<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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.)
4410 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 February 28, 1995 was 104,747,167 shares.
<PAGE>
TABLE OF CONTENTS
PART I Financial Information
Consolidated Balance Sheets
January 31, 1995 (Unaudited) and
April 30, 1994 (Audited)
Consolidated Statements of Operations
Three Months Ended January 31, 1995 and 1994 (Unaudited)
Nine Months Ended January 31, 1995 and 1994 (Unaudited)
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1995 and 1994 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II Other Information
SIGNATURES
<PAGE>
<TABLE>
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
<CAPTION>
January 31, April 30,
1995 1994
(Unaudited) (Audited)
ASSETS ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash (including certificates of deposit of $15,354 and $23,519) $ 59,998 $ 41,343
Marketable securities 109,750 473,043
Receivables, less allowance for doubtful accounts of $16,047 and
$12,744 263,802 165,858
Prepaid expenses 31,872 19,551
------------- -------------
TOTAL CURRENT ASSETS 465,422 699,795
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 101,003 105,705
Excess of cost over fair value of net tangible assets acquired,
net of amortization 68,337 67,679
Other 41,600 36,301
------------- -------------
210,940 209,685
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 201,629 165,224
------------- -------------
$ 877,991 $ 1,074,704
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 90,624 $ -
Accounts payable, accrued expenses and deposits 121,631 160,592
Accrued salaries, wages and payroll taxes 41,941 55,195
Accrued taxes on income 22,082 120,425
------------- -------------
TOTAL CURRENT LIABILITIES 276,278 336,212
OTHER NONCURRENT LIABILITIES 41,034 30,617
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 87,750 90,552
Retained earnings 628,727 719,724
------------- -------------
717,566 811,365
Less cost of 4,118,232 and 2,823,605 shares of common stock
in treasury 156,887 103,490
------------- -------------
560,679 707,875
------------- -------------
$ 877,991 $ 1,074,704
============= =============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
<CAPTION>
Three Months Ended
January 31,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES
Service revenues $ 252,528 $ 213,787
Franchise royalties 8,931 9,551
Investment income 4,104 2,800
Other income 2,451 3,303
------------ ------------
268,014 229,441
------------ ------------
EXPENSES
Employee compensation and benefits 94,643 83,731
Occupancy and equipment 74,777 60,686
Marketing and advertising 17,649 9,730
Supplies, freight and postage 20,490 17,385
Other 47,353 44,292
Purchased research and development - 25,072
------------ ------------
254,912 240,896
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 13,102 (11,455)
Income tax expense 5,018 6,479
------------ ------------
Net earnings (loss) from continuing operations 8,084 (17,934)
Net earnings from discontinued operations (less applicable
income taxes of $2,920) - 3,225
Gain on sale of discontinued operations (less applicable income
taxes of $16,711) - 27,265
------------ ------------
NET EARNINGS $ 8,084 $ 12,556
============ ============
Weighted average number of common shares outstanding 105,658 106,892
======= =======
EARNINGS (LOSS) PER SHARE
From continuing operations $ .08 $ (.17)
============ ============
Net earnings $ .08 $ .12
============ ============
Dividends per share $ .3125 $ .28
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
<CAPTION>
Nine Months Ended
January 31,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES
Service revenues $ 551,651 $ 434,886
Franchise royalties 13,560 13,725
Investment income 13,809 10,331
Other income 7,251 5,019
------------ ------------
586,271 463,961
------------ ------------
EXPENSES
Employee compensation and benefits 189,545 162,575
Occupancy and equipment 199,759 160,602
Marketing and advertising 37,972 23,486
Supplies, freight and postage 38,048 32,261
Other 114,671 93,662
Purchased research and development - 25,072
------------ ------------
579,995 497,658
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE (BENEFIT) 6,276 (33,697)
Income tax expense (benefit) 2,404 (3,347)
------------ ------------
Net earnings (loss) from continuing operations 3,872 (30,350)
Net earnings from discontinued operations (less applicable
income taxes of $8,706) - 9,268
Gain on sale of discontinued operations (less applicable income
