1
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 JANUARY 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- -------------------
COMMISSION FILE NUMBER 1-6089
H&R BLOCK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 44-0607856
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MAIN STREET
KANSAS CITY, MISSOURI 64111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(816) 753-6900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
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The number of shares outstanding of the registrant's Common Stock, without par
value, at March 1, 2000 was 98,382,049 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
January 31, 2000 and April 30, 1999 .................................................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 2000 and 1999 ........................................... 2
Nine Months Ended January 31, 2000 and 1999 ............................................ 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2000 and 1999 ............................................ 4
Notes to Consolidated Financial Statements ................................................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 11
Quantitative and Qualitative Disclosures about Market Risk................................. 22
PART II Other Information.......................................................................... 23
SIGNATURES................................................................................................. 25
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
JANUARY 31, APRIL 30,
2000 1999
---- ----
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 248,490 $ 193,240
Marketable securities 33,074 56,881
Receivables from customers, brokers, dealers and clearing
organizations, less allowance for doubtful accounts of $744 2,385,785 -
Receivables, less allowance for doubtful accounts of $37,474
and $61,872 1,248,065 743,301
Prepaid expenses and other current assets 163,121 94,000
----------- -----------
TOTAL CURRENT ASSETS 4,078,535 1,087,422
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 294,792 170,528
Excess of cost over fair value of net tangible assets acquired,
net of accumulated amortization 1,149,546 405,534
Other 178,903 132,470
----------- -----------
1,623,241 708,532
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 219,594 114,222
----------- -----------
$ 5,921,370 $ 1,910,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,094,939 $ 71,939
Accounts payable to customers, brokers and dealers 2,106,142 -
Accounts payable, accrued expenses and deposits 182,842 168,641
Accrued salaries, wages and payroll taxes 80,558 161,590
Accrued taxes on earnings 6,784 151,659
Current portion of long-term debt 60,207 -
----------- -----------
TOTAL CURRENT LIABILITIES 4,531,472 553,829
LONG-TERM DEBT 356,283 249,725
OTHER NONCURRENT LIABILITIES 108,342 44,635
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 417,311 420,658
Retained earnings 963,212 1,130,909
Accumulated other comprehensive income (loss) (17,229) (23,400)
----------- -----------
1,364,383 1,529,256
Less cost of 10,600,900 and 11,343,608 shares of common stock
in treasury 439,110 467,269
----------- -----------
925,273 1,061,987
----------- -----------
$ 5,921,370 $ 1,910,176
=========== ===========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
THREE MONTHS ENDED
------------------
JANUARY 31,
-----------
2000 1999
---- ----
REVENUES
Service revenues $ 406,564 $ 213,156
Product revenues 81,941 60,110
Royalties 16,124 12,961
Other 7,878 5,255
------------- -------------
512,507 291,482
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 230,943 124,718
Occupancy and equipment 63,842 42,950
Interest 48,826 23,689
Depreciation and amortization 36,539 18,105
Marketing and advertising 39,221 17,824
Supplies, freight and postage 26,755 22,616
Other 80,085 49,930
------------- -------------
526,211 299,832
------------- -------------
Operating loss (13,704) (8,350)
OTHER INCOME
Investment income, net 72 4,641
Other, net 109 (879)
------------- -------------
181 3,762
Loss from continuing operations before income tax benefit (13,523) (4,588)
Income tax benefit (6,448) (1,743)
------------- -------------
Net loss from continuing operations (7,075) (2,845)
Net loss from discontinued operations (less applicable
income tax benefit of ($175)) - (273)
Net loss on sale of discontinued operations (less
applicable income tax benefit of ($12,773)) - (19,978)
------------- -------------
Net loss $ (7,075) $ (23,096)
============= =============
Weighted average number of common shares outstanding 98,358 97,481
============= =============
Basic and diluted net loss per share from continuing operations $ (.07) $ (.03)
============= =============
Basic and diluted net loss per share $ (.07) $ (.24)
============= =============
Dividends per share $ .275 $ .25
============= =============
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
2000 1999
---- ----
REVENUES
Service revenues $ 632,766 $ 308,466
Product revenues 176,182 111,906
Royalties 20,264 17,023
Other 14,801 10,273
------------- -------------
844,013 447,668
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 424,601 216,711
Occupancy and equipment 152,036 108,229
Interest 83,644 53,889
Depreciation and amortization 79,270 44,800
Marketing and advertising 59,076 30,088
Supplies, freight and postage 39,646 31,230
Other 156,701 87,631
------------- -------------
994,974 572,578
------------- -------------
Operating loss (150,961) (124,910)
OTHER INCOME
Investment income, net 5,125 28,177
Other, net 359 (879)
------------- -------------
5,484 27,298
Loss from continuing operations before income tax benefit (145,477) (97,612)
Income tax benefit (56,591) (37,072)
------------- -------------
Net loss from continuing operations (88,886) (60,540)
Net loss from discontinued operations (less applicable
income tax benefit of ($953)) - (1,490)
Net loss on sale of discontinued operations (less
applicable income tax benefit of ($12,773)) - (19,978)
------------- -------------
Net loss $ (88,886) $ (82,008)
============= =============
Weighted average number of common shares outstanding 97,962 100,526
============= =============
Basic and diluted net loss per share from continuing operations $ (.91) $ (.60)
============= =============
Basic and diluted net loss per share $ (.91) $ (.82)
============= =============
Dividends per share $ .80 $ .70
============= =============
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (88,886) $ (82,008)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 79,270 44,800
Accretion of acquisition liabilities 7,266 -
Net loss on sale of discontinued operations - 19,978
