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, 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 December 1, 1999 was 98,336,052 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
October 31, 1999 and April 30, 1999 ................................. 1
Consolidated Statements of Operations
Three Months Ended October 31, 1999 and 1998 ........................ 2
Six Months Ended October 31, 1999 and 1998 .......................... 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 1999 and 1998 .......................... 4
Notes to Consolidated Financial Statements ............................. 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 10
Qantitative and Qualitative Disclosures about Market Risk.............. 23
PART II Other Information....................................................... 24
SIGNATURES......................................................................... 28
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H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
OCTOBER 31, APRIL 30,
1999 1999
---- ----
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 168,182 $ 193,240
Marketable securities 43,831 56,881
Receivables, less allowance for doubtful accounts of $73,608
and $61,872 727,738 743,301
Prepaid expenses and other current assets 169,198 94,000
----------- -----------
TOTAL CURRENT ASSETS 1,108,949 1,087,422
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 218,103 170,528
Excess of cost over fair value of net tangible assets acquired,
net of amortization 659,166 405,534
Other 151,602 132,470
----------- -----------
1,028,871 708,532
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 135,695 114,222
----------- -----------
$ 2,273,515 $ 1,910,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 625,666 $ 71,939
Accounts payable, accrued expenses and deposits 108,314 168,641
Accrued salaries, wages and payroll taxes 24,708 161,590
Accrued taxes on earnings 53,162 151,659
Current portion of long-term debt 56,358 -
----------- -----------
TOTAL CURRENT LIABILITIES 868,208 553,829
LONG-TERM DEBT 352,598 249,725
OTHER NONCURRENT LIABILITIES 104,051 44,635
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 419,411 420,658
Retained earnings 997,534 1,130,909
Accumulated other comprehensive income (loss) (16,313) (23,400)
----------- -----------
1,401,721 1,529,256
Less cost of 10,937,737 and 11,343,608 shares of common stock
in treasury 453,063 467,269
----------- -----------
948,658 1,061,987
----------- -----------
$ 2,273,515 $ 1,910,176
=========== ===========
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,
-----------
1999 1998
---- ----
REVENUES
Service revenues $ 152,699 $ 55,922
Product revenues 50,049 23,154
Royalties 3,210 2,995
Other 3,988 3,542
--------- ---------
209,946 85,613
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 118,306 48,995
Occupancy and equipment 59,553 41,642
Interest 23,344 15,508
Marketing and advertising 14,635 8,481
Supplies, freight and postage 8,699 5,546
Other 60,203 25,336
--------- ---------
284,740 145,508
--------- ---------
Operating loss (74,794) (59,895)
OTHER INCOME
Investment income, net 2,402 9,646
Other, net 235 -
--------- ---------
2,637 9,646
Loss from continuing operations before income tax benefit (72,157) (50,249)
Income tax benefit (27,420) (19,094)
--------- ---------
Net loss from continuing operations (44,737) (31,155)
Net loss from discontinued operations (less applicable
income tax benefit of ($11)) - (18)
--------- ---------
Net loss $ (44,737) $ (31,173)
========= =========
Weighted average number of common shares outstanding 97,814 99,122
========= =========
Basic and diluted net loss per share from continuing operations $ (.46) $ (.31)
========= =========
Basic and diluted net loss per share $ (.46) $ (.31)
========= =========
Dividends per share $ .275 $ .25
========= =========
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,
-----------
1999 1998
---- ----
REVENUES
Service revenues $ 226,202 $ 95,310
Product revenues 94,241 51,796
Royalties 4,140 4,062
Other 6,923 5,018
--------- ---------
331,506 156,186
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 193,658 91,993
Occupancy and equipment 110,599 82,229
Interest 34,818 30,200
Marketing and advertising 19,855 12,264
Supplies, freight and postage 12,891 8,614
Other 96,942 47,446
--------- ---------
468,763 272,746
--------- ---------
Operating loss (137,257) (116,560)
OTHER INCOME
Investment income, net 5,053 23,536
Other, net 250 -
--------- ---------
5,303 23,536
Loss from continuing operations before income tax benefit (131,954) (93,024)
Income tax benefit (50,143) (35,329)
--------- ---------
Net loss from continuing operations (81,811) (57,695)
Net loss from discontinued operations (less applicable
income tax benefit of ($778)) - (1,217)
--------- ---------
Net loss $ (81,811) $ (58,912)
========= =========
Weighted average number of common shares outstanding 97,764 102,049
========= =========
Basic and diluted net loss per share from continuing operations $ (.84) $ (.57)
========= =========
Basic and diluted net loss per share $ (.84) $ (.58)
========= =========
Dividends per share $ .525 $ .45
========= =========
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,
-----------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (81,811) $ (58,912)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 42,731 26,884
Accretion of acquisition liabilities 3,633 -
Other noncurrent liabilities 2,935 2,457
Changes in:
Receivables 24,153 (563,792)
Prepaid expenses and other current assets (69,082) (50,287)
Accounts payable, accrued expenses and deposits (47,986) (28,351)
Accrued salaries, wages and payroll taxes (136,882) (84,351)
Accrued taxes on earnings (98,555) (294,179)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (360,864) (1,050,531)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (3,987) (198,969)
Maturities of marketable securities 25,112 564,988
Loan to affiliate (62,627) -
Purchases of property and equipment (21,306) (14,896)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (81,550) (16,513)
Other, net (13,958) (11,024)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (158,316) 323,586
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (25,815,955) (3,277,627)
Proceeds from issuance of notes payable 26,369,682 3,870,614
Dividends paid (51,564) (46,248)
Payments to acquire treasury shares (32,366) (472,566)
Proceeds from stock options exercised 24,325 59,857
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 494,122 134,030
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (25,058) (592,915)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 168,182 $ 307,941
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 48,956 $ 257,402
Interest paid 38,373 33,524
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, 1999, the Consolidated
Statements of Operations for the three and six months ended October 31,
1999 and 1998, and the Consolidated Statements of Cash Flows for the six
months ended October 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 October 31,
1999 and for all periods presented have been made.
