<PAGE> 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 October 31, 1995
[ ] 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 5, 1995 was 103,911,849 shares.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I Financial Information
Consolidated Balance Sheets
October 31, 1995 (Unaudited) and
April 30, 1995 (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended October 31, 1995 and 1994 (Unaudited) . . . . . . . . . . . . 2
Six Months Ended October 31, 1995 and 1994 (Unaudited) . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 1995 and 1994 (Unaudited) . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 7
PART II Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1995 1995
---- ----
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash (including certificates of deposit of $8,192 and $25,781) $29,304 $ 90,248
Marketable securities 39,900 263,239
Receivables, less allowance for doubtful accounts of $7,141 and
$7,274 258,827 260,198
Prepaid expenses 58,831 21,823
---------- -----------
TOTAL CURRENT ASSETS 386,862 635,508
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 64,343 91,494
Excess of cost over fair value of net tangible assets acquired,
net of amortization 52,748 78,205
Other 60,365 45,383
---------- -----------
177,456 215,082
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 288,170 227,448
---------- -----------
$ 852,488 $ 1,078,038
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 60,724 $ 49,421
Accounts payable, accrued expenses and deposits 128,070 145,909
Accrued salaries, wages and payroll taxes 23,871 71,281
Accrued taxes on income 35,129 92,100
---------- ----------
TOTAL CURRENT LIABILITIES 247,794 358,711
OTHER NONCURRENT LIABILITIES 36,275 33,462
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Convertible preferred stock, no par, stated value $.01 per share 4 4
Additional paid-in capital 140,491 140,578
Retained earnings 634,908 700,423
---------- ----------
776,492 842,094
Less cost of 5,464,835 and 4,109,662 shares of common stock
in treasury 208,073 156,229
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568,419 685,865
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$ 852,488 $ 1,078,038
========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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OCTOBER 31,
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1995 1994
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<S> <C> <C>
REVENUES
Service revenues $ 216,464 $ 163,404
Franchise royalties 3,582 3,442
Investment income 2,866 4,554
Other income 1,001 1,457
---------- ----------
223,913 172,857
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EXPENSES
Employee compensation and benefits 61,523 49,908
Occupancy and equipment 89,727 64,072
Marketing and advertising 16,572 13,880
Supplies, freight and postage 17,931 10,878
Other 51,630 36,148
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237,383 174,886
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LOSS BEFORE INCOME TAX BENEFIT (13,470) (2,029)
Income tax benefit (5,172) (777)
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NET LOSS $ (8,298) $ (1,252)
========== ===========
Weighted average number of common shares outstanding 103,950 105,000
======= =======
Net loss per share $ (.08) $ (.01)
========== ===========
Dividends per share $ .32 $ .3125
========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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OCTOBER 31,
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1995 1994
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<S> <C> <C>
REVENUES
Service revenues $ 415,811 $ 299,123
Franchise royalties 4,977 4,629
Investment income 7,173 9,705
Other income 14,066 4,800
---------- ----------
442,027 318,257
---------- ----------
EXPENSES
Employee compensation and benefits 116,427 94,902
Occupancy and equipment 171,238 124,982
Marketing and advertising 20,149 20,323
Supplies, freight and postage 33,142 17,558
Other 106,058 67,318
---------- ----------
447,014 325,083
---------- ----------
LOSS BEFORE INCOME TAX BENEFIT (4,987) (6,826)
Income tax benefit (1,915) (2,614)
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NET LOSS $ (3,072) $ (4,212)
========== ==========
Weighted average number of common shares outstanding 104,423 105,063
========== ==========
Net loss per share $ (.03) $(.04)
========== ==========
Dividends per share $ .6325 $ .5925
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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OCTOBER 31,
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1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,072) $ (4,212)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 49,811 31,481
Gain on sale of subsidiaries (12,445) (2,796)
Other noncurrent liabilities 2,813 7,002
Changes in:
Receivables (4,388) 2,483
Prepaid expenses (37,629) (15,988)
Accounts payable, accrued expenses and deposits (15,003) (36,725)
Accrued salaries, wages and payroll taxes (46,872) (38,814)
Accrued taxes on income (57,826) (78,033)
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NET CASH USED IN OPERATING ACTIVITIES (124,611) (135,602)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (354,642) (843,724)
Maturities of marketable securities 607,353 1,043,297
Purchases of property and equipment (101,156) (44,167)
Excess of cost over fair value of net tangible assets acquired (2,626) (2,150)
Proceeds from sale of subsidiary 35,000 -
Other, net (14,522) 4,750
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 169,407 158,006
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (665,412) (749,612)
Proceeds from issuance of notes payable 676,715 813,362
Dividends paid (65,112) (62,948)
Payments to acquire treasury shares (59,453) (83,112)
Proceeds from stock options exercised 7,522 52,754
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (105,740) (29,556)
---------- ----------
NET DECREASE IN CASH (60,944) (7,152)
CASH AT BEGINNING OF PERIOD 90,248 41,343
---------- ----------
CASH AT END OF PERIOD $ 29,304 $ 34,191
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 55,909 $74,023
Interest paid 1,455 1,185
</TABLE>
See Notes to Consolidated Financial Statements.
