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, 1996
[ ] 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 6, 1996 was 104,022,952 shares.
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TABLE OF CONTENTS
Page
----
PART I Financial Information
Consolidated Balance Sheets
October 31, 1996 (Unaudited) and
April 30, 1996 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended October 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . 2
Six Months Ended October 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 8
PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in Thousands, Except Share Amounts
OCTOBER 31, APRIL 30,
1996 1996
---- ----
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash (including certificates of deposit of $10,492 and $22,093) $ 211,514 $ 339,055
Marketable securities 89,523 389,557
Receivables, less allowance for doubtful accounts of $11,462 and $7,848 416,970 333,734
Prepaids and other current assets 74,165 59,912
----------- -----------
TOTAL CURRENT ASSETS 792,172 1,122,258
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 32,625 17,081
Excess of cost over fair value of net tangible assets acquired,
net of amortization 82,502 61,141
Deferred subscriber acquisition costs, net of amortization 50,213 96,636
Other 65,948 59,201
----------- -----------
231,288 234,059
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 432,328 399,574
----------- -----------
$ 1,455,788 $ 1,755,891
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 183,360 $ 72,651
Accounts payable, accrued expenses and deposits 172,258 201,320
Accrued salaries, wages and payroll taxes 16,280 109,870
Accrued taxes on income 3,892 94,406
----------- -----------
TOTAL CURRENT LIABILITIES 375,790 478,247
DEFERRED INCOME TAXES 33,205 46,700
OTHER NONCURRENT LIABILITIES 40,761 38,222
MINORITY INTEREST 135,713 153,129
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Convertible preferred stock, no par, stated value $.01 per share 4 4
Additional paid-in capital 502,675 504,694
Retained earnings 556,420 747,212
----------- -----------
1,060,188 1,252,999
Less cost of 4,944,321 and 5,556,097 shares of common stock
in treasury 189,869 213,406
----------- -----------
870,319 1,039,593
----------- -----------
$ 1,455,788 $ 1,755,891
=========== ===========
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,
-----------
1996 1995
---- ----
REVENUES
Service revenues $ 247,817 $ 216,463
Franchise royalties 4,390 3,582
Other income 1,243 1,001
------------ ------------
253,450 221,046
------------ ------------
OPERATING EXPENSES
Employee compensation and benefits 72,405 61,523
Occupancy and equipment 133,553 89,727
Marketing and advertising 88,618 16,572
Supplies, freight and postage 11,352 17,931
Other 88,785 51,630
------------ ------------
394,713 237,383
------------ ------------
Operating loss (141,263) (16,337)
OTHER INCOME
Investment income 4,664 2,867
------------ ------------
Loss before income taxes and minority interest (136,599) (13,470)
Income tax benefit (50,940) (5,172)
------------ ------------
Net loss before minority interest (85,659) (8,298)
Minority interest in consolidated subsidiary (11,531) -
------------ ------------
Net earnings (loss) $ (74,128) $ (8,298)
============ ============
Weighted average number of common shares outstanding 104,017 103,950
============ ============
Net loss per share $ (.71) $ (.08)
============ ============
Dividends per share $ .32 $ .32
============ ============
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, Amounts in Thousands, Except Per Share Amounts
SIX MONTHS ENDED
----------------
OCTOBER 31,
-----------
1996 1995
---- ----
REVENUES
Service revenues $ 471,530 $ 415,810
Franchise royalties 6,207 4,977
Other income 2,971 1,621
-------------- -------------
480,708 422,408
-------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 140,728 116,427
Occupancy and equipment 258,283 171,238
Marketing and advertising 120,219 20,149
Supplies, freight and postage 21,559 33,142
Other 182,213 106,058
-------------- -------------
723,002 447,014
-------------- -------------
Operating loss (242,294) (24,606)
OTHER INCOME
Investment income 11,738 7,174
Other - 12,445
-------------- -------------
11,738 19,619
-------------- -------------
Loss before income taxes and minority interest (230,556) (4,987)
Income tax benefit (86,786) (1,915)
-------------- -------------
Net loss before minority interest (143,770) (3,072)
Minority interest in consolidated subsidiary (17,416) -
-------------- -------------
Net loss $ (126,354) $ (3,072)
============== =============
Weighted average number of common shares outstanding 103,920 104,423
============== =============
Net loss per share $ (1.22) $ (.03)
============== =============
Dividends per share $ .64 $ .6325
============== =============
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,
-----------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (126,354) $ (3,072)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 72,587 49,811
Amortization of deferred subscriber acquisition costs 86,255 2,821
Gain on sale of subsidiaries - (12,445)
Deferred subscriber acquisition costs (39,832) (28,920)
Provision for deferred taxes on earnings (14,404) 17,749
Other noncurrent liabilities 2,539 2,813
Minority interest (17,416) -
Changes in:
Receivables (83,236) (4,388)
Prepaid expenses (13,344) (37,629)
