<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
[ ] 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 September 1, 1999 was 97,880,527 shares.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I Financial Information
Consolidated Balance Sheets
July 31, 1999 and April 30, 1999 ....................................................... 1
Consolidated Statements of Operations
Three Months Ended July 31, 1999 and 1998 .............................................. 2
Consolidated Statements of Cash Flows
Three Months Ended July 31, 1999 and 1998 .............................................. 3
Notes to Consolidated Financial Statements ................................................ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 8
Quantitative and Qualitative Disclosures about Market Risk................................. 15
PART II Other Information.......................................................................... 15
SIGNATURES................................................................................................. 17
</TABLE>
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 1999
---- ----
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 500,667 $ 193,240
Marketable securities 42,355 56,881
Receivables, less allowance for doubtful accounts of $63,513
and $61,872 853,352 743,301
Prepaid expenses and other current assets 101,938 94,000
----------- -----------
TOTAL CURRENT ASSETS 1,498,312 1,087,422
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 166,057 170,528
Excess of cost over fair value of net tangible assets acquired,
net of amortization 406,604 405,534
Other 141,315 132,470
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713,976 708,532
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 110,230 114,222
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$ 2,322,518 $ 1,910,176
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 757,033 $ 71,939
Accounts payable, accrued expenses and deposits 127,231 168,641
Accrued salaries, wages and payroll taxes 24,163 161,590
Accrued taxes on earnings 111,011 151,659
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TOTAL CURRENT LIABILITIES 1,019,438 553,829
LONG-TERM DEBT 249,738 249,725
OTHER NONCURRENT LIABILITIES 46,858 44,635
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 419,304 420,658
Retained earnings 1,069,399 1,130,909
Accumulated other comprehensive income (loss) (24,115) (23,400)
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1,465,677 1,529,256
Less cost of 11,147,565 and 11,343,608 shares of common stock
in treasury 459,193 467,269
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1,006,484 1,061,987
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$ 2,322,518 $ 1,910,176
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 4
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 73,503 $ 39,388
Product revenues 44,192 28,642
Royalties 930 1,067
Other 2,935 1,476
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121,560 70,573
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OPERATING EXPENSES
Employee compensation and benefits 75,352 42,998
Occupancy and equipment 51,046 40,587
Interest 11,474 14,692
Marketing and advertising 5,220 3,783
Supplies, freight and postage 4,192 3,068
Other 36,739 22,110
--------- ---------
184,023 127,238
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Operating loss (62,463) (56,665)
OTHER INCOME
Investment income, net 2,651 13,890
Other, net 15 -
--------- ---------
2,666 13,890
Loss from continuing operations before income tax benefit (59,797) (42,775)
Income tax benefit (22,723) (16,235)
--------- ---------
Net loss from continuing operations (37,074) (26,540)
Net loss from discontinued operations (less applicable
income tax benefit of ($767)) - (1,199)
--------- ---------
Net loss $ (37,074) $ (27,739)
========= =========
Weighted average number of common shares outstanding 97,713 104,976
========= =========
Basic and diluted net loss per share from continuing operations $ (.38) $ (.25)
========= =========
Basic and diluted net loss per share $ (.38) $ (.26)
========= =========
Dividends per share $ .25 $ .20
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 5
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (37,074) $ (27,739)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 18,400 13,388
Other noncurrent liabilities 2,024 2,481
Changes in:
Receivables (108,838) (20,460)
Prepaid expenses and other current assets (7,879) (20,337)
Accounts payable, accrued expenses and deposits (42,555) (16,995)
Accrued salaries, wages and payroll taxes (137,427) (79,914)
Accrued taxes on earnings (40,706) (200,487)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (354,055) (350,063)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (2,967) (117,868)
Maturities of marketable securities 21,964 337,604
Purchases of property and equipment (2,682) (4,018)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (12,307) (12,127)
Other, net (9,906) (9,986)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,898) 193,605
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (8,920,883) (1,762,864)
Proceeds from issuance of notes payable 9,605,977 1,885,365
Proceeds from issuance of long-term debt - 13
Dividends paid (24,436) (21,275)
Payments to acquire treasury shares - (153,788)
Proceeds from stock options exercised 6,722 4,361
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 667,380 (48,188)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 307,427 (204,646)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 500,667 $ 696,210
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 18,348 $ 182,815
Interest paid 14,621 13,952
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of July 31, 1999, the Consolidated
Statements of Operations for the three months ended July 31, 1999 and 1998,
and the Consolidated Statements of Cash Flows for the three months ended
July 31, 1999 and 1998 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 July 31, 1999 and for all periods
presented have been made.
