1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
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The number of shares outstanding of the registrant's Common Stock, without par
value, at March 7, 1997 was 104,042,145 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
January 31, 1997 (Unaudited) and
April 30, 1996 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended January 31, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . 2
Nine Months Ended January 31, 1997 and 1996 (Unaudited) . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1997 and 1996 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
JANUARY 31, APRIL 30,
1997 1996
---- ----
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash (including certificates of deposit of $444 and $22,093) $ 199,539 $ 339,055
Marketable securities 70,382 389,557
Receivables, less allowance for doubtful accounts of $15,058
and $7,848 680,087 333,734
Prepaids and other current assets 97,733 59,912
------------- ------------
TOTAL CURRENT ASSETS 1,047,741 1,122,258
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 31,759 17,081
Excess of cost over fair value of net tangible assets acquired,
net of amortization 89,960 61,141
Deferred subscriber acquisition costs, net of amortization 46,127 96,636
Other 70,209 59,201
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238,055 234,059
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 433,016 399,574
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$ 1,718,812 $ 1,755,891
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 461,020 $ 72,651
Accounts payable, accrued expenses and deposits 175,107 201,320
Accrued salaries, wages and payroll taxes 51,976 109,870
Accrued taxes on earnings - 94,406
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TOTAL CURRENT LIABILITIES 688,103 478,247
DEFERRED INCOME TAXES 31,924 46,700
OTHER NONCURRENT LIABILITIES 42,302 38,222
MINORITY INTEREST 132,884 153,129
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Convertible preferred stock, no par, stated value $.01 per share 4 4
Additional paid-in capital 502,436 504,694
Retained earnings 509,191 747,212
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1,012,720 1,252,999
Less cost of 4,924,855 and 5,556,097 shares of common stock
in treasury 189,121 213,406
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823,599 1,039,593
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$ 1,718,812 $ 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
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JANUARY 31,
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1997 1996
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REVENUES
Service revenues $ 346,233 $ 296,060
Franchise royalties 10,279 9,068
Other income 6,552 6,717
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363,064 311,845
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OPERATING EXPENSES
Employee compensation and benefits 120,245 105,124
Occupancy and equipment 145,408 98,738
Marketing and advertising 36,485 21,151
Supplies, freight and postage 21,458 29,812
Other 86,561 66,129
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410,157 320,954
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Operating loss (47,093) (9,109)
OTHER INCOME
Investment income, net 3,008 227
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Loss before income taxes and minority interest (44,085) (8,882)
Income tax benefit (15,930) (3,411)
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Net loss before minority interest (28,155) (5,471)
Minority interest in consolidated subsidiary (2,829) -
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Net loss $ (25,326) $ (5,471)
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Weighted average number of common shares outstanding 104,041 103,361
============= =============
Net loss per share $ (.24) $ (.05)
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Dividends per share $ .20 $ .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
NINE MONTHS ENDED
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JANUARY 31,
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1997 1996
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REVENUES
Service revenues $ 817,763 $ 711,871
Franchise royalties 16,486 14,045
Other income 9,523 8,337
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843,772 734,253
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OPERATING EXPENSES
Employee compensation and benefits 260,973 221,551
Occupancy and equipment 403,691 269,976
Marketing and advertising 156,704 41,300
Supplies, freight and postage 43,017 62,954
Other 268,774 172,187
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1,133,159 767,968
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Operating loss (289,387) (33,715)
OTHER INCOME
Investment income, net 14,746 7,401
Other, net - 12,445
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14,746 19,846
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Loss before income taxes and minority interest (274,641) (13,869)
Income tax benefit (102,716) (5,326)
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Net loss before minority interest (171,925) (8,543)
Minority interest in consolidated subsidiary (20,245) -
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Net loss $ (151,680) $ (8,543)
============= =============
