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, 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 December 1, 1998 was 97,622,285 shares.
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TABLE OF CONTENTS
PAGE
PART I Financial Information
Consolidated Balance Sheets
October 31, 1998 and April 30, 1998 .................................................... 1
Consolidated Statements of Operations
Three Months Ended October 31, 1998 and 1997 ........................................... 2
Six Months Ended October 31, 1998 and 1997 ............................................. 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 1998 and 1997 ............................................. 4
Notes to Consolidated Financial Statements ................................................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 10
Quantitative and Qualitative Disclosures about Market Risk................................. 22
PART II Other Information.......................................................................... 23
SIGNATURES................................................................................................. 27
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
OCTOBER 31, APRIL 30,
1998 1998
---- ----
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 307,941 $ 900,856
Marketable securities 148,753 346,158
Receivables, less allowance for doubtful accounts of $47,493
and $45,314 1,357,029 793,237
Prepaid expenses and other current assets 153,313 103,026
------------- -------------
TOTAL CURRENT ASSETS 1,967,036 2,143,277
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 123,438 289,096
Excess of cost over fair value of net tangible assets acquired,
net of amortization 295,441 288,580
Other 108,111 105,809
------------- -------------
526,990 683,485
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 75,084 77,321
------------- -------------
$ 2,569,110 $ 2,904,083
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,235,989 $ 643,002
Accounts payable, accrued expenses and deposits 86,524 114,875
Accrued salaries, wages and payroll taxes 11,817 96,168
Accrued taxes on earnings 129,792 422,847
------------- -------------
TOTAL CURRENT LIABILITIES 1,464,122 1,276,892
LONG-TERM DEBT 249,958 249,675
OTHER NONCURRENT LIABILITIES 38,341 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 410,784 432,335
Retained earnings 905,384 1,010,545
Accumulated other comprehensive income (loss) (31,588) (24,515)
------------- -------------
1,285,669 1,419,454
Less cost of 11,402,585 and 1,992,043 shares of common stock
in treasury 468,980 77,822
------------- -------------
816,689 1,341,632
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$ 2,569,110 $ 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
------------------
OCTOBER 31,
-----------
1998 1997
---- ----
REVENUES
Service revenues $ 63,937 $ 56,469
Product revenues 23,154 22,201
Royalties 2,995 3,401
Other 3,542 921
------------- -------------
93,628 82,992
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 49,271 41,849
Occupancy and equipment 41,798 38,111
Interest 18,280 13,355
Marketing and advertising 8,492 8,430
Supplies, freight and postage 5,548 5,617
Other 31,269 28,662
------------- -------------
154,658 136,024
------------- -------------
Operating loss (61,030) (53,032)
OTHER INCOME
Investment income, net 9,646 3,191
Other, net 1,106 12
------------- -------------
10,752 3,203
Loss from continuing operations before income tax benefit (50,278) (49,829)
Income tax benefit (19,105) (19,380)
------------- -------------
Net loss from continuing operations (31,173) (30,449)
Net loss from discontinued operations (less applicable
income tax benefit of ($6,730)) - (10,782)
------------- -------------
Net loss $ (31,173) $ (41,231)
============= =============
Weighted average number of common shares outstanding 99,122 104,552
============= =============
Basic and diluted net loss per share from continuing operations $ (.31) $ (.29)
============= =============
Basic and diluted net loss per share $ (.31) $ (.39)
============= =============
Dividends per share $ .25 $ .20
============= =============
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,
-----------
1998 1997
---- ----
REVENUES
Service revenues $ 111,639 $ 86,829
Product revenues 51,796 28,212
Royalties 4,062 4,418
Other 5,018 2,743
------------- -------------
172,515 122,202
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 92,706 72,042
Occupancy and equipment 82,559 73,711
Interest 35,831 21,540
Marketing and advertising 12,290 11,729
Supplies, freight and postage 8,622 7,734
Other 60,168 49,177
------------- -------------
292,176 235,933
------------- -------------
Operating loss (119,661) (113,731)
OTHER INCOME
Investment income, net 23,536 8,381
Other, net 1,106 12
------------- -------------
24,642 8,393
Loss from continuing operations before income tax benefit (95,019) (105,338)
Income tax benefit (36,107) (40,028)
------------- -------------
Net loss from continuing operations (58,912) (65,310)
Net loss from discontinued operations (less applicable
income tax benefit of ($8,218)) - (14,056)
------------- -------------
Net loss $ (58,912) $ (79,366)
============= =============
Weighted average number of common shares outstanding 102,049 104,327
============= =============
Basic and diluted net loss per share from continuing operations $ (.58) $ (.63)
============= =============
Basic and diluted net loss per share $ (.58) $ (.76)
============= =============
Dividends per share $ .45 $ .40
============= =============
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,