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. The Consolidated Balance Sheet as of October 31, 1995, the Consolidated
Statements of Operations for the three and six months ended October 31, 1995
and 1994, and the Consolidated Statements of Cash Flows for the six months
ended October 31, 1995 and 1994 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, 1995 and for
all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1995 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring
in the months of January through April. Thus, the six month results are not
indicative of results to be expected for the year.
2. On May 1, 1995, the Company sold its wholly-owned subsidiary, MECA Software,
Inc., exclusive of its rights to publish TaxCut, for $35,000,000 cash. The
sale resulted in a pretax gain of $12,445,000, which is included in other
income in the Consolidated Statements of Operations. MECA Software, Inc. was
part of the Financial Services segment.
3. On May 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used. In connection with the adoption of this Statement, the Company
reviewed the assets and related goodwill of its personal tax preparation
software business for impairment. Since the expected future cash flows of
this business, undiscounted and without interest charges, were less than the
carrying value of the assets, the Company recognized an impairment loss of
$8,389,000. The impairment loss represents the amount by which the carrying
value of the tax preparation software business assets, including goodwill,
exceeded the estimated fair value of those assets. The estimated fair value
was determined as the present value of estimated expected future cash flows
using a discount rate appropriate for the risks associated with the personal
software industry. The loss is included in other expenses in the
Consolidated Statements of Operations. The personal tax preparation business
is reported in the Financial Services segment.
4. On May 1, 1995, the Company changed its method of accounting for direct
response advertising costs to conform with the requirements of the American
Institute of Certified Public Accountants Statement of Position 93-7,
"Reporting on Advertising Costs," which specifies the accounting for direct
response advertising. Under this accounting method, direct response
advertising costs that meet certain criteria are reported as assets and are
amortized on a cost-pool-by-cost-pool basis over the period during which the
future benefits are expected to be received. Such assets are amortized over
a 24-month period, on an accelerated basis, beginning in the month subsequent
to the expenditure. Direct response advertising consists primarily of
magazine and newspaper advertisements, broadcast, direct mail costs including
mailing lists and postage, and disk and CD-ROM costs related directly to new
subscriber solicitations. No indirect costs are included in the capitalized
direct response advertising. The net effect of the
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<PAGE> 8
change in accounting increased assets by $26,099,000, decreased the net
loss by $16,077,000 and decreased the net loss per share by $.15 for the six
months ended October 31, 1995. Amortization of direct response advertising
assets was $2,821,000 for the six months ended October 31, 1995. The Company
expenses advertising costs not classified as direct response the first time
the advertising takes place.
5. During the six months ended October 31, 1995, the net unrealized holding
gain on available-for-sale securities increased $1,368,000 to $1,603,000.
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, 1995 declined to 104,423,000 from
105,063,000 last year, due to repurchase of outstanding shares, partially
offset by the issuance of treasury shares for stock option exercises.
8. During the six months ended October 31, 1995 and 1994, the Company issued
200,327 and 1,452,473 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans; during the same
periods, the Company acquired 1,555,500 and 2,041,500 shares of its
common stock at an aggregate cost of $59,453,000 and $83,112,000,
respectively.