Weighted average number of common shares outstanding 103,960 104,069
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Net loss per share $ (1.46) $ (.08)
============= =============
Dividends per share $ .84 $ .9525
============= =============
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
NINE MONTHS ENDED
-----------------
JANUARY 31,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (151,680) $ (8,543)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 110,628 74,528
Amortization of deferred subscriber acquisition costs 104,276 9,267
Gain on sale of subsidiary - (12,445)
Deferred subscriber acquisition costs (53,767) (74,876)
Provision for deferred taxes on earnings (11,152) 34,258
Other noncurrent liabilities 4,080 4,318
Minority interest (20,245) -
Changes in:
Receivables (346,353) (90,460)
Prepaid expenses (41,445) (30,384)
Accounts payable, accrued expenses and deposits (27,257) 14,597
Accrued salaries, wages and payroll taxes (57,894) (27,229)
Accrued taxes on earnings (94,622) (97,867)
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NET CASH USED IN OPERATING ACTIVITIES (585,431) (204,836)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (171,763) (356,855)
Maturities of marketable securities 476,711 676,895
Purchases of property and equipment (129,884) (180,829)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (19,524) (11,264)
Proceeds from sale of subsidiary - 35,000
Other, net (13,635) (22,158)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 141,905 140,789
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (3,147,413) (1,452,392)
Proceeds from issuance of notes payable 3,535,782 1,647,510
Dividends paid (87,180) (99,813)
Payments to acquire treasury shares - (71,897)
Proceeds from stock options exercised 2,821 11,072
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NET CASH PROVIDED BY FINANCING ACTIVITIES 304,010 34,480
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NET DECREASE IN CASH (139,516) (29,567)
CASH AT BEGINNING OF PERIOD 339,055 90,248
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CASH AT END OF PERIOD $ 199,539 $ 60,681
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 18,695 $ 58,281
Interest paid 6,989 2,898
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 1997, the Consolidated
Statements of Operations for the three and nine months ended January 31,
1997 and 1996, and the Consolidated Statements of Cash Flows for the nine
months ended January 31, 1997 and 1996 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 31,
1997 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 nine month results are not
indicative of results to be expected for the year.
2. Other expenses for the nine months ended January 31, 1997 include charges
totaling $25,563 recorded by the Computer Services segment. The second
quarter includes a charge of $7,850 due to the withdrawal of the WOW!
online service from the marketplace as of January 31, 1997. The first
quarter includes a charge of $17,713 due to 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% in 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 accelerated amortization of previously deferred CompuServe
Interactive Service subscriber acquisition costs of $34,500 in the second
quarter. Additionally, all previously deferred subscriber acquisition
costs for WOW! and SPRYNET, totaling $8,321 and $2,560, respectively, were
written off in the second quarter due to the costs to service these high
usage, flat-priced services. All future subscriber acquisition costs for
SPRYNET will be
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expensed as incurred. The total $45,381 adjustment of deferred subscriber
acquisition costs is included in marketing expenses for the nine months
ended January 31, 1997.
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 nine months ended January 31, 1997, the net unrealized holding
gain on available-for-sale securities increased $235 to $1,404.
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 nine months ended January 31, 1997 declined to 103,960,000 from
104,069,000 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 a franchise
acquisition this fiscal year.
8. During the nine months ended January 31, 1997 and 1996, the Company issued
69,511 and 318,108 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the nine
months ended January 31, 1996, the Company reacquired 1,833,200 shares of
its common stock at an aggregate cost of $71,897.
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 later
voluntarily dismissed this suit and joined the plaintiffs in the Romine
suit. The complaints in the Greenfield and Romine cases also name certain
officers and directors of CompuServe at the time of the IPO
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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 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 $359.6
million at January 31, 1997. The working capital ratio at January 31, 1997 is
1.52 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 loan and other financial service programs.
During January through April this year, BFC will use short-term borrowings to
purchase a participating interest of 40 percent in certain Refund Anticipation
Loans (RALs) through a ten-year agreement with Beneficial National Bank. RALs
are loans that are expected to be retired by income tax refunds. In December
1996, BFC 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.
