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 OCTOBER 31, 1997
[ ] 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 of the registrant's Common Stock, without par value,
outstanding at December 1, 1997 was 104,983,334 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
October 31, 1997 and April 30, 1997 ....................... 1
Consolidated Statements of Operations
Three Months Ended October 31, 1997 and 1996 .............. 2
Six Months Ended October 31, 1997 and 1996 ................ 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 1997 and 1996 ................ 4
Notes to Consolidated Financial Statements ................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 9
PART II Other Information ............................................ 17
SIGNATURES ............................................................ 21
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
OCTOBER 31, APRIL 30,
1997 1997
----------- ----------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 216,103 $ 457,079
Marketable securities 106 61,755
Receivables, less allowance for doubtful accounts of $32,355
and $30,144 645,566 407,441
Prepaid expenses and other current assets 89,782 31,671
Net assets of discontinued operations 508,801 522,144
----------- ----------
TOTAL CURRENT ASSETS 1,460,358 1,480,090
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 25,813 20,273
Excess of cost over fair value of net tangible assets acquired,
net of amortization 260,872 74,794
Other 78,074 66,836
----------- ----------
364,759 161,903
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 63,405 65,065
----------- ----------
$ 1,888,522 $1,707,058
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 568,402 $ 269,619
Accounts payable, accrued expenses and deposits 81,146 164,872
Accrued salaries, wages and payroll taxes 5,060 105,326
Accrued taxes on earnings 38,478 129,192
----------- ----------
TOTAL CURRENT LIABILITIES 693,086 669,009
LONG-TERM DEBT 249,650 -
OTHER NONCURRENT LIABILITIES 41,409 38,952
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 496,266 502,308
Retained earnings 561,657 684,071
----------- ----------
1,059,016 1,187,472
Less cost of 4,026,915 and 4,905,421 shares of common stock
in treasury 154,639 188,375
----------- ----------
904,377 999,097
----------- ----------
$ 1,888,522 $1,707,058
=========== ==========
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
--------------------
OCTOBER 31,
--------------------
1997 1996
--------- ---------
REVENUES
Service revenues $ 52,254 $ 36,548
Royalties 3,401 3,624
Other income 27,337 935
--------- ---------
82,992 41,107
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 41,849 26,248
Occupancy and equipment 38,111 31,484
Interest expense 13,355 2,027
Marketing and advertising 8,430 7,381
Supplies, freight and postage 5,617 4,380
Other 28,662 16,334
--------- ---------
136,024 87,854
--------- ---------
Operating loss (53,032) (46,747)
OTHER INCOME
Investment income, net 3,191 2,262
Other, net 12 -
--------- ---------
3,203 2,262
--------- ---------
Loss from continuing operations before income tax benefit (49,829) (44,485)
Income tax benefit (19,380) (16,860)
--------- ---------
Net loss from continuing operations (30,449) (27,625)
Net loss from discontinued operations (less applicable
tax benefit of $6,730 and $27,308) (10,782) (46,503)
--------- ---------
Net loss $ (41,231) $ (74,128)
========= =========
Weighted average number of common shares outstanding 104,552 104,017
========= =========
Net loss per share from continuing operations $ (.29) $ (.27)
========= =========
Net loss per share $ (.39) $ (.71)
========= =========
Dividends per share $ .20 $ .32
========= =========
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
SIX MONTHS ENDED
--------------------
OCTOBER 31,
--------------------
1997 1996
--------- ---------
REVENUES
Service revenues $ 88,021 $ 55,692
Royalties 4,418 4,555
Other income 29,763 1,475
--------- ---------
122,202 61,722
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 72,042 47,803
Occupancy and equipment 73,711 61,482
Interest expense 21,540 3,330
Marketing and advertising 11,729 8,982
Supplies, freight and postage 7,734 6,310
Other 49,177 30,392
--------- ---------
235,933 158,299
--------- ---------
Operating loss (113,731) (96,577)
OTHER INCOME
Investment income, net 8,381 6,206
Other, net 12 -
--------- ---------
8,393 6,206
--------- ---------
Loss from continuing operations before income tax benefit (105,338) (90,371)
Income tax benefit (40,028) (34,251)
--------- ---------
Net loss from continuing operations (65,310) (56,120)
Net loss from discontinued operations (less applicable
tax benefit of $8,218 and $42,096) (14,056) (70,234)
--------- ---------
Net loss $ (79,366) $(126,354)
========== =========
Weighted average number of common shares outstanding 104,327 103,920
========= =========
Net loss per share from continuing operations $ (.63) $ (.54)
========= =========
Net loss per share $ (.76) $ (1.22)
========= =========
Dividends per share $ .40 $ .64
========= =========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
SIX MONTHS ENDED
------------------------
OCTOBER 31,
------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (79,366) $ (126,354)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 19,034 13,523
Other noncurrent liabilities 2,457 2,539
Changes in:
Receivables 215,320 (91,185)
Prepaid expenses and other current assets (26,922) (16,134)
Net assets of discontinued operations 13,304 68,875
Accounts payable, accrued expenses and deposits (90,562) (698)
Accrued salaries, wages and payroll taxes (102,073) (90,323)
Accrued taxes on earnings (75,814) (74,311)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (124,622) (314,068)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (132,328) (8,623)
Maturities of marketable securities 188,309 2,586
Purchases of property and equipment (6,826) (7,323)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (227,787) (9,711)
Other, net (16,016) (3,072)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (194,648) (26,143)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (6,045,212) (2,039,130)
Proceeds from issuance of notes payable 5,887,832 2,149,839
Proceeds from issuance of long-term debt 249,650 -
Dividends paid (41,670) (66,374)
Proceeds from stock options exercised 27,694 2,312
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 78,294 46,647
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (240,976) (293,564)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 457,079 405,019
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 216,103 $ 111,455
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 36,272 $ 18,201
Interest paid 18,643 3,357
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 October 31, 1997, the Consolidated
Statements of Operations for the three and six months ended October 31,
1997 and 1996, and the Consolidated Statements of Cash Flows for the six
months ended October 31, 1997 and 1996 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 October 31,
1997 and for all periods presented have been made.
Reclassifications have been made to prior period amounts to conform with
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 Annual Report on
Form 10-K/A, Amendment Number 2, for the fiscal year ended April 30, 1997.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the six month results are not
indicative of results to be expected for the year.
2. On September 7, 1997, the Company entered into an Agreement and Plan of
Merger (Merger Agreement) under which WorldCom, Inc. (WorldCom) would
acquire CompuServe Corporation (CompuServe) through a merger of a
subsidiary of WorldCom with and into CompuServe. At the effective time of
the merger, each of the outstanding shares of CompuServe common stock
(including the 74,200,000 shares owned by the Company) are to be converted
into the right to receive, and there shall be paid and issued, in exchange
for each of the CompuServe shares, .40625 of a share of WorldCom stock,
subject to adjustment as provided in the Merger Agreement. The
transaction is subject to the satisfaction of certain conditions set forth
in the Merger Agreement. The applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with
respect to the transaction has expired. The Company has agreed to vote
all of the shares of CompuServe directly or indirectly owned by the
Company in favor of the transaction, and such vote is sufficient to
approve the Merger Agreement and the merger contemplated thereby. The
transaction is expected to close as soon as practicable after the
satisfaction of all of the conditions set forth in the Merger Agreement.
The consolidated financial statements have been reclassified to reflect the
Company's Computer Services segment as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. Revenues from
Computer Services for the six months ended October 31, 1997 and 1996 were
$411.1 million and $423.0 million, respectively, and
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were $205.4 million and $214.3 million, respectively, for the three months
ended October 31, 1997 and 1996.
3. On June 17, 1997, the Company completed the purchase of Option One
Mortgage Corporation (Option One). The cash purchase price was $218.1
million, consisting of $28.1 million in adjusted stockholder's equity and
a premium of $190 million. In addition, the Company made cash payments of
$456 million to Option One's parent to eliminate intercompany loans made
to Option One to finance its mortgage loan operations. The $456 million
payment was recorded as an intercompany loan and was repaid to the Company
by the end of June 1997 after Option One sold the loans to a third party
in the ordinary course of business. The acquisition was accounted for as
a purchase and, accordingly, Option One's results are included since the
date of acquisition. The fair value of tangible assets acquired,
including cash, and liabilities assumed was $683.8 million and $463.9
million, respectively. Liabilities assumed were treated as a noncash
investing activity in the Consolidated Statement of Cash Flows for the six
months ended October 31, 1997. The excess of cost over fair value of net
tangible assets acquired was $183.1 million and is being amortized on a
straight-line basis over 15 years. The acquisition was ultimately
financed with the issuance of $250 million in Senior Notes during the
second quarter of fiscal 1998, discussed below.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company and Option One as if the
acquisition had occurred on May 1, 1997 and 1996, 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 information 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.