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<PAGE> 9
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 $276.8 million at April 30, 1995 to $139.1
million at October 31, 1995. The working capital ratio at October 31, 1995
is 1.6 to 1, compared to 1.8 to 1 at April 30, 1995. 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 program. At October 31,
1995, short-term borrowings used to fund credit card receivables totalled
$40.8 million, compared to $49.4 million at April 30, 1995. Additionally,
short-term borrowings of $19.9 million were outstanding at October 31, 1995
to meet operating cash requirements of the Company. The Company also
maintains a year-round $100 million line of credit to support various
financial activities conducted by BFC.
The Company's acquisition of treasury shares, capital expenditures and dividend
payments during the first six months were funded primarily through
internally-generated funds. In October, the Company began borrowing on a
short-term basis to meet certain cash requirements. Management anticipates
such borrowings will continue through January 1996, at which time the Tax
Services segment will produce positive cash flows as a result of the tax
season. Management anticipates seasonal short-term borrowing to fund
operations during October through January in the next two fiscal years.
The Company's Board of Directors has approved a series of investment
initiatives for CompuServe Incorporated designed to enhance its long-term
competitiveness and take advantage of accelerating growth opportunities in
the market for online services. These initiatives include the launch of a
new consumer online service, a simplified and less expensive pricing
structure, two new interfaces, infrastructure expenditures and expansion of
Internet activities offered through the various online services. The
estimated cost of this undertaking, net of capitalized direct response
advertising, is in excess of $70 million for fiscal 1996, and will therefore
reduce the Company's fiscal 1996 profitability. However, management
anticipates that these initiatives will have a positive impact on revenues in
fiscal 1996 and on earnings beginning in fiscal 1997.
During the second quarter, the Company's Board of Directors announced
resumption of the previously approved stock buyback program for ten million
shares, initiated in December 1993. This program was suspended while
consideration was given to the strategic investments in CompuServe described
above. As of October 31, 1995, the Company has purchased 4,479,500 of the
ten million shares authorized for repurchase.
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<PAGE> 10
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.
During the first quarter of fiscal 1996, the Company sold its wholly-owned
subsidiary, MECA Software, Inc. for $35 million cash, and recorded a pretax
gain of $12.445 million. Additionally, an impairment loss of $8.389 million
was recognized related to the assets of the tax preparation software
operations of the Company. The operations of MECA prior to the sale, the
gain on the sale and the impairment loss are included in the Financial
Services segment.
Prior year amounts have been reclassified to conform to current year
presentation.
THREE MONTHS ENDED OCTOBER 31, 1995 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
------------------------- ---------------------------
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Computer services $ 188,373 $ 136,631 $ 22,072 $ 34,336
Tax services 27,602 27,733 (34,351) (35,114)
Financial services 6,815 5,286 (1,504) (3,214)
Intersegment sales (1,999) (2,775) - -
---------- ---------- ---------- ----------
220,791 166,875 (13,783) (3,992)
Investment income 2,867 4,554 2,867 4,554
Unallocated corporate 255 1,428 (2,554) (2,591)
---------- ---------- ---------- ----------
$ 223,913 $ 172,857 (13,470) (2,029)
========== ========== (5,172) (777)
Income tax benefit ---------- ----------
Net loss $ (8,298) $ (1,252)
========== ==========
</TABLE>
Consolidated revenues for the three months ended October 31, 1995 increased
29.5% to $223.913 million from $172.857 million reported last year. The
increase is primarily due to greater revenues reported by the Computer
Services segment.
The consolidated pretax loss for the second quarter of fiscal 1996 increased to
$13.470 million from $2.029 million in the second quarter of last year. The
significant change in the second quarter loss is due to the Computer Services
segment and investment income, slightly offset by improved results reported
by the Financial Services segment.
The net loss was $8.298 million, or $.08 per share, compared to $1.252 million,
or $.01 per share, for the same period last year.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 37.9% to $188.373 million from $136.631 million in the
comparable period last year, due to increases in consumer, network and
Internet revenues. Consumer Services revenues were 34.8% better than last
year, despite the largest price decrease in the history of CompuServe in
September 1995
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<PAGE> 11
and the price decrease effected in February 1995. The growth in consumer
revenues is due to customer acquisitions and increased usage. The number of
worldwide users of CompuServe and its licensees and distributors increased 1.5
million to 3.8 million at the end of the second quarter of fiscal 1996.
