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 January 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, without par
value, at March 1, 1999 was 97,188,921 shares.
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TABLE OF CONTENTS
Page
----
PART I Financial Information
Consolidated Balance Sheets
January 31, 1999 and April 30, 1998........................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 1999 and 1998.................. 2
Nine Months Ended January 31, 1999 and 1998................... 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1999 and 1998................... 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....... 21
PART II Other Information................................................ 22
SIGNATURES................................................................ 23
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
January 31, April 30,
1999 1998
---- ----
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 188,340 $ 900,856
Marketable securities 91,582 346,158
Receivables, less allowance for doubtful accounts of $21,302
and $45,314 896,363 793,237
Prepaid expenses and other current assets 94,477 48,944
---------- ----------
TOTAL CURRENT ASSETS 1,270,762 2,089,195
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 221,069 343,178
Excess of cost over fair value of net tangible assets
acquired, net of accumulated amortization 355,987 288,580
Other 127,084 105,809
---------- ----------
704,140 737,567
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 100,597 77,321
---------- ----------
$2,075,499 $2,904,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 805,985 $ 643,002
Accounts payable, accrued expenses and deposits 135,394 114,875
Accrued salaries, wages and payroll taxes 55,229 96,168
Accrued taxes on earnings 26,648 422,847
---------- ----------
TOTAL CURRENT LIABILITIES 1,023,256 1,276,892
LONG-TERM DEBT 249,692 249,675
OTHER NONCURRENT LIABILITIES 43,269 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 411,428 432,335
Retained earnings 857,837 1,010,545
Accumulated other comprehensive income (loss) (27,017) (24,515)
---------- ----------
1,243,337 1,419,454
Less cost of 11,751,531 and 1,992,043 shares of common stock
in treasury 484,055 77,822
---------- ----------
759,282 1,341,632
---------- ----------
$2,075,499 $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
------------------
January 31,
-----------
1999 1998
---- ----
REVENUES
Service revenues $213,156 $151,185
Product revenues 60,110 36,176
Royalties 12,961 10,562
Other 5,255 853
-------- --------
291,482 198,776
-------- --------
OPERATING EXPENSES
Employee compensation and benefits 124,718 93,703
Occupancy and equipment 54,829 48,796
Interest 23,689 12,371
Marketing and advertising 17,824 13,978
Supplies, freight and postage 22,616 16,077
Other 56,156 38,872
-------- --------
299,832 223,797
-------- --------
Operating loss (8,350) (25,021)
OTHER INCOME
Investment income, net 4,641 1,107
Other, net (879) (17)
-------- --------
3,762 1,090
Loss from continuing operations before income tax benefit (4,588) (23,931)
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (less applicable income
tax benefit of ($175) and ($663)) (273) (2,452)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
Weighted average number of common shares outstanding 97,481 105,050
======== ========
Basic and diluted net loss per share from continuing operations $ (.03) $ (.14)
======== ========
Basic and diluted net earnings (loss) per share $ (.24) $ 2.04
======== ========
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
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
REVENUES
Service revenues $ 308,466 $ 219,426
Product revenues 111,906 64,388
Royalties 17,023 14,980
Other 10,273 3,596
--------- ---------
447,668 302,390
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 216,711 162,546
Occupancy and equipment 137,058 122,012
Interest 53,889 26,819
Marketing and advertising 30,088 24,646
Supplies, freight and postage 31,230 23,794
Other 103,602 73,587
--------- ---------
572,578 433,404
--------- ---------
Operating loss (124,910) (131,014)
OTHER INCOME
Investment income, net 28,177 9,490
Other, net (879) (5)
--------- ---------
27,298 9,485
Loss from continuing operations before income tax benefit (97,612) (121,529)
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (less applicable income
tax benefit of ($953) and ($11,823)) (1,490) (21,307)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
Weighted average number of common shares outstanding 100,526 104,568
========= =========
Basic and diluted net loss per share from continuing operations $ (.60) $ (.72)
========= =========
Basic and diluted net earnings (loss) per share $ (.82) $ 1.29
========= =========
Dividends per share $ .70 $ .60
========= =========
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (82,008) $ 135,212
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 45,066 34,637
Net (gain) loss on sale of discontinued operations 19,978 (231,867)
Other noncurrent liabilities 7,385 2,480
Changes in:
Receivables (232,429) 82,717
Prepaid expenses and other current assets (45,533) (44,304)
Net assets of discontinued operations - 13,665
Accounts payable, accrued expenses and deposits 18,477 (64,385)
Accrued salaries, wages and payroll taxes (40,939) (65,796)
Accrued taxes on earnings (385,928) (123,339)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (695,931) (260,980)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (227,381) (133,774)
