1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
[ ] 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
----- -----
The number of shares outstanding of the registrant's Common Stock, without par
value, at March 8, 1996 was 103,385,215 shares.
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TABLE OF CONTENTS
Page
PART I Financial Information
Consolidated Balance Sheets
January 31, 1996 (Unaudited) and
April 30, 1995 (Audited) . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended January 31, 1996 and 1995 (Unaudited) . . . . . 2
Nine Months Ended January 31, 1996 and 1995 (Unaudited). . . . . . 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1996 and 1995 (Unaudited). . . . . . 4
Notes to Consolidated Financial Statements (Unaudited). . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . 7
PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
JANUARY 31, APRIL 30,
1996 1995
------------------- -------------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash (including certificates of deposit of $8,114 and $25,781) $ 60,681 $ 90,248
Marketable securities 36,741 263,239
Receivables, less allowance for doubtful accounts of $10,653 and
$7,274 344,899 260,198
Prepaid expenses 51,586 21,823
---------- ----------
TOTAL CURRENT ASSETS 493,907 635,508
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities - 91,494
Excess of cost over fair value of net tangible assets acquired,
net of amortization 60,062 78,205
Other 130,187 45,383
---------- ----------
190,249 215,082
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 344,450 227,448
---------- ----------
$1,028,606 $1,078,038
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 244,539 $ 49,421
Accounts payable, accrued expenses and deposits 157,670 145,909
Accrued salaries, wages and payroll taxes 43,514 71,281
Accrued taxes on income 29,280 92,100
---------- ----------
TOTAL CURRENT LIABILITIES 475,003 358,711
OTHER NONCURRENT LIABILITIES 37,780 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 139,549 140,578
Retained earnings 591,206 700,423
---------- ----------
731,848 842,094
Less cost of 5,624,754 and 4,109,662 shares of common stock
in treasury 216,025 156,229
---------- ----------
515,823 685,865
---------- ----------
$1,028,606 $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
JANUARY 31,
------------------
1996 1995
------------------- -------------------
REVENUES
Service revenues $296,060 $252,528
Royalties 9,068 8,931
Investment income 229 4,104
Other income 6,715 2,451
-------- --------
312,072 268,014
-------- --------
EXPENSES
Employee compensation and benefits 105,124 94,643
Occupancy and equipment 98,738 74,777
Marketing and advertising 21,151 17,649
Supplies, freight and postage 29,812 20,490
Other 66,129 47,353
-------- --------
320,954 254,912
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (8,882) 13,102
Income tax expense (benefit) (3,411) 5,018
-------- --------
NET EARNINGS (LOSS) $ (5,471) $ 8,084
======== ========
Weighted average number of common shares outstanding 103,361 105,658
======== ========
Net earnings (loss) per share $ (.05) $ .08
======== ========
Dividends per share $ .32 $ .3125
======== ========
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,
-----------------
1996 1995
------------------- -------------------
REVENUES
Service revenues $711,871 $551,651
Royalties 14,045 13,560
Investment income 7,402 13,809
Other income 20,781 7,251
-------- --------
754,099 586,271
-------- --------
EXPENSES
Employee compensation and benefits 221,551 189,545
Occupancy and equipment 269,976 199,759
Marketing and advertising 41,300 37,972
Supplies, freight and postage 62,954 38,048
Other 172,187 114,671
-------- --------
767,968 579,995
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (13,869) 6,276
Income tax expense (benefit) (5,326) 2,404
-------- --------
NET EARNINGS (LOSS) $ (8,543) $ 3,872
======== ========
Weighted average number of common shares outstanding 104,069 105,729
======== ========
Net earnings (loss) per share $ (.08) $ .04
======== ========
Dividends per share $ .9525 $ .905
======== ========
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,
-----------------
1996 1995
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (8,543) $ 3,872
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 74,528 49,364
Amortization of deferred subscriber acquisition costs 9,267 -
Gain on sale of subsidiaries (12,445) (2,796)
Other noncurrent liabilities 4,318 10,417
Changes in:
Receivables (90,460) (97,944)
Prepaid expenses (30,384) (12,321)
Deferred subscriber acquisition costs (74,876) -
Accounts payable, accrued expenses and deposits 14,597 (38,961)
Accrued salaries, wages and payroll taxes (27,229) (13,254)
Accrued taxes on income (63,609) (99,223)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (204,836) (200,846)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (356,855) (1,166,754)
Maturities and sales of marketable securities 676,895 1,537,046
Purchases of property and equipment (180,829) (82,675)
Excess of cost over fair value of net tangible assets acquired (11,264) (6,042)
Proceeds from sale of subsidiary 35,000 -
Other, net (22,158) (1,314)
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 140,789 280,261
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (1,452,392) (1,353,360)
Proceeds from issuance of notes payable 1,647,510 1,443,984
