1,074,704
============= =============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
Three Months Ended
July 31,
1994 1993
------------ ------------
REVENUES
Service revenues $ 135,719 $ 97,591
Franchise royalties 1,187 1,071
Investment income 5,151 4,067
Other income 3,343 585
------------ ------------
145,400 103,314
------------ ------------
EXPENSES
Employee compensation and benefits 44,994 36,896
Occupancy and equipment 60,910 48,269
Marketing and advertising 6,443 4,389
Supplies, freight and postage 6,680 5,314
Other 31,170 22,821
------------ ------------
150,197 117,689
------------ ------------
Loss from continuing operations before income tax benefit (4,797) (14,375)
Income tax benefit (1,837) (6,132)
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (2,960) (8,243)
Net earnings from discontinued operations (less applicable
income taxes of $2,682) - 2,802
------------ ------------
NET LOSS $ (2,960) $ (5,441)
============ ============
Weighted average number of common shares outstanding 105,126 105,898
======= =======
LOSS PER SHARE
From continuing operations $ (.03) $ (.08)
============ ============
Net loss $ (.03) $ (.05)
============ ============
Dividends per share $ .28 $ .25
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Three Months Ended
July 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES ------------ ------------
Net loss $ (2,960) $ (5,441)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,137 14,672
Gain on sale of subsidiaries (2,796) -
Other noncurrent liabilities 3,765 2,018
Changes in:
Receivables 24,399 87,560
Prepaid expenses (6,849) (8,309)
Accounts payable, accrued expenses and deposits (40,641) (40,473)
Accrued salaries, wages and payroll taxes (39,009) (25,390)
Accrued taxes on income (42,357) (33,629)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (91,311) (8,992)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (488,748) (193,658)
Maturities of marketable securities 627,356 333,635
Purchases of property and equipment (16,835) (19,080)
Excess of cost over fair value of net tangible assets acquired, net
of cash acquired (682) (1,767)
Other, net 3,527 (9,507)
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 124,618 109,623
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (419,562) (80,661)
Proceeds from issuance of notes payable 466,694 43,494
Dividends paid (29,550) (26,512)
Payments to acquire treasury shares (63,610) (40,207)
Proceeds from stock options exercised 3,432 1,637
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (42,596) (102,249)
------------ ------------
Net decrease in cash (9,289) (1,618)
Cash at beginning of period 41,343 43,417
------------ ------------
Cash at end of period $ 32,054 $ 41,799
============ ============
Supplemental disclosures of cash flow information
Income taxes paid $ 38,050 $ 30,217
Interest paid 449 326
<FN>
See Notes to Consolidated Financial Statements.
</FN>
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. The Consolidated Balance Sheet as of July 31, 1994, the
Consolidated Statements of Operations for the three months
ended July 31, 1994 and 1993 and the Consolidated Statements
of Cash Flows for the three months ended July 31, 1994 and
1993 have been prepared by the Company, without audit. In
the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash
flows at July 31, 1994 and for all periods presented have
been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1994 Annual
Report to Shareholders.
Operating revenues are seasonal in nature with peak revenues
occurring in the months January through April. Thus, the
three months results are not indicative of results to be
expected for the year.
2. During the third quarter of fiscal 1994, the Company sold
100% of the common stock of its wholly-owned subsidiary,
Interim Services Inc. Prior year amounts include Interim's
results, reported as discontinued operations. The Company
acquired MECA Software, Inc. in November 1993. The
acquisition was accounted for as a purchase and, accordingly,
the Consolidated Statements of Operations include MECA's
results since the date of acquisition.
3. In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." This Standard addresses the reporting for debt
and equity securities by requiring such investments to be
classified in held-to-maturity, available-for-sale or trading
categories. The Company adopted this Standard on May 1,
1994. All marketable debt and equity securities have been
classified as current or noncurrent available-for-sale
securities, and are carried at market value with unrealized
gains and losses included in stockholders' equity. The
adoption of this Standard resulted in an increase to
stockholders' equity of $5,526,000 (net of taxes of
$3,431,000), representing the aggregate excess market value
over carrying value of the Company's securities on the date
of adoption. During the quarter ended July 31, 1994, the net
unrealized holding gain on available-for-sale securities
decreased $1,548,000 to $3,978,000. Net earnings for the
period were not affected by the accounting change.
4. The Company files its Federal and state income tax returns on
a calendar year basis. The Consolidated Statements of
Operations reflect the effective tax rates expected to be
applicable for the respective full fiscal years.
