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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q/A
AMENDMENT NUMBER 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997
[ ] 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)
<TABLE>
<S> <C>
MISSOURI 44-0607856
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 September 1, 1997 was 104,178,653 shares.
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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 3,
respectively.
Working capital decreased from $821.4 million at April 30, 1997 to $550.5
million at July 31, 1997. The working capital ratio at July 31, 1997 is 1.6 to
1, compared to 2.3 to 1 at April 30, 1997. The decrease in working capital and
working capital ratio is primarily due to the following: (1) working capital was
decreased by approximately $189.3 million due to the acquisition of Option One;
and (2) the seasonal 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 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 from Revenue Canada.
BFC incurs short-term borrowings throughout the year to fund receivables
associated with its credit card, nonconforming mortgage loan and other financial
service programs. BFC has a $1.0 billion back-up credit facility to support its
various financial activities through December 1997, subject to renewal. At July
31, 1997, short-term borrowings totaled $657.2 million compared to $269.6
million at April 30, 1997 due mainly to the acquisition of Option One and the
funding of its mortgage operations.
BFC filed a $1.0 billion shelf registration statement for medium-term debt
securities after the end of the first quarter of fiscal 1998. BFC intends to
draw down $250 million on the shelf registration in the second quarter to pay
down the commercial paper used to fund the acquisition of Option One, described
below.
The Company's capital expenditures, excluding the acquisition of Option One, and
dividend payments during the first three months were funded through
internally-generated funds.
The Company will pay CompuServe Corporation (CompuServe) $67.1 million
in the second quarter for the tax benefits derived by the Company from
CompuServe's operating losses in the 1996 calendar year using
internally-generated funds. Such payment will be made in accordance with the
Tax Sharing Agreement between the Company and CompuServe.
Upon the completion of the CompuServe transaction, described below, the Company
will hold an approximate 3 percent stake in WorldCom, Inc. (WorldCom) and will
evaluate various alternatives to convert its holdings into cash in a timely
manner. The proceeds will be used to assist the Company in growing its core tax
and financial services businesses and to fund the Company's stock repurchase
program discussed below.
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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 of which 4.8 million had
been repurchased at July 31, 1997. 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 separation of CompuServe. Such
authorization is in addition to the 1993 authorization. Following the completion
of the CompuServe transaction, the Company plans to continue to purchase its
shares on the open market in accordance with these authorizations. However, the
repurchase program will depend on the price of the stock, availability of excess
cash, the ability to maintain financial flexibility, and other investment
opportunities available.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On June 17, 1997, the Company completed the purchase of Option One. Option One
engages in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans. Based in Santa Ana, California, Option One has a
network of more than 5,000 mortgage brokers in 46 states. The cash purchase
price was $218.1 million. In addition, the Company made a cash payment of $456
million to Option One's parent to eliminate intercompany loans made to Option
One to finance its mortgage loan operations. Both payments are subject to
post-closing adjustments. The $456 million payment was recorded as an
intercompany loan and was repaid to the Company by the end of June 1997 after
Option One sold the mortgage loans to a third party in the ordinary course of
business. The acquisition was accounted for as a purchase, and accordingly,
Option One's results are included since the date of acquisition.
On September 7, 1997, the Company entered into an Agreement and Plan of Merger
(Merger Agreement) under which a subsidiary of WorldCom would acquire
CompuServe. At the effective time of the merger, each of the outstanding shares
of CompuServe common stock (including the 74,200,000 shares owned by the
Company) are to be converted into the right to receive, and there shall be paid
and issued, in exchange for each of the CompuServe shares, .40625 of a share of
WorldCom stock, subject to adjustment as provided in the Merger Agreement. The
transaction is subject to the satisfaction of certain conditions, including,
among others, the expiration or termination of any applicable waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
any foreign competition law or similar law, the receipt of other regulatory
approvals and CompuServe shareholder approval and adoption of the Merger
Agreement. The Company has agreed to vote all of its directly or indirectly
owned shares of CompuServe common stock in favor of the merger, and such action
is sufficient to approve the transaction. The transaction will be treated as a
sale of assets for tax purposes and it is expected to close as soon as
practicable after the satisfaction of all the conditions set forth in the
Merger Agreement. The financial summary below has been reclassified to reflect
CompuServe as discontinued operations. CompuServe was previously reported in
the Computer Services segment.