Dividends paid (99,813) (95,185)
Payments to acquire treasury shares (71,897) (110,668)
Proceeds from stock options exercised 11,072 54,469
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,480 (60,760)
---------- ----------
NET INCREASE (DECREASE) IN CASH (29,567) 18,655
CASH AT BEGINNING OF PERIOD 90,248 41,343
---------- ----------
CASH AT END OF PERIOD $ 60,681 $ 59,998
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 58,281 $ 101,627
Interest paid 2,898 2,635
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 January 31, 1996, the Consolidated
Statements of Operations for the three and nine months ended January 31,
1996 and 1995, and the Consolidated Statements of Cash Flows for the nine
months ended January 31, 1996 and 1995 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,
1996 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 of January through April. Thus, the nine-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 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
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change in accounting increased assets by $65,609,000 at January 31, 1996,
and decreased the net loss by $40,415,000 and the net loss per share by
$.39 for the nine months ended January 31, 1996. Amortization of direct
response advertising assets was $9,267,000 for the nine months ended
January 31, 1996. The Company expenses advertising costs not classified as
direct response the first time the advertising takes place.
5. During the nine months ended January 31, 1996, the net unrealized holding
gain on available-for-sale securities increased $1,261,000 to $1,496,000.
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 is based on the weighted average
number of shares outstanding during each period, and in periods in which
they have a dilutive effect, the effect of common shares contingently
issuable from stock options and convertible preferred stock. The weighted
average shares outstanding for the nine months ended January 31, 1996 is
104,069,000 compared to 105,729,000 in the prior year, due to repurchase
of outstanding shares and the exclusion of common stock equivalents from
weighted shares outstanding for the nine months ended January 31, 1996
because of their dilutive effect.
8. During the nine months ended January 31, 1996 and 1995, the Company
issued 318,108 and 1,496,273 shares, respectively, pursuant to provisions
for exercise of stock options under its stock option plans; during the
same periods, the Company acquired 1,833,200 and 2,790,900 shares of its
common stock at an aggregate cost of $71,897,000 and $110,668,000,
respectively.
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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 4,
respectively.
Working capital decreased from $276.8 million at April 30, 1995 to $18.9
million at January 31, 1996. The working capital ratio at January 31, 1996 is
1.0 to 1, compared to 1.8 to 1 at April 30, 1995. 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 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. Additionally, the
Company has used its working capital to fund the investment initiatives of
CompuServe Incorporated approved by the Board of Directors in July 1995.
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 commercial paper borrowings to
purchase refunds due its clients. Block Financial Corporation (BFC), a
wholly-owned subsidiary of the Company, incurs short-term commercial paper
borrowings throughout the year to fund receivables associated with its credit
card program. At January 31, 1996, short-term borrowings used to purchase
refunds in Canada and fund credit card receivables totaled $22.4 million and
$62.1 million, respectively, compared to $49.4 million related entirely to
credit card receivables 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 acquisition of treasury shares, capital expenditures and dividend
payments during the first nine months were funded through both
internally-generated funds and short-term borrowing. During the third quarter
of fiscal 1996, the Company obtained a $200 million line of credit facility to
fund short-term operating needs of the Company. At January 31, 1996, $160.0
million was outstanding under this line of credit facility. The Company
expects to extend the line of credit, which expires in April 1996.
The Company's Board of Directors has approved a series of investment
initiatives for CompuServe Incorporated (CompuServe) 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, 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 expected to reduce the Company's fiscal 1996 profitability.
However, management anticipates that these initiatives will have a positive
impact on CompuServe's revenues in fiscal 1996 and on its earnings beginning in
fiscal 1997.
During the second quarter, the Company's Board of Directors announced
resumption of the previously approved stock buyback program for ten million
shares, initiated in December 1993. This program had been suspended while
consideration was given to the strategic investments in CompuServe described
above. The buyback program was also suspended during the third quarter while
management considered the initial public offering of stock by CompuServe. As
of January 31, 1996, the Company has purchased 4,757,200 of the ten million
shares authorized for repurchase.