Reclassifications have been made to prior year amounts to conform with the
current year presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1999 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 December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of Olde Financial Corporation (Olde)
for $887,000 in cash. Olde, based in Detroit, Michigan, offers brokerage
and other financial services through Olde's network of approximately
1,200 registered representatives located in 181 branch offices in 35
states. The transaction will be treated as a purchase and Olde's results
will be included as of the date of acquisition in the Company's third
quarter.
3. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc.
(RSM), completed the purchase of substantially all of the non-attest assets
of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh
largest accounting and consulting firm with more than 70 offices located
primarily in the Eastern, Midwestern, Northern and Southwestern United
States. The purchase price was $240,000 in cash payments over the next four
years and the assumption of certain pension liabilities with a present
value of $52,728. The purchase agreement also provides for possible future
contingent consideration based on a calculation of earnings in year two,
three and four after the acquisition and will be treated as purchase price
when paid. In addition, the Company made cash payments of $65,453 for
outstanding accounts receivable and work-in-process that will be repaid to
the Company as RSM collects these amounts in the ordinary course of
business. The acquisition was accounted for as a purchase, and accordingly,
RSM's results are included since the date of acquisition. The additional
cash payments due over the next four years of $148,803 were treated as
noncash investing activities in the Consolidated Statement of Cash Flows
for the
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six months ended October 31, 1999. The excess of cost over the fair value
of net tangible assets acquired was $240,535 and is being amortized on a
straight-line basis over periods of up to 20 years.
4. Receivables consist of the following:
October 31, April 30,
----------- ---------
1999 1999
---- ----
(Unaudited) (Audited)
Mortgage loans held for sale $ 586,998 $ 636,687
Business services accounts receivable and work-in-process 94,776 33,015
Participation in refund anticipation loans 43,147 51,074
Other 76,425 84,397
-------------- ---------------
801,346 805,173
Allowance for doubtful accounts 73,608 61,872
-------------- ---------------
$ 727,738 $ 743,301
============== ===============
5. 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.
6. 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 for 9,517,209
shares and the conversion of 608 shares of preferred stock to common stock,
as they are antidilutive. The weighted average shares outstanding for the
six months ended October 31, 1999 decreased to 97,764,000 from 102,049,000
last year, due to the purchase of treasury shares by the Company during
fiscal 1999 and 2000. This decrease was partially offset by stock option
exercises and the issuance of stock for acquisitions.
7. During the six months ended October 31, 1999 and 1998, the Company issued
617,028 and 1,918,558 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. In addition, the
Company issued 475,443 shares of its common stock for an acquisition in the
second quarter of fiscal 2000. The issuance of common stock for the
acquisition was treated as a noncash investing activity in the Consolidated
Statement of Cash Flows for the six months ended October 31, 1999. During
the six months ended October 31, 1999, the Company acquired 721,800 shares
of its common stock at an aggregate cost of $32,366. 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.
8. CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. 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
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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 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. As a part of the sale of its interest in CompuServe,
the Company has agreed to indemnify WorldCom, Inc. 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. In the
opinion of management, the ultimate resolution of these suits will not have
a material adverse impact on the Company's consolidated financial position
or results of operations.
9. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
October 31, April 30,
----------- ---------
1999 1999
---- ----
(Unaudited) (Audited)
Condensed balance sheets:
Cash and cash equivalents $ 41,373 $ 16,026
Finance receivables, net 596,546 658,882
Other assets 543,783 448,010
-------------- ---------------
Total assets $ 1,181,702 $ 1,122,918
============== ===============
Notes payable $ 625,666 $ 71,939
Long-term debt 249,750 249,725
Other liabilities 120,388 636,330
Stockholder's equity 185,898 164,924
-------------- ---------------
Total liabilities and stockholder's equity $ 1,181,702 $ 1,122,918
============== ===============
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Condensed statements of operations:
Revenues $ 93,106 $ 53,712 $ 173,824 $ 107,227
Earnings from operations 13,549 6,340 25,290 15,454
Net earnings 12,945 2,726 15,136 8,259
10. The Company sells short FNMA mortgage-backed securities to certain
broker-dealer counterparties. The position on certain or all of the fixed
rate mortgages is closed, on standard Public Securities Association (PSA)
settlement dates, when the Company enters into a forward commitment to sell
those mortgages or decides to securitize the 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 the value of the hedged
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item. If correlation ceases to exist, hedge accounting is terminated and
the gains or losses are recorded in revenues. Deferred gains on the FNMA
securities hedging instrument amounted to $196 at October 31, 1999. The
contract value and the market value of this hedging instrument at October
31, 1999 were $13,980 and $13,974, respectively. The contract value and
market value of the forward commitment at October 31, 1999 were $155,000
and $154,599, respectively.