Accounts payable, accrued expenses and deposits (30,106) (15,003)
Accrued salaries, wages and payroll taxes (93,590) (46,872)
Accrued taxes on income (90,583) (75,575)
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (347,484) (150,710)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (132,471) (354,642)
Maturities of marketable securities 417,167 607,353
Purchases of property and equipment (94,962) (101,156)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (9,711) (2,626)
Proceeds from sale of subsidiary - 35,000
Other, net (6,727) 11,577
----------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 173,296 195,506
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (2,039,130) (665,412)
Proceeds from issuance of notes payable 2,149,839 676,715
Dividends paid (66,374) (65,112)
Payments to acquire treasury shares - (59,453)
Proceeds from stock options exercised 2,312 7,522
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 46,647 (105,740)
----------- ------------
NET DECREASE IN CASH (127,541) (60,944)
CASH AT BEGINNING OF PERIOD 339,055 90,248
----------- ------------
CASH AT END OF PERIOD $ 211,514 $ 29,304
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 18,201 $ 55,909
Interest paid 3,378 1,455
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, 1996, the Consolidated
Statements of Operations for the three and six months ended October 31,
1996 and 1995, and the Consolidated Statements of Cash Flows for the six
months ended October 31, 1996 and 1995 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,
1996 and for all periods presented have been made.
Prior year amounts have been reclassified to conform to 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 Annual Report on Form 10-K/A,
Amendment Number 1, for the fiscal year ended April 30, 1996.
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. Other expenses for the six months ended October 31, 1996 include charges
totaling $25,563 recorded by the Computer Services segment. The current
quarter includes a charge of $7,850 due to the planned withdrawal of the
WOW! online service from the marketplace as of January 31, 1997, and the
previous quarter includes a charge of $17,713 due to the estimated loss on
the potential sale or other disposition of certain assets and business
operations of a corporate computer software group; the consolidation of
certain U.S.-based staff functions and office facilities; the renegotiation
of certain third-party customer service agreements; and the write-off of
certain obsolete software costs for billing and customer service systems.
3. In October 1996, the Computer Services segment changed its rate of
amortization of deferred subscriber acquisition costs to more closely
correlate with recent trends in subscriber retention rates and member net
revenues. The new rate of amortization is 50% in the first three months,
30% over the next nine months, and 20% in the subsequent year, compared to
the previous policy of 60% in the first 12 months and 40% in the subsequent
year. In conjunction with this change in amortization rates, the Computer
Services segment recorded an acceleration of amortization of previously
deferred CompuServe Interactive Service subscriber acquisition costs
totaling $34,500. Additionally, all previously deferred subscriber
acquisition costs for WOW! and Sprynet, totaling $8,321 and $2,560,
respectively, were written off due to the costs to service these high
usage, flat-priced services. As stated above, the WOW! online service will
be withdrawn from service in January 1997. All future subscriber costs for
Sprynet will be expensed as incurred. The total $45,381 adjustment of
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deferred subscriber acquisition costs is included in marketing expenses for
the six months ended October 31, 1996.
4. On July 16, 1996, the Company's Board of Directors approved a plan to
spin-off the Company's remaining ownership interest of approximately 80.1%
in CompuServe Corporation ("CompuServe") on or about November 1, 1996. The
spin-off was subject to, among other things, shareholder approval at the
Company's annual meeting on September 11, 1996 and a favorable ruling
from the Internal Revenue Service as to the tax-free nature of the
distribution.
On August 28, 1996, the Company's Board of Directors decided not to present
the proposed spin-off to shareholders at the September 1996 annual meeting.
This decision was based, in part, on CompuServe's reported first quarter
and projected second quarter losses, market uncertainties related to the
online industry and the planned September introduction of new interfaces
for CompuServe Interactive Service and WOW!
5. During the six months ended October 31, 1996, the net unrealized holding
gain on available-for-sale securities increased $137 to $1,306.
6. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the
effective tax rates expected to be applicable for the respective full
fiscal years.
7. Net loss per common share is based on the weighted average number of shares
outstanding during each period. The weighted average shares outstanding
for the six months ended October 31, 1996 declined to 103,920,000 from
104,423,000 last year, due to repurchase of outstanding shares, principally
in the second quarter of the prior fiscal year, partially offset by the
issuance of treasury shares for stock option exercises and franchise
acquisitions this fiscal year.