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On February 20, 1996, the Board of Directors approved a plan that will separate
CompuServe from the Company. Management anticipates that, in April 1996, up to
20% of CompuServe will be offered through an initial public offering of common
stock. The Company has announced its intention to completely separate
CompuServe from the Company through a tax-free spin-off or split-off within 12
months after the initial public offering. The distribution will be subject to
receiving a favorable ruling from the Internal Revenue Service or an opinion of
counsel regarding the tax-free nature of the transaction, certain other
conditions, and the absence of any change in market conditions or circumstances
that causes the Board of Directors to conclude that the distribution is not in
the best interest of the Company's shareholders. CompuServe will repay certain
intercompany debt from the proceeds of the initial public offering; CompuServe
will retain all remaining proceeds to fund accelerated investment initiatives
described above.
Subject to developments in the Company's business, its results from operations
and the annual review of its dividend policy, the quarterly dividend will
remain at $.32 per share. The quarterly dividend may also be affected by
further review in connection with the contemplated distribution of CompuServe.
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RESULTS OF OPERATIONS
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.
During the first quarter of fiscal 1996, the Company sold its wholly-owned
subsidiary, MECA Software, Inc., for $35 million cash, and recorded a pretax
gain of $12.445 million. Additionally, an impairment loss of $8.389 million
was recognized related to the assets of the tax preparation software operations
of the Company. The operations of MECA prior to the sale, the gain on the sale
and the impairment loss are included in the Financial Services segment.
Prior year amounts have been reclassified to conform to current year
presentation.
THREE MONTHS ENDED JANUARY 31, 1996 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1995
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
Computer services $203,032 $154,172 $ 22,121 $ 41,207
Tax services 97,581 96,002 (29,393) (28,762)
Financial services 12,750 14,911 2,112 706
Intersegment sales (2,001) (2,774) - -
-------- -------- -------- --------
311,362 262,311 (5,160) 13,151
Investment income 227 4,104 227 4,104
Unallocated corporate 483 1,599 (3,949) (4,153)
-------- -------- -------- --------
$312,072 $268,014 (8,882) 13,102
======== ========
Income tax expense (benefit) (3,411) 5,018
-------- --------
Net earnings (loss) $ (5,471) $ 8,084
======== ========
Consolidated revenues for the three months ended January 31, 1996 increased
16.4% to $312.072 million from $268.014 million last year. The increase is
primarily due to greater revenues reported by the Computer Services segment.
The consolidated pretax loss for the third quarter of fiscal 1996 was $8.882
million, compared to pretax earnings of $13.102 million in the third quarter of
last year. The significant change in third quarter results is due to the
Computer Services segment and investment income, slightly offset by improved
results reported by the Financial Services segment.
The net loss was $5.471 million, or $.05 per share, compared to net earnings of
$8.084 million, or $.08 per share, for the same period last year.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 31.7% to $203.032 million from $154.172 million in the
comparable period last year, due to increases in consumer and network revenues.
Consumer Services revenues were 31.6% better than last year, despite two price
decreases introduced in September 1995 and February 1995. The growth in
consumer revenues is due to customer acquisitions and increased usage. The
number of worldwide users
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of CompuServe and its licensee and distributors increased 1.6 million to 4.3
million at the end of the third quarter of fiscal 1996. Network Services
revenues were 33.7% better than last year, also due to increasing usage and new
customers. As of January 31, 1996, CompuServe had 928 network customers, a
32.8% increase compared to the same date a year ago.
Pretax earnings decreased 46.3% to $22.121 million from $41.207 million in the
third quarter of fiscal 1995. Pretax earnings as a percentage of revenues was
10.9% for the third quarter of fiscal 1996, compared to 26.7% for the same
period last year. The decrease in pretax earnings and the pretax margin
resulted from the significant price decreases in February and September 1995
related to the CompuServe online services.
TAX SERVICES
Revenues increased 1.6% to $97.581 million from $96.002 million last year,
primarily due to an increase in sales of supplies to franchises in the United
States.
The pretax loss increased by 2.2% to $29.393 million from $28.762 million in
the third quarter of last year, due to expected inflationary increases in
employee costs and office rent.
FINANCIAL SERVICES
Revenues decreased 14.5% to $12.750 million from $14.911 million in the same
period last year. The decrease in revenues was due to lower revenues from
sales of TaxCut software and the revenues of certain operations sold or
transferred in May 1995.