Maturities of marketable securities 709,106 202,473
Purchases of property and equipment (52,365) (30,633)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (83,048) (237,786)
Other, net (28,040) (14,283)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 318,272 (214,003)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (7,301,430) (8,499,105)
Proceeds from issuance of notes payable 7,464,413 8,405,163
Proceeds from issuance of long-term debt - 249,663
Dividends paid (70,700) (62,676)
Payments to acquire treasury shares (490,868) -
Proceeds from stock options exercised 63,728 32,416
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (334,857) 125,461
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (712,516) (349,522)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 188,340 $ 107,557
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 360,959 $ 58,746
Interest paid 59,392 35,492
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 January 31, 1999, the Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998, and the Consolidated Statements of Cash Flows for the nine months
ended January 31, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at January 31, 1999 and for
all periods presented have been made.
Reclassifications have been made to prior periods to conform with the current
period 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 nine-month results are not
indicative of results to be expected for the year.
2. On January 29, 1999, the Company completed the sale of its WebCard Visa
portfolio. The Company recorded a $20.0 million loss, net of taxes, on the
transaction. The $127.6 million receivable for the sale of the portfolio was
treated as a noncash investing activity in the Consolidated Statement of Cash
Flows for the nine months ended January 31, 1999. The Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998 have been reclassified to reflect the Company's Credit Card
operations segment as discontinued operations.
3. 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 nine
months ended January 31, 1998 and the Consolidated Statement of Cash Flows
for the nine months ended January 31, 1998 reflect CompuServe as discontinued
operations.
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4. Revenues from discontinued operations for the nine months ended January 31,
1999 and 1998 were $24.1 million and $657.2 million, respectively. Revenues
for the three months ended January 31, 1999 and 1998 were $7.8 million and
$227.2 million, respectively.
5. Receivables consist of the following:
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
Mortgage loans held for sale $387,500 $448,102
Participation in refund anticipation loans 201,890 39,165
Receivable from sale of discontinued operations 127,639 -
Credit card loans - 202,852
Other 200,636 148,432
-------- --------
917,665 838,551
Allowance for doubtful accounts 21,302 45,314
-------- --------
$896,363 $793,237
======== ========
6. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
7. The Company securitized $1.7 billion in mortgage loans during the nine
months ended January 1999. The retained interests from the securitizations
of $104.3 million were treated as noncash investing activities in the
Consolidated Statement of Cash Flows for the nine months ended January 31,
1999.
8. Basic and diluted net earnings (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 5,884,733 shares and the conversion of 712 shares of preferred stock to
common stock, as they are antidilutive. The weighted average shares
outstanding for the nine months ended decreased to 100,526,000 from
104,568,000 last year, due to the purchase of treasury shares by the Company
during the period from February 1998 to January 1999. The decrease was
partially offset by stock option exercises during fiscal 1998 and 1999.
9. During the nine months ended January 31, 1999 and 1998, the Company issued
1,996,012 and 1,025,326 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the nine
months ended January 31, 1999, the Company acquired 11,792,500 shares of its
common stock at an aggregate cost of $490,868.
10. 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
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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. 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
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.
11. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
Condensed balance sheets:
Cash and cash equivalents $ 48,724 $ 30,895
Finance receivables, net 659,658 737,005
Other assets 558,536 311,759
---------- ----------
Total assets $1,266,918 $1,079,659
========== ==========
Commercial paper $ 804,672 $ 643,002
Long-term debt 249,692 249,675
Other liabilities 77,032 57,372
Stockholder's equity 135,522 129,610
---------- ----------
Total liabilities and stockholder's equity $1,266,918 $1,079,659
========== ==========
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Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Condensed statements of
operations:
Revenues $110,472 $59,648 $217,699 $115,104
Earnings from continuing
operations 19,904 7,960 35,357 11,497
Net earnings (loss) (8,026) 2,291 233 (297)
12. 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 in the
second quarter. At January 31, 1999, the Company had no hedging instruments
in place.