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1997 COMPARED TO 1996
The analysis that follows should be read in conjunction with the table below
and the Consolidated Statements of Operations found on page 2.
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO
THREE MONTHS ENDED JULY 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
------------------- ------------------
1997 1996 1997 1996
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Tax services $ 14,389 $ 12,282 $(52,059) $(45,229)
Financial services 29,209 8,224 (6,349) (1,022)
Unallocated corporate 387 109 (2,291) (3,579)
Investment income, net - - 5,190 3,944
Intersegment sales (18) - - -
-------- --------- -------- -------
$ 43,967 $ 20,615 (55,509) (45,886)
======== =========
Income tax benefit (20,648) (17,391)
-------- --------
Net loss from continuing operations (34,861) (28,495)
Net loss from discontinued operations (3,274) (23,731)
-------- --------
Net loss $(38,135) $(52,226)
======== ========
</TABLE>
Consolidated revenues for the three months ended July 31, 1997 increased 113.3%
to $44.0 million from $20.6 million reported last year. The increase is
primarily due to the revenues of the Company's new retail mortgage operations
this year of $18.4 million, which include revenues of Option One, acquired on
June 17, 1997.
The consolidated pretax loss from continuing operations for the first quarter
of fiscal 1998 increased to $55.5 million from $45.9 million in the first
quarter of last year. The increase is attributable to the Tax Services
segment, which incurred a pretax loss of $52.1 million compared to $45.2
million in the first quarter of last year.
The net loss from continuing operations was $34.9 million, or $.33 per share,
compared to $28.5 million, or $.27 per share, for the same period last year.
An analysis of operations by segment follows.
TAX SERVICES
Revenues increased 17.2% to $14.4 million from $12.3 million last year,
resulting primarily from higher tax preparation fees that are attributable to
increases in pricing and in the number of tax returns prepared.
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The pretax loss increased 15.1% to $52.1 million from $45.2 million in the first
quarter of last year due to normal operational increases in compensation, rent
and utilities. Additionally, expenses associated with continued office
acquisitions and expansion, which include rent, salaries and benefits, have
contributed to the increased loss. Due to the seasonality of this segment's
business, first quarter operating results are not indicative of expected results
for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 255.2% to $29.2 million from $8.2 million in the same period
last year. The increase is primarily related to new mortgage operations which
contributed increased revenues of $18.4 million this year. New mortgage
operations include revenues related to the recently acquired Option One. Credit
card operations also contributed $2.4 million to the increase due to larger
revolving credit card balances over the first quarter of fiscal 1997.
The pretax loss increased to $6.3 million from $1.0 million in the first quarter
of fiscal 1997, primarily due to increased bad debt expenses resulting from
larger revolving credit card balances and operational costs related to the new
retail mortgage business. In addition, higher bad debt and compensation expenses
in software and online operations, respectively, contributed to the loss.
INVESTMENT INCOME, NET
Net investment income increased 31.6% to $5.2 million from $3.9 million last
year. The increase resulted from more funds available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first quarter
decreased 36.0% to $2.3 million from $3.6 million in the comparable period last
year. The decrease resulted mainly from expenses included in the first quarter
of fiscal 1997 of $517 thousand related to the planned spin-off of the Company's
remaining investment in CompuServe. Also contributing to the decrease were lower
consultant fees, charitable contributions and insurance expenses.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10(a)* Amendment and Termination of the H&R Block, Inc. Retirement Plan
for Non-Employee Directors
10(b)* Amendment No. 8 to the H&R Block Deferred Compensation Plan for
Executives
10(c)* Amendment No. 3 to the H&R Block Deferred Compensation Plan for
Directors
10(d)* Amendment No. 4 to the H&R Block Deferred Compensation Plan for
Directors
10(e)* Amendment No. 4 to the H&R Block Supplemental Deferred Compensation
Plan for Executives
(27)* Financial Data Schedule.
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*Previously filed.
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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 10/2/97 BY /s/ Ozzie Wenich
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Ozzie Wenich
Senior Vice President,
Chief Financial Officer
and Treasurer
DATE 10/2/97 BY /s/ Patrick D. Petrie
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Patrick D. Petrie
Vice President and Corporate Controller
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