-----------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (58,912) $ (79,366)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 26,884 19,034
Other noncurrent liabilities 2,457 2,457
Changes in:
Receivables (563,792) 215,320
Prepaid expenses and other current assets (50,287) (26,922)
Net assets of discontinued operations - 13,304
Accounts payable, accrued expenses and deposits (28,351) (90,562)
Accrued salaries, wages and payroll taxes (84,351) (102,073)
Accrued taxes on earnings (294,179) (75,814)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,050,531) (124,622)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (198,969) (132,328)
Maturities of marketable securities 564,988 188,309
Purchases of property and equipment (14,896) (6,826)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (16,513) (227,787)
Other, net (11,024) (16,016)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 323,586 (194,648)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (3,277,627) (6,045,212)
Proceeds from issuance of notes payable 3,870,614 5,887,832
Proceeds from issuance of long-term debt - 249,650
Dividends paid (46,248) (41,670)
Payments to acquire treasury shares (472,566) -
Proceeds from stock options exercised 59,857 27,694
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 134,030 78,294
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (592,915) (240,976)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 307,941 $ 216,103
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 257,402 $ 36,272
Interest paid 33,524 18,643
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, 1998, the Consolidated
Statements of Operations for the three and six months ended October 31,
1998 and 1997, and the Consolidated Statements of Cash Flows for the six
months ended October 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 October 31,
1998 and for all periods presented have been made.
Reclassifications have been made to prior year and prior period amounts to
conform with the current year presentation.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, 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 six-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 Statements of Operations for the three and six
months ended October 31, 1997 and the Consolidated Statement of Cash Flows
for the six months ended October 31, 1997 reflect CompuServe as
discontinued operations. CompuServe's revenues for the three and six months
ended October 31, 1997 were $205.4 million and $411.1 million,
respectively.
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3. Receivables consist of the following:
October 31, April 30,
----------- ---------
1998 1998
---- ----
(Audited)
Mortgage loans held for sale $ 1,057,348 $ 448,102
Credit card loans 188,642 202,852
Other 158,532 187,597
-------------- ---------------
1,404,522 838,551
Allowance for doubtful accounts 47,493 45,314
-------------- ---------------
$ 1,357,029 $ 793,237
============== ===============
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 6,775,159 shares
and the conversion of 712 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the six
months ended decreased to 102,049,000 from 104,327,000 last year, due to
the repurchase of treasury shares by the Company during the period from
February 1998 to October 1998. The decrease was partially offset by stock
option exercises during fiscal 1998 and 1999.
6. During the six months ended October 31, 1998 and 1997, the Company issued
1,918,558 and 878,506 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the six
months ended October 31, 1998, the Company acquired 11,365,100 shares of
its common stock at an aggregate cost of $472,566.
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 were consolidated, the defendants filed a motion to dismiss
the consolidated suits, the district court stayed all proceedings pending
the outcome of the state court suits, and the United States Court of
Appeals for the Sixth Circuit affirmed such stay on November 10, 1998. 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 were consolidated for discovery purposes and
defendants 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
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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. As a part of the sale of its interest in
CompuServe, the Company 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.
October 31, April 30,
----------- ---------
1998 1998
---- ----
(Audited)
Condensed balance sheets:
Cash and cash equivalents $ 26,518 $ 30,895
Finance receivables, net 1,341,162 737,005
Other assets 316,605 311,759
-------------- ---------------
Total assets $ 1,684,285 $ 1,079,659
============== ===============
Commercial paper $ 1,235,988 $ 643,002
Long-term debt 249,700 249,675
Other liabilities 60,754 57,372
Stockholder's equity 137,843 129,610
-------------- ---------------
Total liabilities and stockholder's equity $ 1,684,285 $ 1,079,659
============== ===============
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Condensed statements of operations:
Revenues $ 61,727 $ 50,508 $ 123,556 $ 74,360
Earnings (loss) from operations 5,205 2,126 12,353 (4,204)
Net earnings (loss) 2,726 1,299 8,259 (2,588)
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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. The effectiveness
of the hedge is measured by a historical and probable future high
correlation of changes in the fair value of the hedging instruments with
changes in value of the hedged item. If correlation ceases to exist, hedge
accounting will be terminated and gains or losses are recorded in revenues.