taxes of $16,711) - 27,265
------------ ------------
NET EARNINGS $ 3,872 $ 6,183
============ ============
Weighted average number of common shares outstanding 105,729 106,581
======= =======
EARNINGS (LOSS) PER SHARE
From continuing operations $ .04 $ (.28)
============ ============
Net earnings $ .04 $ .06
============ ============
Dividends per share $ .905 $ .81
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
<CAPTION>
Nine Months Ended
January 31,
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,872 $ 6,183
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 49,364 46,541
Gain on sale of subsidiaries (2,796) (27,265)
Purchased research and development - 25,072
Other noncurrent liabilities 10,417 3,248
Changes in:
Receivables (97,944) (249,504)
Prepaid expenses (12,321) (20,043)
Net assets of discontinued operations - (17,370)
Accounts payable, accrued expenses and deposits (38,961) 1,154
Accrued salaries, wages and payroll taxes (13,254) (272)
Accrued taxes on income (99,223) (91,646)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (200,846) (323,902)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (1,166,754) (518,466)
Maturities of marketable securities 1,537,046 757,826
Purchases of property and equipment (82,675) (65,011)
Excess of cost over fair value of net tangible assets acquired (6,042) (49,938)
Other, net (1,314) (20,042)
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 280,261 104,369
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (1,353,360) (327,302)
Proceeds from issuance of notes payable 1,443,984 647,505
Dividends paid (95,185) (86,356)
Payments to acquire treasury shares (110,668) (68,899)
Proceeds from stock options exercised 54,469 47,180
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (60,760) 212,128
------------ ------------
NET INCREASE (DECREASE) IN CASH 18,655 (7,405)
CASH AT BEGINNING OF PERIOD 41,343 43,417
------------ ------------
CASH AT END OF PERIOD $ 59,998 $ 36,012
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 101,627 $ 97,199
Interest paid 2,635 976
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. The Consolidated Balance Sheet as of January 31, 1995, the Consolidated
Statements of Operations for the three and nine months ended January 31,
1995 and 1994, and the Consolidated Statements of Cash Flows for the nine
months ended January 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 January
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, 1994
Annual Report to Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months January through April. Thus, the nine month results are not
indicative of results to be expected for the year.
2. During the third quarter of fiscal 1994, the Company sold 100% of the
common stock of its wholly-owned subsidiary, Interim Services Inc.
through an initial public offering of 10,000,000 shares at $20.00 per
share. The Company recorded a net gain on the sale of $27.265 million,
or $.26 per share. Since cash proceeds from the sale were received
subsequent to quarter end, a receivable, net of underwriting fees, of
$188.500 million is included in accounts receivable at January 31, 1994.
The sale was treated as a non-cash item for purposes of reporting cash
flows. Prior year amounts also include Interim's operating results,
reported as discontinued operations.
3. The Company acquired MECA Software, Inc. (now Block Financial Software,
Inc.) in November 1993 for $45.384 million in cash. The acquisition was
accounted for as a purchase and, accordingly, the Consolidated Statements
of Operations include MECA's results since the date of acquisition. The
excess purchase price over fair value of the net tangible assets acquired
was $55.978 million, of which $25.072 million was allocated to purchased
research and development, $4.900 million was allocated to various other
intangibles including technology, software and trademarks, and the
remainder was allocated to goodwill. Fiscal 1994 results include a
charge for purchased research and development which is not deductible for
income tax purposes. The fair value of assets acquired, including
intangibles, was $62.004 million; liabilities assumed were $16.620
million. Liabilities assumed in connection with the acquisition were
non-cash items excluded from the Consolidated Statements of Cash Flows.
Pro forma results assuming MECA had been acquired as of the beginning of
the periods presented would not be materially different from reported
results.