8. During the six months ended October 31, 1996 and 1995, the Company issued
50,045 and 200,327 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the six
months ended October 31, 1995 the Company acquired 1,555,500 shares of its
common stock at an aggregate cost of $59,453,000.
9. In June 1996, a purported shareholder class action complaint was filed
against CompuServe and the Company in the Court of Common Pleas, Franklin
County, Ohio, entitled Greenfield v. CompuServe Corporation et al. A
second purported shareholder class action suit was filed in July 1996
against CompuServe and the Company in the United States District Court for
the Southern District of Ohio, entitled Romine v. CompuServe Corporation,
et al. A third purported shareholder class action suit was filed in August
1996 against CompuServe, the Company and the lead underwriters in
CompuServe's initial public offering of its common stock in April 1996 (the
"IPO") in United States District Court for the District of Minnesota,
entitled Acker v. CompuServe Corporation, et al, but the plaintiffs have
since voluntarily dismissed this suit and plan to join the plaintiffs in
the Romine suit. The complaints in these three cases also name certain
officers and directors of CompuServe at the time of the IPO as
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additional defendants. Each suit alleges 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 the IPO.
The Greenfield suit also alleges similar violations of the Ohio Securities
Code and common law of negligent misrepresentation. Relief sought is
unspecified but includes pleas for rescission and damages. In August 1996,
an action for discovery was filed solely against CompuServe on behalf of a
shareholder in the Court of Common Pleas, Franklin County, Ohio, in a
matter entitled Schnipper v. CompuServe Corporation, seeking factual
support for a possible additional claim relating to disclosures in
connection with the IPO. The defendants are vigorously defending these
suits.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased from $644.0 million at April 30, 1996 to $416.4
million at October 31, 1996. The working capital ratio at October 31,
1996 is 2.1 to 1, compared to 2.3 to 1 at April 30, 1996. The decrease in
working capital and working capital ratio must be viewed in the context of the
Company's business which is seasonal, with peak activity in the fourth quarter,
due to the nature of the Company's Tax Services segment. Tax return
preparation occurs almost entirely in the fourth quarter and has the effect of
increasing certain assets and liabilities during this time.
The Company has no long-term debt. However, the Company maintains seasonal
lines of credit to support short-term borrowing facilities in the United States
and Canada. During the months of January through April the Company's Canadian
Tax Services regularly incurs short-term borrowings to purchase refunds due its
clients. Block Financial Corporation (BFC), a wholly-owned subsidiary of the
Company, incurs short-term borrowings throughout the year to fund receivables
associated with its credit card, home equity loans and other financial service
programs. At October 31, 1996, short-term borrowings used to fund credit card
loans, home equity loans and other programs totaled $183.4 million, compared to
$72.7 million at April 30, 1996.
BFC recently obtained a $1.25 billion back-up credit facility to support their
various financial activities over the next twelve months; however, this
facility will reduce to a $400 million year-round credit facility on April 30,
1997. During the upcoming tax season, BFC plans to use short-term borrowings
to purchase a participating interest of 40 percent in certain Refund
Anticipation Loans ("RALs") offered through Beneficial National Bank. RALs are
loans that are expected to be retired by an income tax refund.
CompuServe Corporation ("CompuServe"), a majority-owned subsidiary of the
Company, maintains a $25 million line of credit to fulfill short-term cash
requirements. This facility expires in June 1997, subject to renewal.
The Company's capital expenditures and dividend payments during the first six
months were funded through internally-generated funds and the proceeds from
CompuServe's initial public offering of its common stock in April 1996. The
Company has obtained a $50 million credit facility to support seasonal working
capital needs from December 1996 through February 1997.
On July 16, 1996, the Company's Board of Directors approved a plan to spin-off
the Company's remaining interest of approximately 80.1% in CompuServe on or
about November 1, 1996. The spin-off was subject to, among other things,
shareholder approval at the Company's annual
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meeting on September 11, 1996 and a favorable ruling from the Internal Revenue
Service as to the tax-free nature of the distribution.
In the quarter ended July 31, 1996, CompuServe incurred a nonrecurring pretax
charge of $17.7 million relating to the potential sale or other disposition
of certain assets and business operations of a corporate computer software
group; the consolidation of U.S.-based staff functions and office facilities;
the renegotiation of certain third-party customer service agreements; and the
write-off of certain obsolete software costs for billing and customer service
systems.
On August 28, 1996, the Company's Board of Directors decided not to present the
proposed spin-off to shareholders at the September 1996 annual meeting. This
decision was based, in part, on CompuServe's reported first quarter and
projected second quarter losses, market uncertainties related to the online
industry and the planned September introduction of new interfaces for
CompuServe Interactive Service and WOW!