Six months ended
----------------
October 31,
-----------
1997 1996
---------- ---------
Revenues $ 129,488 $ 100,157
Net loss (83,383) (129,590)
Net loss per share (.80) (1.25)
4. Receivables consist of the following:
October 31, April 30,
----------- ---------
1997 1997
----------- ---------
(Audited)
Credit card loans $ 229,881 $ 247,889
Mortgage loans held for sale 356,626 107,115
Other 91,414 82,581
----------- ---------
677,921 437,585
Allowance for doubtful accounts 32,355 30,144
----------- ---------
$ 645,566 $ 407,441
=========== =========
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5. During the six months ended October 31, 1997, the net unrealized holding
gain on available-for-sale securities decreased $105 to $1,221.
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 loss per common share is based on the weighted average number of
shares outstanding during each period. The weighted average shares
outstanding for the six months ended October 31, 1997 increased to
104,327,000 from 103,920,000 last year, mainly due to stock option
exercises.
8. During the six months ended October 31, 1997 and 1996, the Company issued
878,506 and 50,045 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans.
9. During fiscal 1997, CompuServe, certain current and former officers and
directors of CompuServe and the registrant were named as defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio.
All but two of the original six cases were brought as putative class
actions. 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. Relief sought is unspecified, but includes pleas for rescission
and damages. One purported class action lawsuit was voluntarily dismissed
by the plaintiffs and such plaintiffs have joined in one of the remaining
class action lawsuits in Federal court. The other 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 are both subject to pending motions to dismiss filed on
behalf of the defendants, and they are being consolidated pursuant to a
scheduling order that has been entered in the first Federal lawsuit. The
first state court lawsuit also alleges violations of the Ohio Securities
Code and common law of negligent misrepresentation, while another state
lawsuit alleges violations of Colorado, Florida, and Ohio statutes and
common law of negligent misrepresentation in addition to the 1933 Act
claims. Three of the state lawsuits have been consolidated for discovery.
A fourth state lawsuit was filed during the first quarter of fiscal 1998
and is expected to be consolidated with the other state lawsuits in due
course. The defendants are vigorously defending these lawsuits.
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10. Summarized financial information for Block Financial Corporation, a
wholly owned subsidiary of the Company, is presented below.
October 31, April 30,
----------- ---------
1997 1997
----------- ---------
(Audited)
Condensed balance sheets:
Cash and cash equivalents $ 61,374 $ 3,425
Finance receivables, net 632,001 380,206
Other assets 271,238 34,657
----------- ---------
Total assets $ 964,613 $ 418,288
=========== =========
Commercial paper $ 568,402 $ 269,619
Other liabilities 27,350 26,867
Long-term debt 249,650 -
Stockholder's equity 119,211 121,802
----------- ---------
Total liabilities and stockholder's equity $ 964,613 $ 418,288
=========== =========
Three months ended Six months ended
------------------- -------------------
October 31, October 31,
------------------- -------------------
1997 1996 1997 1996
--------- -------- ---------- -------
Condensed statements
of operations:
Revenues $50,508 $ 9,984 $74,360 $18,208
Earnings (loss) from operations 2,126 (2,090) (4,204) (3,112)
Net earnings (loss) 1,299 (1,255) (2,588) (1,885)
11. On October 21, 1997, the Company issued $250,000 of 6 3/4 % Senior Notes
due 2004. The Senior Notes are not redeemable prior to maturity. The net
proceeds of this transaction were used to repay short-term borrowings
which initially funded the acquisition of Option One, as discussed above.
12. As a part of its interest rate risk management strategy, the Company
hedged its interest rate risk related to its fixed rate mortgage portfolio
during the six months ended October 31, 1997 by selling short treasury
securities and utilizing forward commitments. With its agreement, the
Company sells short treasury securities under an open repurchase agreement
that can be adjusted at any time by either party. The position on certain
or all of the fixed rate mortgages is closed when the Company enters into
a forward commitment to sell those mortgages. Deferred losses on the
treasury securities hedging instrument amounted to $187 at October 31,
1997. The contract value and the market value of this hedging instrument
at October 31, 1997 was $13,766 and $13,790, respectively. The contract
value and market value of the forward commitment at October 31, 1997 was
$55,000 and $54,912, 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 $811.1 million at April 30, 1997 to $767.3
million at October 31, 1997. The working capital ratio at October 31, 1997
is 2.1 to 1, compared to 2.2 to 1 at April 30, 1997. 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.
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 from Revenue Canada.
Block Financial Corporation (BFC) incurs short-term borrowings throughout the
year to fund receivables associated with its credit card, nonconforming
mortgage loan and other financial service programs. BFC has a $1.8 billion
back-up credit facility to support its various financial activities through
November 1998, subject to renewal. At October 31, 1997, short-term borrowings
increased to $568.4 million compared to $269.6 million at April 30, 1997, due
mainly to the funding of mortgage operations.