During the second quarter of fiscal 1999, the Company's short treasury
securities no longer correlated with the hedged item and, therefore, the
hedge was terminated. A loss of $2.5 million was recognized upon
termination. At October 31, 1998, the Company had no hedging instruments in
place.
10. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in the first quarter of fiscal
1999. 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 statements. The components of
comprehensive income (loss) during the three and six months ended October
31, 1998 and 1997 were:
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Net loss $ (31,173) $ (41,231) $ (58,912) $ (79,366)
Change in net unrealized
gain (loss) on mkt. securities 897 (568) 1,832 (105)
Change in foreign currency
translation adjustments (1,503) (1,163) (8,905) (1,269)
------------- ----------- -------------- ---------------
Comprehensive income (loss) $ (31,779) $ (42,962) $ (65,985) $ (80,740)
============= =========== ============== ===============
11. In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" (SFAS 134), effective for the
Company's fourth quarter of fiscal 1999. SFAS 134 requires that
mortgage-backed securities or other interests retained after a
securitization be classified based on the intent to sell or hold the
investments. The Company does not anticipate that the implementation of
SFAS 134 will have a material impact on the consolidated financial
statements.
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12. 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 currently offers its services through regional accounting
firms based in Kansas City, Missouri and Chicago, Illinois. Revenues of
this segment are seasonal in nature.
Information concerning the Company's operations by reportable operating
segments for the three and six months ended October 31, 1998 and 1997 is as
follows:
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
U.S. tax operations $ 18,400 $ 17,707 $ 30,579 $ 29,139
International tax operations 11,817 13,470 15,254 16,850
Mortgage operations 52,888 41,309 105,593 55,517
Credit card operations 8,015 9,597 16,329 18,904
Business services 1,534 - 2,864 -
Unallocated corporate 974 1,098 1,896 2,108
Inter-segment sales - (189) - (316)
------------ -------------- -------------- --------------
$ 93,628 $ 82,992 $ 172,515 $ 122,202
============ ============== ============== ==============
Earnings (loss) from
continuing operations:
U.S. tax operations $ (61,316) $ (54,808) $ (119,132) $ (104,183)
International tax operations (2,263) (1,125) (8,234) (6,249)
Mortgage operations 10,538 12,565 24,325 12,074
Credit card operations (29) (4,758) (1,995) (7,740)
Business services (135) - (249) -
Unallocated corporate (2,281) (1,569) (4,389) (2,715)
Acquisition interest expense (4,438) (3,327) (8,881) (4,908)
Investment income, net 9,646 3,193 23,536 8,383
------------ -------------- -------------- --------------
Loss from continuing operations
before income tax benefit $ (50,278) $ (49,829) $ (95,019) $ (105,338)
============ ============== ============== ==============
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN
THIS DISCUSSION ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, YEAR 2000 READINESS OF THE
COMPANY, ITS FRANCHISEES OR THIRD PARTIES; AND ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND VARIOUS OTHER FACTORS AFFECTING THE COMPANY'S OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES.
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased to $502.9 million at October 31, 1998 from $866.4
million at April 30, 1998. The working capital ratio at October 31, 1998 is 1.3
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.
In November, the credit facility was increased to $1.85 billion through November
1999.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first six months were funded through internally-generated
funds.
At October 31, 1998, short-term borrowings used to fund mortgage loans, credit
cards and other programs increased to $1,236.0 million from $643.0 million at
April 30, 1998 due mainly to the funding of mortgage operations. For the six
months ended October 31, 1998 and 1997, interest expense was $35.8 million and
$21.5 million, respectively. The increase in interest expense is primarily
attributable to the funding of mortgage operations with short-term borrowings
and the debt incurred to fund the acquisition of Option One Mortgage Corporation
(Option One) in June 1997.
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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. 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
Corporation. At October 31, 1998, 16.5 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, securities laws restrictions 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 pages 2 and 3.