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 nine
months were funded through internally-generated funds, the proceeds from
CompuServe's initial public offering of its common stock in April 1996 and, to
a lesser extent, short-term borrowing. The Company obtained a $50 million
credit facility to support seasonal working capital needs from December 1996
through February 1997.
At January 31, 1997, short-term borrowings used to fund credit card loans, home
equity loans, other programs and operations totaled $461.0 million, compared to
$72.7 million at April 30, 1996.
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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
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.
In the first quarter, 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 announced its decision 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!
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 withdrew its family-oriented WOW! online service
effective January 31, 1997, which resulted 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 JANUARY 31, 1997 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1996
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
Computer services $ 210,975 $ 203,032 $ (21,667) $ 22,121
Tax services 123,863 97,581 (27,192) (29,393)
Financial services 32,590 12,750 7,795 2,112
Unallocated corporate 183 483 (3,678) (3,949)
Corporate investment income - - 657 227
Intersegment sales (4,547) (2,001) - -
------------- ------------- ------------- -------------
$ 363,064 $ 311,845 (44,085) (8,882)
============= =============
Income tax benefit (15,930) (3,411)
------------- -------------
Net loss before minority interest (28,155) (5,471)
Minority interest (2,829) -
------------- -------------
Net loss $ (25,326) $ (5,471)
============= =============
Consolidated revenues for the three months ended January 31, 1997 increased
16.4% to $363.064 million from $311.845 million reported last year. The
increase is primarily due to greater revenues reported by the Tax Services and
Financial Services segments.
The consolidated pretax loss before minority interest for the third quarter of
fiscal 1997 increased to $44.085 million from $8.882 million in the third
quarter of last year. The increase in the third quarter loss is attributable
to the Computer Services segment, which incurred a pretax loss of $21.667
million compared to pretax earnings of $22.121 million in the third quarter of
last year.
The net loss was $25.326 million, or $.24 per share, compared to $5.471
million, or $.05 per share, for the same period last year.
An analysis of operations by segment follows.
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COMPUTER SERVICES
Revenues increased 3.9% to $210.975 million from $203.032 million in the
comparable period last year, due to increases in Network Services revenues.
Network Services revenues of $65.239 million were 27.4% 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 24% over last
year to 1,151. Commercial customer hours increased to 14.160 million hours
this quarter from 10.873 million in last year's comparable quarter.
Interactive Services revenues of $138.506 million declined 2.1% compared to
last year as a result of a relatively flat membership base coupled with a
decline in usage. The number of CompuServe Interactive Service (CSi)
subscribers at January 31, 1997, exclusive of the Japanese licensee, decreased
3.2% to 2.892 million from 2.989 million last year. Average monthly CSi total
revenue per subscriber decreased 9.8% to $15.22 for the quarter ended January
31, 1997, compared to $16.88 for last year's third quarter. This decrease is
primarily due to decreased usage by the membership base. Average monthly CSi
total revenue per subscriber includes revenues from fees, usage, product sales,
online advertising, mall, magazine and CD-ROM subscriptions.
Operating expenses increased 26.5% to $234.987 million from $185.785 million
last year. Over half of the increase is attributable to a $30.419 million
increase in costs directly associated with service revenues this quarter
compared to last year. The increase is primarily a result of increased network
hours, higher outsourced customer service costs and the write-off of obsolete
equipment. Online subscriber hours, including CSi and SPRYNET, increased 11.6%
to 37.808 million hours for the third quarter of fiscal 1997 from 33.874
million hours in the comparable period last year. Depreciation and
amortization increased 52.7% to $29.363 million as a result of increased
capital expenditures to double network capacity to support the rapid growth
during the past year.
The pretax loss was $21.667 million, compared to pretax earnings of $22.121
million in the third quarter of fiscal 1997.