13. 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 nine months ended January
31, 1999 and 1998 were:
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings (loss) $(23,096) $214,578 $(82,008) $135,212
Change in net unrealized
gain (loss) on mkt. securities 2,113 226 3,945 121
Change in foreign currency
translation adjustments 2,458 (5,813) (6,447) (7,082)
-------- -------- -------- --------
Comprehensive income (loss) $(18,525) $208,991 $(84,510) $128,251
======== ======== ======== ========
14. In the third quarter of fiscal 1999, the Company elected early adoption of
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). 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
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investments. The Company has classified its retained interests as
available-for-sale securities, which are included in Investments in
marketable securities on the Consolidated Balance Sheet.
15. 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; Chicago, Illinois; Indianapolis,
Indiana; Buffalo, New York and Dallas, Texas. Revenues of this segment are
seasonal in nature, with peak revenues occurring during January through
April.
Information concerning the Company's operations by reportable operating
segments for the three and nine months ended January 31, 1999 and 1998 is as
follows:
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
U.S. tax operations $189,083 $152,773 $ 219,662 $ 181,912
International tax operations 6,776 7,371 22,030 24,221
Mortgage operations 79,333 37,522 184,926 93,039
Business services 15,271 - 18,135 -
Unallocated corporate 1,019 1,110 2,915 3,218
-------- -------- --------- ---------
$291,482 $198,776 $ 447,668 $ 302,390
======== ======== ========= =========
Earnings (loss) from
continuing operations:
U.S. tax operations $(18,845) $(19,050) $(137,977) $(123,233)
International tax operations (7,508) (6,925) (15,742) (13,174)
Mortgage operations 24,305 7,682 48,630 19,756
Business services (8) - (220) -
Unallocated corporate (2,735) (2,314) (7,161) (5,029)
Interest exp. on LT debt (4,438) (4,431) (13,319) (9,339)
Investment income, net 4,641 1,107 28,177 9,490
-------- -------- --------- ---------
Loss from continuing operations
before income tax benefit $ (4,588) $(23,931) $ (97,612) $(121,529)
======== ======== ========= =========
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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 $247.5 million at January 31, 1999 from $812.3
million at April 30, 1998. The working capital ratio at January 31, 1999 is 1.2
to 1, compared to 1.6 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, to a lesser extent, 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 and other financial services
programs. These short-term borrowings in the U.S. are supported by a $1.85
billion back-up credit facility through November 1999, subject to renewal.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first nine months were funded through internally-generated
funds.
At January 31, 1999, short-term borrowings used to fund mortgage loans and other
programs increased to $806.0 million from $643.0 million at April 30, 1998 due
mainly to the funding of mortgage operations. For the nine months ended January
31, 1999 and 1998, interest expense was $53.9 million and $26.9 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 January 31, 1999, 17.0 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 JANUARY 31, 1999 COMPARED TO
-----------------------------------------------
THREE MONTHS ENDED JANUARY 31, 1998
-----------------------------------
(amounts in thousands)
Revenues Earnings (loss)
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $189,083 $152,773 $(18,845) $(19,050)
International tax operations 6,776 7,371 (7,508) (6,925)
Mortgage operations 79,333 37,522 24,305 7,682
Business services 15,271 - (8) -
Unallocated corporate 1,019 1,110 (2,735) (2,314)
Interest expense on LT debt - - (4,438) (4,431)
Investment income, net - - 4,641 1,107
-------- -------- -------- --------
$291,482 $198,776 (4,588) (23,931)
======== ========
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (273) (2,452)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
Consolidated revenues for the three months ended January 31, 1999 increased
46.6% to $291.5 million from $198.8 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $79.3 million, a 111.4%
increase over last year and U.S. tax operations, a 23.8% increase. The new
Business services segment, acquired in May 1998, also contributed $15.3 million
to the increase.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $23.9 million in the third quarter of
last year. The decrease is attributable to increased earnings from Mortgage
operations and higher investment income.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $14.8 million, or $.14 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 23.8% to $189.1 million from $152.8 million last year,
resulting primarily from increased revenues from tax-related services that are
attributable to an increase in the number of clients served and price increases.