11. 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 components of
comprehensive income (loss) during the three and six months ended October
31, 1999 and 1998 were:
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Net loss $ (44,737) $ (31,173) $ (81,811) $ (58,912)
Change in net unrealized
gain (loss) on mkt. securities 4,680 897 5,257 1,832
Change in foreign currency
translation adjustments 3,122 (1,503) 1,830 (8,905)
------------- ----------- -------------- ------------
Comprehensive income (loss) $ (36,935) $ (31,779) $ (74,724) $ (65,985)
============= =========== ============== ============
12. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
will now be effective for the Company's fiscal year ending April 30, 2002.
13. In the second quarter of fiscal year 2000, management redefined its
Mortgage operations segment to reflect the change in how the business is
analyzed and evaluated. The redefined segment, Financial services, includes
all of the previous mortgage activity along with the startup of the
Company's new financial services operations. Financial services is
primarily engaged in the origination, purchase, servicing, securitization
and sale of nonconforming and conforming mortgage loans, as well as
offering full-service investment opportunities to the general public.
Mortgage origination services are offered through a network of mortgage
brokers and through H&R Block offices. Financial planning and investment
advice is offered through H&R Block offices, and stock, bonds, mutual funds
and other products and securities are offered through a nationwide network
of registered representatives.
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Information concerning the Company's operations by reportable operating
segments for the three and six months ended October 31, 1999 and 1998 is as
follows:
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
U.S. tax operations $ 19,723 $ 18,400 $ 32,798 $ 30,579
International tax operations 14,713 11,817 18,781 15,254
Financial services 91,503 52,914 170,957 105,655
Business services 83,167 1,534 107,339 2,864
Unallocated corporate 840 948 1,631 1,834
------------ -------------- -------------- --------------
$ 209,946 $ 85,613 $ 331,506 $ 156,186
============ ============== ============== ==============
Earnings (loss) from
continuing operations:
U.S. tax operations $ (83,663) $ (61,316) $ (154,733) $ (119,132)
International tax operations (1,644) (2,263) (8,165) (8,234)
Financial services 20,931 10,442 39,757 23,854
Business services (2,134) (105) (2,319) (219)
Unallocated corporate (3,431) (3,131) (6,783) (5,758)
Interest expense on LT debt (7,042) (4,438) (11,480) (8,881)
------------ -------------- -------------- --------------
(76,983) (60,811) (143,723) (118,370)
Investment income, net 2,402 9,646 5,053 23,536
Intercompany interest 2,424 916 6,716 1,810
------------ -------------- -------------- --------------
Loss from continuing operations
before income tax benefit $ (72,157) $ (50,249) $ (131,954) $ (93,024)
============ ============== ============== ==============
October 31, April 30,
----------- ---------
1999 1999
---- ----
IDENTIFIABLE ASSETS:
U.S. tax operations $ 271,575 $ 268,650
International tax operations 39,756 55,684
Financial services 1,129,907 1,038,909
Business services 489,747 146,252
Unallocated corporate 342,530 400,681
-------------- --------------
$ 2,273,515 $ 1,910,176
============== ==============
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q AND THE EXHIBITS HERETO MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
STATEMENTS ARE BASED UPON CURRENT INFORMATION, EXPECTATIONS, ESTIMATES AND
PROJECTIONS REGARDING THE COMPANY, THE INDUSTRIES AND MARKETS IN WHICH THE
COMPANY OPERATES, AND MANAGEMENT'S ASSUMPTIONS AND BELIEFS RELATING THERETO.
WORDS SUCH AS "WILL," "PLAN," "EXPECT," "REMAIN," "INTEND," "ESTIMATE,"
"APPROXIMATE," AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE
DATE ON WHICH THEY ARE MADE, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND
INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THEREFORE, ACTUAL OUTCOMES AND RESULTS COULD MATERIALLY DIFFER FROM
WHAT IS EXPRESSED, IMPLIED OR FORECAST IN SUCH FORWARD-LOOKING STATEMENTS. SUCH
DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED
TO, THE UNCERTAINTY OF THE ENTRY BY THE COMPANY INTO ANY AGREEMENT REGARDING ANY
SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION INVOLVING OPTION ONE MORTGAGE
CORPORATION (OPTION ONE); THE UNCERTAINTY REGARDING THE COMPLETION OF ANY
TRANSACTION INVOLVING OPTION ONE; THE UNCERTAINTY OF LAWS, LEGISLATION,
REGULATIONS, SUPERVISION AND LICENSING BY FEDERAL, STATE AND LOCAL AUTHORITIES
AND THEIR IMPACT ON ANY PROPOSED OR POSSIBLE TRANSACTION AND THE LINES OF
BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; YEAR 2000 READINESS
OF THE COMPANY AND EXTERNAL PARTIES; UNFORESEEN COMPLIANCE COSTS; CHANGES IN
ECONOMIC, POLITICAL OR REGULATORY ENVIRONMENTS; CHANGES IN COMPETITION AND THE
EFFECTS OF SUCH CHANGES; THE INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES;
CHANGES IN MANAGEMENT AND MANAGEMENT STRATEGIES; THE COMPANY'S INABILITY TO
SUCCESSFULLY DESIGN, CREATE, MODIFY AND OPERATE ITS COMPUTER SYSTEMS AND
NETWORKS; LITIGATION INVOLVING THE COMPANY; AND RISKS DESCRIBED FROM TIME TO
TIME IN REPORTS AND REGISTRATION STATEMENTS FILED BY THE COMPANY AND ITS
SUBSIDIARIES WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD TAKE
THESE FACTORS INTO ACCOUNT IN EVALUATING ANY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
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 $240.7 million at October 31, 1999 from $533.6
million at April 30, 1999. The working capital ratio at October 31, 1999 is 1.28
to 1, compared to 1.96 to 1 at April 30, 1999. The decrease in working capital
and the working capital ratio is primarily due to increased short-term
borrowings to fund mortgage loan receivables which were previously funded with
corporate cash 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.