On October 21, 1997, the Company issued $250 million of 6 3/4 % Senior Notes
due 2004. The Senior Notes are not redeemable prior to maturity. The net
proceeds of this transaction were used to repay short-term borrowings which
initially funded the acquisition of Option One Mortgage Corporation (Option
One), described below.
The Company's capital expenditures, excluding the acquisition of Option One,
and dividend payments during the first six months were funded through
internally-generated funds.
Using internally-generated funds, the Company paid CompuServe Corporation
(CompuServe) $67.1 million in September for the tax benefits derived by the
Company from CompuServe's operating losses in the 1996 calendar year. Such
payment was made in accordance with the Tax Sharing Agreement between the
Company and CompuServe.
Upon the completion of the CompuServe transaction, described below, the Company
will hold an approximate 3 percent stake in WorldCom, Inc. (WorldCom) and will
evaluate various alternatives to convert its holdings into cash in a timely
manner. The proceeds will be used to assist the Company in growing its core
tax and financial services businesses and to fund the Company's stock
repurchase program discussed below.
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The Company announced in December 1993 its intention to repurchase from time to
time up to 10 million of its shares on the open market. At October 31, 1997,
4.8 million shares had been repurchased. In July 1996, the Company announced
its intention to repurchase up to 10 million additional shares in the open
market over a two-year period following the separation of CompuServe. Such
authorization is in addition to the 1993 authorization. Following the
completion of the CompuServe transaction, the Company plans to continue to
purchase its shares in accordance with these authorizations. However, the
repurchase program will depend on the price of the stock, availability of
excess cash, the ability to maintain financial flexibility, and other
investment opportunities available.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On June 17, 1997, the Company completed the purchase of Option One. Option One
engages in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans. Based in Santa Ana, California, Option One has a
network of more than 5,000 mortgage brokers in 46 states. The cash purchase
price was $218.1 million. In addition, the Company made a cash payment of $456
million to Option One's parent to eliminate intercompany loans made to Option
One to finance its mortgage loan operations. The $456 million payment was
recorded as an intercompany loan and was repaid to the Company by the end of
June 1997 after Option One sold the mortgage loans to a third party in the
ordinary course of business. The acquisition was accounted for as a purchase
and, accordingly, Option One's results are included since the date of
acquisition.
On September 7, 1997, the Company entered into an Agreement and Plan of Merger
(Merger Agreement) under which WorldCom would acquire CompuServe through a
merger of a subsidiary of WorldCom with and into CompuServe. At the effective
time of the merger, each of the outstanding shares of CompuServe common stock
(including the 74,200,000 shares owned by the Company) are to be converted into
the right to receive, and there shall be paid and issued, in exchange for each
of the CompuServe shares, .40625 of a share of WorldCom stock, subject to
adjustment as provided in the Merger Agreement. The transaction is subject to
the satisfaction of certain conditions, including, among others, the expiration
or termination of any applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and any foreign competition law
or similar law, the receipt of other regulatory approvals, the absence of
certain adverse material changes, and CompuServe shareholder approval and
adoption of the Merger Agreement. The applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired. The Company
has agreed to vote all of its directly or indirectly owned shares of CompuServe
common stock in favor of the merger and such action is sufficient to approve
the transaction. The transaction will be treated as a sale of assets for tax
purposes and it is expected to close as soon as practicable after the
satisfaction of all the conditions set forth in the Merger Agreement. The
financial summary below has been reclassified to reflect CompuServe as
discontinued operations. CompuServe was previously reported in the Computer
Services segment.
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FISCAL 1998 COMPARED TO FISCAL 1997
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 OCTOBER 31, 1997 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1996
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
----------------- ----------------------
1997 1996 1997 1996
-------- ------- ---------- ---------
Tax services $ 31,689 $ 30,805 $ (52,165) $ (41,576)
Financial services 50,810 9,984 1,678 (2,090)
Unallocated corporate 493 318 (2,535) (3,081)
Investment income, net - - 3,193 2,262
-------- -------- ---------- ---------
$ 82,992 $ 41,107 (49,829) (44,485)
======== ========
Income tax benefit (19,380) (16,860)
---------- ---------
Net loss from continuing operations (30,449) (27,625)
Net loss from discontinued operations (10,782) (46,503)
---------- ---------
Net loss $ (41,231) $ (74,128)
========== =========
Consolidated revenues for the three months ended October 31, 1997 increased
101.9% to $83.0 million from $41.1 million reported last year. The increase is
primarily due to the revenues from Option One, acquired on June 17, 1997, and
included in the Financial Services segment.