Other noncurrent liabilities 5,279 3,613
Changes in:
Receivables from customers, brokers, dealers and
clearing organizations (423,288) -
Receivables (493,884) (217,181)
Prepaid expenses and other current assets (54,171) (45,195)
Accounts payable to customers, brokers and dealers 403,954 -
Accounts payable, accrued expenses and deposits (56,815) 14,341
Accrued salaries, wages and payroll taxes (81,032) (42,816)
Accrued taxes on earnings (144,933) (386,235)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (847,240) (690,703)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (5,009) (227,381)
Maturities of marketable securities 33,003 709,106
Purchases of property and equipment (68,855) (49,301)
Payments made for business acquisitions, net of cash acquired (986,556) (90,618)
Other, net (18,094) (23,738)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,045,511) 318,068
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (31,187,422) (7,301,430)
Proceeds from issuance of notes payable 33,210,422 7,459,389
Dividends paid (78,811) (70,700)
Payments to acquire treasury shares (32,366) (490,868)
Proceeds from stock options exercised 36,178 63,728
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,948,001 (339,881)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,250 (712,516)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 248,490 $ 188,340
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 87,168 $ 360,959
Interest paid 79,672 59,392
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 2000, the Consolidated
Statements of Operations for the three and nine months ended January 31,
2000 and 1999, and the Consolidated Statements of Cash Flows for the nine
months ended January 31, 2000 and 1999 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 January 31,
2000 and for all periods presented have been made.
Reclassifications have been made to prior periods to conform with the
current period presentation.
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, 1999 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the nine-month results are not
indicative of results to be expected for the year.
2. On December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of all of the issued and outstanding
shares of capital stock of Olde Financial Corporation and Financial
Marketing Services, Inc. (collectively, Olde) for $850,000 in cash plus an
estimated tangible book value payment of $37,100. An additional cash
payment of $11,372 was made in the fourth quarter based on the aggregate
consolidated net book value at the acquisition date, after a final
independent audit of the balance sheet. 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. Olde Discount Corporation, a wholly owned subsidiary of
Olde Financial Corporation, based in Detroit, Michigan, offers brokerage
and other financial services through its network of approximately 1,200
registered representatives located in 181 branch offices in 35 states. The
transaction was accounted for as a purchase and, accordingly, Olde's
results are included since the date of acquisition. The excess of cost over
fair value of net tangible assets acquired at January 31, 2000 was
$491,179, and will be adjusted for the additional payment made in the
fourth quarter. Such is being amortized on a straight-line basis over 15
years, subject to completion of an asset valuation as of the purchase date.
The acquisition was financed with short-term borrowings, and it is the
intention of the Company that a portion of the acquisition will ultimately
be financed with the issuance of approximately $500,000 in term debt in the
fourth quarter of fiscal 2000.
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The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Olde as if the acquisition had occurred on
May 1, 1999 and 1998, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the
acquisition debt and the related income tax effects. The pro forma
information is presented for informational purposes only and is not
necessarily indicative of what would have occurred if the acquisition had
been made as of those dates. In addition, the pro forma information is not
intended to be a projection of future results.
Nine months ended
-----------------
January 31,
-----------
2000 1999
---- ----
Revenues $ 1,158,919 $ 703,152
Net loss (102,969) (84,794)
Basic and diluted net loss per share $ (1.05) $ (.84)
3. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc.
(RSM), completed the purchase of substantially all of the non-attest assets
of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh
largest accounting and consulting firm with more than 70 offices located
primarily in the Eastern, Midwestern, Northern and Southwestern United
States. The purchase price was $240,000 in cash payments over the next four
years and the assumption of certain pension liabilities with a present
value 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 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 collected these amounts in the ordinary course of
business. The acquisition was accounted for as a purchase, and accordingly,
RSM's results are included since the date of acquisition. The present value
of the additional cash payments due over the next four years of $148,803
was treated as a noncash investing activity in the Consolidated Statement
of Cash Flows for the nine months ended January 31, 2000. The excess of
cost over the fair value of net tangible assets acquired was $240,535 and
is being amortized on a straight-line basis over periods of up to 25 years.
4. Receivables consist of the following:
January 31, April 30,
----------- ---------
2000 1999
---- ----
(Unaudited) (Audited)
Mortgage loans held for sale $ 621,578 $ 636,687
Participation in refund anticipation loans 356,659 51,074
Business services accounts receivable and work-in-process 122,397 33,015
Other 184,905 84,397
-------------- ---------------
1,285,539 805,173
Allowance for doubtful accounts 37,474 61,872
-------------- ---------------
$ 1,248,065 $ 743,301
============== ===============
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5. 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.
6. Basic and diluted net loss per share is computed using the weighted average
number of shares outstanding during each period. Diluted net loss per share
excludes the impact of common stock options outstanding of 8,464,234 shares
and the conversion of 608 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the nine
months ended decreased to 97,962,000 from 100,526,000 last year, due to the
purchase of treasury shares by the Company during fiscal 1999 and 2000.
This decrease was partially offset by stock option exercises and the
issuance of stock for acquisitions.