<PAGE>
4. In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Standard addresses the
reporting for debt and equity securities by requiring such investments to
be classified in held-to-maturity, available-for-sale or trading
categories. The Company adopted this Standard on May 1, 1994. All
marketable debt and equity securities have been classified as current or
noncurrent available-for-sale securities, and are carried at market value
with unrealized gains and losses included in stockholders' equity. The
adoption of this Standard resulted in an increase to stockholders' equity
of $5,526,000 (net of taxes of $3,431,000), representing the aggregate
excess market value over carrying value of the Company's securities on
the date of adoption. During the nine months ended January 31, 1995, the
net unrealized holding gain on available-for-sale securities decreased
$4,109,000 to $1,417,000. Net earnings for the period were not affected
by the accounting change.
5. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the
effective tax rates expected to be applicable for the respective full
fiscal years.
6. Net earnings (loss) per common share is based on the weighted average
number of shares outstanding during each period, and in periods in which
they have a dilutive effect, the effect of common shares contingently
issuable from stock options. Earnings (loss) per share assuming full
dilution has not been shown as there would be no material dilution.
7. During the nine months ended January 31, 1995 and 1994, the Company
issued 1,496,273 and 1,546,551 shares, respectively, pursuant to
provisions for exercise of its stock option plans; during the same
periods, the Company acquired 2,790,900 and 1,883,816 shares of its
common stock at an aggregate cost of $110,668,000 and $68,899,000,
respectively.
<PAGE>
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 3 and 6,
respectively.
Working capital decreased from $363.6 million at April 30, 1994 to $189.1
million at January 31, 1995. The working capital ratio at January 31, 1995
was 1.7 to 1 compared to 2.1 to 1 at April 30, 1994. The decrease in working
capital 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 largest segment, Tax Services. 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. Additionally, 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 January 31, 1995, short-term borrowings used to fund credit card
receivables and purchases of refunds in Canada totaled $90.6 million. There
were no borrowings outstanding at April 30, 1994. 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 nine months were funded through internally-
generated funds.
On October 26, 1994, the Internal Revenue Service announced that, as a result
of concerns relating to fraudulent tax refund claims by taxpayers, it was
eliminating the Direct Deposit Indicator (DDI) beginning with the 1995 tax
season. Previously, the IRS used the DDI to notify the electronic filer after
receiving a taxpayer's electronically filed tax return that the direct deposit
of the refund would be honored. The DDI was a key element of the Refund
Anticipation Loan (RAL) program because it helped control the risk of loan
losses and thus encouraged participating financial institutions to make RALs
under relatively favorable terms to taxpayers.
In response to the IRS's decision, the Company has amended its RAL agreement
with Beneficial National Bank ("Beneficial"). As of January 1995, all Block
company-owned offices, and most of its franchised offices, are offering the
Beneficial RAL products. Previously, Beneficial served about 40% of Tax
Services' company-owned offices, in addition to many of its franchises. As a
result of the IRS's decision, more traditional credit underwriting methods are
being used by Beneficial to determine eligibility of RAL customers, and the
price of most RALs has risen significantly. A higher price and more limited
availability will affect the number of RAL customers served in 1995, but the
full extent of the effect can not be estimated with any assurance at this
time. For the month of January 1995, worldwide Tax Services' volume for
<PAGE>
company-owned and franchised offices decreased 6.2% as compared to the same
month last year, and the number of taxpayers served was down 7.7%. From
January 1 through February 15, worldwide Tax Services' volume decreased 9.7%,
and the number of taxpayers served declined 11.5%, compared with the same
period a year ago. The number of returns prepared by Tax Services in the
United States for the period from January 1 through February 15 this year
decreased 5.1% compared with last year, and the number of returns filed
electronically for both company-owned and franchised offices was 3,829,966, a
decrease of 22.2% compared with the same period a year ago.
Although it is difficult to predict the business results for an entire tax
season based on the operating performance during the first six-week period,
the Company continues to believe that pretax earnings for Tax Services will be
lower than the preceding year. Additionally, BFC will not participate in RALs
made during the 1995 tax season. Consequently, BFC, which contributed $8.7
million to consolidated pretax earnings last year, will likely report a loss
resulting from its other operations and start-up businesses. It is not
possible, at this time, to quantify the overall impact of such changes on
consolidated earnings.
