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, 1998
/ / 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 September 1, 1998 was 100,534,662 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
July 31, 1998 and April 30, 1998 ........................... 1
Consolidated Statements of Operations
Three Months Ended July 31, 1998 and 1997 .................. 2
Consolidated Statements of Cash Flows
Three Months Ended July 31, 1998 and 1997 .................. 3
Notes to Consolidated Financial Statements .................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Quantitative and Qualitative Disclosures about Market Risk..... 11
PART II Other Information.............................................. 12
SIGNATURES ............................................................... 13
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
JULY 31, APRIL 30,
1998 1998
---- ----
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 696,210 $ 900,856
Marketable securities 139,657 346,158
Receivables, less allowance for doubtful accounts of $45,870
and $45,314 813,697 793,237
Prepaid expenses and other current assets 123,363 103,026
------------- -------------
TOTAL CURRENT ASSETS 1,772,927 2,143,277
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 277,369 289,096
Excess of cost over fair value of net tangible assets acquired,
net of amortization 295,803 288,580
Other 108,346 105,809
------------- -------------
681,518 683,485
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 72,901 77,321
------------- -------------
$ 2,527,346 $ 2,904,083
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 765,503 $ 643,002
Accounts payable, accrued expenses and deposits 97,880 114,875
Accrued salaries, wages and payroll taxes 16,254 96,168
Accrued taxes on earnings 222,933 422,847
------------- -------------
TOTAL CURRENT LIABILITIES 1,102,570 1,276,892
LONG-TERM DEBT 249,688 249,675
OTHER NONCURRENT LIABILITIES 38,365 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 432,165 432,335
Retained earnings 961,530 1,010,545
Accumulated other comprehensive income (loss) (30,982) (24,515)
------------- -------------
1,363,802 1,419,454
Less cost of 5,436,964 and 1,992,043 shares of common stock
in treasury 227,079 77,822
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1,136,723 1,341,632
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$ 2,527,346 $ 2,904,083
============= =============
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,
--------
1998 1997
---- ----
REVENUES
Service revenues $ 47,702 $ 30,360
Product revenues 28,642 6,011
Royalties 1,067 1,017
Other 1,476 1,822
------------- -------------
78,887 39,210
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 43,435 30,193
Occupancy and equipment 40,761 35,600
Interest 17,551 8,238
Marketing and advertising 3,798 3,299
Supplies, freight and postage 3,074 2,117
Other 28,899 20,462
------------- -------------
137,518 99,909
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Operating loss (58,631) (60,699)
OTHER INCOME
Investment income, net 13,890 5,190
------------- -------------
Loss from continuing operations before income tax benefit (44,741) (55,509)
Income tax benefit (17,002) (20,648)
------------- -------------
Net loss from continuing operations (27,739) (34,861)
Net loss from discontinued operations (less applicable
income tax benefit of ($1,489)) - (3,274)
------------- -------------
Net loss $ (27,739) $ (38,135)
============= =============
Weighted average number of common shares outstanding 104,976 104,102
============= =============
Basic and diluted net loss per share from continuing operations $ (.26) $ (.33)
============= =============
Basic and diluted net loss per share $ (.26) $ (.37)
============= =============
Dividends per share $ .20 $ .20
============= =============
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,
--------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,739) $ (38,135)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 13,388 8,796
Other noncurrent liabilities 2,481 1,146
Changes in:
Receivables (20,460) 342,147
Prepaid expenses and other current assets (20,337) (21,439)
Net assets of discontinued operations - 4,177
Accounts payable, accrued expenses and deposits (16,995) (19,605)
Accrued salaries, wages and payroll taxes (79,914) (96,471)
Accrued taxes on earnings (200,487) (39,936)
-------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (350,063) 140,680
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (117,868) (111,837)
Maturities of marketable securities 337,604 138,738
Purchases of property and equipment (4,018) (4,149)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (12,127) (223,209)
Other, net (9,986) (5,138)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 193,605 (205,595)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (1,762,864) (2,808,632)
Proceeds from issuance of notes payable 1,885,365 2,740,059
Proceeds from issuance of long-term debt 13 -
Dividends paid (21,275) (20,816)
Payments to acquire treasury shares (153,788) -
Proceeds from stock options exercised 4,361 1,145
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (48,188) (88,244)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (204,646) (153,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 696,210 $ 303,920
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 182,815 $ 19,950
Interest paid 13,952 5,668
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 July 31, 1998, the Consolidated
Statements of Operations for the three months ended July 31, 1998 and 1997,
and the Consolidated Statements of Cash Flows for the three months ended
July 31, 1998 and 1997 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, 1998 and for all periods
presented have been made.
