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 July 31, 1995
[ ] 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 August 31, 1995 was 104,488,285 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
July 31, 1995 and April 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended July 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows
Three Months Ended July 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited, amounts in thousands, except share amounts
JULY 31, APRIL 30,
1995 1995
---- ----
ASSETS
CURRENT ASSETS
Cash (including certificates of deposit of $4,053 and $25,781) $ 38,637 $ 90,248
Marketable securities 167,903 263,239
Receivables, less allowance for doubtful accounts of $6,735 and
$7,274 258,327 260,198
Prepaid expenses 37,142 21,823
------------- -------------
TOTAL CURRENT ASSETS 502,009 635,508
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 82,557 91,494
Excess of cost over fair value of net tangible assets acquired,
net of amortization 51,858 78,205
Other 50,150 45,383
------------- -------------
184,565 215,082
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 253,755 227,448
------------- -------------
$ 940,329 $ 1,078,038
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 43,869 $ 49,421
Accounts payable, accrued expenses and deposits 118,186 145,909
Accrued salaries, wages and payroll taxes 17,949 71,281
Accrued taxes on income 62,778 92,100
------------- -------------
TOTAL CURRENT LIABILITIES 242,782 358,711
OTHER NONCURRENT LIABILITIES 35,552 33,462
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Convertible preferred stock, no par, stated value $.01 per share 4 4
Additional paid-in capital 142,015 140,578
Retained earnings 673,256 700,423
------------- -------------
816,364 842,094
Less cost of 4,060,757 and 4,109,662 shares of common stock
in treasury 154,369 156,229
------------- -------------
661,995 685,865
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$ 940,329 $ 1,078,038
============= =============
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
------------------
JULY 31,
--------
1995 1994
---- ----
REVENUES
Service revenues $ 199,347 $ 135,719
Franchise royalties 1,395 1,187
Investment income 4,307 5,151
Other income 13,065 3,343
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218,114 145,400
------------- -------------
EXPENSES
Employee compensation and benefits 54,904 44,994
Occupancy and equipment 81,511 60,910
Marketing and advertising 3,577 6,443
Supplies, freight and postage 15,211 6,680
Other 54,428 31,170
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209,631 150,197
------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 8,483 (4,797)
Income tax expense (benefit) 3,257 (1,837)
------------- -------------
NET EARNINGS (LOSS) $ 5,226 $ (2,960)
============= =============
Weighted average number of shares outstanding 107,103 105,126
============= =============
Net earnings (loss) per share $ .05 $ (.03)
============= =============
Dividends per share $ .3125 $ .28
============= =============
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
THREE MONTHS ENDED
------------------
JULY 31,
--------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 5,226 $ (2,960)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 27,563 15,137
Gain on sale of subsidiaries (12,445) (2,796)
Other noncurrent liabilities 2,090 3,765
Changes in:
Receivables (3,888) 24,399
Prepaid expenses (15,940) (6,849)
Accounts payable, accrued expenses and deposits (24,887) (40,641)
Accrued salaries, wages and payroll taxes (52,794) (39,009)
Accrued taxes on income (30,153) (42,357)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (105,228) (91,311)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (287,390) (488,748)
Maturities of marketable securities 393,821 627,356
Purchases of property and equipment (46,013) (16,835)
Excess of cost over fair value of net tangible assets acquired, net
of cash acquired (216) (682)
Proceeds from sale of subsidiary 35,000 -
Other, net (6,563) 3,527
------------ -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 88,639 124,618
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (309,547) (419,562)
Proceeds from issuance of notes payable 303,995 466,694
Dividends paid (32,767) (29,550)
Payments to acquire treasury shares - (63,610)
Proceeds from stock options exercised 3,297 3,432
------------ -------------
NET CASH USED IN FINANCING ACTIVITIES (35,022) (42,596)
------------ -------------
NET DECREASE IN CASH (51,611) (9,289)
CASH AT BEGINNING OF PERIOD 90,248 41,343
------------ -------------
CASH AT END OF PERIOD $ 38,637 $ 32,054
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 33,408 $ 38,050
Interest paid 840 449
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. The Consolidated Balance Sheet as of July 31, 1995, the Consolidated
Statements of Operations for the three months ended July 31, 1995 and 1994
and the Consolidated Statements of Cash Flows for the three months ended
July 31, 1995 and 1994 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, 1995 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, 1995 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months January through April. Thus, the three month results are not
indicative of results to be expected for the year.