RESULTS OF OPERATIONS
During the third quarter of fiscal 1994, the Company sold 100% of the common
stock of its wholly-owned subsidiary, Interim Services Inc. (See Note 2 of the
Notes to Consolidated Financial Statements on page 7.) The results
of Interim Services Inc. were previously reflected as the Temporary help
services segment.
The Company acquired MECA Software, Inc. in November 1993. (See Note 3 of the
Notes to Consolidated Financial Statements on page 7.) The personal finance
software operations of MECA Software, Inc. (now Block Financial Software,
Inc.) are included in the Financial services segment; the personal tax
software operations of Legal Knowledge Systems, Inc., formerly a subsidiary of
MECA, are reported as Other services.
The analysis that follows should be read in conjunction with the table below
and the Consolidated Statements of Operations found on pages 4 and 5.
<PAGE>
<TABLE>
THREE MONTHS ENDED JANUARY 31, 1995 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1994
(amounts in thousands)
<CAPTION>
Revenues Earnings (loss)
1995 1994 1995 1994
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax services $ 96,002 $ 104,557 $ (28,762) $ (12,471)
Computer services 154,172 113,749 41,207 29,313
Financial services 10,211 8,230 (1,616) 222
Other services 6,990 2,848 2,268 (937)
Inter-segment eliminations (3,465) (2,850) - -
----------- ------------ ------------ -----------
263,910 226,534 13,097 16,127
Investment income 4,104 2,800 4,104 2,800
Unallocated corporate - 107 (4,099) (5,310)
----------- ------------
$ 268,014 $ 229,441
=========== ============
Purchased research and
development - (25,072)
------------ -----------
13,102 (11,455)
Income tax expense 5,018 6,479
------------ -----------
Net earnings (loss) from
continuing operations 8,084 (17,934)
Discontinued operations:
Net earnings - 3,225
Net gain on sale - 27,265
------------ -----------
Net earnings $ 8,084 $ 12,556
============ ===========
</TABLE>
Consolidated revenues for the three months ended January 31, 1995 increased
16.8% to $268.014 million from $229.441 million reported last year. The
increase is primarily due to greater revenues reported by Computer services,
partially offset by decreased revenues of Tax services.
Consolidated net earnings for the third quarter of fiscal 1995 were $8.084
million, compared to a net loss from continuing operations of $17.934 million
in the third quarter of last year. The net loss from continuing operations
for the quarter ended January 31, 1994 included a non-recurring charge for
purchased research and development of $25.072 million, recognized in
connection with the acquisition of MECA Software, Inc. Excluding purchased
research and development, net earnings from continuing operations increased
13.3% due to higher earnings contributed by Computer services and Other
services, offset by an increased loss reported by Tax services.
Third quarter net earnings decreased 35.6% to $8.084 million, or $.08 per
share, from net earnings of $12.556 million, or $.12 per share, for the same
period last year. The decrease was effected by both earnings from, and the
gain on the sale of, discontinued operations which improved earnings by $.03
and $.26 per share, respectively, in the third quarter of fiscal 1994. The
<PAGE>
earnings from, and gain on the sale of, discontinued operations was
substantially offset by the charge for purchased research and development
amounting to $.24 per share.
An analysis of operations by segment follows.
TAX SERVICES
Third quarter revenues decreased 8.2% to $96.002 million from $104.557 million
last year. The pretax loss increased 130.6% to $28.762 million from $12.471
million in the comparable period last year. Both revenues and operating
results suffered as a result of the IRS's decision to eliminate the Direct
Deposit Indicator, a key element of the electronic filing and Refund
Anticipation Loan (RAL) programs. (See Management's Discussion and Analysis
of Financial Condition on page 9.)