TAX SERVICES
Revenues increased 26.9% to $123.863 million from $97.581 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. During the first month of the U.S. tax season, returns prepared
by company-owned offices increased 21.7% to 1.2 million compared with the
previous January. The number of electronically filed returns prepared by
company-owned offices increased 29.2% to 946 thousand in January. However, the
number of returns filed electronically in company-owned offices for taxpayers
who prepare their own returns remained consistent with the prior year. The
significant increase in revenues and number of returns prepared and
electronically filed is partially due to favorable weather conditions this
year. Last year, severe weather in January led to the late distribution of
W-2s throughout much of the eastern part of the country, shifting some amount
of tax preparation into early February.
The pretax loss decreased 7.5% to $27.192 million from $29.393 million in the
third quarter of last year, benefiting from the investments that began last May
of adding approximately 250 new
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offices, significantly improving technology, enhancing the Premium business and
favorable weather conditions this year.
FINANCIAL SERVICES
Revenues increased 155.6% to $32.590 million from $12.750 million in the same
period last year. This increase is mainly attributed to participation in the
RAL program and mortgage loan operations, including a gain recognized on the
securitization of home equity loans. In the third quarter of fiscal 1997, the
Financial Services segment began participating in the RALs offered through
Beneficial National Bank by purchasing a 40% interest in such RALs, generating
revenues of $10.719 million. The Financial Services segment also completed its
first securitization of home equity loans, recording a $3 million gain on a
$102 million asset backed security issue that closed on January 30, 1997.
Additionally, revenues from credit cards and software sales increased 28.1% and
40.6%, respectively, compared to last year.
The pretax earnings increased to $7.795 million from $2.112 million in the
third quarter of fiscal 1996, primarily due to participation in the RAL program
and the $3 million gain on the securitization.
INVESTMENT INCOME
Net corporate investment income increased 189.4% to $657 thousand from $227
thousand last year. The increase resulted from more funds available for
investment, partially offset by lower short-term interest rates in fiscal 1997.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the third quarter decreased
6.9% to $3.678 million from $3.949 million in the comparable period last year.
The decrease resulted from lower professional fees partially offset by
increased charitable contributions.
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THREE MONTHS ENDED JANUARY 31, 1997 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1996 (SECOND QUARTER)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
------------------------ ------------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
------- ------- ------- -------
Computer services $ 210,975 $ 214,343 $ (21,667) $ (92,115)
Tax services 123,863 30,805 (27,192) (41,576)
Financial services 32,590 9,984 7,795 (2,090)
Unallocated corporate 183 318 (3,678) (3,081)
Corporate investment income - - 657 2,263
Intersegment sales (4,547) (2,000) - -
------------- ------------- ------------- -----------
$ 363,064 $ 253,450 (44,085) (136,599)
============= =============
Income tax benefit (15,930) (50,940)
------------- -----------
Net loss before minority interest (28,155) (85,659)
Minority interest (2,829) (11,531)
------------- -----------
Net loss $ (25,326) $ (74,128)
============= ===========
Consolidated revenues increased 43.2% to $363.064 million from $253.450 million
in the second quarter of fiscal 1997. The increase is primarily due to higher
revenues generated by the Tax Services segment related to the beginning of the
U.S. and Canadian tax filing seasons and higher revenues from the Financial
Services segment.
The consolidated pretax loss before minority interest decreased 67.7% to
$44.085 million from $136.599 million for the three months ended October 31,
1996. The decrease is largely due to the Computer Services segment, which
incurred a pretax loss of $21.667 million compared to $92.115 million in the
second quarter.
The net loss was $25.326 million, or $.24 per share, compared to $74.128
million, or $.71 per share, for the second quarter of fiscal 1997.
An analysis of operations by segment follows.