In October 1996, CompuServe changed its rate of amortization of deferred
subscriber acquisition costs to more closely correlate with the recent trends
in subscriber retention rates and member net revenues. As a result, CompuServe
recorded accelerated amortization of previously deferred CompuServe Interactive
Service subscriber acquisition costs of $34.5 million in the current quarter.
Additionally, CompuServe wrote-off all previously deferred WOW! and Sprynet
subscriber acquisition costs totaling $8.3 million and $2.5 million,
respectively, due to the high costs to service these high usage, flat-priced
services.
On November 21, 1996, CompuServe announced a shift in its marketing emphasis to
build on its leadership in the small-business professional and technical market
sectors, and focus on profitable segments in the consumer markets. As a part
of this shift, CompuServe will be withdrawing its family-oriented WOW! online
service effective January 31, 1997, resulting in an additional nonrecurring
pretax charge of $7.9 million in the second quarter of fiscal 1997.
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 spin-off of
CompuServe. Such authorization is in addition to the 1993 authorization.
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RESULTS OF OPERATIONS
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.
Prior year amounts have been reclassified to conform to current year
presentation.
THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1995
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Computer services $ 214,343 $ 188,373 $ (92,115) $ 22,072
Tax services 30,805 27,602 (41,576) (34,351)
Financial services 9,984 6,815 (2,090) (1,504)
Unallocated corporate 318 255 (3,081) (2,554)
Corporate investment income - - 2,263 2,867
Intersegment sales (2,000) (1,999) - -
------------ ----------- ------------- ------------
$ 253,450 $ 221,046 (136,599) (13,470)
============ ===========
Income tax benefit (50,940) (5,172)
------------- ------------
Net loss before minority interest (85,659) (8,298)
Minority interest (11,531) -
------------- ------------
Net loss $ (74,128) $ (8,298)
============= ============
Consolidated revenues for the three months ended October 31, 1996 increased
14.7% to $253.450 million from $221.046 million reported last year. The
increase is primarily due to greater revenues reported by the Computer Services
segment.
The consolidated pretax loss before minority interest for the second quarter of
fiscal 1997 increased to $136.599 million from $13.470 million in the second
quarter of last year. The significant change in the second quarter loss is
attributable to the Computer Services segment which experienced decreased
average revenue per member resulting from the reduced pricing structure
introduced in September 1995, a nonrecurring pretax charge of $7.850 million
due to the planned withdrawal of the WOW! online service, an acceleration of
amortization of previously deferred CompuServe Interactive Service subscriber
acquisition costs of $34.500 million, and the write-off of previously deferred
WOW! and Sprynet subscriber acquisition costs totaling $8.321 million and
$2.560 million, respectively.
The net loss was $74.128 million, or $.71 per share, compared to $8.298
million, or $.08 per share, for the same period last year.
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An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 13.8% to $214.343 million from $188.373 million in the
comparable period last year, due to increases in Interactive Services and
Network Services revenues. Interactive Services revenues were 8.4% better than
last year as a result of an increase in the number of international
subscribers. The number of CompuServe Interactive Service ("CSi") subscribers
at October 31, 1996, exclusive of the Japanese licensee, increased 11.5% to
2.992 million from 2.684 million last year. Average monthly CSi total revenue
per subscriber decreased 14.1% to $15.06 for the quarter ended October 31,
1996, compared to $17.54 for last year's second quarter. This decrease is
primarily due to the new pricing structure implemented in September 1995.
Average monthly CSi total revenue per subscriber includes revenues from fees,
usage, product sales, online advertising, mall, magazine and CD-ROM
subscriptions.
Network Services revenues were 33.5% better than last year due to an increase
in the number of network customers and increased usage by existing customers.
The number of network customers increased 22.9% over last year to 1,061.
Commercial customer hours increased to 24.650 million hours this quarter from
10.728 million in last year's comparable quarter.
Operating expenses increased 87.6% to $308.838 million from $164.639 million
last year. Over half of the increase is attributable to a $73.907 million
increase in marketing expenses this quarter compared to last year. Marketing
expenses this quarter include an acceleration of amortization of previously
deferred CSi subscriber acquisition costs of $34.500 million. The amortization
rate was accelerated to more closely correlate with recent trends in subscriber
retention rates and member net revenues. All previously deferred WOW! and
Sprynet subscriber acquisition costs totaling $8.321 million and $2.560
million, respectively, were written off, reflecting the high costs to service
these high usage, flat-priced services. Costs directly associated with service
revenues increased $55.150 million to $146.185 million as a result of increased
network hours, higher outsourced customer service costs and additional customer
service and network operations staff to support significant world-wide customer
growth during the past year. Online subscriber hours increased 54.0% to 38.276
million hours for the second quarter of fiscal 1997 from 24.853 million hours
in the comparable period last year. Also included in the current quarter is a
nonrecurring pretax charge of $7.850 million related to the withdrawal of the
WOW! online service.