COMPUTER SERVICES
Revenues increased 35.5% to $154.172 million from $113.749 million in the
comparable period last year, due to increases in both consumer and network
revenues. Consumer services revenues were 47.2% better than last year. The
growth in consumer revenues is due to the increase in new customers in the
United States and further expansion into Europe. Network services revenues
were 36.7% better than last year, due to increasing usage and new customers.
Third quarter revenues for the prior fiscal year include the operations of two
software subsidiaries which were sold in the first quarter of fiscal 1995.
Exclusive of operations sold, revenues increased 41.5% as compared to the
prior year.
Pretax earnings increased 40.6% to $41.207 million from $29.313 million in the
third quarter of fiscal 1994. The increase in pretax earnings is attributable
to the continued strong performances of the consumer and network divisions.
Excluding the operating results of the software subsidiaries sold, pretax
earnings increased 43.1% as compared to the prior year. Pretax earnings as a
percentage of revenues, excluding the software operations sold, was 26.7% for
the third quarter of fiscal 1995, compared to 26.4% for the same period last
year.
FINANCIAL SERVICES
Revenues increased 24.1% to $10.211 million from $8.230 million in the same
period last year. The increase in revenues was due to increases in credit
card fees and the personal finance software sales of Block Financial Software,
Inc., formerly MECA Software, Inc., which was acquired in the third quarter
last year. Fiscal 1994 third quarter results include only two months of
personal financial software operations. These increases were significantly
offset by a decrease in RAL participation fees, which is directly associated
with the IRS's decision to eliminate the Direct Deposit Indicator. (See
Management's Discussion and Analysis of Financial Condition on page 9.)
The pretax loss was $1.616 million, compared to earnings of $222 thousand in
the third quarter of fiscal 1994, almost entirely attributable to the absence
of earnings from investments in RALs. Results for the third quarter of fiscal
1995 and 1994 include goodwill amortization of $251 thousand and $773
thousand, respectively.
<PAGE>
OTHER SERVICES
Since Legal Knowledge Systems, Inc. was acquired in November 1993, fiscal 1994
third quarter results include only two months of personal tax software
operations. Third quarter revenues increased to $6.990 million from $2.848
million last year subsequent to the date of acquisition. Pretax earnings
were $2.268 million, compared to last year's pretax loss of $937 thousand
subsequent to the date of acquisition. Growth in revenues and earnings
resulted from increases in sales to both recurring and new customers. Tax
preparation software sales are seasonal and normally peak during both the
third and fourth quarters of the fiscal year. Therefore, third quarter
results are not indicative of expected annual results. Results include
goodwill amortization of $247 thousand and $773 thousand for the third
quarters of fiscal 1995 and 1994, respectively.
INVESTMENT INCOME
Investment income increased 46.6% to $4.104 million from $2.800 million last
year. The increase resulted primarily from greater funds available for
investment, largely due to the proceeds from the sale of Interim Services Inc.
received in the fourth quarter of fiscal 1994.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss for the third quarter decreased
22.8% to $4.099 million from $5.310 million in the comparable period last
year. The improvement is the result of the first-time allocation to operating
segments of certain employee benefit expenses paid at the corporate level, in
addition to a decrease in staff wages.
<TABLE>
THREE MONTHS ENDED JANUARY 31, 1995 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1994 (SECOND QUARTER)
(amounts in thousands)
<CAPTION>
Revenues Earnings (loss)
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax services $ 96,002 $ 27,733 $ (28,762) $ (35,114)
Computer services 154,172 136,631 41,207 34,336
Financial services 10,211 6,792 (1,616) (1,308)
Other services 6,990 550 2,268 (2,020)
Inter-segment eliminations (3,465) (3,454) - -
----------- ------------ ------------ -----------
263,910 168,252 13,097 (4,106)
Investment income 4,104 4,554 4,104 4,554
Unallocated corporate - 51 (4,099) (2,477)
----------- ------------ ------------ -----------
$ 268,014 $ 172,857 13,102 (2,029)
=========== ============
Income tax expense (benefit) 5,018 (777)
------------ -----------
Net earnings (loss) $ 8,084 $ (1,252)
============ ===========
</TABLE>
<PAGE>
Consolidated revenues increased 55.0% to $268.014 million from $172.857
million in the second quarter of fiscal 1995. The significant increase is due
to higher revenues generated by all of the operating segments, with the
majority of the increase due to Tax services and Computer services.