Network Services revenues were 31.9% better than last year, also due to
increasing usage and new customers. Additionally, revenues from Internet
software sales, which is new in fiscal 1996, contributed revenues of $8.788
million in the second quarter.
Pretax earnings decreased 35.7% to $22.072 million from $34.336 million in the
second quarter of fiscal 1995. Pretax earnings as a percentage of revenues
was 11.7% for the second quarter of fiscal 1996, compared to 25.1% for the
same period last year. The decrease in pretax earnings and the pretax margin
resulted from the significant price decreases in February and September 1995
related to the CompuServe online services.
TAX SERVICES
Revenues decreased 0.5% to $27.602 million from $27.733 million last year, due
to lower tuition tax school fees in the United States, nearly offset by
greater revenues generated by Australian tax operations during its tax
season.
The pretax loss improved by 2.2% to $34.351 million from $35.114 million in the
second quarter of last year, due to lower employer taxes on stock option
exercises caused by a significant decrease in seasonal options exercised
during September.
FINANCIAL SERVICES
Revenues increased 28.9% to $6.815 million from $5.286 million in the same
period last year. The increase in revenues was due to credit card operations
which experienced an increase in cards outstanding and higher revolving
balances.
The pretax loss decreased to $1.504 million from $3.214 million in the second
quarter of fiscal 1995, due to the improvement in credit card operations and
the absence of losses in fiscal 1996 of operations which were sold at the
beginning of the year.
INVESTMENT INCOME
Investment income decreased 37.0% to $2.867 million from $4.554 million last
year. The decrease resulted primarily from less funds available for
investment, caused by increased capital expenditures and investments in
marketing and advertising, particularly related to the Computer Services
segment, increased treasury share purchases and a decrease in proceeds from
stock options exercised.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the second quarter decreased
1.4% to $2.554 million from $2.591 million in the comparable period last
year.
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THREE MONTHS ENDED OCTOBER 31, 1995 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 1995 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
--------------------------- ----------------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
Computer services $ 188,373 $ 186,550 $ 22,072 $ 44,130
Tax services 27,602 9,956 (34,351) (41,219)
Financial services 6,815 18,737 (1,504) 3,484
Intersegment sales (1,999) (2,011) - -
---------- ---------- ---------- ----------
220,791 213,232 (13,783) 6,395
Investment income 2,867 4,307 2,867 4,307
Unallocated corporate 255 575 (2,554) (2,219)
---------- ---------- ---------- ----------
$ 223,913 $ 218,114 (13,470) 8,483
========== ==========
Income tax expense (benefit) (5,172) 3,257
----------- ----------
Net earnings (loss) $ (8,298) $ 5,226
=========== ==========
</TABLE>
Consolidated revenues increased 2.7% to $223.913 million from $218.114 million
in the first quarter of fiscal 1996. The increase is due to higher revenues
generated by the Tax Services segment.
The consolidated pretax loss was $13.470 million, compared to pretax earnings
of $8.483 million for the three months ended July 31, 1995. The decline is
largely due to Computer Services segment earnings which decreased by 50.0%,
the gain on the sale of MECA Software, Inc. in the first quarter, net of the
impairment loss, included in the Financial Services segment of $4.056
million, and decreased investment income.
The net loss was $8.298 million, or $.08 per share, compared to net earnings of
$5.226 million, or $.05 per share, for the first quarter of fiscal 1996.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 1.0% to $188.373 million from $186.550 million reported in
the first quarter of fiscal 1996. The increase is due to greater revenues
generated by the Consumer Services and Network Services divisions, partially
offset by a decline in revenues from Internet software sales. Consumer
Services and Network Services revenues for the three months ended October 31,
1995 increased 1.8% and 5.7%, respectively, as compared to the first quarter
of fiscal 1996. The growth in Consumer Services is due to customer
acquisitions, net of the effect of the September 1995 price decrease. The
number of worldwide users of CompuServe and its licensees and distributors
increased 400,000 during the second quarter. The growth in Network Services
resulted from increasing usage and new customers. The decline in sales of
Internet software of $3.260 million was caused by management's decision to
lower per unit sales prices. Management anticipates that further price
reductions will be made during fiscal 1996.