The pretax loss was $92.115 million, compared to pretax earnings of $22.072
million in the second quarter of fiscal 1996. The current quarter pretax loss
includes investment income of $2.380 million earned on the remaining IPO
proceeds.
TAX SERVICES
Revenues increased 11.6% to $30.805 million from $27.602 million last year, due
to an increase in the number of tax returns prepared and an increase in the
average charge which is a continuation of a pricing strategy adopted last
fiscal year.
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The pretax loss increased 21.0% to $41.576 million from $34.351 million in the
second quarter of last year, due to first-time expenses in operating acquired
franchises and competitors, investment in field management and existing
offices, with the remainder due to normal inflationary and volume-related
increases.
FINANCIAL SERVICES
Revenues increased 46.5% to $9.984 million from $6.815 million in the same
period last year. Credit card revenues increased 27.0% to $7.736 million from
$6.091 million in the prior year. Second quarter fiscal 1997 includes revenues
of $1.338 million from mortgage operations. Mortgage operations began in the
third quarter of fiscal 1996.
The pretax loss increased to $2.090 million from $1.504 million in the second
quarter of fiscal 1996, due to higher bad debt and interest expense related to
increases in the credit card portfolio and new mortgage loan portfolio,
partially offset by lower marketing and advertising which decreased due to
timing differences of marketing campaigns between this year and last year.
INVESTMENT INCOME
Investment income decreased 21.1% to $2.263 million from $2.867 million last
year. The decrease resulted from less funds available for investment and lower
short-term interest rates in fiscal 1997.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the second quarter increased
20.6% to $3.081 million from $2.554 million in the comparable period last year.
The increase resulted from higher shareholder-related expenses, a $100 thousand
fee paid during this quarter to increase the number of authorized shares from
200 million to 400 million, and $247 thousand of expenses associated with the
planned spin-off of the Company's remaining investment in CompuServe (see
discussion under the Financial Condition section of Management's Discussion and
Analysis).
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THREE MONTHS ENDED OCTOBER 31, 1996 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 1996 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
------------------------------ ------------------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
Computer services $ 214,343 $ 208,642 $ (92,115) $ (48,070)
Tax services 30,805 12,282 (41,576) (45,229)
Financial services 9,984 8,224 (2,090) (1,022)
Unallocated corporate 318 109 (3,081) (3,579)
Corporate investment income - - 2,263 3,943
Intersegment sales (2,000) (1,999) - -
----------- ----------- ----------- -----------
$ 253,450 $ 227,258 (136,599) (93,957)
=========== ===========
Income tax benefit (50,940) (35,846)
----------- -----------
Net loss before minority interest (85,659) (58,111)
Minority interest (11,531) (5,885)
----------- -----------
Net loss $ (74,128) $ (52,226)
=========== ===========
Consolidated revenues increased 11.5% to $253.450 million from $227.258 million
in the first quarter of fiscal 1997. The increase is primarily due to higher
revenues generated by the Tax Services segment related to the Australian tax
filing season and higher revenues from the Computer Services segment.
The consolidated pretax loss before minority interest increased 45.4% to
$136.599 million from $93.957 million for the three months ended July 31, 1996.
The increase is largely due to expenses recorded by the Computer Services
segment this quarter related to the planned withdrawal of the WOW! online
service, the accelerated amortization of previously deferred CompuServe
Interactive Service subscriber acquisition costs and the write-off of
previously deferred WOW! and Sprynet deferred subscriber acquisition costs.
The net loss was $74.128 million, or $.71 per share, compared to $52.226
million, or $.50 per share, for the first quarter of fiscal 1997.
An analysis of operations by segment follows.
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COMPUTER SERVICES
Revenues increased 2.7% to $214.343 million from $208.642 million reported in
the first quarter of fiscal 1997. The increase is due to greater revenues
generated by the Interactive Services and Network Services divisions, offset by
a decline in other revenues. Interactive Services and Network Services
revenues for the three months ended October 31, 1996 increased 1.9% and 7.3%,
respectively, as compared to the first quarter of fiscal 1997. Interactive
Services revenues grew due to higher service usage which increased per-member
revenues. The growth in Interactive Services is due to customer acquisitions,
net of the effect of the new pricing structure implemented in September 1995.
The growth in Network Services resulted from increasing usage and new
customers.