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1997
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
U.S. tax operations $ 18,400 $ 17,707 $ (61,316) $ (54,808)
International tax operations 11,817 13,470 (2,263) (1,125)
Mortgage operations 52,888 41,309 10,538 12,565
Credit card operations 8,015 9,597 (29) (4,758)
Business services 1,534 - (135) -
Unallocated corporate 974 1,098 (2,281) (1,569)
Acquisition interest expense - - (4,438) (3,327)
Investment income, net - - 9,646 3,193
Inter-segment sales - (189) - -
--------------- -------------- -------------- -------------
$ 93,628 $ 82,992 (50,278) (49,829)
=============== ==============
Income tax benefit (19,105) (19,380)
-------------- -------------
Net loss from continuing operations (31,173) (30,449)
Net loss from discontinued operations - (10,782)
-------------- -------------
Net loss $ (31,173) $ (41,231)
============== =============
Consolidated revenues for the three months ended October 31, 1998 increased
12.8% to $93.6 million from $83.0 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $52.9 million, a 28.0%
increase over last year, and revenues from the new Business services segment,
acquired in May 1998. These increases were offset by lower revenues from
International and Credit card operations.
The consolidated pretax loss from continuing operations for the second quarter
of fiscal 1999 increased to $50.3 million from $49.8 million in the second
quarter of last year. The increase is attributable to increased losses from U.S.
tax operations and decreased earnings from Mortgage operations that was
partially offset by higher investment income and improved results from Credit
card operations.
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15
The net loss from continuing operations was $31.2 million, or $.31 per share,
compared to $30.4 million, or $.29 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 3.9% to $18.4 million from $17.7 million last year, resulting
primarily from increased revenues from sales of non-financial software.
The pretax loss increased 11.9% to $61.3 million from $54.8 million in the
second quarter of last year due to normal operational increases in compensation
and benefits and rent expenses. In addition to the normal increases, rent
expense increased due to the amount of tax office space maintained under lease
during this year's off-season and employee benefits expense increased due to
employer taxes paid on the exercise of non-qualified seasonal stock options. Due
to the nature of this segment's business, second quarter operating results are
not indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 12.3% to $11.8 million compared to the prior year's second
quarter. The decrease is principally attributable to Australia operations. In
local currency, Australia reported a 7.7% increase in revenues. However, due to
the decline in the value of the Australian dollar compared to the U.S. dollar,
Australia revenues in U.S. dollars declined $1.6 million.
The pretax loss increased 101.2% to $2.3 million from $1.1 million last year.
The increase is due to the impact of translation from Australian dollars, the
continued expansion in the United Kingdom and normal operational increases in
compensation and other facility-related expenses in Canada. Due to the nature of
this segment's business, second quarter operating results are not indicative of
expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 28.0% to $52.9 million from $41.3 million in the same period
last year. The increase is attributable to a higher volume of loan sales and
increased interest income over the prior year. Option One originated and sold
$837.9 million and $539.6 million in loans, respectively, during the second
quarter of fiscal 1999, compared to $499.0 million originated and $474.6 million
sold in the second quarter last year. Companion Mortgage contributed improved
revenues due to interest income earned on higher balances of mortgage loans held
for sale. These increases were reduced by a one-time loss of $2.5 million on the
termination of a hedging instrument.
Mortgage operations pretax earnings of $10.5 million declined this year compared
to earnings of $12.6 million during the second quarter of fiscal 1998. The
decline in earnings is due to the timing of loan sales and increased
compensation, and occupancy and equipment expenses due to the expansion of
Option One's operations. Option One contributed $10.2 million this quarter
compared to $13.3 million in the same period last year.
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CREDIT CARD OPERATIONS
Revenues decreased 16.5% to $8.0 million from $9.6 million in the prior year due
to a decline in the average revolving credit card balance by 19.6% from the
second quarter of fiscal 1998.
The pretax loss declined 99.4% to $29 thousand from $4.8 million last year. The
decrease is attributable to (1) lower expenses from bad debts and marketing and
advertising; (2) the write-off of $1.5 million in capitalized salaries in the
second quarter last year; (3) the sale of WebBank resulting in a $1.1 million
pretax gain; and (4) the winding down of online services this year.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $1.5 million and a pretax loss of $135
thousand for the second quarter of fiscal 1999, including goodwill amortization
of $88 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 second quarter are not indicative of the expected results for
the entire year.
INVESTMENT INCOME, NET
Net investment income increased 202.1% to $9.6 million from $3.2 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 second quarter
increased 45.4% to $2.3 million from $1.6 million in the comparable period last
year. The increase is a result of higher losses at the Company's captive
insurance subsidiary, increased employee costs and the start-up of a business
that offers financial planning services through the Company's tax offices.
Acquisition interest expense of $4.4 million represents the interest on the debt
associated with the acquisition of Option One.