Pretax earnings decreased 50.0% to $22.072 million from $44.130 million
reported in the first quarter of fiscal 1996. Pretax earnings as a
percentage of revenues was 11.7% for the second quarter, compared to 23.7%
for the first quarter of the fiscal year. The decrease in pretax earnings
and the pretax margin
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<PAGE> 13
was caused entirely by the reduction in pricing for online services in
September.
TAX SERVICES
Revenues increased to $27.602 million from $9.956 million in the first quarter
of fiscal 1996. The increase partially resulted from the onset of the tax
season in Australia, which contributed revenues of approximately $9.6
million. U.S. revenues increased approximately $7.9 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 16.7% to $34.351 million from $41.219 million
reported for the three months ended July 31, 1995. The decrease is due to
earnings reported by Australian tax operations from its fiscal 1996 tax
season.
FINANCIAL SERVICES
Revenues decreased 63.6% to $6.815 million from $18.737 million for the three
months ended July 31, 1995. The decrease resulted entirely from the gain on
the sale of MECA Software, Inc. of $12.445 million in the first quarter of
this year.
The pretax loss was $1.504 million, compared to pretax earnings of $3.484
million for the first quarter of fiscal 1996, due to the net effect of the
gain on the sale of MECA and the impairment loss recognized on the assets of
the tax preparation software business of $4.056 million.
INVESTMENT INCOME
Investment income decreased 33.4% to $2.867 million from $4.307 million earned
for the three months ended July 31, 1995, due to the resources required to
fund operations during the Tax Services segment's off-season, the significant
marketing and capital investments made in the Computer Services segment and
share repurchases during the second quarter totalling $59.453 million.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 15.1% to $2.554 million
from $2.219 million in the first quarter of fiscal 1996, resulting from
increased employee costs and consultant fees.
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<PAGE> 14
SIX MONTHS ENDED OCTOBER 31, 1995 (FYTD) COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1994 (FYTD)
(AMOUNTS IN THOUSANDS)
<TABLE>
Revenues Earnings (loss)
------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computer services $ 374,923 $ 264,527 $ 66,202 $ 68,248
Tax services 37,558 37,296 (75,570) (75,112)
Financial services 25,552 9,741 1,980 (5,110)
Intersegment sales (4,010) (5,550) - -
---------- ---------- ---------- ----------
434,023 306,014 (7,388) (11,974)
Investment income 7,174 9,705 7,174 9,705
Unallocated corporate 830 2,538 (4,773) (4,557)
---------- ---------- ---------- ----------
$ 442,027 $ 318,257 (4,987) (6,826)
========== ========== (1,915) (2,614)
Income tax benefit ---------- ----------
Net loss $ (3,072) $ (4,212)
========== ==========
</TABLE>
Consolidated revenues for the six months ended October 31, 1995 increased 38.9%
to $442.027 million from $318.257 million reported last year. The increase
is principally due to greater revenues reported by the Computer Services and
Financial Services segments, including the gain on the sale of MECA Software,
Inc. of $12.445 million.
The consolidated pretax loss improved 26.9% to $4.987 million from $6.826
million in the comparable period last year. The improvement is due to the
Financial Services segment, partially offset by a decline reported by the
Computer Services segment and lower investment income. In fiscal 1996,
Financial Services results include a gain on the sale of MECA Software, Inc.
of $12.445 million and an impairment loss of $8.389 million recognized on the
assets of the tax preparation software business.
The net loss was $3.072 million, or $.03 per share, compared to $4.212 million,
or $.04 per share, for the comparable period last year.
An analysis of operations by segment follows.
COMPUTER SERVICES
Revenues increased 41.7% to $374.923 million from $264.527 million last year
due to increases in both Consumer Services and Network Services revenues, and
the addition of revenues from Internet software sales this year totaling
$20.836 million. Consumer Services revenues were 41.7% better than last
year. The growth is due to the increase in customers and usage, offset by
price reductions introduced in February and September 1995. The new pricing
policy introduced in September is the largest reduction in the history of the
company. The number of worldwide users of CompuServe and its licensees and
distributors has increased 1.5 million as compared to last year. Network
Services revenues were 33.7% better than last year, due to increasing usage
and new customers.