The pretax loss increased 91.6% to $92.115 million from $48.070 million
reported in the first quarter of fiscal 1997 due to the $7.850 million
nonrecurring pretax charge related to the planned withdrawal of the WOW! online
service and the accelerated amortization of previously deferred CompuServe
Interactive Service subscriber acquisition costs of $34.500 million and the
write-off of previously deferred WOW! and Sprynet deferred subscriber
acquisition costs of $8.321 million and $2.560 million, respectively.
TAX SERVICES
Revenues increased to $30.805 million from $12.282 million in the first quarter
of fiscal 1997. The increase partially resulted from the onset of the tax
season in Australia, which contributed revenues of approximately $11.5 million.
U.S. revenues increased approximately $7.7 million due to tuition tax school
fees earned in the second quarter and increased sales of supplies to
franchisees, both of which are seasonal.
The pretax loss decreased 8.1% to $41.576 million from $45.229 million reported
for the three months ended July 31, 1996. The decrease is due to earnings
reported by Australian tax operations from its fiscal 1997 tax season partially
offset by an increased loss in U.S. tax operations.
FINANCIAL SERVICES
Revenues increased 21.4% to $9.984 million from $8.224 million for the three
months ended July 31, 1996, due to increased revenues associated with growth in
credit cards outstanding and higher revolving balances, as well as increased
mortgage loan receivables.
The pretax loss increased to $2.090 million from $1.022 million for the first
quarter of fiscal 1997, due to higher interest and bad debt expenses related to
the growth in credit card and mortgage loan portfolios. Marketing and
advertising expenses increased over the prior quarter due to the timing of
credit card, software and online services marketing campaigns.
INVESTMENT INCOME
Investment income decreased 42.6% to $2.263 million from $3.943 million earned
for the three months ended July 31, 1996, due to the resources required to fund
operations during the Tax Services segment's off-season.
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CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss decreased 13.9% to $3.081 million
from $3.579 million in the first quarter of fiscal 1997, resulting from
decreased employee costs, insurance and spin-off expenses, partially offset by
increased shareholder-related expenses and the fee paid to increase the number
of authorized shares.
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SIX MONTHS ENDED OCTOBER 31, 1996 (FYTD) COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1995 (FYTD)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Computer services $ 422,985 $ 374,923 $ (140,185) $ 66,202
Tax services 43,087 37,558 (86,805) (75,570)
Financial services 18,208 13,107 (3,112) 1,980
Unallocated corporate 427 830 (6,660) (4,773)
Corporate investment income - - 6,206 7,174
Intersegment sales (3,999) (4,010) - -
------------ ------------ ------------- ------------
$ 480,708 $ 422,408 (230,556) (4,987)
============ ============
Income tax benefit (86,786) (1,915)
------------- ------------
Net loss before minority interest (143,770) (3,072)
Minority interest (17,416) -
------------- ------------
Net loss $ (126,354) $ (3,072)
============= =============
Consolidated revenues for the six months ended October 31, 1996 increased 13.8%
to $480.708 million from $422.408 million reported last year. The increase is
principally due to greater revenues reported by all operating segments.
The consolidated pretax loss before minority interest increased to
$230.556 million from $4.987 million in the comparable period last year. The
increased loss is largely due to the Computer Services segment which
experienced a decline in average revenue per member primarily due to last
year's pricing structure change, recorded nonrecurring pretax charges of
$25.563 million and had an increase in marketing expenses due to an
acceleration of previously deferred CompuServe Interactive Service subscriber
acquisition costs of $34.500 million and the write-off of previously deferred
WOW! and Sprynet subscriber acquisition costs of $8.321 million and $2.560
million, respectively, in this fiscal year.
The net loss was $126.354 million, or $1.22 per share, compared to $3.072
million, or $.03 per share, for the comparable period last year.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 12.8% to $422.985 million from $374.923 million last year
due to increases in both Interactive Services and Network Services revenues.
Interactive Services revenues were
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6.9% better than last year. The growth is due to an increase in customers and
usage, offset by a pricing structure change introduced in September 1995. The
number of CompuServe Interactive Service ("CSi") subscribers at October 31,
1996, exclusive of the Japanese licensee, increased 11.5% to 2.992 million from
2.684 million last year. Average monthly CSi total revenue per subscriber
decreased 19.3% to $14.76 for the six months ended October 31, 1996, from
$18.28 for the comparable prior year period. Network Services revenues were
32.5% better than last year, due to increasing usage and new customers. The
number of network customers increased 22.9% over last year to 1,061.
Commercial customer hours increased to 44.194 million from 20.458 million at
October 31, 1995.
Operating expenses increased 86.1% to $568.681 million from $305.583 million
last year. Costs directly associated with service revenues increased $112.616
million, or 65.0%, as a result of increased network hours and higher outsourced
customer service costs and additional customer service and network operations
staff to support significant world-wide customer growth during the past year.