7. During the nine months ended January 31, 2000 and 1999, the Company issued
953,865 and 1,996,012 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. In addition, the
Company issued 475,443 shares of its common stock for an acquisition in the
second quarter of fiscal 2000. The issuance of common stock for the
acquisition was treated as a noncash investing activity in the Consolidated
Statement of Cash Flows for the nine months ended January 31, 2000. During
the nine months ended January 31, 2000, the Company acquired 721,800 shares
of its common stock at an aggregate cost of $32,366. During the nine months
ended January 31, 1999, the Company acquired 11,792,500 shares of its
common stock at an aggregate cost of $490,868.
8. CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in
connection with CompuServe's public filings related to its initial public
offering in April 1996. One state lawsuit also alleges certain oral
omissions and misstatements in connection with such offering. Relief sought
in the lawsuits is unspecified, but includes pleas for rescission and
damages. One Federal lawsuit names the lead underwriters of CompuServe's
initial public offering as additional defendants and as representatives of
a defendant class consisting of all underwriters who participated in such
offering. The Federal suits were consolidated, the defendants filed a
motion to dismiss the consolidated suits, the district court stayed all
proceedings pending the outcome of the state court suits, and the United
States Court of Appeals for the Sixth Circuit affirmed such stay. The four
state court lawsuits allege violations of various state statutes and common
law of negligent misrepresentation in addition to the 1933 Act claims. The
state lawsuits were consolidated for discovery purposes and defendants
filed a motion for summary judgment covering all four state lawsuits. As a
part of the sale of its interest in CompuServe, the Company agreed to
indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and
expenses incurred by them with respect to these lawsuits. The defendants
are vigorously defending these lawsuits. In the opinion of management, the
ultimate resolution of these suits will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
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9. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
January 31, April 30,
----------- ---------
2000 1999
---- ----
(Unaudited) (Audited)
Condensed balance sheets:
Cash and cash equivalents $ 147,465 $ 16,026
Finance receivables, net 3,373,268 658,882
Other assets 1,233,689 448,010
-------------- ---------------
Total assets $ 4,754,422 $ 1,122,918
============== ===============
Notes payable $ 2,090,802 $ 71,939
Long-term debt 249,763 249,725
Other liabilities 2,211,510 636,330
Stockholder's equity 202,347 164,924
-------------- ---------------
Total liabilities and stockholder's equity $ 4,754,422 $ 1,122,918
============== ===============
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Condensed statements of operations:
Revenues $ 220,892 $ 110,472 $ 394,716 $ 217,699
Earnings from continuing
operations 26,336 19,904 51,626 35,357
Net earnings (loss) 19,710 (8,026) 34,846 233
10. As part of its interest rate risk management strategy, the Company may
choose to hedge its interest rate risk related to its fixed rate mortgage
or debt portfolios. The effectiveness of a hedge is measured by a
historical and probable future high correlation of changes in the fair
value of the hedging instruments with changes in the value of the hedged
item. If correlation ceases to exist, hedge accounting is terminated and
the gains or losses are recorded in revenues.
The Company sells short FNMA mortgage-backed securities to certain
broker-dealer counterparties. The position on certain or all of the fixed
rate mortgages is closed, on standard Public Securities Association (PSA)
settlement dates, when the Company enters into a forward commitment to sell
those mortgages or decides to securitize the mortgages. Deferred gains on
the FNMA securities hedging instrument amounted to $227 at January 31,
2000. There were no open FNMA hedging instruments at January 31, 2000. The
contract value and market value of the forward commitment at January 31,
2000 were $130,000 and $130,171, respectively. In addition, the Company has
hedged its interest rate risk related to the anticipated issuance of term
debt in the fourth quarter of fiscal 2000 by utilizing treasury rate
guarantees. The position on the treasury rate guarantees is closed on the
anticipated bond issuance date. The contract value and the market value of
these treasury rate guarantees as of January 31, 2000 were $300,000 and
$297,873. These treasury rate guarantees expire on March 31, 2000.
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11. The Company's comprehensive income is comprised of net loss, foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements. The components of
comprehensive income (loss) during the three and nine months ended January
31, 2000 and 1999 were:
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Net loss $ (7,075) $ (23,096) $ (88,886) $ (82,008)
Change in net unrealized
gain (loss) on mkt. securities (3,390) 2,113 1,867 3,945
Change in foreign currency
translation adjustments 2,474 2,458 4,304 (6,447)
------------- ------------- -------------- ---------------
Comprehensive income (loss) $ (7,991) $ (18,525) $ (82,715) $ (84,510)
============= ============= ============== ===============
12. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
will now be effective for the Company's fiscal year ending April 30, 2002.
13. In the second quarter of fiscal year 2000, management redefined its
Mortgage operations segment to reflect the change in how the business is
analyzed and evaluated. The redefined segment, Financial services, includes
all of the previous mortgage activity along with the startup of the
Company's new financial services operations and the acquisition of Olde.
Financial services is primarily engaged in the origination, purchase,
servicing, securitization and sale of nonconforming and conforming mortgage
loans, as well as offering full-service investment opportunities to the
general public. Mortgage origination services are offered through a network
of mortgage brokers, through H&R Block Financial Centers and through H&R
Block Mortgage Corporation retail offices. Financial planning and
investment advice are offered through H&R Block Financial Centers and tax
offices, and stock, bonds, mutual funds and other products and securities
are offered through a nationwide network of registered representatives,
including representatives located at H&R Block Financial Centers and tax
offices.