Reclassifications have been made to prior year amounts to conform with the
current year presentation.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries and
companies that are directly or indirectly controlled by the Company through
majority ownership or otherwise.
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, 1998 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the three-month results are not
indicative of results to be expected for the year.
2. On January 31, 1998, the Company completed the sale of all of its interest
in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc.
(WorldCom). The Consolidated Statement of Operations for the three months
ended July 31, 1997 and the Consolidated Statement of Cash Flows for the
three months ended July 31, 1997 have been reclassified to reflect
CompuServe as discontinued operations. CompuServe's revenues for the three
months ended July 31, 1997 were $205.7 million.
3. Receivables consist of the following:
July 31, April 30,
-------- ---------
1998 1998
---- ----
(Audited)
Mortgage loans held for sale $ 513,007 $ 448,102
Credit card loans 194,566 202,852
Other 151,994 187,597
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859,567 838,551
Allowance for doubtful accounts 45,870 45,314
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$ 813,697 $ 793,237
============== ===============
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4. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
5. Basic and diluted net loss per share is computed using the weighted average
number of shares outstanding during each period. Diluted net loss per share
excludes the impact of common stock options outstanding of 8,669,184 shares
and the conversion of 1,088 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the
first quarter of fiscal 1999 increased to 104,976,000 from 104,102,000 last
year, due to stock option exercises during fiscal 1998. The increase was
partially reduced by the repurchase of treasury shares by the Company
during the period from February 1998 to July 1998.
6. During the three months ended July 31, 1998 and 1997, the Company issued
111,379 and 50,145 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the three
months ended July 31, 1998, the Company acquired 3,556,300 shares of its
common stock at an aggregate cost of $153,788.
7. CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits allege
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServe's public
filings related to its initial public offering in April 1996. One state
lawsuit also alleges certain oral omissions and misstatements in connection
with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the
lead underwriters of CompuServe's initial public offering as additional
defendants and as representatives of a defendant class consisting of all
underwriters who participated in such offering. The Federal suits have been
consolidated, the defendants have filed a motion to dismiss the
consolidated suits, and the court has stayed all proceedings pending the
outcome of the state court suits. The four state court lawsuits also allege
violations of various state statutes and common law of negligent
misrepresentation in addition to the 1933 Act claims. The state lawsuits
have been consolidated for discovery purposes and defendants have filed a
motion for summary judgment covering all four state lawsuits. In the state
lawsuits, the court entered an order in July 1998 that the suits entitled
Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation,
et al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of
CompuServe Corporation between April 18, 1996 pursuant to the CompuServe's
initial public offering or on the open market and July 16, 1996, and who
were damaged thereby. All named defendants to these consolidated actions,
members of their immediate families, any entity in which they have a
controlling interest, and their legal representatives, heirs, successors or
assigns are excluded from the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in
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state court was not included in the class certification order as the
plaintiff in such case did not seek class certification of its action. As a
part of the sale of its interest in CompuServe, the Company has agreed to
indemnify WorldCom and CompuServe against 80.1% of any losses and expenses
incurred by them with respect to these lawsuits. The defendants are
vigorously defending these lawsuits.
8. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
July 31, April 30,
1998 1998
---- ----
(Audited)
Condensed balance sheets:
Cash and cash equivalents $ 93,138 $ 30,895
Finance receivables, net 791,901 737,005
Other assets 315,438 311,759
---------- ----------
Total assets $1,200,477 $1,079,659
========== ==========
Commercial paper $ 765,503 $ 643,002
Long-term debt 249,688 249,675
Other liabilities 51,268 57,372
Stockholder's equity 134,018 129,610
---------- ----------
Total liabilities and stockholder's equity $1,200,477 $1,079,659
========== ==========
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
Condensed statements of operations:
Revenues $ 61,829 $ 28,609
Earnings (loss) from operations 7,148 (6,330)
Net earnings (loss) 4,427 (3,887)
9. 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 $1,153 at July
31, 1998. The contract value and the market value of this hedging
instrument at July 31, 1998 was $54,578 and $54,821, respectively. The
contract value and market value of the forward commitment at July 31, 1998
was $335,000 and $330,913, respectively.
10. In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires that all changes in equity during the period,
except those resulting from investments by and distributions to owners, be
reported as "comprehensive income" in the financial statements. The
Company's comprehensive income is comprised of net earnings (loss), foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial
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statements. The components of comprehensive income (loss) during the three
months ended July 30, 1998 and 1997 were:
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
Net loss $(27,739) $(38,135)
Change in net unrealized gain (loss) on mkt. securities 935 463
Change in foreign currency translation adjustments (7,402) (106)
-------- --------
Comprehensive income (loss) $(34,206) $(37,778)
======== ========
11. In the first quarter of fiscal year 1999, the Company acquired operations
that management determined to be a new reportable operating segment. The
new segment, Business services, is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. The Business
services segment offers its services through a regional accounting firm
based in Kansas City, Missouri. Revenues of this segment are seasonal in
nature.