The consolidated pretax loss from continuing operations for the second quarter
of fiscal 1998 increased 12.0% to $49.8 million from $44.5 million in the
second quarter of last year. The increase is attributable to the Tax Services
segment, which incurred a pretax loss of $52.2 million compared to $41.6
million in the second quarter of last year.
The net loss from continuing operations was $30.4 million, or $.29 per share,
compared to $27.6 million, or $.27 per share, for the same period last year.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased 2.9% to $31.7 million from $30.8 million last year,
resulting primarily from higher tax preparation fees that are attributable to
increases in pricing.
The pretax loss increased 25.5% to $52.2 million from $41.6 million in the
second quarter of last year due to normal operational increases in
compensation, rent, telephone and depreciation and
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amortization expenses. Expenses associated with continued office expansion,
which include rent, salaries and benefits, have also contributed to the
increased loss as more than 270 offices have been added in the U.S. and
internationally during the last 12 months. In addition, costs associated with
improvements made to the client services and technology systems increased.
FINANCIAL SERVICES
Revenues increased 408.9% to $50.8 million from $10.0 million in the same
period last year. The increase is primarily related to new mortgage operations
which contributed increased revenues of $40.0 million, including a $21.3
million gain on whole loan sales. New mortgage operations include the revenues
of Option One which sold $474.6 million in mortgage loans, on a non-recourse
basis, through whole loan sales during the second quarter. Credit card
operations also contributed $1.7 million to the increase due to revolving
credit card balances that grew 15.9% over the second quarter of fiscal 1997.
Financial Services reported earnings of $1.7 million, an increase of $3.8
million over a loss of $2.1 million in the prior year. The increase is
primarily due to new mortgage operations that contributed $9.2 million to
second quarter earnings. The overall results from Financial Services were
reduced by increased bad debt expenses related to credit card and software
receivables and a one-time $1.5 million write-off of capitalized salaries
related to online services.
INVESTMENT INCOME, NET
Net investment income increased 41.2% to $3.2 million from $2.3 million last
year. The increase resulted from more funds available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the second quarter
decreased 17.7% to $2.5 million from $3.1 million in the comparable period last
year. The decrease resulted mainly from improved performance at the Company's
captive insurance subsidiary.
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THREE MONTHS ENDED OCTOBER 31, 1997 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 1997 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
---------------- --------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- --------- ---------
Tax services $ 31,689 $14,389 $ (52,165) $ (52,059)
Financial services 50,810 24,452 1,678 (6,349)
Unallocated corporate 493 387 (2,535) (2,291)
Investment income, net - - 3,193 5,190
Intersegment sales - (18) - -
-------- ------- --------- ---------
$ 82,992 $39,210 (49,829) (55,509)
======== =======
Income tax benefit (19,380) (20,648)
--------- ---------
Net loss from continuing operations (30,449) (34,861)
Net loss from discontinued operations (10,782) (3,274)
--------- ---------
Net loss $ (41,231) $ (38,135)
========= =========
Consolidated revenues for the three months ended October 31, 1997 increased
111.7% to $83.0 million from $39.2 million in the first quarter of fiscal 1998.
The increase is primarily due to revenues from the Company's new mortgage
operations, which include revenues of Option One, acquired on June 17, 1997,
and increased revenues generated by the Tax Services segment related to the
Australian tax filing season and tuition tax school fees in the U.S. and
Canada.
The consolidated pretax loss from continuing operations for the second quarter
of fiscal 1998 decreased 10.2% to $49.8 million from $55.5 million in the first
quarter of this year. The decrease is attributable to the Financial Services
segment, which contributed pretax earnings of $1.7 million compared to a loss
of $6.3 million in the first quarter of fiscal 1998.
The net loss from continuing operations was $30.4 million, or $.29 per share,
compared to $34.9 million, or $.33 per share, for the first quarter.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased 120.2% to $31.7 million from $14.4 million in the first
quarter. The increase is mainly due to the onset of tax season in Australia,
which contributed $10.8 million of the increase. Additionally, tuition tax
school fees in the U.S. increased $6.7 million in the second quarter.
Australian tax preparation fees and tuition tax school fees are seasonal.
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The pretax loss increased to $52.2 million from $52.1 million in the three
months ended July 31, 1997. The increased loss is attributable to increased
marketing and advertising and supply expenses related to the tuition tax
schools. These increased costs were partially offset by earnings reported by
Australian tax operations.