-9-
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Information concerning the Company's operations by reportable operating
segments for the three and nine months ended January 31, 2000 and 1999 is
as follows:
Three months ended Nine months ended
January 31, January 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
U.S. tax operations $ 237,851 $ 189,083 $ 270,649 $ 219,662
International tax operations 8,478 6,776 27,259 22,030
Financial services 182,419 79,350 353,376 185,005
Business services 82,806 15,341 190,165 18,205
Unallocated corporate 953 932 2,564 2,766
------------ -------------- -------------- --------------
$ 512,507 $ 291,482 $ 844,013 $ 447,668
============ ============== ============== ==============
Earnings (loss) from continuing operations:
U.S. tax operations $ (29,427) $ (18,845) $ (184,160) $ (137,977)
International tax operations (7,134) (7,508) (15,299) (15,742)
Financial services 43,976 24,189 83,733 48,043
Business services 2,156 (1) (169) (220)
Unallocated corporate (5,226) (3,231) (12,003) (8,989)
Interest exp - acquisition debt (18,472) (4,438) (29,952) (13,319)
------------ -------------- -------------- --------------
(14,127) (9,834) (157,850) (128,204)
Investment income, net 72 4,641 5,125 28,177
Intercompany interest 532 605 7,248 2,415
------------ -------------- -------------- --------------
Loss from continuing operations
before income tax benefit $ (13,523) $ (4,588) $ (145,477) $ (97,612)
============ ============== ============== ==============
January 31, April 30,
----------- ---------
2000 1999
---- ----
IDENTIFIABLE ASSETS:
U.S. tax operations $ 771,895 $ 268,650
International tax operations 56,937 55,684
Financial services 4,313,269 1,038,909
Business services 508,610 146,252
Unallocated corporate 270,659 400,681
-------------- --------------
$ 5,921,370 $ 1,910,176
============== ==============
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q AND THE EXHIBITS HERETO MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
STATEMENTS ARE BASED UPON CURRENT INFORMATION, EXPECTATIONS, ESTIMATES AND
PROJECTIONS REGARDING THE COMPANY, THE INDUSTRIES AND MARKETS IN WHICH THE
COMPANY OPERATES, AND MANAGEMENT'S ASSUMPTIONS AND BELIEFS RELATING THERETO.
WORDS SUCH AS "WILL," "PLAN," "EXPECT," "REMAIN," "INTEND," "ESTIMATE,"
"APPROXIMATE," AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE
DATE ON WHICH THEY ARE MADE, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND
INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THEREFORE, ACTUAL OUTCOMES AND RESULTS COULD MATERIALLY DIFFER FROM
WHAT IS EXPRESSED, IMPLIED OR FORECAST IN SUCH FORWARD-LOOKING STATEMENTS. SUCH
DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED
TO, THE UNCERTAINTY OF THE ENTRY BY THE COMPANY INTO ANY AGREEMENT REGARDING ANY
SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION INVOLVING OPTION ONE MORTGAGE
CORPORATION (OPTION ONE); THE UNCERTAINTY REGARDING THE COMPLETION OF ANY
TRANSACTION INVOLVING OPTION ONE; THE UNCERTAINTY OF LAWS, LEGISLATION,
REGULATIONS, SUPERVISION AND LICENSING BY FEDERAL, STATE AND LOCAL AUTHORITIES
AND THEIR IMPACT ON ANY PROPOSED OR POSSIBLE TRANSACTION AND THE LINES OF
BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; THE UNCERTAINTY THAT
INCREASES IN THE NUMBER OF CLIENTS SERVED BY THE U.S. TAX OPERATIONS SEGMENT
WILL CONTINUE AT THE RATES STATED FOR A PORTION OF THE U.S. TAX-FILING SEASON;
UNFORESEEN COMPLIANCE COSTS; CHANGES IN ECONOMIC, POLITICAL OR REGULATORY
ENVIRONMENTS; CHANGES IN COMPETITION AND THE EFFECTS OF SUCH CHANGES; THE
INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES; CHANGES IN MANAGEMENT AND
MANAGEMENT STRATEGIES; THE COMPANY'S INABILITY TO SUCCESSFULLY DESIGN, CREATE,
MODIFY AND OPERATE ITS COMPUTER SYSTEMS AND NETWORKS; LITIGATION INVOLVING THE
COMPANY; AND RISKS DESCRIBED FROM TIME TO TIME IN REPORTS AND REGISTRATION
STATEMENTS FILED BY THE COMPANY AND ITS SUBSIDIARIES WITH THE SECURITIES AND
EXCHANGE COMMISSION. READERS SHOULD TAKE THESE FACTORS INTO ACCOUNT IN
EVALUATING ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased to a negative $452.9 million at January 31, 2000 from
$533.6 million at April 30, 1999. The working capital ratio at January 31, 2000
is 0.90 to 1, compared to 1.96 to 1 at April 30, 1999. The decrease in working
capital and the working capital ratio is due to the following: (1) purchase of
Olde Financial Corporation (Olde) with short-term borrowings; (2) the increase
in short-term borrowings to fund mortgage loan receivables which were funded
with corporate cash at April 30, 1999 and; (3) the seasonal nature of the
Company's U.S. tax
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operations segment. 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 maintains a seasonal line of credit to support short-term borrowing
facilities in Canada. The credit limit of this line fluctuates according to the
amount of short-term borrowings outstanding during the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its mortgage loan and other financial services programs. These
short-term borrowings in the U.S. are supported by a $1.89 billion back-up
credit facility through November 2000, subject to renewal. An additional credit
facility of $750 million was added in November 1999, which extends through April
2000, to support commercial paper that was issued to finance the acquisition of
Olde. It's the Company's intention to ultimately finance a portion of the
acquisition price with the issuance of approximately $500 million in term debt
in the fourth quarter of fiscal 2000.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first nine months were funded primarily through
internally-generated funds and, to a lesser extent, short-term borrowings.