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THREE MONTHS ENDED OCTOBER 31, 1998 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 1998 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
----------------------- ---------------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
U.S. tax operations $ 18,400 $ 12,179 $ (61,316) $ (57,816)
International tax operations 11,817 3,437 (2,263) (5,971)
Mortgage operations 52,888 52,705 10,538 13,787
Credit card operations 8,015 8,314 (29) (1,966)
Business services 1,534 1,330 (135) (114)
Unallocated corporate 974 922 (2,281) (2,108)
Acquisition interest expense - - (4,438) (4,443)
Investment income, net - - 9,646 13,890
Inter-segment sales - - - -
---------- --------- ---------- ---------
$ 93,628 $ 78,887 (50,278) (44,741)
========== =========
Income tax benefit (19,105) (17,002)
---------- ---------
Net loss from continuing operations (31,173) (27,739)
Net loss from discontinued operations - -
---------- ---------
Net loss $ (31,173) $ (27,739)
========== =========
Consolidated revenues for the three months ended October 31, 1998 increased
18.7% to $93.6 million from $78.9 million reported in the first quarter of
fiscal 1999. The increase is primarily due to revenues from International tax
and U.S. tax operations 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 1999 increased to $50.3 million from $44.7 million in the first
quarter of this year. The increase is attributable to decreased investment
income, increased losses from U.S. tax operations and a decline in earnings from
Mortgage operations.
The net loss from continuing operations was $31.2 million, or $.31 per share,
compared to $27.7 million, or $.26 per share, for the first quarter.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased 51.1% to $18.4 million from $12.2 million in the first
quarter, resulting primarily from tuition tax school fees, which contributed
$5.7 million to the increase. Tuition tax school fees are seasonal.
The pretax loss increased 6.1% to $61.3 million from $57.8 million in the three
months ended July 31, 1998. The increased loss is due to increased marketing and
advertising and supplies expenses related to tuition tax schools and increased
employee benefits due to employer taxes paid on the exercise of non-qualified
seasonal stock options.
INTERNATIONAL TAX OPERATIONS
Revenues increased to $11.8 million compared to the first quarter revenues of
$3.4 million. The increase is entirely due to the onset of the tax season in
Australia, which contributed $9.2 million to the increase. The increase was
partially offset by a decline in tax preparation and discounted return fees in
Canada due to a decrease in the number of returns prepared.
The pretax loss decreased 62.1% to $2.3 million from $6.0 million in the first
quarter. The improved results are attributable to the Australian tax-filing
season which contributed earnings of $3.5 million compared to a pretax loss of
$1.2 million in the quarter ended July 31, 1998. The improved results were
reduced by increased losses in Canada due to increased marketing and advertising
and supplies expenses.
MORTGAGE OPERATIONS
Revenues increased 0.3% to $52.9 million from $52.7 million in the prior
quarter. The increase is due to interest income earned on higher balances of
mortgage loans held for sale at Companion Mortgage. Decreased revenues at Option
One, resulting from the timing of loan sales, offset this increase.
Pretax earnings decreased 23.6% to $10.5 million from $13.8 million in the three
months ended July 31, 1998. The decline is principally due to Option One, which
contributed earnings of $10.2 million, a 27.2% decline, and increased losses
from an equity investment. These losses were partially offset by improved
results from the Company's other mortgage entities.
CREDIT CARD OPERATIONS
Revenues decreased 3.6% to $8.0 million from $8.3 million in the prior quarter
due to a decline in the average revolving credit card balance by 3.1% from the
first quarter of fiscal 1999.
The pretax loss declined 98.5% to $29 thousand from $2.0 million in the first
quarter. The decrease is attributable to lower bad debt expense and the $1.1
million pretax gain on the sale of WebBank.
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BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Revenues increased 15.3% to $1.5 million from $1.3 million in the three months
ended July 31, 1998. The pretax loss increased 18.4% to $135 thousand due to
increased compensation and national office expenses.
INVESTMENT INCOME, NET
Net investment income decreased 30.6% to $9.6 million from $13.9 million in the
first quarter of fiscal 1999. 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 8.2% to $2.3 million from $2.1 million in the first quarter. The
increase is due to higher employee costs and the timing of legal and audit
expenses.