FINANCIAL SERVICES
Revenues increased 107.8% to $50.8 million from $24.5 million in the first
quarter. The increase is due to new mortgage operations which contributed
increased revenues of $27.1 million for the second quarter, including a $21.3
million gain on whole loan sales. New mortgage operations include revenues of
the recently acquired Option One which sold $474.6 million in mortgage loans,
on a non-recourse basis, through whole loan sales during the second quarter.
Pretax earnings increased to $1.7 million from a loss of $6.3 million in the
first quarter. The increase is primarily due to mortgage operations which
reported increased earnings of $11.3 million over the first quarter. However,
increased bad debt expenses related to credit card and software operations and
a one-time write-off of capitalized salaries related to online services reduced
the overall earnings for Financial Services.
INVESTMENT INCOME, NET
Net investment income decreased 38.5% to $3.2 million from $5.2 million in the
first three months of fiscal 1998. The decrease resulted from less funds
available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the second quarter
increased 10.7% to $2.5 million from $2.3 million in the first quarter. The
increase resulted mainly from increased employee costs and shareholder-related
expenses.
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SIX MONTHS ENDED OCTOBER 31, 1997 (FYTD) COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1996 (FYTD)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
---------------- ---------------------
1997 1996 1997 1996
------- ------- ----------- ---------
Tax services $ 46,078 $43,087 $ (104,224) $ (86,805)
Financial services 75,262 18,208 (4,671) (3,112)
Unallocated corporate 880 427 (4,826) (6,660)
Investment income, net - - 8,383 6,206
Intersegment sales (18) - - -
-------- ------- ----------- ----------
$122,202 $61,722 (105,338) (90,371)
======== =======
Income tax benefit (40,028) (34,251)
----------- ---------
Net loss from continuing operations (65,310) (56,120)
Net loss from discontinued operations (14,056) (70,234)
----------- ---------
Net loss $ (79,366) $(126,354)
=========== =========
Consolidated revenues for the six months ended October 31, 1997 increased 98.0%
to $122.2 million from $61.7 million reported last year. The increase is
primarily due to the revenues of the Company's new mortgage operations this
year of $55.5 million, which include revenues of Option One, acquired on June
17, 1997.
The consolidated pretax loss from continuing operations increased 16.6% to
$105.3 million from $90.4 million in the comparable period last year. The
increase is attributable to the Tax Services segment, which incurred a pretax
loss of $104.2 million compared to $86.8 million last year.
The net loss from continuing operations was $65.3 million, or $.63 per share,
compared to $56.1 million, or $.54 per share, for the same period last year.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased 6.9% to $46.1 million from $43.1 million last year,
resulting primarily from higher tax preparation fees that are attributable to
increases in pricing partially offset by lower tuition tax school fees in the
U.S and internationally.
The pretax loss increased 20.1% to $104.2 million from $86.8 million last year
due to normal operational increases in compensation, rent, telephone and
depreciation and amortization expenses. Expenses associated with continued
office expansion, which include rent, salaries and benefits, have also
contributed to the increased loss as more than 270 offices have been added in
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the U.S. and internationally during the last 12 months. In addition, costs
associated with improvements made to the client services and technology systems
increased. Due to the seasonality of this segment's business, the first six
months operating results are not indicative of expected results for the entire
fiscal year.
FINANCIAL SERVICES
Revenues increased 313.3% to $75.3 million from $18.2 million in the same
period last year. The increase is primarily related to new mortgage operations
which contributed increased revenues of $53.6 million this year, including a
$25.1 million gain on whole loan sales. New mortgage operations include
revenues of the recently acquired Option One. Credit card operations also
contributed $4.0 million to the increase due to larger revolving credit card
balances over the comparable period of fiscal 1997.
The pretax loss increased to $4.7 million from $3.1 million in the first six
months of fiscal 1997, primarily due to increased bad debt expenses from credit
card and software operations. Additionally, a one-time $1.5 million write-off
of capitalized salaries related to online services contributed to the loss.