Consolidated pretax earnings were $13.102 million, compared to a consolidated
pretax loss of $2.029 million in the second quarter of fiscal 1995. The
improved operating results are due to Tax services, Computer services and
Other services.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased to $96.002 million from $27.733 million reported in the
second quarter of fiscal 1995. The pretax loss decreased 18.1% to $28.762
million from $35.114 million reported for the three months ended October 31,
1994. The improved results are due to the onset of the tax season in the
United States and Canada in January.
COMPUTER SERVICES
Revenues increased 12.8% to $154.172 million from $136.631 million reported in
the second quarter of fiscal 1995. The increase is due to the improved
performance of the consumer services and network services divisions. The
growth in consumer services' revenues is due to an increase in new customers
in the United States and business development in Europe, and the growth in
network services results from increasing usage and new customers.
Pretax earnings increased 20.0% to $41.207 million from $34.336 million
reported in the second quarter of fiscal 1995. Pretax earnings as a
percentage of revenues was 26.7% and 25.1% for the third and second quarters
of fiscal 1995, respectively. The increase in the pretax margin resulted
primarily from revenue increases which outpaced expenses, a significant
portion of which are not directly associated with revenues.
FINANCIAL SERVICES
Revenues increased 50.3% to $10.211 million from $6.792 million for the three
months ended October 31, 1994. The increase resulted from increases in credit
card fees and personal finance software sales. Sales of personal financial
software are seasonal in nature, with sales increasing in the third and fourth
quarters of the fiscal year due to the holiday season and filing of tax
returns.
The pretax loss increased 23.5% to $1.616 million, compared to $1.308 million
for the second quarter of fiscal 1995, due to increased expenses associated
with credit card operations, offset by an improvement in the results of
personal finance software operations.
OTHER SERVICES
Revenues increased to $6.990 million from $550 thousand in the second quarter
of fiscal 1995. Pretax earnings for the third quarter were $2.268 million,
compared to a pretax loss of $2.020 million in the second quarter. 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.
<PAGE>
INVESTMENT INCOME
Investment income decreased 9.9% to $4.104 million from $4.554 million earned
for the three months ended October 31, 1994, due to the resources required to
fund Tax Services' operations during its off-season period.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss increased 65.5% to $4.099 million
from $2.477 million in the second quarter of fiscal 1995, due to increased
staff wages, employee benefits and legal and audit fees.
<TABLE>
NINE MONTHS ENDED JANUARY 31, 1995 (FYTD) COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1994 (FYTD)
(amounts in thousands)
<CAPTION>
Revenues Earnings (loss)
1995 1994 1995 1994
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax services $ 133,298 $ 140,544 $ (103,874) $ (81,973)
Computer services 418,699 308,180 109,455 75,343
Financial services 22,992 10,214 (2,713) (50)
Other services 7,618 2,848 (1,791) (937)
Inter-segment eliminations (10,196) (8,325) - -
----------- ------------ ------------ -----------
572,411 453,461 1,077 (7,617)
Investment income 13,809 10,331 13,809 10,331
Unallocated corporate 51 169 (8,610) (11,339)
----------- ------------
$ 586,271 $ 463,961
=========== ============
Purchased research and
development - (25,072)
------------ -----------
6,276 (33,697)
Income tax expense (benefit) 2,404 (3,347)
------------ -----------
Net earnings (loss) from
continuing operations 3,872 (30,350)
Discontinued operations:
Net earnings - 9,268
Net gain on sale - 27,265
------------ -----------
Net earnings $ 3,872 $ 6,183
============ ===========
</TABLE>
Consolidated revenues for the nine months ended January 31, 1995 increased
26.4% to $586.271 million from $463.961 million last year. The increase is
principally due to greater revenues from Computer services and Financial
services.