Pretax earnings decreased 3.0% to $66.202 million from $68.248 million last
year. Pretax earnings as a percentage of revenues was 17.7% for the six
months ended October 31, 1995, compared to 25.8% for the same period last
year. The decrease in pretax earnings and the pretax margin resulted
primarily from the two price reductions which have been implemented since
October 1994.
- 12 -
<PAGE> 15
TAX SERVICES
Revenues increased 0.7% to $37.558 million from $37.296 million last year, due
to higher revenues generated by Australian tax operations, substantially
offset by lower tuition tax school fees in the United States by 13.8%.
The pretax loss slightly increased 0.6% to $75.570 million from $75.112 million
last year. Management is closely monitoring expenses in an effort to keep
expenses in line with last year. Additionally, Tax Services incurred less
employer taxes than in the prior year due to the significant decrease in the
number of seasonal options exercised in fiscal 1996.
FINANCIAL SERVICES
Revenues increased to $25.552 million from $9.741 million last year, largely
due to the gain on the sale of MECA Software, Inc. in fiscal 1996 of $12.445
million, offset by a reduction in revenues resulting from operations sold and
transferred in fiscal 1996. Increased revenues are also being generated by
the credit card business.
Pretax earnings for the first six months was $1.980 million, compared to a
pretax loss of $5.110 million last year, mostly due to the net effect of the
gain on the sale of MECA and the impairment loss of $8.389 million realized
on the assets of the tax preparation software business, and the absence of
losses in fiscal 1996 of operations which were sold or transferred at the
beginning of the year.
INVESTMENT INCOME
Investment income decreased 26.1% to $7.174 million from $9.705 million last
year. The decrease resulted primarily from less funds available for
investment, due to the marketing and capital investments being made in
CompuServe and a decrease in proceeds from seasonal stock option exercises.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 4.7% to $4.773 million
from $4.557 million last year, due to increased employee expenses and
consultant fees.
- 13 -
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the registrant was held on September 12,
1995. At such meeting, four Class III directors were elected to serve
three-year terms. In addition, the resolutions set forth below were
submitted to a vote of shareholders. With respect to the election of
directors and the adoption of each resolution, the number of votes cast for,
against or withheld, and the number of abstentions or nonvotes were as
follows:
<TABLE>
<CAPTION>
ELECTION OF CLASS III DIRECTORS
Nominee Votes FOR Votes WITHHELD
--------------------- ---------- --------------
<S> <C> <C>
Richard H. Brown 91,838,023 454,421
Donna R. Ecton 91,608,356 684,088
Marvin L. Rich 91,618,811 673,634
Morton I. Sosland 91,556,488 735,956
</TABLE>
APPROVAL OF AMENDMENT TO THIRD STOCK OPTION PLAN FOR SEASONAL EMPLOYEES
The following resolution was adopted by a vote of 68,658,913 shares in
favor of such resolution, 14,929,706 shares against such resolution and
401,327 shares abstaining. In addition, there were 8,302,498 shares for
which proxies were submitted for the meeting, but for which no vote was cast
on the resolution. The resolution states:
"RESOLVED, That this corporation's Third Stock Option Plan for Seasonal
Employees, as amended, be further amended to extend it for three years, to
terminate (unless further extended) on December 31, 1998."
APPOINTMENT OF AUDITORS
The following resolution was adopted by a vote of 91,928,653 shares in
favor of such resolution, 162,689 shares against such resolution and 201,102
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, 1996, is hereby ratified, approved and confirmed."
At the close of business on July 14, 1995, the record date for the
annual meeting of shareholders, there were 104,896,019 shares of Common Stock
of the registrant outstanding and entitled to vote at the meeting. There were
92,292,445 shares represented at the annual meeting of shareholders held on
September 12, 1995.
- 14 -
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10) Restricted Shares Agreement dated August 5, 1995, between the
registrant and Richard H. Brown.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the second
quarter of fiscal year 1996.
- 15 -
<PAGE> 18
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 12/12/95 BY /s/Richard H. Brown
-------------- ------------------------
Richard H. Brown
President and
Chief Executive Officer
DATE 12/12/95 BY /s/Ozzie Wenich
-------------- ------------------------
Ozzie Wenich
Vice President, Finance
and Treasurer
- 16 -
<PAGE> 1
EXHIBIT 10
RESTRICTED SHARES AGREEMENT
THIS RESTRICTED SHARES AGREEMENT is made and entered into as of August
5, 1995, by and between H&R BLOCK, INC., a Missouri corporation ("Block") and
RICHARD H. BROWN ("Brown").