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COMPUTER SERVICES
Revenues decreased 1.6% to $210.975 million from $214.343 million reported in
the second quarter of fiscal 1997. The decrease is due to less revenues
generated by the Interactive Services division offset by increases in the
Network Services division and other revenues. Interactive Services revenues
for the three months ended January 31, 1997 decreased 3.9% to $138.506 million,
as compared to the second quarter. Network Services revenues grew 2.6% to
$65.239 million due to an increase in number of customers. New commercial
customers increased 8.5% to 1,151, adding a record 90 corporate customers in
the third quarter.
The pretax loss decreased 76.5% to $21.667 million from $92.115 million
reported in the second quarter of fiscal 1997. The decrease is largely due to
the $7.850 million nonrecurring pretax charge related to the withdrawal of the
WOW! online service, 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, in the
second quarter. Additionally, cost savings were obtained in the third quarter
related to costs directly associated with service revenues and marketing
expenses.
TAX SERVICES
Revenues increased to $123.863 million from $30.805 million in the second
quarter of fiscal 1997. The pretax loss decreased 34.6% to $27.192 million
from $41.576 million reported for the three months ended October 31, 1996. The
improved results are due to the onset of the tax filing season in the United
States and Canada.
FINANCIAL SERVICES
Revenues increased 226.4% to $32.590 million from $9.984 million for the three
months ended October 31, 1996. The increase in revenues is associated with
participation in the RAL program, mortgage loan operations and growth in
software sales. In the third quarter of fiscal 1997, the Financial Services
segment began participating in the RALs offered through Beneficial National
Bank by purchasing a 40% interest in such RALs, generating revenues of $10.719
million. Mortgage operations revenues increased 261.1% to $4.832 million from
$1.338 million for the three months ended October 31, 1996, including a gain of
$3 million on the first securitization of home equity loans. The increase in
software sales is from sales of TaxCut(R) software. Tax preparation software
sales are highly seasonal, and normally peak in the third and fourth quarters
of the fiscal year concurrent with the tax filing season.
The pretax earnings of $7.795 million increased from the pretax loss of $2.090
million for the second quarter of fiscal 1997, due to greater revenues related
to the beginning of the tax season and the $3 million gain on the
securitization.
INVESTMENT INCOME
Net corporate investment income decreased 71.0% to $657 thousand from $2.263
million earned for the three months ended October 31, 1996, due to lower funds
available for investment because of the additional 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 increased 19.4% to $3.678 million
from $3.081 million in the second quarter of fiscal 1997, resulting from
increased employee costs and charitable contributions, partially offset by
decreased shareholder-related expenses.
NINE MONTHS ENDED JANUARY 31, 1997 (FYTD) COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1996 (FYTD)
(AMOUNTS IN THOUSANDS)
Revenues Earnings (loss)
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
Computer services $ 633,960 $ 577,955 $ (161,852) $ 88,323
Tax services 166,950 135,139 (113,997) (104,963)
Financial services 50,798 25,857 4,683 4,092
Unallocated corporate 610 1,313 (10,338) (8,722)
Corporate investment income - - 6,863 7,401
Intersegment sales (8,546) (6,011) - -
------------- ------------- ------------ ------------
$ 843,772 $ 734,253 (274,641) (13,869)
============= =============
Income tax benefit (102,716) (5,326)
------------ ------------
Net loss before minority interest (171,925) (8,543)
Minority interest (20,245) -
------------ ------------
Net loss $ (151,680) $ (8,543)
============ ============
Consolidated revenues for the nine months ended January 31, 1997 increased
14.9% to $843.772 million from $734.253 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 $274.641
million from $13.869 million in the comparable period last year. The increased
loss is largely due to the Computer Services segment which incurred a pretax
loss of $161.852 million compared to pretax earnings of $88.323 million in the
prior year.
The net loss was $151.680 million, or $1.46 per share, compared to $8.543
million, or $.08 per share, for the comparable period last year.
An analysis of operations by segment follows.
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COMPUTER SERVICES
Revenues increased 9.7% to $633.960 million from $577.955 million last year due
to increases in both Interactive Services and Network Services revenues.