Consolidated net earnings were $3.872 million for the nine months ended
January 31, 1995, compared to a net loss from continuing operations of $30.350
million in the comparable period last year. Last year's net loss from
continuing operations for the nine months ended January 31 included a non-
recurring charge for purchased research and development of $25.072 million,
<PAGE>
recognized in connection with the acquisition of MECA Software, Inc. in
November 1993. Excluding purchased research and development, net results from
continuing operations improved by $9.150 million, related almost entirely to
the outstanding performance of the Computer services segment, which increased
earnings by 44.2% (excluding the gain on sales of subsidiaries), offset by the
increased losses of Tax services and Financial services.
Consolidated net earnings for the nine months ended January 31, 1995
decreased 37.4% to $3.872 million, or $.04 per share, from $6.183 million, or
$.06 per share, in the comparable period last year. The decrease was effected
by both earnings from, and the gain on the sale of, discontinued operations
which improved earnings by $.09 and $.26 per share, respectively, in fiscal
1994. The earnings from, and the gain on the sale of, discontinued operations
last year was substantially offset by the charge for purchased research and
development amounting to $.24 per share.
An analysis of operations by segment follows.
TAX SERVICES
Revenues decreased 5.2% to $133.298 million from $140.544 million last year,
and the pretax loss increased 26.7% to $103.874 million from $81.973 million
last year, both as a result of the IRS's decision to eliminate the Direct
Deposit Indicator. The Direct Deposit Indicator was a key element of the
electronic filing and RAL programs. (See Management's Discussion and Analysis
of Financial Condition on page 9).
COMPUTER SERVICES
Revenues increased 35.9% to $418.699 million from $308.180 million last year
due to increases in both consumer and network revenues. Consumer services
revenues were 48.0% better than last year, due to the increase in new
customers and expansion of European operations. Network services revenues
were 34.4% better than last year, due to increasing usage and new customers.
Computer services revenues include a pretax gain of $2.796 million on the sale
of two small subsidiaries. Exclusive of the gain on the sale and the
operating revenues of these subsidiaries, Computer services revenues increased
41.2% from the comparable period last year.
Pretax earnings increased 45.3% to $109.455 million from $75.343 million last
year. The increase in pretax earnings is attributable to the continued robust
performances of the consumer and network divisions, in addition to the gains
recorded on the sale of two subsidiaries. Excluding the gain and the
operating results of the software subsidiaries sold, pretax earnings increased
44.2% from the comparable period last year. Pretax earnings as a percentage
of revenues, excluding the gain and operating results of subsidiaries sold,
was 25.7% for the nine months ended January 31, 1995, compared to 25.2% for
the same period last year.
FINANCIAL SERVICES
Revenues increased 125.1% to $22.992 million from $10.214 million last year.
The growth is due to a significant increase in credit card fees and the
personal finance software sales of Block Financial Software, Inc., formerly
MECA Software, Inc., which was acquired in November 1993. These increases
were somewhat offset by the absence of revenues generated from RAL
participation fees due to the IRS's decision to eliminate the Direct Deposit
Indicator. (See Management's Discussion and Analysis of Financial Condition
on page 9.)
<PAGE>
The pretax loss increased to $2.713 million from a pretax loss of $50 thousand
last year, due to the absence of earnings from investments in RALs and an
increased loss from the personal finance software operations of Block
Financial Software, Inc.
OTHER SERVICES
Revenues increased to $7.618 million from $2.848 million last year subsequent
to the date of acquisition, due to increased sales to both new and recurring
customers. The pretax loss increased to $1.791 million from $937 thousand
last year subsequent to the date of acquisition. Personal tax software sales
are seasonal, with nearly all revenues generated during the third and fourth
quarters coincident with the tax filing period. Since Legal Knowledge
Systems, Inc. was acquired in November 1993, the fiscal 1994 year-to-date
pretax loss does not include the non-tax season operating expenses which are
included in the fiscal 1995 pretax loss.