During the first month of the U.S. tax-filing season, the number of clients
served in company-owned offices increased 4.8%. Improved software sales and
revenues from Refund Anticipation Loan (RAL) participations also contributed to
the increase.
The pretax loss decreased 1.1% to $18.8 million from $19.1 million in the third
quarter of last year due to the strong increase in revenues. The increase in
revenues completely offset the increase in expenses over the prior year. The
increase in expenses is attributable to normal increases in compensation and
benefits related to tax services, a more conservative loss reserve related to
RAL participations than in the same period last year and an increase in the
number of tax offices. Due to the nature of this segment's business, the results
for the first month of the tax-filing season are not necessarily indicative of
expected results for the entire tax season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 8.1% to $6.8 million compared to $7.4 million in the prior
year's third quarter. The decrease is principally attributable to increased
competitive conditions related to discounted returns and a slower start to the
Canadian tax-filing season. The number of regular and discounted returns
prepared in company-owned offices in Canada during the month of January
decreased 27.5% from the prior year. The decline in Canada was partially offset
by increased revenues in Australia.
The pretax loss increased 8.4% to $7.5 million from $6.9 million last year. The
increase is due to compensation and other facility-related expenses in Canada
primarily attributable to normal operational increases and an increase in the
number of tax offices, as well as decreased revenues. Due to the nature of this
segment's business, third quarter operating results are not indicative of
expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 111.4% to $79.3 million from $37.5 million in the same period
last year. The increase is attributable to a higher volume of loans sold or
securitized and increased interest income over the prior year. Option One
originated and sold or securitized $930.2 million and $1.3 billion in loans,
respectively, during the third quarter of fiscal 1999, compared to $507.0
million originated and $466.0 million sold in the third quarter last year. Both
Option One and Companion Mortgage had higher interest income earned related to
higher balances of mortgage loans held for sale during the quarter.
Mortgage operations pretax earnings of $24.3 million increased 216.4% this year
compared to $7.7 million during the third quarter of fiscal 1998, driven
entirely by the increase in revenues. Increases in compensation and benefits and
marketing and advertising expense had a negative impact on pretax earnings due
primarily to the continued expansion of Option One's operations.
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BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $15.3 million and a pretax loss of $8
thousand for the third quarter of fiscal 1999, including goodwill amortization
of $1.1 million. Due to the nature of this segment's business, revenues are
seasonal, while expenses are relatively fixed throughout the year. Results for
the third quarter are not indicative of the expected results for the entire
year.
INVESTMENT INCOME, NET
Net investment income increased 319.2% to $4.6 million from $1.1 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 third quarter
increased 18.2% to $2.7 million from $2.3 million in the comparable period last
year. The increase is a result of higher employee costs.
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THREE MONTHS ENDED JANUARY 31, 1999 (THIRD QUARTER) COMPARED TO
---------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31, 1998 (SECOND QUARTER)
----------------------------------------------------
(amounts in thousands)
Revenues Earnings (loss)
----------------- -------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
-------- ------- -------- --------
U.S. tax operations $189,083 $18,400 $(18,845) $(61,316)
International tax operations 6,776 11,817 (7,508) (2,263)
Mortgage operations 79,333 52,888 24,305 10,538
Business services 15,271 1,534 (8) (98)
Unallocated corporate 1,019 974 (2,735) (2,318)
Interest expense on LT debt - - (4,438) (4,438)
Investment income, net - - 4,641 9,646
-------- ------- -------- --------
$291,482 $85,613 (4,588) (50,249)
======== =======
Income tax benefit (1,743) (19,094)
-------- --------
Net loss from continuing operations (2,845) (31,155)
Net loss from discontinued operations (273) (18)
Net loss on sale of discontinued operations (19,978) -
-------- --------
Net loss $(23,096) $(31,173)
======== ========
Consolidated revenues for the three months ended January 31, 1999 increased
240.5% to $291.5 million from $85.6 million reported in the second quarter of
fiscal 1999. The increase is primarily due to revenues from U.S. tax operations
related to the beginning of the U.S. tax-filing season, as well as increased
revenues from Mortgage operations and Business services.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $50.2 million in the second quarter
of this year. The decrease is attributable to U.S. tax operations, which
incurred a pretax loss of $18.8 million this quarter compared to a pretax loss
of $61.3 million in the second quarter, and improved results from Mortgage
operations.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $31.2 million, or $.31 per share, for the second quarter.