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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 can
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 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. In November 1999, the
credit facility was increased to $1.89 billion through November 2000. An
additional credit facility of $750 million was also added in November 1999,
which extends through April 2000, to support commercial paper which will be
issued to finance the acquisition of Olde Financial Corporation (Olde). It's the
Company's intention to ultimately finance a portion of the acquisition price
with the debt.
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, 1999, short-term borrowings used to fund mortgage loans and other
programs increased to $625.7 million from $71.9 million at April 30, 1999 due
mainly to the funding of mortgage loan receivables which were previously funded
with corporate cash. For the six months ended October 31, 1999 and 1998,
interest expense was $34.8 million and $30.2 million, respectively. The increase
in interest expense is primarily attributable to interest expense related to the
purchase of the non-attest assets of McGladrey & Pullen, LLP. This increase is
partially offset by lower interest rates and the funding of a portion of
mortgage loans held for sale with internal funds instead of short-term
borrowings throughout most of the six-month period.
In July 1996, the Company announced its intention to repurchase up to 10 million
shares in the open market over a two-year period following the separation of
CompuServe Corporation. The two-year period expires January 31, 2000. At October
31, 1999, 7.7 million shares had been repurchased under this plan. The Company
plans to continue to purchase its shares on the open market in accordance with
this authorization, subject to various factors including the price of the stock,
availability of excess cash, the ability to maintain financial flexibility,
regulatory restrictions, and other investment opportunities available.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On July 21, 1999, the Company announced it was evaluating strategic alternatives
for Option One, including a possible sale or joint venture with a business
partner. Option One is reported in the Financial services segment.
On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM),
completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest
accounting and consulting firm with more than 70 offices located primarily in
the Eastern, Midwestern, Northern and Southwestern United States. The purchase
price was $240.0 million in cash payments over the next four years and the
assumption of certain pension liabilities with a present value of $52.7 million.
In
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addition, the Company made cash payments of $65.5 million for outstanding
accounts receivable and work-in-process balances that will be repaid to the
Company as RSM collects these amounts in the ordinary course of business. The
acquisition was accounted for as a purchase, and accordingly, RSM's results are
included since the date of acquisition.
On December 1, 1999, the Company, through a subsidiary, Block Financial
Corporation, completed the purchase of Olde for $887.0 million in cash. Olde,
based in Detroit, Michigan, offers brokerage and other financial services
through Olde's network of approximately 1,200 registered representatives
located in 181 branch offices in 35 states. The transaction will be treated as
a purchase and Olde's results will be included as of the date of acquisition in
the Company's third quarter.
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FISCAL 2000 COMPARED TO FISCAL 1999
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, 1999 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1998
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $ 19,723 $ 18,400 $ (83,663) $ (61,316)
International tax operations 14,713 11,817 (1,644) (2,263)
Financial services 91,503 52,914 20,931 10,442
Business services 83,167 1,534 (2,134) (105)
Unallocated corporate 840 948 (3,431) (3,131)
Interest expense on long-term debt - - (7,042) (4,438)
--------------- -------------- -------------- -------------
$ 209,946 $ 85,613 (76,983) (60,811)
=============== ==============
Investment income, net 2,402 9,646
Intercompany interest 2,424 916
-------------- -------------
(72,157) (50,249)
Income tax benefit (27,420) (19,094)
-------------- -------------
Net loss from continuing operations (44,737) (31,155)
Net loss from discontinued operations - (18)
-------------- -------------
Net loss $ (44,737) $ (31,173)
============== =============
Consolidated revenues for the three months ended October 31, 1999 increased
145.2% to $209.9 million from $85.6 million reported last year. The increase is
primarily due to revenues from Business services of $83.2 million and revenues
from Financial services of $91.5 million, a 72.9% increase over the prior year.
The consolidated pretax loss from continuing operations for the second quarter
of fiscal 2000 increased to $72.2 million from $50.2 million in the second
quarter of last year. The increase is attributable to the increased loss from
U.S. tax operations and lower investment income, which is partially offset by
improved results from Financial services.
The net loss from continuing operations was $44.7 million, or $.46 per share,
compared to $31.2 million, or $.31 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 7.2% to $19.7 million from $18.4 million last year, resulting
primarily from higher tax preparation fees that are attributable to increases in
pricing.
The pretax loss increased 36.4% to $83.7 million from $61.3 million in the
second quarter of last year due to normal operational increases in compensation
and benefits, rent and other facilities-related expenses and marketing and
advertising expenses. In addition to the normal increases, the higher
compensation is related to a change in the field manager compensation structure
that shifts their compensation to salary incurred throughout the year from
incentive bonuses incurred during the fourth quarter. 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, second quarter operating results
are not indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 24.5% to $14.7 million compared to $11.8 million in the prior
year's second quarter. The increase is attributable to Australian operations.