At January 31, 2000, short-term borrowings used to fund mortgage loans and other
programs increased to $2.1 billion from $71.9 million at April 30, 1999 due
mainly to the funding of the acquisition of Olde and mortgage loan receivables
which were previously funded with corporate cash. For the nine months ended
January 31, 2000 and 1999, interest expense was $83.6 million and $53.9 million,
respectively. The increase in interest expense is primarily attributable to
interest expense related to the purchase of Olde and the non-attest assets of
McGladrey & Pullen, LLP.
In July 1996, the Company announced its intention to repurchase up to 10 million
shares in the open market over a two-year period following the separation of
CompuServe Corporation. At January 31, 2000, 7.7 million shares had been
repurchased. The two-year period expired January 31, 2000.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On July 21, 1999, the Company announced it was evaluating strategic alternatives
for Option One, including a possible sale or joint venture with a business
partner. There are no assurances that any transaction will take place. Option
One is reported in the Financial services segment.
On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM),
completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest
accounting and consulting firm with more than 70 offices located primarily in
the Eastern, Midwestern, Northern and Southwestern United States. The purchase
price was $240.0 million in cash payments over the next four years and the
assumption of certain pension liabilities with a present value of $52.7 million.
In addition, the Company made cash payments of $65.5 million for outstanding
accounts receivable
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and work-in-process balances that have been repaid to the Company as RSM
collected these amounts in the ordinary course of business. The acquisition was
accounted for as a purchase, and accordingly, RSM's results are included since
the date of acquisition.
On December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of all of the issued and outstanding shares
of capital stock of Olde for $850.0 million in cash plus an estimated tangible
book value payment of $37.1 million. An additional cash payment of $11.4 million
was made in the fourth quarter based on the aggregate consolidated net book
value at the acquisition date, after a final independent audit of the balance
sheet. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial
Corporation, based in Detroit, Michigan, offers brokerage and other financial
services through its network of approximately 1,200 registered representatives
located in 181 branch offices in 35 states. The transaction was accounted for as
a purchase and, accordingly, Olde's results are included since the date of
acquisition.
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FISCAL 2000 COMPARED TO FISCAL 1999
The analysis that follows should be read in conjunction with the table below and
the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1999
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
U.S. tax operations $ 237,851 $ 189,083 $ (29,427) $ (18,845)
International tax operations 8,478 6,776 (7,134) (7,508)
Financial services 182,419 79,350 43,976 24,189
Business services 82,806 15,341 2,156 (1)
Unallocated corporate 953 932 (5,226) (3,231)
Interest expense on acquisition debt - - (18,472) (4,438)
--------------- -------------- -------------- -------------
$ 512,507 $ 291,482 (14,127) (9,834)
=============== ==============
Investment income, net 72 4,641
Intercompany interest 532 605
-------------- -------------
(13,523) (4,588)
Income tax benefit (6,448) (1,743)
-------------- -------------
Net loss from continuing operations (7,075) (2,845)
Net loss from discontinued operations - (273)
Net loss on sale of discontinued operations - (19,978)
-------------- -------------
Net loss $ (7,075) $ (23,096)
============== =============
Consolidated revenues for the three months ended January 31, 2000 increased
75.8% to $512.5 million from $291.5 million reported last year. The increase is
primarily due to acquisitions. Revenues from Financial services increased 129.9%
over last year, due to the acquisition of Olde, and Business services increased
$67.5 million over the prior year, due mainly to the acquisition of RSM.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 2000 increased to $13.5 million from $4.6 million in the third quarter of
last year. The increase is attributable to increased losses from U.S. tax
operations. These increases were partially offset by improved results from
Financial services.
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The net loss from continuing operations was $7.1 million, or $.07 per share,
compared to $2.8 million, or $.03 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 25.8% to $237.9 million from $189.1 million last year,
resulting primarily from increased revenues from higher tax preparation fees
that are attributable to an increase in the number of clients served and price
increases. During the first month of the U.S. tax-filing season, the number of
clients served in company-owned offices increased 11.0%. Improved software sales
also contributed to the increase.
The pretax loss increased 56.2% to $29.4 million from $18.8 million in the third
quarter of last year due to higher expenses related to increased competitive
conditions for software sales and the startup of new e-commerce initiatives, as
well as normal operational increases in compensation and benefits, rent and
other facilities-related expenses and marketing and advertising related to tax
services. An increase in the number of tax offices over the prior year also
contributed to the increased expenses in tax services. These losses were
partially offset by improved performance of Refund Anticipation Loans (RALs) due
to lower bad debt expense, which is believed to primarily be a result of the IRS
Debt Indicator Program. Due to the nature of this segment's business, the
results for the first month of the tax-filing season are not necessarily
indicative of expected results for the entire tax season.