2. On May 1, 1995, the Company sold its wholly-owned subsidiary, MECA
Software, Inc., exclusive of its rights to publish TaxCut, for $35,000,000
cash. The sale resulted in a pretax gain of $12,445,000, which is included
in other income in the Consolidated Statements of Operations. MECA
Software, Inc. was part of the Financial Services segment.
3. On May 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used. In connection with the adoption of this Statement, the Company
reviewed the assets and related goodwill of its personal tax preparation
software business for impairment. Since the expected future cash flows of
this business, undiscounted and without interest charges, were less than
the carrying value of the assets, the Company recognized an impairment
loss of $8,389,000. The impairment loss represents the amount by which
the carrying value of the tax preparation software business assets,
including goodwill, exceeded the estimated fair value of those assets. The
estimated fair value was determined as the present value of estimated
expected future cash flows using a discount rate appropriate for the risks
associated with the personal software industry. The loss is included in
other expenses in the Consolidated Statements of Operations. The personal
tax preparation business is reported in the Financial Services segment.
4. On May 1, 1995, the Company changed its method of accounting for direct
response advertising costs to conform with the requirements of the American
Institute of Certified Public Accountants Statement of Position 93-7,
"Reporting on Advertising Costs," which specifies the accounting for direct
response advertising. Under this accounting method, direct response
advertising costs that meet certain criteria are reported as assets and are
amortized on a cost-pool-by-cost-pool basis over the period during which
the future benefits are expected to be received. Such assets are amortized
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over a 24-month period, on an accelerated basis, beginning in the month
subsequent to the expenditure. Direct response advertising consists
primarily of magazine and newspaper advertisements, broadcast, direct mail
costs including mailing lists and postage, and disk and CD-ROM costs
related directly to new subscriber solicitations. No indirect costs are
included in the capitalized direct response advertising. The net effect of
the change in accounting increased assets by $10,505,000, increased net
earnings by $6,471,000 and increased net earnings per share by $.06 for the
quarter ended July 31, 1995. Amortization of direct response advertising
assets was $512,000 for the quarter ended July 31, 1995. The Company
expenses advertising costs not classified as direct response the first time
the advertising takes place.
5. During the quarter ended July 31, 1995, the net unrealized holding gain on
available-for-sale securities increased $1,329,000 to $1,564,000.
6. 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.
7. Net earnings (loss) per common share are based on the weighted average
number of shares outstanding during each period, including, where
applicable, the dilutive effect of stock options and convertible preferred
stock outstanding. The weighted average shares outstanding for the first
quarter of fiscal 1996 increased to 107,103,000 from 105,126,000 last year.
In the fourth quarter of fiscal 1995, the Company issued 401,768 shares of
convertible preferred stock to certain shareholders of SPRY, Inc. in
connection with the Company's acquisition of such corporation. Each share
of preferred stock is convertible into four shares of common stock on or
after April 5, 1998.
8. During the three months ended July 31, 1995 and 1994, the Company issued
48,905 and 71,566 shares, respectively, pursuant to provisions for exercise
of its stock option plans. During the three months ended July 31, 1994,
the Company acquired 1,561,500 shares of its common stock at an aggregate
cost of $63,610,000.
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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 1 and 3,
respectively.