INVESTMENT INCOME, NET
Net investment income increased 35.1% to $8.4 million from $6.2 million last
year. The increase resulted from more funds available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first six
months decreased 27.5% to $4.8 million from $6.7 million in the comparable
period last year. The decrease resulted mainly from a decrease in expenses of
$688 thousand related to the planned spin-off of the Company's remaining
investment in CompuServe. Also contributing to the decrease were lower
consultant fees and shareholder-related expenses.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Form 10-Q for the first
quarter of fiscal 1998. During fiscal 1997, CompuServe Corporation
(CompuServe), certain current and former officers and directors of CompuServe
and the registrant were named as defendants in six lawsuits pending before the
state and Federal courts in Columbus, Ohio. All but two of the original six
cases were brought as putative class actions. 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. Relief sought is unspecified, but includes pleas
for rescission and damages. One purported class action lawsuit was voluntarily
dismissed by the plaintiffs and such plaintiffs have joined in one of the
remaining class action lawsuits in Federal court. The other 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 are both
subject to pending motions to dismiss filed on behalf of the defendants, and
they are being consolidated pursuant to a scheduling order that has been
entered in the first Federal lawsuit. The first state court lawsuit also
alleges violations of the Ohio Securities Code and common law of negligent
misrepresentation, while another state lawsuit alleges violations of Colorado,
Florida, and Ohio statutes and common law of negligent misrepresentation in
addition to the 1933 Act claims. Three of the state lawsuits have been
consolidated for discovery. A fourth state lawsuit was filed during the first
quarter of fiscal 1998 and is expected to be consolidated with the other state
lawsuits in due course. The defendants are vigorously defending these
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the registrant was held on September 10,
1997. At such meeting, three Class II directors were elected to serve
three-year terms. In addition, the resolutions set forth below were submitted
to a vote of shareholders. With respect to the election of directors and the
adoption of each resolution, the number of votes cast for, against or withheld,
and the number of abstentions were as follows:
Election of Class II Directors
Nominee Votes FOR Votes WITHHELD
--------------- --------- --------------
G. Kenneth Baum 86,186,112 2,262,370
Henry F. Frigon 86,206,002 2,242,480
Roger W. Hale 86,211,440 2,237,042
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Approval of Amendment to the Registrant's 1993 Long-Term Executive
Compensation Plan
The following resolution was adopted by a vote of 80,258,653
shares in favor of such resolution, 7,313,748 shares against such
resolution and 876,081 shares abstaining:
"RESOLVED, That this Company's 1993 Long-Term
Executive Compensation Plan, as previously amended, be
further amended as follows:
(1) by adding the following sentence to the end of
Section 6 thereof:
'The total number of shares of Common
Stock that may be subject to one or more
Awards granted to any one Recipient during
a calendar year may not exceed 350,000,
subject to adjustment as provided in
Section 16 of the Plan.'; and
(2) by deleting Section 16 thereof and replacing it
with the following new Section 16:
'16. Dilution or Other Adjustments.
In the event of any changes in the capital
structure of the Company, including but
not limited to a change resulting from a
stock dividend or split-up, or combination
or reclassification of shares, the Board
of Directors shall make such equitable
adjustments with respect to Awards or any
provisions of this Plan as it deems
necessary and appropriate, including, if
necessary, any adjustments in the maximum
number of shares that may be subject to
one or more Awards granted to any one
Recipient during a calendar year, or the
number of shares of Common Stock subject
to an outstanding Award.'"
Adoption of the H&R Block Stock Plan for Non-Employee Directors
The following resolution was adopted by a vote of 82,755,276
shares in favor of such resolution, 4,813,897 shares against such
resolution and 879,309 shares abstaining:
"RESOLVED, That the H&R Block Stock Plan for
Non-Employee Directors included as Appendix B to the
proxy statement relating to this meeting is hereby
adopted and approved."
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Appointment of Auditors
The following resolution was adopted by a vote of 87,853,694
shares in favor of such resolution, 179,534 shares against such
resolution and 415,254 shares abstaining:
"RESOLVED, That the appointment of Deloitte &
Touche LLP as the independent auditors for H&R Block,
Inc., and its subsidiaries for the year ending April
30, 1998, is hereby ratified, approved and confirmed."
At the close of business on July 11, 1997, the record date for the annual
meeting of shareholders, there were 104,093,161 shares of Common Stock of the
registrant outstanding and entitled to vote at the meeting. There were
88,448,482 shares represented at the annual meeting of shareholders held on
September 10, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
4(a) Indenture dated as of October 20, 1997, among the registrant, Block
Financial Corporation and Bankers Trust Company, as Trustee.
4(b) Form of 6 3/4 % Senior Note due 2004 of Block Financial Corporation,
filed as Exhibit 2.2 to the registrant's current report on Form 8-K
dated October 23, 1997, is incorporated herein by reference.
10(a) Agreement and Plan of Merger, dated as of September 7, 1997, by and
among the registrant, H&R Block Group, Inc., CompuServe Corporation,
WorldCom, Inc., and Walnut Acquisition Company, L.L.C., filed as
Exhibit 2.1 to the registrant's current report on Form 8-K dated
September 7, 1997, is incorporated herein by reference.