An analysis of operations by reportable operating segments follows.
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U.S. TAX OPERATIONS
Revenues increased 927.6% to $189.1 million from $18.4 million in the second
quarter. The pretax loss decreased 69.3% to $18.8 million from $61.3 million in
the three months ended October 31, 1998. The improved results are due to the
onset of the U.S. tax-filing season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 42.7% to $6.8 million compared to the second quarter revenues
of $11.8 million. The pretax loss increased 231.8% to $7.5 million from $2.3
million in the second quarter. The decreased results are due to the timing of
the tax-filing seasons in Australia and Canada. The Australian tax season ends
in October while the Canada tax season begins in late January.
MORTGAGE OPERATIONS
Revenues increased 50.0% to $79.3 million from $52.9 million in the prior
quarter. Pretax earnings increased 130.6% to $24.3 million from $10.5 million in
the three months ended October 31, 1998. The improved results are due to the
timing of loan sales, increased interest income earned on higher loan balances
and a one-time loss of $2.5 million on the termination of a hedging instrument
incurred during the second quarter. The increased earnings were partially
reduced by increases in compensation and benefits expenses. Option One sold or
securitized $1.3 billion in loans in the current quarter compared to $539.6
million in the second quarter.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Revenues increased 895.5% to $15.3 million from $1.5 million in the three months
ended October 31, 1998. The pretax loss decreased 91.8% to $8 thousand from $98
thousand in the prior quarter. The improved results are due to acquisitions made
during the third quarter and the onset of the accounting firms' tax and
accounting season.
INVESTMENT INCOME, NET
Net investment income decreased 51.9% to $4.6 million from $9.6 million in the
second quarter of fiscal 1999. The decrease resulted from less funds available
for investment due to the purchase of treasury shares.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 18.0% to $2.7 million from $2.3 million in the second quarter. The
increase is due to higher charitable contributions, employee costs and
consultant fees. Improved results at the Company's captive insurance subsidiary
partially offset the increased loss.
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NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO
----------------------------------------------
NINE MONTHS ENDED JANUARY 31, 1998
----------------------------------
(amounts in thousands)
Revenues Earnings (loss)
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $219,662 $181,912 $(137,977) $(123,233)
International tax operations 22,030 24,221 (15,742) (13,174)
Mortgage operations 184,926 93,039 48,630 19,756
Business services 18,135 - (220) -
Unallocated corporate 2,915 3,218 (7,161) (5,029)
Interest expense on LT debt - - (13,319) (9,339)
Investment income, net - - 28,177 9,490
-------- -------- --------- ---------
$447,668 $302,390 (97,612) (121,529)
======== ========
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (1,490) (21,307)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
Consolidated revenues for the nine months ended January 31, 1999 increased 48.0%
to $447.7 million from $302.4 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $184.9 million, a 98.8%
increase over last year, a 20.8% increase in revenues from U.S. tax operations
and revenues from the new Business services segment.
The consolidated pretax loss from continuing operations for the first nine
months of fiscal 1999 decreased to $97.6 million from $121.5 million last year.
The decrease is attributable to higher earnings from Mortgage operations and
increased investment income, which were reduced by increased losses from U.S.
tax operations.
The net loss from continuing operations was $60.5 million, or $.60 per share,
compared to $75.3 million, or $.72 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 20.8% to $219.7 million from $181.9 million last year,
resulting primarily from higher revenues from tax related services that are
attributable to a 3.8% increase in clients served and price increases. Revenues
from software sales and RAL participations also contributed to the increase.