5. Net loss per common share is based on the weighted average
number of shares outstanding during each period. The
weighted average shares outstanding for the first quarter of
fiscal 1995 declined to 105,126,000 from 105,898,000 last
year, due to repurchase of outstanding shares in the first
three months of this year, offset by treasury shares issued
for stock option exercises.
6. During the three months ended July 31, 1994 and 1993, the
Company issued 71,566 and 69,349 shares, respectively,
pursuant to provisions for exercise of its stock option
plans; during the same period, the Company acquired 1,561,500
and 1,145,816 shares of its common stock at an aggregate cost
of $63,610,000 and $40,207,000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
These comments should be read in conjunction with the
Consolidated Balance Sheets and Consolidated Statements of Cash
Flows found on pages 3 and 5, respectively.
Working capital decreased from $363.6 million at April 30, 1994
to $275.7 million at July 31, 1994. The working capital ratio at
July 31, 1994 was 2.0 to 1 compared to 2.1 to 1 at April 30,
1994. The decrease in working capital and working capital ratio
must be viewed in the context of the Company's business which is
seasonal, with peak activity in the fourth quarter, due to the
nature of the Company's largest segment, Tax Services. Tax
return preparation occurs almost entirely in the fourth quarter
and has the effect of increasing certain assets and liabilities
during this time.
The Company has no long-term debt. However, the Company
maintains seasonal lines of credit to support short-term
borrowing facilities in the United States and Canada. During the
months of January through April, the Company's Canadian Tax
Services regularly incurs short-term borrowings to purchase
refunds due its clients. Additionally, Block Financial
Corporation (BFC), a wholly-owned subsidiary of the Company,
incurs short-term borrowings during the months of January through
April to purchase interests in a trust to which certain Refund
Anticipation Loans made by Mellon Bank are sold. BFC also incurs
short-term borrowings throughout the year to fund receivables
associated with its credit card program. At July 31, 1994,
short-term borrowings used to fund credit card receivables
totaled $47.1 million. There were no borrowings outstanding at
April 30, 1994. The Company also maintains a year-round $100
million line of credit to support various financial activities
conducted by BFC.
The Company's acquisition of treasury shares, capital
expenditures and dividend payments during the first three months
were funded through internally-generated funds.
RESULTS OF OPERATIONS
During the third quarter of fiscal 1994, the Company sold 100% of
the common stock of its wholly-owned subsidiary, Interim Services
Inc. Prior year amounts include Interim's results, reported as
discontinued operations. The results of Interim Services Inc.
were previously reflected as the Temporary Help Services segment.
The Company acquired MECA Software, Inc. in November 1993. The
transaction was accounted for as a purchase and, accordingly,
results include MECA's operations subsequent to the date of
acquisition. The personal finance software operations of MECA
Software, Inc. are included in the Financial Services segment;
the personal tax software operations are included as Other
Services.
The analysis of operations that follows should be read in
conjunction with the table below and the Consolidated Statements
of Operations found on page 4.
Three Months Ended July 31, 1994 Compared to
Three Months Ended July 31, 1993
(amounts in thousands)
Revenues Earnings (loss)
1994 1993 1994 1993
------------ ------------ ------------ -------------
Tax services $ 9,563 $ 9,672 $ (39,998) $ (37,164)
Computer services 127,896 91,888 33,912 21,588
Financial services 5,989 537 211 (118)
Other services 78 - (2,039) -
Inter-segment sales (3,277) (2,850) - -
------------ ------------ ------------ -------------
140,249 99,247 (7,914) (15,694)
Investment income 5,151 4,067 5,151 4,067
Unallocated corporate - - (2,034) (2,748)
------------ ------------ ------------ -------------
$ 145,400 $ 103,314 (4,797) (14,375)
============ ============
Income tax benefit (1,837) (6,132)
------------ -------------
Net loss from
continuing operations (8,243)
(2,960)
Net earnings from
discontinued operations - 2,802
------------ -------------
Net loss $ (2,960) $ (5,441)
============ =============
Consolidated revenues for the three months ended July 31, 1994 increased 40.7%
to $145.400 million from $103.314 million reported last year. The increase is
due to greater revenues reported by the Computer Services and Financial
Services segments.