Network Services revenues of $188.124 million were 30.7% better than last year,
due to increasing usage and new customers. The number of network customers
increased 24.0% over last year to 1,151. Commercial customer hours increased
to 41.617 million from 30.620 million at January 31, 1996. Interactive
Services revenues of $424.013 million were 3.8% better than last year. The
growth is due to an increase in customers, offset by a pricing structure change
introduced in September 1995. The number of CSi and SPRYNET subscribers at
January 31, 1997, exclusive of the Japanese licensee, increased 2.4% to 3.162
million from 3.088 million last year.
Operating expenses increased 63.6% to $803.668 million from $491.368 million
last year. Costs directly associated with service revenues increased $143.035
million, or 51.3%, as a result of increased network hours and higher outsourced
customer service costs. Online subscriber hours, including CSi and SPRYNET,
increased 42.6% to 113.049 million hours for the nine months ended January 31,
1997, from 79.267 million hours last year. Marketing expenses for the nine
months increased $106.298 million over last year primarily due to accelerated
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 first
nine months of the year also include nonrecurring charges totaling $25.563
million before taxes. A nonrecurring pretax charge of $17.713 million was
recorded in the first quarter related to 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 $161.852 million, compared to pretax earnings of $88.323
million last year.
TAX SERVICES
Revenues increased 23.5% to $166.950 million from $135.139 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. The significant increase in revenues and number of returns
prepared and electronically filed is partially due to favorable weather
conditions this year. Last year, severe weather in January led to the late
distribution of W-2s throughout much of the eastern part of the country,
shifting some amount of tax preparation to early February.
The pretax loss increased 8.6% to $113.997 million from $104.963 million last
year, due to first-time expenses in operating acquired franchises and
competitors, investment in field management and existing offices, and normal
inflationary and volume-related increases in expenses. The
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expense increases were partially offset by improved revenues due in part to
favorable weather conditions this year.
FINANCIAL SERVICES
Revenues increased 96.5% to $50.798 million from $25.857 million last year due
to participation in the RAL program and mortgage loan operations, including a
gain recognized on the securitization of home equity loans. In the third
quarter of fiscal 1997, the Financial Services segment began participating in
the RALs offered through Beneficial National Bank by purchasing a 40% interest
in such RALs, generating revenues of $10.719 million. The Financial Services
segment also completed its first securitization of home equity loans, recording
a $3 million gain on a $102 million asset backed security issue that closed on
January 30, 1997. Additionally, revenues from credit cards increased 24.1% to
$22.624 million compared to last year.
Pretax earnings increased 14.4% to $4.683 from $4.092 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, resulting in pretax earnings of $36 thousand exclusive of these items.
Pretax results increased by $4.647 million, exclusive of these items, due to
participation in the RAL program and the $3 million gain on the securitization.
INVESTMENT INCOME
Net corporate investment income decreased 7.3% to $6.863 million from $7.401
million last year. The decrease resulted from lower short-term interest rates
in fiscal 1997.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 18.5% to $10.338 million
from $8.722 million last year, due to increased charitable contributions and
expenses of $795 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). Increases in
expenses were partially offset by lower professional fees.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Forms 10-Q for the first and
second quarters 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 later
voluntarily dismissed the suit and joined the plaintiffs in the Romine suit.
The complaints in the Greenfield and Romine 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)(a) Amendment No. 7 to the H&R Block Deferred Compensation
Plan for Executives.
(10)(b) Amendment No. 3 to the H&R Block Supplemental Deferred
Compensation Plan for Executives.
(10)(c) Amendment No. 2 to the H&R Block Deferred Compensation
Plan for Directors.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the third
quarter of fiscal 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 3/13/97 BY /s/ George T. Robson
---------------- ------------------------------
George T. Robson
Senior Vice President,
Chief Financial Officer
and Treasurer
DATE 3/13/97 BY /s/ Patrick D. Petrie
---------------- ------------------------------
Patrick D. Petrie
Vice President and
Corporate Controller
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