INTERNATIONAL TAX OPERATIONS
Revenues increased 25.1% to $8.5 million compared to $6.8 million in the prior
year's third quarter. The increase is principally attributable to higher check
cashing and tax preparation fees in Canada and higher tax preparation fees in
Australia.
The pretax loss decreased 5.0% to $7.1 million from $7.5 million last year. The
decrease is due to lower freight and postage and facilities-related expenses in
Canada. The lower facilities-related expense is attributable to a decrease in
the number of tax offices to 537 compared to 574 in the prior year. Improved
results from Australia and the United Kingdom also contributed to the decreased
loss. Due to the nature of this segment's business, third quarter operating
results are not indicative of expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 129.9% to $182.4 million from $79.4 million in the same
period last year. The increase is primarily attributable to the acquisition of
Olde on December 1, 1999. Olde contributed revenues for the two-month period of
$92.8 million. Option One, which includes H&R Block Mortgage Corporation
(formally Assurance Mortgage Corporation of America), also contributed $77.2
million to revenues, an 11.8% increase over the prior year. Option One
originated and sold or securitized $1.4 billion in loans during the third
quarter of fiscal 2000, compared to $930.2 million originated and $1.3 billion
sold or securitized in the third quarter last year.
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Financial services pretax earnings of $44.0 million increased 81.8% this year
compared to $24.2 million during the third quarter of fiscal 1999. The increase
is mainly due to the acquisition of Olde, which contributed earnings of $25.7
million for the two-month period. Pretax earnings were reduced by losses related
to the startup of financial services operations that offer financial planning
services in H&R Block Financial Centers and tax offices.
BUSINESS SERVICES
Business services revenues of $82.8 million increased 439.8% from $15.3 million
in the third quarter last year. The increase is primarily due to the acquisition
of two regional and one national accounting firm, RSM, as well as several
smaller market firms since the third quarter of fiscal 1999. Pretax earnings
were $2.2 million compared to a loss of $1 thousand in the prior year, which
includes goodwill amortization of $5.7 million and $1.1 million, respectively.
Due to the nature of this segment's business, revenues are seasonal, while
expenses are relatively fixed throughout the year. Results for the third quarter
are not indicative of the expected results for the entire year.
INVESTMENT INCOME, NET
Net investment income decreased 98.4% to $72 thousand from $4.6 million last
year. The decrease is due to less funds available for investment resulting from
using corporate cash to fund acquisitions and mortgage loans held for sale.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 61.7% to $5.2 million from $3.2 million in the comparable period last
year. The increase is due to higher employee costs and consulting fees and the
timing of charitable contributions. Also contributing to the increased loss from
last year are lower earnings from the Company's captive insurance company.
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THREE MONTHS ENDED JANUARY 31, 2000 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1999 (SECOND QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- --------------------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
------- ------- ------- -------
U.S. tax operations $ 237,851 $ 19,723 $ (29,427) $ (83,663)
International tax operations 8,478 14,713 (7,134) (1,644)
Financial services 182,419 91,503 43,976 20,931
Business services 82,806 83,167 2,156 (2,134)
Unallocated corporate 953 840 (5,226) (3,431)
Interest expense on acquisition debt - - (18,472) (7,042)
--------------- -------------- -------------- -------------
$ 512,507 $ 209,946 (14,127) (76,983)
=============== ==============
Investment income, net 72 2,402
Intercompany interest 532 2,424
-------------- -------------
(13,523) (72,157)
Income tax benefit (6,448) (27,420)
-------------- -------------
Net loss from continuing operations (7,075) (44,737)
Net loss from discontinued operations - -
Net loss on sale of discontinued operations - -
-------------- -------------
Net loss $ (7,075) $ (44,737)
============== =============
Consolidated revenues for the three months ended January 31, 2000 increased
144.1% to $512.5 million from $209.9 million reported in the second quarter of
fiscal 2000. The increase is primarily due to revenues from U.S. tax operations
related to the beginning of the U.S. tax-filing season, as well as increased
revenues from Financial services related to the acquisition of Olde on December
1, 1999.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 2000 decreased to $13.5 million from $72.2 million in the second quarter
of this year. The decrease is attributable to U.S. tax operations, which
incurred a pretax loss of $29.4 million this quarter compared to a pretax loss
of $83.7 million in the second quarter, and improved results from Financial
services.
The net loss from continuing operations was $7.1 million, or $.07 per share,
compared to $44.7 million, or $.46 per share, for the second quarter.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased $218.2 million to $237.9 million from $19.7 million in the
second quarter. The pretax loss decreased 64.8% to $29.4 million from $83.7
million in the three months ended October 31, 1999. The improved results are due
to the start of the U.S. tax-filing season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 42.4% to $8.5 million compared to the second quarter revenues
of $14.7 million. The pretax loss increased 333.9% to $7.1 million from $1.6
million in the second quarter. The decreased results are due to the timing of
the tax-filing seasons in Australia and Canada. The Australian tax season ends
in October while the Canadian tax season begins in late January.