The increase in Australian revenues is due to higher tax preparation fees which
is the result of a 15.7% increase in the number of tax returns prepared over the
same period last year. Canadian and United Kingdom operations contributed
slightly to the increase in revenues.
The pretax loss decreased 27.4% to $1.6 million from $2.3 million last year. The
decrease is primarily due to the strong start to the Australian tax season. The
improved performance from Australia and the United Kingdom was partially offset
by an increased loss from Canadian operations due to increased compensation and
benefits expenses. Due to the nature of this segment's business, second quarter
operating results are not indicative of expected results for the entire fiscal
year.
FINANCIAL SERVICES
Revenues increased 72.9% to $91.5 million from $52.9 million in the same period
last year. The increase is primarily attributable to Option One, which
contributed revenues of $74.5 million for the quarter compared to $43.6 million
last year. Option One's improved performance is attributable to a higher volume
of loan sales and increased interest income as a result of higher mortgage loan
balances. Option One and Assurance Mortgage originated and sold or securitized
$1.5 billion and $1.6 billion in loans, respectively, during the second quarter
of fiscal 2000, compared to $837.9 million originated and $539.6 million sold in
the second quarter last year. In addition, the Company's broker-dealer,
Birchtree Financial, and Assurance Mortgage, both new this year, contributed to
the improved revenues.
Financial services pretax earnings of $20.9 million improved 100.5% this year
compared to earnings of $10.4 million during the second quarter of fiscal 1999.
The increase is mainly due to Option One, which contributed earnings of $21.2
million compared to $10.2 million in the same
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quarter last year. Pretax earnings were somewhat reduced by losses related to
the startup of financial services operations that offer financial planning
services in the Company's tax offices.
BUSINESS SERVICES
Business services revenues of $83.2 million increased from $1.5 million in the
prior year due to the acquisition of six regional and one national accounting
firm since the second quarter of last year. The pretax loss was $2.1 million
compared to $105 thousand in the prior year, which includes goodwill
amortization of $5.2 million and $89 thousand, respectively. Business services
was a new reportable operating segment in fiscal 1999 with only one regional
accounting firm acquired as of the second quarter last year. In the second
quarter of fiscal 2000, there is one national accounting firm, seven regional
accounting firms and several smaller market firms included in Business services.
Due to the nature of this segment's business, revenues are seasonal, while
expenses are relatively fixed throughout the year. Results for the second
quarter are not indicative of the expected results for the entire fiscal year.
INVESTMENT INCOME, NET
Net investment income decreased 75.1% to $2.4 million from $9.6 million last
year. The decrease is due to less funds available for investment resulting from
the stock repurchase program and the use of corporate cash to fund mortgage
loans held for sale.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the second quarter
increased 9.6% to $3.4 million from $3.1 million in the comparable period last
year. The increase is a result of increased employee costs, and consulting and
accounting expenses.
Interest expense on long-term debt increased from $4.4 million to $7.0 million
in the current quarter. The increase is attributable to the acquisition of the
non-attest assets of McGladrey & Pullen, LLP in August 1999.
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THREE MONTHS ENDED OCTOBER 31, 1999 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 1999 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- -------------------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
U.S. tax operations $ 19,723 $ 13,075 $ (83,663) $ (71,070)
International tax operations 14,713 4,068 (1,644) (6,521)
Financial services 91,503 79,454 20,931 18,826
Business services 83,167 24,172 (2,134) (185)
Unallocated corporate 840 791 (3,431) (3,352)
Interest expense on long-term debt - - (7,042) (4,438)
--------------- -------------- -------------- -------------
$ 209,946 $ 121,560 (76,983) (66,740)
=============== ==============
Investment income, net 2,402 2,651
Intercompany interest 2,424 4,292
-------------- -------------
(72,157) (59,797)
Income tax benefit (27,420) (22,723)
-------------- -------------
Net loss from continuing operations (44,737) (37,074)
Net loss from discontinued operations - -
-------------- -------------
Net loss $ (44,737) $ (37,074)
============== =============
Consolidated revenues for the three months ended October 31, 1999 increased
72.7% to $209.9 million from $121.6 million reported in the first quarter of
fiscal 2000. The increase is due primarily to revenues from Business services,
with additional increases in Financial services and International tax
operations.
The consolidated pretax loss from continuing operations for the second quarter
of fiscal 2000 increased to $72.2 million from $59.8 million in the first
quarter of this year. The increase is attributable to increased losses from U.S.
tax operations.
The net loss from continuing operations was $44.7 million, or $.46 per share,
compared to $37.1 million, or $.38 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 50.8% to $19.7 million from $13.1 million in the first
quarter, resulting primarily from tuition tax school fees, which contributed
$5.5 million to the increase. Tuition tax school fees are seasonal.
The pretax loss increased 17.7% to $83.7 million from $71.1 million in the three
months ended July 31, 1999. The increased loss is due to increased marketing and
advertising and supplies and compensation and benefits expenses related to
tuition tax schools.
INTERNATIONAL TAX OPERATIONS
Revenues increased 261.7% to $14.7 million compared to first quarter revenues of
$4.1 million. The increase is entirely due to the onset of the tax season in
Australia, which contributed $11.3 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 declined 74.8% to $1.6 million from $6.5 million in the first
quarter. The improved results are attributable to the Australian tax-filing
season, which contributed earnings of $4.6 million compared to a pretax loss of
$1.5 million in the quarter ended July 31, 1999. The improved results were
reduced by increased losses in Canada due to increased marketing and advertising
expenses.