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SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1997
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
U.S. tax operations $ 30,579 $ 29,139 $ (119,132) $ (104,183)
International tax operations 15,254 16,850 (8,234) (6,249)
Mortgage operations 105,593 55,517 24,325 12,074
Credit card operations 16,329 18,904 (1,995) (7,740)
Business services 2,864 - (249) -
Unallocated corporate 1,896 2,108 (4,389) (2,715)
Acquisition interest expense - - (8,881) (4,908)
Investment income, net - - 23,536 8,383
Inter-segment sales - (316) - -
--------------- -------------- -------------- -------------
$ 172,515 $ 122,202 (95,019) (105,338)
=============== ==============
Income tax benefit (36,107) (40,028)
-------------- -------------
Net loss from continuing operations (58,912) (65,310)
Net loss from discontinued operations - (14,056)
-------------- -------------
Net loss $ (58,912) $ (79,366)
============== =============
Consolidated revenues for the six months ended October 31, 1998 increased 41.2%
to $172.5 million from $122.2 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $105.6 million, a 90.2%
increase over last year.
The consolidated pretax loss from continuing operations for the first six months
of fiscal 1999 decreased to $95.0 million from $105.3 million last year. The
decrease is attributable to increased investment income and increased earnings
from Mortgage operations and Credit card operations, which were reduced by
increased losses from U.S. tax operations.
The net loss from continuing operations was $58.9 million, or $.58 per share,
compared to $65.3 million, or $.63 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased 4.9% to $30.6 million from $29.1 million last year, resulting
primarily from higher non-financial software sales and tax preparation fees,
which is attributable to increases in pricing.
The pretax loss increased 14.3% to $119.1 million from $104.2 million in the
comparable period 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, the six month operating results are not
indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 9.5% to $15.3 million compared to the prior year. The
decrease is entirely due to foreign currency translation. In local currencies,
revenues increased for all international entities.
The pretax loss increased 31.8% to $8.2 million from $6.2 million last year. The
increase is due to continued expansion in the United Kingdom and normal
operational increases in other facility-related expenses in Canada. Due to the
nature of this segment's business, the six month operating results are not
indicative of expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 90.2% to $105.6 million from $55.5 million in the same period
last year. The increase is essentially attributable to Option One, which was
acquired on June 17, 1997. Option One contributed revenues of $87.9 million for
the six months compared to $46.8 million for the four-and-a-half month period
last year. Option One originated and sold $1.6 billion and $1.2 billion in
loans, respectively, during the first six months of fiscal 1999. Companion
Mortgage also contributed improved revenues due to interest income earned on
higher balances of mortgage loans held for sale.
Pretax earnings increased 101.5% to $24.3 million from $12.1 million in the
prior year. The increase is primarily due to Option One, which contributed
earnings of $24.2 million compared to earnings of $12.9 million last year and
increased earnings from Companion Mortgage. Earnings were reduced by losses from
the Company's other mortgage entities.
CREDIT CARD OPERATIONS
Revenues decreased 13.6% to $16.3 million from $18.9 million in the prior year
due to a decline in the average revolving credit card balance over the prior
year's six month period.
The pretax loss declined 74.2% to $2.0 million from $7.7 million last year. The
decrease is attributable to lower marketing and advertising expenses, as well as
the one-time write-off of capitalized salaries taken in the prior year and the
sale of WebBank.
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BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $2.9 million and a pretax loss of $249
thousand for the six months ended October 31, 1998, including goodwill
amortization of $161 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 six months are not indicative of the expected results
for the entire year.
INVESTMENT INCOME, NET
Net investment income increased 180.8% to $23.5 million from $8.4 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 six months
increased 61.7% to $4.4 million from $2.7 million in the comparable period last
year. The increase is a result of higher losses incurred by the Company's
captive insurance subsidiary and the start-up of a business that offers
financial planning services through the Company's tax offices.
Acquisition interest expense of $8.9 million represents the interest on the debt
associated with the acquisition of Option One, which was acquired on June 17,
1997.
OTHER ISSUES
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, evaluate and mitigate
potential Year 2000 related issues. As part of its program, the Company has
identified three key categories of software and systems, including information
technology (IT) systems, non-IT systems (systems with internal clocks or
imbedded microprocessors) and systems of third parties with which it interacts,
for which the Company has developed detailed plans to address the Year 2000
issue.
The Company has identified 9 mission critical business functions (i.e. U.S. tax
preparation services, wholesale loan services, etc.) and 28 non-mission critical
business functions (i.e. TaxCut software, Australian tax operations, etc.).
Within each of the business functions key IT and non-IT systems have been
inventoried and assessed for compliance and detailed plans are in place for
required system modifications or replacements. Currently remediation projects
are at different phases of completion. One hundred and thirty-three remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 11 are complete and
successfully tested, 95 are in the testing phase and 27 are still in progress.
Of the projects in the testing phase, 91% are scheduled to be completed by
January 31, 1999. The remaining projects in testing can not be fully completed
and in production until after the 1998 tax season due to the nature of our
business.
