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 -------------- -------------- 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 ------------- ------------- 210,011 209,685 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 167,937 165,224 ------------- ------------- $ 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 ------------- ------------- 619,245 707,875 ------------- ------------- $ 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 ------------ ------------ 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