Working capital decreased from $276.8 million at April 30, 1995 to $259.2
million at July 31, 1995. The working capital ratio at July 31, 1995 was 2.1
to 1 compared to 1.8 to 1 at April 30, 1995. The decrease in working capital
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 Tax
Services 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 increase in the working capital ratio was largely due to the
proceeds from the sale of MECA Software, Inc. of $35.0 million received in the
first quarter of fiscal 1996.
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 throughout the year to
fund receivables associated with its credit card program. At July 31, 1995,
short-term borrowings used to fund credit card receivables totaled $43.9
million, compared to $49.4 million at April 30, 1995. The Company also
maintains a year-round $100 million line of credit to support various financial
activities conducted by BFC.
The Company's capital expenditures and dividend payments during the first three
months were funded through internally-generated funds.
The Company's Board of Directors has approved a series of investment
initiatives for CompuServe Incorporated designed to enhance its long-term
competitiveness and take advantage of accelerating growth opportunities in the
market for online services. These initiatives include the launch of a new
consumer online service, a simplified and less expensive pricing structure,
improved customer service, two new interfaces, infrastructure expenditures and
expansion of Internet activities offered through the various online services.
The estimated cost of this undertaking, net of capitalized direct-response
advertising, is in excess of $70 million for fiscal 1996, and will therefore
reduce the Company's fiscal 1996 profitability. However, management
anticipates that these initiatives will have a positive impact on revenues in
fiscal 1996 and on earnings beginning in fiscal 1997.
Subsequent to the end of the first quarter, the Company's Board announced
resumption of the previously approved stock buyback program for ten million
shares, initiated in December 1994. This program was suspended while
consideration was given to the strategic investments in CompuServe described
above. As of July 31, 1995, the Company has purchased only three million of
the ten million shares authorized for repurchase.
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Management anticipates the Company's need for short-term borrowing will
increase in the near future, as a result of funding the investment initiatives
at CompuServe and the stock buyback program.
RESULTS OF OPERATIONS
The analysis of operations that follows should be read in conjunction with the
table below and the Consolidated Statements of Operations found on page 2.
During the first quarter of fiscal 1996, the Company sold its wholly-owned
subsidiary, MECA Software, Inc. The operations of MECA prior to the sale are
included in the Financial Services segment.
Prior year amounts have been reclassified to conform to current year
presentation.
THREE MONTHS ENDED JULY 31, 1995 COMPARED TO
THREE MONTHS ENDED JULY 31, 1994
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
--------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
Computer services $ 186,550 $ 127,896 $ 44,130 $ 33,912
Tax services 9,956 9,563 (41,219) (39,998)
Financial services 18,737 4,455 3,484 (1,896)
Inter-segment sales (2,011) (2,775) - -
------------- ------------- -------------- --------------
213,232 139,139 6,395 (7,982)
Investment income 4,307 5,151 4,307 5,151
Unallocated corporate 575 1,110 (2,219) (1,966)
------------- ------------- ------------- -------------
$ 218,114 $ 145,400 8,483 (4,797)
============= =============
Income tax expense (benefit) 3,257 (1,837)
------------- -------------
Net earnings (loss) $ 5,226 $ (2,960)
============= =============
Consolidated revenues for the three months ended July 31, 1995 increased 50.0%
to $218.114 million from $145.400 million reported last year. Consolidated
pretax earnings for the first quarter of fiscal 1996 were $8.483 million,
compared to a pretax loss of $4.797 million in the first quarter of last year.
The increases are due to greater revenues and earnings reported by both the
Computer Services and Financial Services segments.
Net earnings were $5.226 million, or $.05 per share, compared to a net loss of
$2.960 million, or $.03 per share, for the same period last year. The loss
last year included a $.02 per share gain from operations sold. This year's
earnings per share includes: 1) $.03 per share gain from the sale of MECA
Software, Inc., net of the write-off of goodwill associated with personal tax
software, 2) $.01 per share from the earnings of Spry, Inc., acquired in the
fourth quarter of fiscal 1995, and 3) a $.06 per share benefit from the change
in accounting for subscriber acquisition costs.