Pretax earnings improved to $2.112 million from $706 thousand in the third
quarter of fiscal 1995, due to lower marketing and advertising expense and
lower amortization of goodwill, partially offset by higher bad debt expense.
INVESTMENT INCOME
Net investment income decreased 94.5% to $227 thousand from $4.104 million last
year. The decrease resulted primarily from less funds available for
investment, caused by increased capital expenditures and investments in
marketing and advertising, particularly related to the Computer Services
segment, a decrease in proceeds from stock options exercised in September by
seasonal employees, and interest expense incurred for corporate borrowings.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the third quarter decreased
4.9% to $3.949 million from $4.153 million in the comparable period last year,
due to lower employee benefits expense.
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THREE MONTHS ENDED JANUARY 31, 1996 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1995 (SECOND QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
---------------------------- -------------------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
------------- ------------- ---------------- -------------
Computer services $203,032 $188,373 $ 22,121 $ 22,072
Tax services 97,581 27,602 (29,393) (34,351)
Financial services 12,750 6,815 2,112 (1,504)
Intersegment sales (2,001) (1,999) - -
-------- -------- -------- --------
311,362 220,791 (5,160) (13,783)
Investment income 227 2,867 227 2,867
Unallocated corporate 483 255 (3,949) (2,554)
-------- -------- -------- --------
$312,072 $223,913 (8,882) (13,470)
======== ========
Income tax benefit (3,411) (5,172)
-------- --------
Net loss $ (5,471) $ (8,298)
======== ========
Consolidated revenues increased 39.4% to $312.072 million from $223.913 million
in the second quarter of fiscal 1996. The improvement is due to higher
revenues generated by all of the operating segments, with the majority of the
increase attributable to the Tax Services segment, due to the beginning of the
tax filing period.
The consolidated pretax loss decreased 34.1% to $8.882 million from $13.470
million for the three months ended October 31, 1995. The improvement is
largely due to the Tax Services and Financial Services segments, partially
offset by lower investment income and higher corporate expenses.
The net loss also decreased 34.1% to $5.471 million, or $.05 per share, from
$8.298 million, or $.08 per share, for the second quarter of fiscal 1996.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 7.8% to $203.032 million from $188.373 million reported in
the second quarter of fiscal 1996. The increase is due to greater revenues
generated by the Consumer Services and Network Services divisions. Consumer
Services and Network Services revenues for the three months ended January 31,
1996 increased 6.3% and 7.4%, respectively, as compared to the second quarter
of fiscal 1996. The growth in Consumer Services is due to customer
acquisitions, partially offset by a decrease in the monthly revenue per
subscriber resulting from the September 1995 price reductions. The number of
worldwide users of CompuServe and its licensee and distributors increased
490,000 during the third quarter. The growth in Network Services resulted from
new customers, which increased 7.5% during the third quarter to 928.
Pretax earnings increased .2% to $22.121 million from $22.072 million in the
second quarter of fiscal 1996. Pretax earnings as a percentage of revenues was
10.9% for the third quarter, compared to 11.7% for the second quarter of the
fiscal year. The decrease in the pretax margin was caused by the price
reductions implemented in September 1995 related to CompuServe's consumer
information service.
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TAX SERVICES
Revenues increased to $97.581 million from $27.602 million in the second
quarter of fiscal 1996. The pretax loss decreased 14.4% to $29.393 million
from $34.351 million for the three months ended October 31, 1995. The improved
results are due to the onset of the tax filing season in the United States and
Canada in January.
FINANCIAL SERVICES
Revenues increased 87.1% to $12.750 million from $6.815 million for the three
months ended October 31, 1995. The increase resulted almost entirely from
sales of TaxCut software. Tax preparation software sales are highly seasonal,
and normally peak in the third and fourth quarters of the fiscal year
concurrent with the tax filing season.
Pretax earnings were $2.112 million, compared to a pretax loss of $1.504
million for the second quarter of fiscal 1996, due to earnings related to
TaxCut software sales and lower marketing and advertising expense, partially
offset by higher bad debt expense, both related to credit card operations.
INVESTMENT INCOME
Net investment income decreased 92.1% to $227 thousand from $2.867 million for
the three months ended October 31, 1995, due to the resources required to fund
operations during the Tax Services segment's off-season, the significant
marketing and capital investments made in the Computer Services segment and
interest incurred on corporate borrowings.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 54.6% to $3.949 million
from $2.554 million in the second quarter of fiscal 1996, resulting primarily
from increased employee benefits expense and professional fees.