FINANCIAL SERVICES
Revenues increased 15.2% to $91.5 million from $79.5 million in the prior
quarter. The increase is due to interest income earned on higher balances of
mortgage loans held for sale.
Pretax earnings increased 11.2% to $20.9 million from $18.8 million in the three
months ended July 31, 1999. The increase is principally due to the timing of
loan sales at Companion Mortgage and improved results at the Company's
broker-dealer, Birchtree Financial. These increases were partially offset by a
decline in results from the Company's other mortgage entities.
BUSINESS SERVICES
Revenues increased 244.1% to $83.2 million from $24.2 million in the three
months ended July 31, 1999 due almost entirely to the acquisition of the
non-attest assets of McGladrey & Pullen, LLP purchased on August 2, 1999. The
pretax loss increased to $2.1 million from $185 thousand in the first quarter
due to increased compensation and benefits expense and the amortization of
goodwill which are primarily due to the acquisition of the non-attest assets of
McGladrey & Pullen, LLP.
INVESTMENT INCOME, NET
Net investment income decreased 9.4% to $2.4 million from $2.7 million in the
first quarter of fiscal 2000. The decrease resulted from fewer funds available
for investment.
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UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the second quarter
increased 2.4% to $3.4 million. The increase is due to lower earnings reported
by the Company's captive insurance subsidiary.
Interest expense on long-term debt increased from $4.4 million to $7.0 million
in the current quarter. The increase is attributable to the acquisition of the
non-attest assets of McGladrey & Pullen, LLP in August 1999.
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SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1998
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
U.S. tax operations $ 32,798 $ 30,579 $ (154,733) $ (119,132)
International tax operations 18,781 15,254 (8,165) (8,234)
Financial services 170,957 105,655 39,757 23,854
Business services 107,339 2,864 (2,319) (219)
Unallocated corporate 1,631 1,834 (6,783) (5,758)
Interest expense on long-term debt - - (11,480) (8,881)
--------------- -------------- --------------- -------------
$ 331,506 $ 156,186 (143,723) (118,370)
=============== ==============
Investment income, net 5,053 23,536
Intercompany interest 6,716 1,810
-------------- -------------
(131,954) (93,024)
Income tax benefit (50,143) (35,329)
-------------- -------------
Net loss from continuing operations (81,811) (57,695)
Net loss from discontinued operations - (1,217)
-------------- -------------
Net loss $ (81,811) $ (58,912)
============== =============
Consolidated revenues for the six months ended October 31, 1999 increased 112.3%
to $331.5 million from $156.2 million reported last year. The increase is
primarily due to revenues from Business and Financial services contributing
increases of $104.5 million and $65.3 million, respectively.
The consolidated pretax loss from continuing operations for the first six months
of fiscal 2000 increased to $132.0 million from $93.0 million last year. The
increase is attributable to increased losses from U.S. tax operations and lower
investment income. The increased loss was partially offset by increased earnings
from Financial services.
The net loss from continuing operations was $81.8 million, or $.84 per share,
compared to $57.7 million, or $.57 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 7.3% to $32.8 million from $30.6 million last year, resulting
primarily from higher tax preparation fees, which is attributable to increases
in pricing.
The pretax loss increased 29.9% to $154.7 million from $119.1 million in the
comparable period last year due to normal operational increases in compensation,
rent and other facility-related expenses and consulting expenses. In addition to
the normal increases, the higher compensation is related to a change in the
field manager compensation structure that shifts their compensation to salary
incurred throughout the year from incentive bonuses incurred during the fourth
quarter. 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 increased 23.1% to $18.8 million compared to $15.3 million the prior
year. The increase is primarily attributable to Australian operations. The
increase in Australian revenues is due to higher tax preparation fees which is
the result of a 7.7% increase in the number of tax returns prepared over the
same period last year. Also contributing to the increase in revenues were higher
tax preparation fees in Canada and the United Kingdom.
The pretax loss decreased .8% to $8.2 million compared to last year. The
decrease is due to improved results in Australia and the United Kingdom that was
almost entirely offset by normal operational increased losses from Canadian
operations. 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.
FINANCIAL SERVICES
Revenues increased 61.8% to $171.0 million from $105.7 million in the same
period last year. The increase is essentially attributable to Option One, which
contributed revenues of $139.9 million for the six months ended October 31, 1999
compared to $87.9 million for the same period last year. Option One and
Assurance Mortgage originated and sold or securitized $2.8 billion in loans
during the first six months of fiscal 2000, compared to $1.6 billion originated
and $1.2 billion sold in the same period last year. Assurance Mortgage and the
Company's broker-dealer, Birchtree Financial, both new this year, contributed to
the improved revenues.
Pretax earnings increased 66.7% to $39.8 million from $23.9 million in the prior
year. The increase is primarily due to Option One, which contributed earnings of
$42.6 million compared to earnings of $24.2 million last year. Earnings were
reduced by losses from the Company's startup of its financial services
operations and its broker-dealer, Birchtree Financial.
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BUSINESS SERVICES
Business services contributed revenues of $107.3 million compared to $2.9
million for the six months ended October 31, 1998. The pretax loss was $2.3
million compared to $219 thousand for the same period last year, which includes
goodwill amortization of $7.0 million and $161 thousand, respectively. Business
services was a new reportable operating segment in fiscal 1999 with only one
regional accounting firm acquired during the six month period last year.