Information concerning the Company's operations by reportable operating
segments for the three months ended July 31, 1998 and 1997 is as follows:
Three months ended
------------------
July 31,
--------
1998 1997
---- ----
Revenues:
U.S. tax operations $ 12,179 $ 11,432
International tax operations 3,437 3,380
Mortgage operations 52,705 14,208
Credit card operations 8,314 9,307
Business services 1,330 -
Unallocated corporate 922 1,010
Inter-segment sales - (127)
-------- --------
$ 78,887 $ 39,210
======== ========
Earnings (loss) from continuing operations:
U.S. tax operations $(57,493) $(49,338)
International tax operations (5,971) (5,124)
Mortgage operations 13,787 (491)
Credit card operations (1,966) (2,982)
Business services (114) -
Unallocated corporate (2,431) (1,183)
Acquisition interest expense (4,443) (1,581)
Investment income, net 13,890 5,190
-------- --------
Loss from continuing operations before
income tax benefit $(44,741) $(55,509)
======== ========
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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 to $670.4 million at July 31, 1998 from $866.4
million at April 30, 1998. The working capital ratio at July 31, 1998 is
1.6 to 1, compared to 1.7 to 1 at April 30, 1998. The decrease in working
capital and the working capital ratio is primarily due to the repurchase of
treasury shares and the seasonal nature of the Company's U.S. tax operations
segment. Tax return preparation occurs almost entirely in the fourth quarter
and has the effect of increasing certain assets and liabilities during this
time.
The Company maintains seasonal lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its nonconforming mortgage loan, credit card and other financial
services programs. These short-term borrowings in the U.S. are supported by a
$1.3 billion back-up credit facility through November 1998, subject to renewal.
The Company's capital expenditures and dividend payments during the first three
months were funded through internally-generated funds.
At July 31, 1998, short-term borrowings used to fund mortgage loans, credit
cards and other programs increased to $765.5 million from $643.0 million at
April 30, 1998 due mainly to the funding of mortgage operations. For the three
months ended July 31, 1998 and 1997, interest expense was $17.6 million and $8.2
million, respectively. The increase in interest expense is primarily
attributable to the funding of mortgage operations with short-term borrowings
and the long-term debt issued to fund the acquisition of Option One Mortgage
Corporation (Option One).
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. 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. At July 31, 1998, 8.7 million shares had been repurchased. The
Company plans to continue to purchase its shares on the open market in
accordance with these authorizations, subject to various factors including the
price of the stock, availability of excess cash, the ability to maintain
financial flexibility, and other investment opportunities available.
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RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
The analysis that follows should be read in conjunction with the table below and
the Consolidated Statements of Operations found on page 2.
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO
--------------------------------------------
THREE MONTHS ENDED JULY 31, 1997
--------------------------------
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
U.S. tax operations $ 12,179 $ 11,432 $ (57,493) $ (49,338)
International tax operations 3,437 3,380 (5,971) (5,124)
Mortgage operations 52,705 14,208 13,787 (491)
Credit card operations 8,314 9,307 (1,966) (2,982)
Business services 1,330 - (114) -
Unallocated corporate 922 1,010 (2,431) (1,183)
Acquisition interest expense - - (4,443) (1,581)
Investment income, net - - 13,890 5,190
Inter-segment sales - (127) - -
--------------- -------------- -------------- -------------
$ 78,887 $ 39,210 (44,741) (55,509)
=============== ==============
Income tax benefit (17,002) (20,648)
-------------- -------------
Net loss from continuing operations (27,739) (34,861)
Net loss from discontinued operations - (3,274)
-------------- -------------
Net loss $ (27,739) $ (38,135)
============== =============
Consolidated revenues for the three months ended July 31, 1998 increased 101.2%
to $78.9 million from $39.2 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $52.7 million, a 271.0%
increase over last year.
The consolidated pretax loss from continuing operations for the first quarter of
fiscal 1999 decreased to $44.7 million from $55.5 million in the first quarter
of last year. The decrease is attributable to Mortgage operations' pretax
earnings of $13.8 million compared to a pretax loss of $491 thousand in the
first quarter of last year and increased investment income.
The net loss from continuing operations was $27.7 million, or $.26 per share,
compared to $34.9 million, or $.33 per share, for the same period last year.
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An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 6.5% to $12.2 million from $11.4 million last year, resulting
primarily from higher tax preparation fees that are attributable to increases in
pricing.