Online subscriber hours increased 67.5% to 76.387 million hours for the six
months ended October 31, 1996, from 45.602 million hours for the comparable
prior year period. Marketing expenses for the six months increased $105.361
million over last year primarily due to an acceleration of amortization of
previously deferred CSi subscriber acquisition costs of $34.500 million, the
write-off of previously deferred WOW! and Sprynet subscriber acquisition costs
of $8.321 million and $2.560 million, respectively, and the scheduled
amortization of deferred subscriber acquisition costs. The current six months
also include nonrecurrent charges totaling $25.563 million before taxes. A
nonrecurring pretax charge of $17.713 million was recorded in the first quarter
related to the estimated loss on the potential sale or other disposition of
certain assets and business operations of a corporate computer software group;
the consolidation of certain U.S.-based staff functions and office facilities;
the renegotiation of certain third-party customer service agreements; and the
write-off of certain obsolete software costs for billing and customer service
systems. The second quarter of fiscal 1997 includes a nonrecurring pretax
charge of $7.850 million related to the withdrawal of the WOW! online service
from the marketplace as of January 31, 1997.
The pretax loss was $140.185 million, compared to pretax earnings of $66.202
million last year. The current fiscal year pretax loss includes investment
income of $5.511 million earned on the remaining IPO proceeds.
TAX SERVICES
Revenues increased 14.7% to $43.087 million from $37.558 million last year, due
to an increase in the number of tax returns prepared and an increase in the
average charge which is a continuation of a pricing strategy adopted last
fiscal year partially offset by lower tuition tax school fees in the U.S.
The pretax loss increased 14.9% to $86.805 million from $75.570 million last
year, due to first-time expenses in operating acquired franchises and
competitors, investment in field management and existing offices, with the
remainder due to normal inflationary and volume-related increases.
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FINANCIAL SERVICES
Revenues increased 38.9% to $18.208 million from $13.107 million last year.
Credit card revenues increased 22.0% to $14.533 million from $11.909 million in
the prior year. The six months ended October 31, 1996, include revenues of
$1.901 million from mortgage operations. Mortgage operations began in the
third quarter of fiscal 1996.
The pretax loss was $3.112 million, compared to pretax earnings of $1.980
million for the comparable prior year period. Last year's results included a
gain on the sale of MECA Software, Inc. of $12.445 million, partially offset by
a write-down of impaired assets associated with the tax preparation software
business of $8.389 million. Exclusive of these items, the pretax loss
increased from a loss of $2.076 million primarily due to increased bad debt and
interest expense related to the growth in the credit card portfolio and the new
mortgage operations.
INVESTMENT INCOME
Investment income decreased 13.5% to $6.206 million from $7.174 million last
year. The decrease resulted from less funds available for investment and lower
short-term interest rates in fiscal 1997.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 39.5% to $6.660 million
from $4.773 million last year, due to increased insurance and
shareholder-related expenses, a $100 thousand fee paid in the current fiscal
year to increase the number of authorized shares and expenses of $782 thousand
associated with the planned spin-off of the Company's remaining investment in
CompuServe (see discussion under the Financial Condition section of the
Management's Discussion and Analysis).
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Form 10-Q for the first
quarter of fiscal year 1997. In June 1996, a purported shareholder class
action complaint was filed against CompuServe Corporation ("CompuServe") and
the registrant in the Court of Common Pleas, Franklin County, Ohio, in a case
entitled Greenfield v. CompuServe Corporation, et al. A second purported
shareholder class action suit was filed in July 1996 against CompuServe and the
registrant in the United States District Court for the Southern District of
Ohio in a case entitled Romine v. CompuServe Corporation, et al. A third
purported shareholder class action suit was filed in August 1996 against
CompuServe, the registrant and the lead underwriters in CompuServe's initial
public offering of its common stock in April 1996 (the "IPO") in the United
States District Court for the District of Minnesota in a case entitled Acker v.
CompuServe Corporation, et al., but the plaintiffs in such case have since
voluntarily dismissed the suit and plan to join as plaintiffs in the Romine
suit. The complaints in these three cases also name certain officers and
directors of CompuServe at the time of the IPO as additional defendants. Each
suit alleges 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 the IPO. The Greenfield suit also
alleges similar violations of the Ohio Securities Code and common law of
negligent misrepresentation. Relief sought is unspecified, but includes pleas
for rescission and damages. In August 1996, an action for discovery was filed
solely against CompuServe on behalf of a shareholder in the Court of Common
Pleas, Franklin County, Ohio, in a matter entitled Schnipper v. CompuServe
Corporation, seeking factual support for a possible additional claim relating
to IPO disclosures. The defendants are vigorously defending these suits.