The pretax loss increased 12.0% to $138.0 million from $123.2 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, as well as an
additional 236 tax offices this tax season compared to last year's tax season.
The increased loss was partially offset by earnings from software sales. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 9.0% to $22.0 million compared to $24.2 million in the prior
year. The decrease is due to foreign currency translation of Australia
operations and a decline in tax preparation and discounted return fees in
Canada. Discounted returns prepared in company-owned offices declined 19.0% from
the prior year. The number of tax returns prepared in company-owned offices
declined 12.6% from last year.
The pretax loss increased 19.5% to $15.7 million from $13.2 million last year.
The increase is due to higher facility-related expenses in Canada, which is
attributable to the increase in the number of offices and normal operational
increases, and increased compensation and benefits in the United Kingdom. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 98.8% to $184.9 million from $93.0 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 $157.8 million for
the nine months, a $76.9 million increase over the seven-and-a-half month period
last year. Option One originated and sold or securitized $2.5 billion in loans
during the first nine months of fiscal 1999. Companion Mortgage also contributed
revenues of $27.1 million, a 123.9% increase over last year, due to interest
income earned on higher balances of mortgage loans held for sale.
Pretax earnings increased 146.2% to $48.6 million from $19.8 million in the
prior year. The increase is primarily due to Option One, which contributed
earnings of $46.7 million compared to earnings of $19.3 million last year and
increased earnings from Companion Mortgage. Earnings were reduced by increased
losses from an equity investment.
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21
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $18.1 million and a pretax loss of
$220 thousand for the nine months ended January 31, 1999, including goodwill
amortization of $1.3 million. Due to the nature of this segment's business,
revenues are seasonal, while expenses are relatively fixed throughout the year.
Results for the nine months are not indicative of the expected results for the
entire year.
INVESTMENT INCOME, NET
Net investment income increased 196.9% to $28.2 million from $9.5 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 nine months
increased 42.4% to $7.2 million from $5.0 million in the comparable period last
year. The increase is a result of increased employee costs and the start-up of a
business that offers financial planning services through the Company's tax
offices.
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(R) 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-five remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 87 are complete and
successfully tested, 23 are in the testing phase and 25 are still in progress.
Of the projects currently in the testing phase, 82% are scheduled to be
completed by April 30, 1999. The remaining projects will be completed after the
1998 tax season due to the nature of the Company's business.
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 given to the
House Committee on Ways and Means on Year 2000 Conversion Efforts on
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February 24, 1999, the Commissioner of the IRS reported the status of the IRS's
Year 2000 effort. He stated: "Nearly all of our (IRS) mission critical systems
were made Y2K compliant and were placed back into production for the 1999 Filing
Season. Approximately half of these systems have been successfully tested
"end-to-end" with the clocks rolled forward. We (IRS) will continue focusing our
repair efforts on mission critical systems from now until the end of March. From
April through the end of 1999, most of the effort will be applied to wrapping up
some smaller systems and, most importantly, completing the full-scale End-to-End
Testing." 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 current 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 $3.7 million, with approximately $1.8 million
incurred to date. The costs associated with the replacement of computer systems,
hardware or equipment (currently estimated to be $12.9 million in total, with
$10.4 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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23
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of January 31, 1999, there has been no change in the Company's market risk
exposure related to interest rates on investments in fixed-rate mortgage loans
held for resale or securitization from what was reported in the Company's Form
10-Q for the quarter ended October 31, 1998. 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 January 31, 1999 the Company had 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 January 31,
1999, the fixed-rate portfolio represents 20.3% of all mortgage loans held for
sale and 3.8% 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
January 31, 1999.
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 $3.4
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 6.9% of the pretax earnings from Mortgage operations and
3.5% of the Company's consolidated pretax loss for the nine months ended January
31, 1999, 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
and second quarters 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. 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 H&R Block Deferred Compensation Plan for Executives, as
Amended and Restated.
for Executives, as Amended and Restated.
10.2 Amendment No. 1 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
27 Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the third
quarter of fiscal 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 03/16/99 BY /s/ Ozzie Wenich
--------------- ---------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 03/16/99 BY /s/ Cheryl L. Givens
--------------- ---------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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