WHEREAS, the parties hereto are parties to an Executive Employment
Agreement dated July 29, 1995 (the "Executive Employment Agreement"), pursuant
to which Brown is employed by Block (or a subsidiary of Block) to serve as
President and Chief Executive Officer of Block effective on August 5, 1995 (the
"Employment Date"); and
WHEREAS, pursuant to Section 1.03(c)(i) of the Executive Employment
Agreement, Brown is to receive from Block an award of 46,370 "Restricted
Shares" (as such term is defined in such Plan) under Block's 1993 Long-Term
Executive Compensation Plan, such award having been first approved by the
Compensation Committee of the Board of Directors, the administrator under such
Plan; and
WHEREAS, the parties desire to define the terms and conditions of the
Restricted Shares award in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement and the Executive Employment Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by Block and Brown, the parties agree as follows:
1. Issuance of Shares; Forfeiture or Redelivery of Shares.
(a) As of August 5, 1995, Block shall issue 46,370 Restricted
Shares (the "Shares") to Brown and Brown shall redeliver the certificate or
certificates representing the Shares to Block, duly endorsed in blank for
transfer. The Shares shall be held by Block and shall be subject to forfeiture
by or redelivery to Brown in the manner provided below.
(b) Except as provided in Section 1(g) below, on the date Brown
ceases for whatever reason to be a full-time and active employee of Block or
any subsidiary of Block (a "Block Employee"), all Shares held on such date by
Block shall be forfeited by Brown and Brown hereby authorizes Block and its
stock transfer agent to cause the delivery, transfer and conveyance of such
Shares to Block. Thereafter, this Agreement shall terminate and Block and
Brown shall, except as provided in Section 3(b) below, have no further rights
or obligations hereunder.
(c) If Brown continuously remains a Block Employee between the
Employment Date and January 1, 1996, inclusive, Block shall promptly thereafter
redeliver to Brown 18,153 of the Shares then held by Block and, for purposes of
Section 1(b) above, as of said
<PAGE> 2
January 1, 1996, such Shares shall no longer be considered to be held by Block.
(d) If Brown continuously remains a Block Employee between the
Employment Date and August 5, 1996, inclusive, Block shall promptly thereafter
redeliver to Brown 9,405 of the Shares then held by Block and, for purposes of
Section 1(b) above, as of said August 5, 1996, such Shares shall no longer be
considered to be held by Block.
(e) If Brown continuously remains a Block Employee between the
Employment Date and August 5, 1997, inclusive, Block shall promptly thereafter
redeliver to Brown 9,406 of the Shares then held by Block and, for purposes of
Section 1(b) above, as of said August 5, 1997, such Shares shall no longer be
considered to be held by Block.
(f) If Brown continuously remains a Block Employee between the
Employment Date and August 5, 1998, inclusive, Block shall promptly thereafter
redeliver to Brown 9,406 of the Shares then held by Block and, for purposes of
Section 1(b) above, as of said August 5, 1998, such Shares shall no longer be
considered to be held by Block. Upon completion of any such redelivery, this
Agreement shall terminate and Block and Brown shall, except as provided in
Section 3(b) below, have no further rights or obligations hereunder.
(g) If Brown ceases to be a Block Employee and Section 1.06(c)
of the Executive Employment Agreement applies, all restrictions (except those
that may apply pursuant to Section 3(b) below) on any of the Shares then held
by Block shall terminate and Block shall promptly thereafter redeliver to Brown
all of the Shares then held by Block. Upon completion of any such redelivery,
this Agreement shall terminate and Block and Brown shall, except as provided in
Section 3(b) below, have no further rights or obligations hereunder.
2. Dividends and Voting Rights. During the time that Block
continues to hold any Shares subject hereunder to forfeiture by (and redelivery
to) Brown, Brown shall be entitled to receive any dividends paid with respect
to such Shares and Brown shall be entitled to vote such Shares on any matters
submitted by Block to its shareholders.