10(b) Stockholders Agreement, dated as of September 7, 1997, by and among
the registrant, H&R Block Group, Inc. and WorldCom, Inc., filed as
Exhibit 10.1 to the registrant's current report on Form 8-K dated
September 7, 1997, is incorporated herein by reference.
10(c) Standstill Agreement, dated as of September 7, 1997, by and among
the registrant, H&R Block Group, Inc. and WorldCom, Inc., filed as
Exhibit 10.2 to the registrant's current report on Form 8-K dated
September 7, 1997, is incorporated herein by reference.
10(d) The registrant's 1993 Long-Term Executive Compensation Plan, as
amended through September 10, 1997.
10(e) H&R Block Stock Plan for Non-Employee Directors.
10(f) Amendment No. 9 to the H&R Block Deferred Compensation Plan for
Executives.
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10(g) Amendment No. 5 to the H&R Block Supplemental Deferred Compensation
Plan for Executives.
(27) Financial Data Schedule.
b) Reports on Form 8-K
A Form 8-K/A, Current Report, dated July 2, 1997, was filed on August 14,
1997 by the registrant reporting as an "Item 7" the audited financial
statements of Option One Mortgage Corporation for the years ended December 31,
1996 and 1995, the unaudited financial statements of Option One Mortgage
Corporation for the three months ended March 31, 1997 and 1996, and the
unaudited pro forma financial statements of the registrant for the year ended
April 30, 1997. The consent of independent auditors was included as Exhibit
23.1 to the Form 8-K/A.
A Form 8-K, Current Report, dated September 7, 1997, was filed by the
registrant reporting as an "Other Event" the registrant's entry into an
Agreement and Plan of Merger with H&R Block Group, Inc., CompuServe
Corporation, WorldCom, Inc. and Walnut Acquisition Company, L.L.C., pursuant to
which WorldCom, Inc. would acquire CompuServe Corporation through a merger of
Walnut Acquisition Company, L.L.C. with and into CompuServe Corporation. The
Form 8-K also reported the entry by the registrant into (i) a Stockholders
Agreement by which the registrant and H&R Block Group, Inc. agreed to vote the
shares of common stock of CompuServe Corporation directly or indirectly owned
by the registrant in favor of the merger transaction, and by which the
registrant and H&R Block Group, Inc. granted to WorldCom, Inc. an option to
purchase CompuServe Corporation common stock owned by H&R Block Group, Inc.
under certain circumstances, and (ii) a Standstill Agreement by which the
registrant and H&R Block Group, Inc. agreed to certain restrictions with
respect to the acquisition of shares of common stock of WorldCom, Inc. The
Agreements and the press release relating to the proposed merger transaction
were included as exhibits to the Form 8-K. No financial statements were filed
as a part of the Form 8-K.
A Form 8-K, Current Report, dated September 25, 1997, was filed by the
registrant to provide pro forma financial information reflecting the exchange
of outstanding shares of common stock of CompuServe Corporation beneficially
owned by the registrant for shares of WorldCom, Inc. stock pursuant to the
transaction reported in the registrant's Form 8-K, Current Report, dated
September 7, 1997. The unaudited pro forma condensed consolidated balance
sheet of H&R Block, Inc. as of July 31, 1997 was filed as a part of the Form
8-K dated September 25, 1997. No exhibits were filed as a part of such Form
8-K.
A Form 8-K, Current Report, dated October 23, 1997, was filed by the
registrant reporting the entry by the registrant, Block Financial Corporation,
Salomon Brothers Inc, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Morgan Stanley & Co. Incorporated into an Underwriting Agreement relating to
the sale by Block Financial Corporation of 6 3/4 % Senior Notes Due 2004 in
the principal amount of $250 million. The Underwriting Agreement and the Form
of 6 3/4% Senior Note due 2004 of Block Financial Corporation were included as
Exhibits 2.1 and 2.2 to the Form 8-K, respectively. No financial statements
were filed as a part of the Form 8-K.
Except for the aforementioned Form 8-K/A and Forms 8-K, the registrant did
not file any reports on Form 8-K during the second quarter of fiscal year 1998.
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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 12/12/97 BY /s/ Ozzie Wenich
---------------- ---------------------------
Ozzie Wenich
Senior Vice President,
Chief Financial Officer
and Treasurer
DATE 12/12/97 BY /s/ Patrick D. Petrie
---------------- ---------------------------
Patrick D. Petrie
Vice President and
Corporate Controller
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