INVESTMENT INCOME
Investment income increased 33.7% to $13.809 million from $10.331 million last
year. The increase resulted primarily from greater funds available for
investment, largely due to the proceeds from the sale of Interim Services Inc.
received in the fourth quarter of fiscal 1994.
CORPORATE AND ADMINISTRATIVE EXPENSES
The corporate and administrative pretax loss decreased 24.1% to $8.610 million
from $11.339 million last year. The improvement is the result of the first-
time allocation to operating segments of certain employee benefit expenses
paid at the corporate level, in addition to decreased staff wages.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(11) Statement re Computation of Per Share Earnings.
(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 1995.
<PAGE>
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 3/10/95 BY /s/ William P. Anderson
----------- --------------------------
William P. Anderson
Senior Vice President and
Chief Financial Officer
DATE 3/10/95 BY /s/ Ozzie Wenich
----------- --------------------------
Ozzie Wenich
Vice President, Finance
and Treasurer
<PAGE>
Exhibit 11
<TABLE>
CALCULATION OF PRIMARY EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
1995 1994 1995 1994
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net earnings (loss) from continuing operations $ 8,084,000 $ (17,934,000) $ 3,872,000 $ (30,350,000)
=============== ============== ============= ===============
Net earnings $ 8,084,000 $ 12,556,000 $ 3,872,000 $ 6,183,000
=============== ============== ============= ===============
Average number of shares outstanding -
primary:
Average number of common shares
outstanding 105,311,000 105,919,000 105,104,000 105,802,000
Dilutive effect of stock options after
application of treasury stock method 347,000 973,000 625,000 779,000
--------------- -------------- ------------- ---------------
Average number of shares outstanding 105,658,000 106,892,000 105,729,000 106,581,000
=============== ============== ============= ===============
Primary earnings (loss) per share:
From continuing operations $ .08 $ (.17) $ .04 $ (.28)
=============== ============== ============= ===============
Net earnings $ .08 $ .12 $ .04 $ .06
=============== ============== ============= ===============
</TABLE>
<TABLE>
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
1995 1994 1995 1994
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net earnings (loss) from continuing operations $ 8,084,000 $ (17,934,000) $ 3,872,000 $ (30,350,000)
=============== ============== ============== ===============
Net earnings $ 8,084,000 $ 12,556,000 $ 3,872,000 $ 6,183,000
=============== ============== ============== ===============
Average number of shares outstanding -
fully diluted:
Shares used in calculating primary
earnings per share 105,658,000 106,892,000 105,729,000 106,581,000
Additional effect of stock options after
application of treasury stock method - - - -
--------------- -------------- -------------- ---------------
Average number of shares outstanding 105,658,000 106,892,000 105,729,000 106,581,000
=============== ============== ============== ===============
Fully diluted earnings (loss) per share:
From continuing operations $ .08 $ (.17) $ .04 $ (.28)
=============== ============== ============== ===============
Net earnings $ .08 $ .12 $ .04 $ .06
=============== ============== ============== ===============
</TABLE>
<PAGE>
<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> 9-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> JAN-31-1995
<CASH> 59998
<SECURITIES> 109750
<RECEIVABLES> 279849
<ALLOWANCES> 16047
<INVENTORY> 0
<CURRENT-ASSETS> 465422
<PP&E> 201629<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 877991
<CURRENT-LIABILITIES> 276278
<BONDS> 0
<COMMON> 1089
0
0
<OTHER-SE> 559590
<TOTAL-LIABILITY-AND-EQUITY> 877991
<SALES> 0
<TOTAL-REVENUES> 586271
<CGS> 0
<TOTAL-COSTS> 579995
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6276
<INCOME-TAX> 2404
<INCOME-CONTINUING> 3872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3872
<EPS-PRIMARY> .04
<EPS-DILUTED> 0
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
</FN>
</TABLE>