The pretax loss increased 16.5% to $57.5 million from $49.3 million in the first
quarter of last year due to normal operational increases in compensation, rent
and other facility-related expenses. Also contributing to the increases in rent
and other facility-related expenses is an increase in the amount of tax office
space maintained under lease during this year's off-season. Due to the nature of
this segment's business, first quarter operating results are not indicative of
expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 1.7% to $3.4 million compared to the prior year's first
quarter. The increase is principally attributable to an increase in tax
preparation fees in Australia resulting from both increases in the number of
returns prepared over last year and higher prices, along with increased
royalities from overseas franchises. These increases were partially offset by
decreased tax preparation fees in Canada due to a decline in the number of
returns prepared.
The pretax loss increased 16.5% to $6.0 million from $5.1 million last year. The
increase is due to continued expansion in the United Kingdom, with an increase
of 16 offices over the same period last year, and normal operational increases
in compensation, rent and other facility-related expenses in Canada. The
increased losses were partially reduced by improved results over the prior
quarter in Australia. Due to the nature of this segment's business, first
quarter operating results are not indicative of expected results for the entire
fiscal year.
MORTGAGE OPERATIONS
Revenues increased 271.0% to $52.7 million from $14.2 million in the same period
last year. The increase is attributable to Option One, which was acquired on
June 17, 1997. Option One contributed revenues of $44.3 million for the quarter
compared to $9.1 million for the one-and-a-half-month period last year. Option
One originated and sold $779.9 million and $705.5 million in loans,
respectively, during the first quarter of fiscal 1999. Companion Mortgage also
contributed improved revenues due to interest income earned on higher balances
of mortgage loans held for sale.
Mortgage operations contributed pretax earnings of $13.8 million this year
compared to a $491 thousand pretax loss during the first quarter of fiscal 1998.
Option One contributed earnings of $14.0 million, including goodwill
amortization of $3.1 million.
CREDIT CARD OPERATIONS
Revenues decreased 10.7% to $8.3 million from $9.3 million in the prior year due
to a decline in the average revolving credit card balance by 21.0% from the
first quarter of fiscal 1998.
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The pretax loss declined 34.1% to $2.0 million from $3.0 million last year. The
decrease is attributable to lower marketing and advertising expenses and lower
service fees resulting from the decrease in the number of credit cards
outstanding.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
The Company acquired its first accounting firm in May 1998, which contributed
revenues of $1.3 million and a pretax loss of $114 thousand for the first
quarter of fiscal 1999, including goodwill amortization of $73 thousand. Due to
the nature of this segment's business, revenues are slightly seasonal, while
expenses are relatively fixed throughout the year. Results for the first quarter
are not indicative of the expected results for the entire year.
INVESTMENT INCOME, NET
Net investment income increased 167.6% to $13.9 million from $5.2 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first quarter
increased 105.5% to $2.4 million from $1.2 million in the comparable period last
year. The increase is a result of the start-up of a business which offers
financial planning services through the Company's tax offices, and increased
employee costs, technology and shareholder-related expenses.
Acquisition interest expense of $4.4 million represents the interest on the debt
associated with the acquisition of Option One.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at
April 30, 1998.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits involve
claims based on allegations of omissions and misstatements of fact in
connection with CompuServe's initial public offering in April 1996. Relief
sought in the lawsuits is unspecified, but includes pleas for rescission and
damages. The Federal suits have been consolidated, the defendants have filed
a motion to dismiss the consolidated suits, and the court has stayed all
proceedings pending the outcome of the state court suits. The state lawsuits
have been consolidated for discovery purposes and defendants have filed a
motion for summary judgment covering all four state lawsuits. In the state
lawsuits, the court entered an order in July 1998 that the suits entitled
Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et
al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were damaged
thereby. All named defendants to these consolidated actions, members of their
immediate families, any entity in which they have a controlling interest, and
their legal representatives, heirs, successors or assigns are excluded from
the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the class
certification order as the plaintiff in such case did not seek class
certification of its action. The defendants continue to vigorously defend
these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10(a) Employment Agreement between HRB Management, Inc. and Mark A. Ernst
(27) Financial Data Schedule
b) Reports on Form 8-K
A Form 8-K, Current Report, dated July 20, 1998, was filed by the
registrant reporting as an "Item 4" the change in the Registrant's certifying
accountant. The registrant reported under "Item 7" the letter from the previous
auditors, Deloitte & Touche LLP, addressed to the Securities and Exchange
Commission. The registrant did not file any other reports on Form 8-K during the
first quarter of fiscal 1999.
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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.
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(Registrant)
DATE 9/14/98 BY /s/ Ozzie Wenich
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Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 9/14/98 BY /s/ Cheryl L. Givens
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Cheryl L.Givens
Vice President and Corporate Controller
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