The consolidated pretax loss for the first quarter of fiscal 1995 improved
66.6% to $4.797 million from a loss from continuing operations of $14.375
million in the first quarter of last year. The significant improvement in the
first quarter loss is due to the improved operating results of the Computer
Services segment, which include a pretax gain of $2.796 million from the sales
of two subsidiaries, offset by increased losses reported by the Tax Services
segment and Other Services.
The net loss was $2.960 million, or $.03 per share, compared to a net loss
from continuing operations of $8.243 million, or $.08 per share, for the same
period last year. Discontinued operations which were sold in January 1994
contributed earnings of $.03 per share in the first quarter of fiscal 1994.
An analysis of operations by segment follows.
TAX SERVICES
Revenues decreased 1.1% to $9.563 million from $9.672 million last year, due
primarily to lower sales of supplies to franchises in the United States and
lower discounted return fees in Canada. Due to the seasonality of this
segment's business, the decline in first quarter revenues is not indicative of
expected results for the entire fiscal year.
The pretax loss increased 7.6% to $39.998 million from $37.164 million in the
first quarter of last year, due to increased office rent and employee-related
expenses and the slight decrease in revenues.
COMPUTER SERVICES
Revenues increased 39.2% to $127.896 million from $91.888 million in the
comparable period last year due to increases in both consumer and network
revenues. Consumer Services revenues were 49.6% better than last year,
despite a price decrease in February 1994. The growth in consumer revenues is
due to the significant increase in new customers in the United States and
further expansion into Europe. Network Services revenues were 33.2% better
than last year, due to increasing usage and new customers. Computer Services
revenues include a pretax gain of $2.796 million on the sale of two software
subsidiaries. Exclusive of the gain on the sale and the operating revenues of
these subsidiaries, Computer Services revenues increased 41.5% as compared to
the first quarter of fiscal 1994.
Pretax earnings increased 57.1% to $33.912 million from $21.588 million in the
first quarter of fiscal 1994. The increase in pretax earnings is attributable
to the continued strong performances of the Consumer and Network divisions, in
addition to the gains recorded on the sale of two subsidiaries. Excluding the
gain and operating results of the software subsidiaries sold, pretax earnings
increased 44.5% from the comparable period last year. Pretax earnings as a
percentage of revenues, excluding the gains on sales of subsidiaries, was
24.9% for the first quarter of fiscal 1995, compared to 23.5% for the same
period last year. The increase in the pretax margin resulted primarily from
the exceptional increases in revenues which outpaced expenses, a significant
portion of which are fixed.
FINANCIAL SERVICES
Revenues increased to $5.989 million compared to $537 thousand for the same
period last year. The increase in revenues was due to increases in credit
card fees and refund loan participation fees, and the revenues of the personal
finance software operations of MECA Software, Inc.
Pretax operating results improved from a loss of $118 thousand in the first
quarter of fiscal 1994 to earnings of $211 thousand in the first quarter of
fiscal 1995. The improved results were primarily due to refund anticipation
loan activity, partially offset by a loss reported by the personal finance
software operations and corporate overhead.
OTHER SERVICES
Other Services represent the operations of the personal tax software business
of MECA Software, Inc., which was acquired in November of 1993. The first
quarter loss of $2.039 million resulted from the seasonality of tax
preparation software sales, which normally peak during the third and fourth
quarters of the fiscal year. The loss includes goodwill amortization expense
of $247 thousand.
INVESTMENT INCOME
Investment income increased 26.7% to $5.151 million from $4.067 million last
year. The increase resulted primarily from greater funds available for
investment, largely due to the proceeds from the sale of Interim Services Inc.
received in the fourth quarter of fiscal 1994.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the first quarter decreased
26.0% to $2.034 million from $2.748 million in the comparable period last
year. The improvement is the result of the first-time allocation to operating
segments of certain employee benefit expenses paid at the corporate level, in
addition to management's efforts to control corporate overhead expenses.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10) The H&R Block Deferred Compensation Plan for Directors, as amended.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended July 31, 1994, the registrant filed a current
report on Form 8-K dated May 10, 1994, pertaining to the disposition of
the registrant's entire interest in its indirect wholly-owned
subsidiary, Interim Services Inc.
No other current reports on Form 8-K were filed during the quarter ended
July 31, 1994.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
DATE 09/14/94 BY /s/ William P. Anderson
--------------------------
William P. Anderson
Senior Vice President and
Chief Financial Officer
DATE 09/14/94 BY /s/ Ozzie Wenich
--------------------------
Ozzie Wenich
Vice President, Corporate
Controller and Treasurer