3. Transfer Restrictions.
(a) During the period that Shares are held by Block hereunder for
redelivery to Brown, such Shares and the rights and privileges conferred hereby
shall not be transferred, assigned, pledged, hypothecated in any way (whether
by operation of law or otherwise) and shall not be subject to sale under
execution, attachment or similar process. Upon any attempt, contrary to the
terms hereof,
2
<PAGE> 3
to transfer, assign, pledge, hypothecate, or otherwise so dispose of such
Shares or any right or privilege conferred hereby, or upon any attempted sale
under any execution, attachment, or similar process upon such Shares or the
rights and privileges hereby granted, then and in any such event this Agreement
and the rights and privileges hereby granted shall, except as provided in
Section 3(b) below, immediately terminate. Immediately after such termination,
such Shares shall be forfeited by Brown and Brown hereby authorizes Block and
its stock transfer agent to cause the delivery, transfer and conveyance of such
Shares to Block.
(b) If at any time counsel for Block determines that qualification
of the Shares under any state or federal securities law, or the consent or
approval of any governmental regulatory authority, is necessary or desirable as
a condition of the transfer of such Shares (including a sale, assignment,
pledge, grant of a security interest in respect of, attachment, or disposal of
the Shares in any manner, by operation of law or otherwise) or offer to
transfer such Shares, Brown shall not transfer or offer to transfer such
Shares, in whole or in part, and any such attempted transfer or offer to
transfer will be void and of no effect, unless and until such qualification,
consent, or approval shall have been effected or obtained free of any
conditions such counsel deems unacceptable.
(c) This Section 3 shall survive any termination of this Agreement
and shall be applicable to any Shares redelivered to Brown under Subsections
1(c), 1(d), 1(e), 1(f) and 1(g) above.
4. Legend. The certificate or certificates representing the
Shares shall contain the following restrictive transfer legend:
"THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF
STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS
(INCLUDING FORFEITURE) OF THE 1993 LONG-TERM EXECUTIVE COMPENSATION
PLAN OF H&R BLOCK, INC. AND AN AGREEMENT ENTERED INTO BETWEEN THE
REGISTERED OWNER AND H&R BLOCK, INC. COPIES OF SUCH PLAN AND
AGREEMENT ARE ON FILE WITH THE SECRETARY OF H&R BLOCK, INC."
5. Brown's Acknowledgement and Acceptance. Brown acknowledges
receipt of a copy of the 1993 Long-Term Executive Compensation Plan, a copy of
which is attached hereto as Exhibit A and incorporated herein, and represents
that he is familiar with the terms thereof. Brown hereby accepts the Shares
subject to all of the terms and provisions of this Agreement and in such Plan.
6. Miscellaneous. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, legal
representatives, successors, and permitted assigns. This Agreement shall be
governed by and construed in accordance with the laws of the State of Missouri.
The section headings here-
3
<PAGE> 4
in are for convenience only and shall not be considered in construing this
Agreement. No amendment, supplement, or waiver to this Agreement is valid or
binding unless in writing and signed by both parties. Failure of Block or
Brown to insist upon strict compliance with any of the terms, covenants, or
conditions hereof shall not be deemed a waiver of such terms, covenants, or
conditions.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates indicated below, but effective as of the date first above written.
H&R BLOCK, INC.
By /s/Henry W. Bloch Date 9-26-95
---------------------- -----------------------
Henry W. Bloch
Chairman of the Board
/s/Richard H. Brown Date 9-27-95
- ------------------------ -----------------------
Richard H. Brown
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> OCT-31-1995
<CASH> 29304
<SECURITIES> 39900
<RECEIVABLES> 265968
<ALLOWANCES> 7141
<INVENTORY> 0
<CURRENT-ASSETS> 386862
<PP&E> 288170<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 852488
<CURRENT-LIABILITIES> 247794
<BONDS> 0
<COMMON> 1089
0
4
<OTHER-SE> 567326
<TOTAL-LIABILITY-AND-EQUITY> 852488
<SALES> 0
<TOTAL-REVENUES> 442027
<CGS> 0
<TOTAL-COSTS> 447014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4987)
<INCOME-TAX> (1915)
<INCOME-CONTINUING> (3072)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3072)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
</FN>
</TABLE>