However, in the six months results of fiscal 2000, there is one national
accounting firm, seven regional accounting firms and several smaller market
firms included in Business services. Due to the nature of this segment's
business, revenues are seasonal, while expenses are relatively fixed throughout
the year. Results for the six months are not indicative of the expected results
for the entire fiscal year.
INVESTMENT INCOME, NET
Net investment income decreased 78.5% to $5.1 million from $23.5 million last
year. The decrease is due to fewer funds available for investment resulting from
the stock repurchase program and the use of corporate cash to fund mortgage
loans held for sale.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the six months
increased 17.8% to $6.8 million from $5.8 million in the comparable period last
year. The increase is a result of higher employee costs and accounting and
consulting expenses.
Interest expense on long-term debt increased to $11.5 million from $8.9 million
in the six months ended October 31, 1998. The increase is attributable to the
acquisition of the non-attest assets of McGladrey & Pullen, LLP in August 1999.
OTHER ISSUES
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, prioritize, evaluate and
mitigate potential Year 2000 related issues. The Company has identified nine
mission critical business functions (e.g. U.S. tax preparation services,
wholesale loan services, etc.) and 28 non-mission critical business functions
(e.g. Kiplinger TaxCut(R) software, Australian tax operations, etc.). Within
each of the business functions, key information technology (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-eight remediation projects, including both IT and non-IT systems, were
identified within the nine mission critical business functions. Of these
projects, 130 are complete and successfully tested, two are in the testing phase
and six are still in progress. All projects are scheduled to be completed by
December 31, 1999.
Certain applications relating to Canadian operations are still in progress and
will be tested in December 1999. Contingency plans are in place with respect to
these applications. These applications are not material to the overall
operations of the Company but were identified within
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the nine mission critical business functions. Failure of some or all of these
systems would not materially affect the Company's results of operations and
financial position.
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 third parties will be Year 2000 compliant. One of the Company's
key third parties is the Internal Revenue Service (IRS). The Company has
successfully conducted Year 2000 testing with the IRS, which consisted of
confirmation of receipt of electronically filed Year 2000 returns and verbal
communication from the IRS that they had completed Year 2000 testing on their
systems that would process the returns. The Company continues to communicate
frequently with the IRS regarding its Year 2000 readiness. The Company has also
completed a survey and inventory of its tax franchisees. Some readiness issues
were identified in this process and the Company has consulted with its
franchisees on their remediation programs to help mitigate their risk. The
Company has obtained assurances from substantially all of its franchisees of
Year 2000 readiness. 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 $3.9 million, with approximately $3.6 million
incurred through October 31, 1999. The remaining costs to complete represent the
cost of on-going monitoring of the Company's continued readiness through the end
of the fiscal year. The costs associated with the replacement of computer
systems, hardware or equipment (currently estimated to be $15.2 million in
total, with $14.9 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 has identified and developed 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 Company has focused its contingency plans on accounting functions,
communications, distribution channels, facilities, insurance, suppliers,
treasury functions and tax operations (which includes franchises, Federal and
state governments, IRS and electronic filing). In addition, disaster recovery
plans and business resumption plans have been reviewed and modified for
information technology functions. While the Company does not anticipate problems
in any of these areas, the Company believes a comprehensive plan includes
preparation for continuity of its mission critical processes. The contingency
plans have been completed and will continue to be monitored with on-going
modifications being made as issues requiring change, if any, are identified.
The Company's Year 2000 program is an on-going process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
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25
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at April
30, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. 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. The four
state court lawsuits 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. As a
part of the sale of its interest in CompuServe, the Company has agreed to
indemnify WorldCom, Inc. 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. In the opinion of management, the
ultimate resolution of these suits will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
The lawsuits discussed herein were previously reported in the first quarter
2000 Form 10-Q filed by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The registrant's Amended and Restated Bylaws, as previously amended
("Bylaws"), were further amended on August 30, 1999, to (a) provide that
the chief executive officer of the registrant may call special meetings of
the shareholders of the registrant; (b) provide that the chief executive
officer of the registrant may preside at meetings of the shareholders in
the absence of the chairman of the board; (c) provide that the chief
executive officer of the registrant may call special meetings of the board
of directors; (d) add the chief executive officer as an officer that may be
elected by the board of directors, if it so desires; (e) designate the
chief executive officer as an executive officer of the registrant; (f)
provide that the salary and compensation of the chief executive officer
must be fixed by the board of directors; (g) provide that the board of
directors may delegate to the chief executive officer of the registrant the
power to fix the salaries and compensation of the elected officers of the
registrant other than the salaries and compensation of the chairman of the
board, the vice chairman of the board, the chief executive officer and the
president; (h) provide that the chief executive officer of the registrant
may fix, increase or decrease the salaries and compensation of appointed
officers (other than those elected by the board), agents and employees of
the registrant until action is taken with respect thereto by the board of
directors; (i) provide that
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27