ITEM 2. CHANGES IN SECURITIES.
The registrant's Articles of Incorporation, as amended and restated, were
further amended, effective upon the filing of the Certificate of Amendment with
the Secretary of State of Missouri on September 18, 1996, to increase the
number of authorized shares of Common Stock, without par value, from
200,000,000 shares to 400,000,000 shares. The aggregate number of shares of
all classes of stock which the registrant now has authority to issue is
406,000,000, with the 400,000,000 authorized shares of Common Stock and
6,000,000 authorized shares of a class designated Preferred Stock, without par
value. The amendment to the Articles of Incorporation was approved by the
shareholders of the registrant at the annual meeting of shareholders held on
September 11, 1996. The resolution approved by the shareholders is set forth
in Item 4 to this Form 10- Q. The Certificate of Amendment of Articles of
Incorporation of H&R Block, Inc. is filed as Exhibit 3(a) to this Form 10-Q and
the Restated Articles of Incorporation, incorporating all amendments thereto
are filed as Exhibit 3(b) to this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the registrant was held on September 11,
1996. 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
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of directors and the adoption of each resolution, the number of votes cast for,
against or withheld, and the number of abstentions or nonvotes were as follows:
Election of Class I Directors
-----------------------------
Nominee Votes FOR Votes WITHHELD
--------- --------- --------------
Henry W. Bloch 84,063,803 1,144,786
Robert E. Davis 84,026,423 1,182,166
Frank L. Salizzoni 84,015,383 1,193,206
Approval of Amendment to Articles of Incorporation
--------------------------------------------------
The following resolution was adopted by a vote of 74,527,720 shares in
favor of such resolution, 10,073,557 shares against such resolution
and 607,312 shares abstaining. The resolution states:
"RESOLVED, That ARTICLE THREE of the Articles of Incorporation
of H&R Block, Inc., as heretofore amended, be further amended
by deleting the first sentence thereof in its entirety and
substituting therefor the following:
'ARTICLE THREE
The aggregate number of shares of all classes of stock which
the corporation shall have authority to issue is 406,000,000,
divided into two classes as follows:
(i) 400,000,000 shares of a class designated Common
Stock, without par value; and
(ii) 6,000,000 shares of a class designated Preferred
Stock, without par value.'"
Adoption of the H&R Block Short-Term Incentive Plan
---------------------------------------------------
The following resolution was adopted by a vote of 81,325,253 shares in
favor of such resolution, 2,947,119 shares against such resolution and
936,217 shares abstaining:
"RESOLVED, That the H&R Block Short-Term Incentive
Plan included as Appendix D to the proxy statement relating to
this meeting is hereby adopted and approved."
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Appointment of Auditors
-----------------------
The following resolution was adopted by a vote of 83,986,416 shares in
favor of such resolution, 946,603 shares against such resolution and
275,570 shares abstaining:
"RESOLVED, That the appointment of Deloitte & Touche
LLP as the independent auditors for H&R Block, Inc., and its
subsidiaries for the year ending April 30, 1997, is hereby
ratified, approved and confirmed."
At the close of business on July 12, 1996, the record date for the annual
meeting of shareholders, there were 103,993,072 shares of Common Stock of the
registrant outstanding and entitled to vote at the meeting. There were
85,208,589 shares represented at the annual meeting of shareholders held on
September 11, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(3)(a) Certificate of Amendment of Articles of Incorporation of
H&R Block, Inc. effective September 18, 1996.
(3)(b) Restated Articles of Incorporation of H&R Block, Inc., as
amended to the date of this Form 10-Q.
(10)(a) H&R Block Short-Term Incentive Plan.
(10)(b) Employment Agreement dated October 11, 1996, between the
registrant and Frank L. Salizzoni.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
A Form 8-K, Current Report, dated August 28, 1996, was filed by the
registrant reporting as an "Other Event" the registrant's issuance of a press
release announcing that its Board of Directors had decided not to present to
shareholders at its September 11, 1996 annual meeting the proposed spin-off of
CompuServe Corporation. The press release was included as Exhibit 99.1
to the Form 8-K. No financial statements were filed as a part of the Form 8-K.
Except for the Form 8-K dated August 28, 1996, the registrant did not file any
reports on Form 8-K during the second quarter of fiscal year 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
-----------------------------------------
(Registrant)
DATE 12/12/96 BY /s/ George T. Robson
----------- -------------------------------------
George T. Robson
Senior Vice President,
Chief Financial Officer
and Treasurer
DATE 12/12/96 BY /s/ Patrick D. Petrie
----------- ---------------------------------------
Patrick D. Petrie
Vice President and Corporate Controller
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