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The Company has initiated communications and surveyed state, Federal and foreign
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 issues. The Company is relying on their responses to
determine if key suppliers will be Year 2000 compliant. One of the Company's key
third parties is the Internal Revenue Service (IRS). In a report from the
Government Accounting Office, dated May 7, 1998, some risks were identified in
relation to the IRS's readiness and contingency plans for Year 2000 issues. The
IRS is scheduled to be Year 2000 compliant by January 31, 1999. The Company is
also in the process of completing a survey and inventory of tax franchisees.
Some readiness issues have been identified and the Company is assisting its
franchisees with their remediation programs to help mitigate their risk.
Assurances from franchisees of Year 2000 readiness are scheduled to be obtained
after the end of the upcoming tax season. The Company will continue to monitor
its third party relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred. Total
costs are currently estimated at $3.0 million, with approximately $1.0 million
incurred to date. The costs associated with the replacement of computer systems,
hardware or equipment (currently estimated to be $12.5 million in total, with
$8.6 million incurred to date), substantially all of which would be capitalized,
are not included in the above estimates. All costs related to the Year 2000
issue are being funded through internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will not be
Year 2000 compliant and the Company would not be able to process electronic
filings or refund anticipation loans. The Company believes that its competitors
will face the same risks.
The Company is currently identifying and developing contingency plans for Year
2000 related interruptions in the event that internal and/or external
remediation projects are not completed on a timely basis or that they fail to
meet anticipated needs. The contingency plans are scheduled to be completed by
June 1999.
The Company's Year 2000 program is an ongoing process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its business
activities, it can not make any assurances that its systems, the systems of the
state, Federal and foreign governments, tax franchisees and suppliers will be
Year 2000 compliant and will not interrupt business. While the impact can not be
fully determined, the inability of these systems to be ready could result in
significant difficulties in processing and completing fundamental transactions.
In such event, the Company's results of operations and financial position could
be adversely affected in a material manner.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of October 31, 1998, there has been a change in the Company's market risk
exposure related to interest rates on investments in fixed-rate mortgage loans
held for resale or securitization. As previously reported in the Company's
Annual Report on Form 10-K for April 30, 1998, the Company hedged its fixed-rate
mortgage portfolio by selling short treasury securities and utilizing forward
commitments. This is still the Company's policy, however, due to market
conditions it became apparent that the performance of selling short treasury
securities was not correlating with the value of fixed-rate mortgages in the
whole loan market. Therefore, at October 31, 1998 the Company has no outstanding
hedges to minimize market risk on the fixed-rate mortgage loan portfolio. The
Company is evaluating other alternatives to minimize market risk. At October 31,
1998, the fixed-rate portfolio represents 19.5% of all mortgage loans held for
sale and 8.0% of total assets. Mortgage loans held for sale are recorded at the
lower of cost or market value. If it is determined that the market value drops
below cost, a valuation allowance would be set up and the loss would be
recognized in the current period. No valuation allowance has been recorded at
October 31, 1998.
The Company estimates that an increase in interest rates on fixed-rate mortgages
of 50 basis points would result in a decline in value of approximately $5.3
million, which would be recorded as a loss in the consolidated income statement
to the extent that the market value dropped below cost. Such impact would
represent approximately 21.6% of the pretax earnings from Mortgage operations
and 5.5% of the Company's consolidated pretax loss for the six months ended
October 31, 1998, assuming the entire decline was recognized as a lower of cost
or market adjustment.
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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 1999. 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 were
consolidated, the defendants filed a motion to dismiss the consolidated
suits, the district court stayed all proceedings pending the outcome of the
state court suits, and the United States Court of Appeals for the Sixth
Circuit affirmed such stay on November 10, 1998. The state lawsuits were
consolidated for discovery purposes and defendants 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The registrant's Amended and Restated Bylaws ("Bylaws") were amended on
October 14, 1998, to require that all shareholders who wish to present
proposals for business at the annual meeting of shareholders give the
Company notice of such proposals at least 45 days before the date on which
the registrant first mailed its proxy materials for the prior year's annual
meeting of shareholders, thereby allowing the registrant to have
discretionary authority for proposals received after that date. Previously,
the Bylaws had provided in Section 4(b) thereof that, to be timely, such
notice of proposals must have been delivered to or mailed and received by
the registrant not less than 50 nor more that 75 days prior to the annual
meeting, provided, however, that if fewer than 65 days' notice or prior
public disclosure of the date of the meeting had been given or made to
shareholders, notice by the shareholder to be timely must have been
received by the registrant not later than the close of business on the 15th
day following the day
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on which notice of the date of the annual meeting was mailed or public
disclosure was made. Section 4(b), as amended on October 14, 1998, now
reads:
"(b) Business Conducted. At an annual meeting of shareholders,
only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual
meeting, business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board,
otherwise properly brought before the meeting by or at the direction of
the board, or otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in
writing to the secretary. To be timely, such notice must be delivered
to or mailed and received at the principal executive offices of the
corporation at least 45 days before the date in the year of the annual
meeting corresponding to the date on which the corporation first mailed
its proxy materials for the prior year's annual meeting of
shareholders. A shareholder's notice to the secretary shall set forth
as to each matter the shareholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of the
shareholder proposing such business, (iii) the class and number of
shares of the corporation that are beneficially owned by the
shareholder, and (iv) any material interest of the shareholder in such
business.