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NINE MONTHS ENDED JANUARY 31, 1996 (FYTD) COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1995 (FYTD)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
Computer services $ 577,955 $ 418,699 $ 88,323 $ 109,455
Tax services 135,139 133,298 (104,963) (103,874)
Financial services 38,302 24,652 4,092 (4,388)
Intersegment sales (6,011) (8,324) - -
--------- --------- --------- ---------
745,385 568,325 (12,548) 1,193
Investment income 7,401 13,809 7,401 13,809
Unallocated corporate 1,313 4,137 (8,722) (8,726)
--------- --------- --------- ---------
$ 754,099 $ 586,271 (13,869) 6,276
========= =========
Income tax expense (benefit) (5,326) 2,404
--------- ---------
Net earnings (loss) $ (8,543) $ 3,872
========= =========
Consolidated revenues for the nine months ended January 31, 1996 increased
28.6% to $754.099 million from $586.271 million last year. The increase is
principally due to greater revenues reported by the Computer Services and
Financial Services segments, which includes the gain on the sale of MECA
Software, Inc. of $12.445 million.
The consolidated pretax loss was $13.869 million, compared to pretax earnings
of $6.276 million in the comparable period last year. The decline in operating
results is primarily due to the Computer Services segment and lower investment
income, offset by the gain on the sale of MECA Software, Inc. of $12.445
million and an impairment loss of $8.389 million recognized on the assets of
the tax preparation software business, both of which are included in Financial
Services.
The net loss was $8.543 million, or $.08 per share, compared to net earnings of
$3.872 million, or $.04 per share, for the comparable period last year.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 38.0% to $577.955 million from $418.699 million last year
due to increases in both Consumer Services and Network Services revenues.
Consumer Services revenues increased 45.2% over last year. The growth is due to
the increase in customers and usage, offset by price reductions introduced in
February and September 1995. The number of worldwide users of CompuServe and
its licensee and distributors has increased 1.6 million as compared to last year
to 4.3 million. Network Services revenues were 33.7% better than last year, due
to increasing usage and new customers. At January 31, 1996, network customers
increased 32.8% as compared with the same date last year.
Pretax earnings decreased 19.3% to $88.323 million from $109.455 million last
year. Pretax earnings as a percentage of revenues was 15.3% for the nine
months ended January 31, 1996, compared to 26.1% for the same period last year.
The decrease in pretax earnings and the pretax margin resulted primarily from
the two price reductions which have been implemented since January 1995.
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TAX SERVICES
Revenues increased 1.4% to $135.139 million from $133.298 million last year,
primarily due to higher revenues generated from Australian tax operations which
completed its tax filing season during the third quarter.
The pretax loss increased 1.0% to $104.963 million from $103.874 a year
earlier, due to the late mailing of W-2s by employers, which resulted in a
delay in the start of the early peak in tax return preparation and electronic
filing in the United States.
FINANCIAL SERVICES
Revenues increased 55.4% to $38.302 million from $24.652 million last year,
largely due to the gain on the sale of MECA Software, Inc. in fiscal 1996 of
$12.445 million and increased revenues produced by credit card operations,
offset by revenues of operations sold or transferred at the beginning of fiscal
1995.
Pretax earnings for the first nine months was $4.092 million, compared to a
pretax loss of $4.388 million last year, due to the net effect of the gain on
the sale of MECA and the impairment loss of $8.389 million realized on the
assets of the tax preparation software business and improved earnings from
credit card operations, attributable to lower advertising and marketing expense
and higher revolving account balances.
INVESTMENT INCOME
Net investment income decreased 46.4% to $7.401 million from $13.809 million
last year. The decrease resulted primarily from less funds available for
investment, due to the marketing and capital investments being made in
CompuServe, a decrease in proceeds from seasonal stock option exercises and
interest expense associated with corporate borrowings.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss of $8.722 million remained
relatively level with last year's loss of $8.726 million.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)(a) The Company's 1993 Long-Term Executive Compensation Plan, as
amended.
(10)(b) Letter setting forth compensatory arrangement for George T.
Robson, Senior Vice President and Chief Financial Officer of
the Company.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the third
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 3/15/96 BY /s/ George T. Robson
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George T. Robson
Senior Vice President and
Chief Financial Officer
DATE 3/15/96 BY /s/ Ozzie Wenich
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Ozzie Wenich
Vice President, Finance
and Treasurer
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