the board of directors of the registrant may delegate to the chief
executive officer of the registrant authority to hire, discharge, and fix
and modify the duties, salary or other compensation of employees of the
registrant under his or her jurisdiction, and the power to obtain and
retain for the registrant the services of attorneys, accountants and other
experts; (j) provide that the board of directors may elect a chief
executive officer of the registrant that is not the chairman of the board
or the president of the registrant; (k) provide that the chief executive
officer shall be vested with such powers, duties, and authority as the
board of directors of the registrant may from time to time determine and as
may be set forth in the Bylaws; (l) provide that the chief executive
officer or the president of the registrant shall preside at all meetings of
the board of directors in the absence of the chairman of the board; (m)
provide that the chief executive officer may execute all bonds, notes,
debentures, mortgages, and other contracts requiring a seal under the seal
of the registrant, and may cause the seal to be affixed thereto, and all
other instruments for and in the name of the registrant (unless required to
be executed by the president and the chief executive officer is not also
the president); (n) provide that the chief executive officer, when
authorized so to do by the board of directors of the registrant, may
execute powers of attorney from, for, and in the name of the corporation;
(o) provide that the chief executive officer of the registrant, except as
may be otherwise directed by the board of directors, is among the officers
of the registrant, one of whom shall attend meetings of shareholders of
other corporations to represent the registrant and to vote or take action
with respect to shares of any such corporation owned by the registrant; and
(p) delete the provision stating that the chief executive officer of the
registrant shall, unless otherwise provided by the board of directors, be
an ex officio member of all standing board committees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the registrant was held on September
8, 1999. At such meeting, three Class I 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 and broker
non-votes were as follows:
Election of Class I Directors
Nominee Votes FOR Votes WITHHELD
------------------ ---------- --------------
Henry W. Bloch 85,370,352 533,697
Robert E. Davis 85,371,477 533,572
Frank L. Salizzoni 85,366,325 537,724
Adoption of the 1999 Stock Option Plan for Seasonal Employees:
The following resolution was adopted by a vote of 70,777,193 shares in
favor of such resolution, 3,539,650 shares against such resolution,
and 1,653,724 shares abstaining. There were 9,933,482 broker
non-votes. The resolution states:
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28
"RESOLVED, That this Company's 1999 Stock Option Plan for
Seasonal Employees, included as Appendix A to the proxy
statement relating to this meeting, is hereby adopted and
approved."
Amendment to the 1993 Long-Term Executive Compensation Plan:
The following resolution was adopted by a vote of 52,508,576 shares in
favor of such resolution, 22,636,308 shares against such resolution,
and 825,683 shares abstaining. There were 9,933,482 broker non-votes.
The resolution states:
"RESOLVED, That this Company's 1993 Long-Term Executive
Compensation Plan, as previously amended, be further amended
by deleting the number 7,000,000 in Section 6 and replacing it
with the number 13,000,000, such that, following the
amendment, the total number of shares of Common Stock issuable
under such Plan may not exceed 13,000,000 shares, subject to
adjustments as provided in the Plan."
Appointment of Auditors
The following resolution was adopted by a vote of 83,871,836 shares in
favor of such resolution, 1,640,060 shares against such resolution and
392,153 shares abstaining:
"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, 2000, is hereby
ratified, approved and confirmed."
At the close of business on July 9, 1999, the record date for the annual meeting
of shareholders, there were 97,706,037 shares of Common Stock of the registrant
outstanding and entitled to vote at the meeting. There were 85,904,049 shares
represented at the annual meeting of shareholders held on September 8, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
3.1 Amended and Restated Bylaws of the registrant, as amended August
30, 1999.
10.1 Stock Purchase Agreement dated August 31, 1999, among Block
Financial Corporation, H&R Block, Inc., Olde Financial
Corporation, Financial Marketing Services, Inc. and the
Shareholders of Olde Financial Corporation and Financial
Marketing Services, Inc., filed as Exhibit 10.1 to the Form
8-K, Current Report, dated August 31, 1999, is incorporated
herein by reference.
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10.2 The H&R Block, Inc. 1993 Long-Term Executive Compensation Plan,
as amended through September 8, 1999.
10.3 The H&R Block 1999 Stock Option Plan for Seasonal Employees, as
amended September 8, 1999.
10.4 Amendment No. 2 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
10.5 Amendment No. 3 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
27 Financial Data Schedule
b) Reports on Form 8-K
A Form 8-K, Current Report, dated August 2, 1999, was filed on August
17, 1999 by the registrant reporting as an "Item 2" the acquisition of
substantially all of the non-attest assets of McGladrey & Pullen, LLP on August
2, 1999, and the registrant's issuance of a press release announcing the same.
The press release was included as Exhibit 99 to the Form 8-K. No financial
statements were filed as a part of the Form 8-K.
A Form 8-K, Current Report, dated August 31, 1999, was filed on
September 10, 1999 by the registrant reporting as an "Item 5" the registrant's
entry into a Stock Purchase Agreement with Olde Financial Corporation and
Financial Marketing Services, Inc. pursuant to which Block Financial Corporation
would acquire all of the outstanding common stock of Olde Financial Corporation
and Financial Marketing Services. The Agreement and the press release relating
to the proposed transaction were included as exhibits to the Form 8-K. No
financial statements were filed as a part of the Form 8-K.
A Form 8-K, Current Report, dated December 14, 1999, was filed by the
registrant reporting as an "Item 2" the acquisition of Olde Financial
Corporation on December 1, 1999. The registrant reported under "Item 7" that the
financial statements of Olde Financial Corporation and the registrant's pro
forma financial statements would be filed as soon as practicable, but no more
than 60 days after that Current Report.
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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 12/15/99 BY /s/ Ozzie Wenich
----------- ------------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 12/15/99 BY /s/ Cheryl L. Givens
----------- ------------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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