FINANCIAL SERVICES
Revenues increased 99.4% to $182.4 million from $91.5 million in the prior
quarter. Pretax earnings increased 110.1% to $44.0 million from $20.9 million in
the three months ended October 31, 1999. The improved results are primarily due
to the acquisition of Olde on December 1, 1999, which contributed $92.8 million
in revenues and $25.7 million in pretax earnings for the two months ended
January 31. The increase in pretax earnings was partially reduced by losses
related to the startup of financial services operations that offer financial
planning services in H&R Block Financial Centers and tax offices.
BUSINESS SERVICES
Revenues decreased .4% to $82.8 million from $83.2 million in the three months
ended October 31, 1999. Pretax earnings were $2.2 million, compared to a pretax
loss of $2.1 million in the prior quarter. The improved results are mainly due
to the improved results of RSM resulting from increased revenues, due to the
start of the tax and accounting season, as well as a decrease in personnel
training costs and lower bad debt expense. Additionally the onset of the
accounting firms' tax and accounting season improved the results of a majority
of the other firms.
INVESTMENT INCOME, NET
Net investment income decreased 97.0% to $72 thousand from $2.4 million in the
second quarter of fiscal 2000. The decrease resulted from less funds available
for investment due to the use of internal cash to fund operations.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 52.3% to $5.2 million from $3.4 million in the second quarter. The
increase is due to higher employee costs and consulting fees and the timing of
charitable contributions. Improved results at the Company's captive insurance
subsidiary partially offset the increased loss.
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NINE MONTHS ENDED JANUARY 31, 2000 COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1999
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
U.S. tax operations $ 270,649 $ 219,662 $ (184,160) $ (137,977)
International tax operations 27,259 22,030 (15,299) (15,742)
Financial services 353,376 185,005 83,733 48,043
Business services 190,165 18,205 (169) (220)
Unallocated corporate 2,564 2,766 (12,003) (8,989)
Interest expense on acquisition debt - - (29,952) (13,319)
--------------- -------------- -------------- -------------
$ 844,013 $ 447,668 (157,850) (128,204)
=============== ==============
Investment income, net 5,125 28,177
Intercompany interest 7,248 2,415
-------------- -------------
(145,477) (97,612)
Income tax benefit (56,591) (37,072)
-------------- -------------
Net loss from continuing operations (88,886) (60,540)
Net loss from discontinued operations - (1,490)
Net loss on sale of discontinued operations - (19,978)
-------------- -------------
Net loss $ (88,886) $ (82,008)
============== =============
Consolidated revenues for the nine months ended January 31, 2000 increased 88.5%
to $844.0 million from $447.7 million reported last year. The increase is
primarily due to acquisitions in the Business and Financial services segments.
Revenues from Business services increased $172.0 million over last year and
Financial services increased $168.4 million over the nine-month period last
year. U.S tax operations also contributed to the increase.
The consolidated pretax loss from continuing operations for the first nine
months of fiscal 2000 increased to $145.5 million from $97.6 million last year.
The increase is attributable to higher losses from U.S. tax operations and lower
investment income, which were reduced by increased earnings from Financial
services, resulting from the Olde acquisition.
The net loss from continuing operations was $88.9 million, or $.91 per share,
compared to $60.5 million, or $.60 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased 23.2% to $270.6 million from $219.7 million last year,
resulting primarily from higher tax preparation fees that are attributable to a
11.0% increase in clients served during the first month of the tax season and
price increases. Revenues from software sales also contributed to the increase.
The pretax loss increased 33.5% to $184.2 million from $138.0 million in the
comparable period last year due to normal operational increases in compensation,
rent and other facility-related expenses and consulting expenses related to tax
services, increased competitive conditions related to software sales and the
startup of e-commerce initiatives. In addition to the normal increases, the
higher compensation is related to a change in the field manager compensation
structure that shifts their compensation to salary incurred throughout the year
from incentive bonuses incurred during the fourth quarter. Contributing to the
increases in rent and other facility-related expenses is an increase in the
amount of tax office space maintained under lease during this year's off-season,
as well as an additional 282 tax offices this tax season compared to last year's
tax season. The increased loss was partially offset by earnings from RALs due to
lower bad debt expense, which is believed to primarily be a result of the IRS
Debt Indicator Program. Due to the nature of this segment's business, the
nine-month operating results are not indicative of expected results for the
entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 23.7% to $27.3 million compared to $22.0 million in the prior
year. The increase is due to Australia and Canada operations. The increase in
Australian revenues is due to higher tax preparation fees which is the result of
an 8.5% increase in the number of tax returns prepared over the same period last
year. The increase in Canadian revenues is due to higher check cashing, tax
preparation and discounted return fees.
The pretax loss decreased 2.8% to $15.3 million from $15.7 million last year.
The decrease is due to improved results in Australia and the United Kingdom.
These results were partially offset by increased losses from Canada operations.
Due to the nature of this segment's business, the nine-month operating results
are not indicative of expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 91.0% to $353.4 million from $185.0 million in the same
period last year. The increase is attributable to Olde, which was acquired on
December 1, 1999, and Option One. Olde contributed revenues of $92.8 million.
Option One, which includes H&R Block Mortgage Corporation (formally Assurance
Mortgage Corporation of America), contributed revenues of $222.6 million for the
nine months, a $64.8 million increase over the same period last year. Option One
originated and sold or securitized $4.2 billion in loans during the first nine
months of fiscal 2000, compared to $2.5 billion in the same period last year.