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An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 45.9% to $186.550 million from $127.896 million in the
comparable period last year primarily due to increases in both consumer and
network revenues. Consumer Services revenues were 49.5% better than last year,
due to record increases in users and member usage. The number of worldwide
users increased to 3.4 million in the first quarter of fiscal 1996, compared to
approximately two million in fiscal 1995. Network Services revenues were 35.7%
better than last year, also due to new members and increased usage.
Additionally, the Internet Services division, which is new in fiscal 1996,
contributed revenues of $12.048 million for the first quarter. Fiscal 1995
first quarter results included gains totaling $2.796 million on the sale of two
small subsidiaries. Exclusive of operations sold and acquired, first quarter
revenues increased 41.7% over last year.
Pretax earnings increased 30.1% to $44.130 million from $33.912 million in the
first quarter of fiscal 1995. Earnings were unfavorably impacted by a
significant increase in expenditures related to the strategic investments being
made to enhance the segment's long-term growth and competitiveness. These
costs were partially offset by the effects of the required adoption of the
American Institute of Certified Public Accountants Statement of Position 93-7,
"Reporting on Advertising Costs." (See Note 4 to Consolidated Financial
Statements on page 4.) Exclusive of the change in accounting for advertising
costs and operations sold and acquired, pretax earnings increased 1.5% over
last year.
Pretax earnings as a percentage of revenues was 23.7% for the first quarter of
fiscal 1996, compared to 26.5% for the same period last year. The decrease in
the pretax margin resulted primarily from the strategic investments described
above. (See Management's Discussion and Analysis of Financial Condition on
page 6.)
TAX SERVICES
Revenues increased 4.1% to $9.956 million from $9.563 million last year, due
primarily to a 10.3% increase in tax preparation fees, offset partially by
lower tuition tax school fees and electronic filing fees.
The pretax loss increased 3.1% to $41.219 million from $39.998 million in the
first quarter of last year, due to higher office rent and employee-related
expenses. Also, bad debt recoveries are significantly less than last year.
Due to the seasonality of this segment's business, first quarter operating
results are not indicative of expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased to $18.737 million compared to $4.455 million for the same
period last year. The increase is largely due to the gain on the sale of MECA
Software, Inc. of $12.445 million. Additionally, excluding the operations of
MECA Software, Inc. in fiscal 1995, revenues for the quarter almost doubled as
compared to last year due to the increase in credit card revenues.
Pretax earnings were $3.484 million compared to a pretax loss of $1.896 million
in the first quarter of fiscal 1995. The improved results are primarily due to
the gain on the sale of MECA of $12.445 million, significantly offset by an
impairment loss of $8.389 million recognized on the assets,
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including goodwill, of the personal tax software operations. (See Note 3 to
Consolidated Financial Statements on page 4 regarding the impairment loss.)
INVESTMENT INCOME
Investment income decreased 16.4% to $4.307 million from $5.151 million last
year. The decrease resulted primarily from greater funds available for
investment in fiscal 1995, 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 increased
12.9% to $2.219 million from $1.966 million in the comparable period last year,
primarily due to greater stockholder expense.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)(a) Letter dated May 10, 1995 from the Company to William P. Anderson
setting forth the terms of a special management incentive program
for Mr. Anderson.
(10)(b) Amendment No. 6 to H&R Block Deferred Compensation Plan for
Executives.
(10)(c) Amendment No. 2 to H&R Block Supplemental Deferred Compensation
Plan for Executives.
(10)(d) Executive Employment Agreement between H&R Block, Inc. and
Richard H. Brown dated July 29, 1995.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the
first quarter of fiscal year 1996.
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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 09/14/95 BY /s/ William P. Anderson
------------ -----------------------------------------
William P. Anderson
Senior Vice President and
Chief Financial Officer
DATE 09/14/95 BY /s/ Ozzie Wenich
------------ -----------------------------------------
Ozzie Wenich
Vice President, Finance
and Treasurer
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