Notwithstanding anything in the bylaws to the contrary, no
business shall be conducted at the annual meeting except in accordance
with the procedures set forth in this section 4(b); provided, however,
that nothing in this section 4(b) shall be deemed to preclude
discussion by any shareholder of any business properly brought before
the annual meeting in accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this
section 4(b), and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting
shall not be transacted."
As a result of the amendment to the Bylaws, for business to be timely and
properly brought before the annual meeting scheduled to be held on
Wednesday, September 8, 1999, notice of proposals which are proper subjects
for consideration thereat must be delivered to or mailed and received by
the Secretary of the registrant at H&R Block, Inc., 4400 Main Street,
Kansas City, Missouri 64111 not later than the close of business on June
15, 1999, the 45th day prior to July 30 (the date on which proxy materials
were first mailed to shareholders in connection with the annual meeting of
shareholders in 1998). As stated in the proxy statement dated July 30,
1998, shareholder proposals must be received by the Secretary of the
registrant no later than April 1, 1999, in order to be included in the
proxy statement and form of proxy relating to the annual meeting of
shareholders in 1999.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the registrant was held on September
9, 1998. At such meeting, four Class III 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 III Directors
Nominee Votes FOR Votes WITHHELD
----------------- ---------- --------------
Donna R. Ecton 78,906,626 9,034,630
Marvin L. Rich 78,857,422 9,083,834
Louis W. Smith 78,888,502 9,052,754
Morton I. Sosland 78,796,354 9,144,902
Approval of Amendments to the Registrant's 1989 Stock Option Plan for
Outside Directors
The following resolution was adopted by a vote of 82,026,187 shares in
favor of such resolution, 5,255,764 shares against such resolution and
659,305 shares abstaining. The resolution states:
"RESOLVED, That this Company's 1989 Stock Option Plan
for Outside Directors, as previously amended, be further
amended as follows:
(1) By changing the date set forth in Section 21
thereof from `December 5, 1999,' to `December 5, 2001,'
thereby extending the Plan for two years; and
(2) By changing the number of shares set forth in
Section 6 thereof from `2,000' to `3,000,' thereby increasing
the aggregate number of shares of Common Stock to be granted
on each date specified in such Section 6 to each Outside
Director of the Company serving as such on the date of grant."
Appointment of Auditors
The following resolution was adopted by a vote of 87,608,251 shares in
favor of such resolution, 128,888 shares against such resolution and
204,117 shares abstaining:
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"RESOLVED, That the appointment of
PricewaterhouseCoopers LLP as the independent auditors for H&R
Block, Inc., and its subsidiaries for the year ending April
30, 1999, is hereby ratified, approved and confirmed."
At the close of business on July 10, 1998, the record date for the annual
meeting of shareholders, there were 104,732,851 shares of Common Stock of
the registrant outstanding and entitled to vote at the meeting. There were
87,941,256 shares represented at the annual meeting of shareholders held on
September 9, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
3.1 Amended and Restated Bylaws of the registrant, as amended
October 14, 1998.
10.1 1989 Stock Option Plan for Outside Directors, as amended.
10.2 Amendment No. 11 to the H&R Block Deferred Compensation
Plan for Executives.
10.3 Amendment No. 7 to the H&R Block Supplemental Deferred
Compensation Plan for Executives.
27 Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the second
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.
---------------------------
(Registrant)
DATE 12/15/98 BY /s/ Ozzie Wenich
------------ ---------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 12/15/98 BY /s/ Cheryl L. Givens
------------- ---------------------------
Cheryl L.Givens
Vice President and Corporate Controller
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