The Company's other mortgage operations and Birchtree Financial, a
broker-dealer, contributed to the improved revenues.
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23
Pretax earnings increased 74.3% to $83.7 million from $48.0 million in the
prior year. The increase is primarily due to Olde, acquired December 1, 1999,
which contributed earnings of $25.7 million and Option One, which contributed
earnings of $63.5 million compared to earnings of $46.7 million last year.
Earnings were reduced by losses related to the startup of financial services
operations that offer financial planning services in H&R Block Financial
Centers and tax offices.
BUSINESS SERVICES
Business services contributed revenues of $190.2 million compared to $18.2
million for the nine months ended January 31, 1999. The pretax loss decreased to
$169 thousand compared to $220 thousand for the same period last year, which
includes goodwill amortization of $12.7 million and $1.3 million, respectively.
Business services was a new reportable operating segment in fiscal 1999 with
only one regional accounting firm acquired during the first six months last year
and an additional four acquired in the third quarter last year. However, in the
nine-month period of fiscal 2000, there are seven regional accounting firms and
several smaller market firms that have been included for the full nine months
and a national accounting firm, RSM, that has been included for six months. Due
to the nature of this segment's business, revenues are seasonal, while expenses
are relatively fixed throughout the year. Results for the nine months are not
indicative of the expected results for the entire fiscal year.
INVESTMENT INCOME, NET
Net investment income decreased 81.8% to $5.1 million from $28.2 million last
year. The decrease is due to less funds available for investment resulting from
internal cash used to fund acquisitions and operations instead of short-term
borrowings.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the nine months
increased 33.5% to $12.0 million from $9.0 million in the comparable period last
year. The increase is a result of increased employee costs and consulting fees
and the timing of charitable contributions.
OTHER ISSUES
YEAR 2000
The Company has completed preparation for the Year 2000, and to date has
successfully managed the transition without any disruption of business. The
Company had estimated the cost of the Year 2000 issue to be $3.9 million and
actual results through January 31, 2000 were not materially different. While the
Company does not anticipate problems, the Company could still encounter
unanticipated issues related to the Year 2000. The Company will continue to
monitor its computer systems, services, vendor and suppliers as needed
throughout 2000 to address any such issues.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at April
30, 1999.
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25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in
connection with CompuServe's public filings related to its initial public
offering in April 1996. One state lawsuit also alleges certain oral
omissions and misstatements in connection with such offering. Relief sought
in the lawsuits is unspecified, but includes pleas for rescission and
damages. One Federal lawsuit names the lead underwriters of CompuServe's
initial public offering as additional defendants and as representatives of
a defendant class consisting of all underwriters who participated in such
offering. The Federal suits were consolidated, the defendants filed a
motion to dismiss the consolidated suits, the district court stayed all
proceedings pending the outcome of the state court suits, and the United
States Court of Appeals for the Sixth Circuit affirmed such stay. The four
state court lawsuits allege violations of various state statutes and common
law of negligent misrepresentation in addition to the 1933 Act claims. The
state lawsuits were consolidated for discovery purposes and defendants
filed a motion for summary judgment covering all four state lawsuits. As a
part of the sale of its interest in CompuServe, the Company agreed to
indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and
expenses incurred by them with respect to these lawsuits. The defendants
are vigorously defending these lawsuits. In the opinion of management, the
ultimate resolution of these suits will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
The lawsuits discussed herein were previously reported in the first and
second quarter 2000 Forms 10-Q filed by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 Amendment No. 4 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
10.2 Amendment No. 6 to the H&R Block Deferred Compensation Plan for
Directors.
10.3 Executive's Agreement dated January 20, 1998, between H&R Block Tax
Services, Inc. and Thomas L. Zimmerman.
10.4 Employment Agreement dated September 7, 1999, between HRB
Management, Inc. and Jeffery W. Yabuki.
10.5 Employment Agreement dated January 26, 2000, between HRB Management,
Inc. and Frank J. Cotroneo.
27 Financial Data Schedule
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26
b) Reports on Form 8-K
A Form 8-K, Current Report, dated December 1, 1999, was filed
on December 14, 1999, by the registrant reporting under "Item 2" the
acquisition of Olde Financial Corporation on December 1, 1999. The
registrant reported under "Item 7" that the financial statements of
Olde Financial Corporation and the registrant's pro forma financial
statements would be filed as soon as practicable, but no more than 60
days after that Current Report. The press release was included as
Exhibit 99.1 to the Form 8-K.
A Form 8-K/A, Current Report, dated December 1, 1999, was
filed on February 14, 2000 by the registrant reporting under "Item 7"
the audited financial statements of Olde Financial Corporation for the
years ended December 31, 1998 and 1997, the unaudited financial
statements of Olde Financial Corporation for the six months ended
September 24, 1999 and September 25, 1998, and the unaudited pro forma
balance sheet of the registrant as of October 31, 1999 and the
statements of operations of the registrant for the year ended April 30,
1999 and the six months ended October 31, 1999. The consent of
independent auditors was included as Exhibit 23.1 to the Form 8-K/A.
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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 03/16/00 BY /s/ Mark A. Ernst
---------------- ------------------------
Mark A. Ernst
President and
Chief Operating Officer
DATE 03/16/00 BY /s/ Cheryl L. Givens
---------------- ------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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