Reclassifications have been made to prior year amounts to conform with the
current year presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1999 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the three-month results are not
indicative of results to be expected for the year.
2. On August 2, 1999, the Company, through a subsidiary - RSM McGladrey,
Inc. (RSM), completed the purchase of substantially all of the non-attest
assets of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's
seventh largest accounting and consulting firm with more than 70 offices
located primarily in the Eastern, Midwestern, Northern and Southwestern
United States. The purchase price was $240,000 in cash payments over the
next four years and the assumption of certain pension liabilities with a
present value of $52,728. In addition, the Company made cash payment of
$53,412 for outstanding accounts receivable balances. The acquisition was
accounted for as a purchase, and accordingly, RSM's results will be
included in the second quarter of fiscal 2000.
3. Receivables consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1999 1999
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
Mortgage loans held for sale $ 786,943 $ 636,687
Participation in refund anticipation loans 47,017 51,074
Other 82,905 117,412
-------------- ---------------
916,865 805,173
Allowance for doubtful accounts 63,513 61,872
-------------- ---------------
$ 853,352 $ 743,301
============== ===============
</TABLE>
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<PAGE> 7
4. 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.
5. Basic and diluted net loss per share is computed using the weighted average
number of shares outstanding during each period. Diluted net loss per share
excludes the impact of common stock options outstanding of 9,451,053 shares
and the conversion of 608 shares of preferred stock to common stock, as
they are antidilutive. The weighted average shares outstanding for the
first quarter of fiscal 2000 decreased to 97,713,000 from 104,976,000 last
year, due to the purchase of treasury shares by the Company during fiscal
1999.
6. During the three months ended July 31, 1999 and 1998, the Company issued
196,043 and 111,379 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the three
months ended July 31, 1998, the Company acquired 3,556,300 shares of its
common stock at an aggregate cost of $153,788.
7. CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the registrant are named defendants in six
lawsuits pending before the state and Federal courts in Columbus, Ohio
since 1996. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in
connection with CompuServe's public filings related to its initial public
offering in April 1996. One state lawsuit also alleges certain oral
omissions and misstatements in connection with such offering. Relief sought
in the lawsuits is unspecified, but includes pleas for rescission and
damages. One Federal lawsuit names the lead underwriters of CompuServe's
initial public offering as additional defendants and as representatives of
a defendant class consisting of all underwriters who participated in such
offering. The Federal suits were consolidated, the defendants filed a
motion to dismiss the consolidated suits, and the district court stayed all
proceedings pending the outcome of the state court suits, and the United
States Court of Appeals for the Sixth Circuit affirmed such stay. The four
state court lawsuits allege violations of various state statutes and common
law of negligent misrepresentation in addition to the 1933 Act claims. The
state lawsuits were consolidated for discovery purposes and defendants
filed a motion for summary judgment covering all four state lawsuits. As a
part of the sale of its interest in CompuServe, the Company has agreed to
indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and
expenses incurred by them with respect to these lawsuits. The defendants
are vigorously defending these lawsuits. In the opinion of management, the
ultimate resolution of these suits will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
8. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
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<PAGE> 8
<TABLE>
<CAPTION>
July 31, April 30,
1999 1999
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 396,104 $ 16,026
Finance receivables, net 802,552 658,882
Other assets 438,559 448,010
-------------- ---------------
Total assets $ 1,637,215 $ 1,122,918
============== ===============
Notes payable $ 757,033 $ 71,939
Long-term debt 249,738 249,725
Other liabilities 462,758 636,330
Stockholder's equity 167,686 164,924
-------------- ---------------
Total liabilities and stockholder's equity $ 1,637,215 $ 1,122,918
============== ===============
<CAPTION>
Three months ended
July 31,
1999 1998
---- ----
<S> <C> <C>
Condensed statements of operations:
Revenues $ 80,718 $ 53,515
Earnings from operations 11,741 9,113
Net earnings 6,291 4,427
</TABLE>
9. The Company sells short FNMA mortgage-backed securities to certain
broker-dealer counterparties. The position on certain or all of the fixed
rate mortgages is closed, on standard Public Securities Association (PSA)
settlement dates, when the Company enters into a forward commitment to sell
those mortgages or decides to securitize the mortgages. The effectiveness
of the hedge is measured by a historical and probable future high
correlation of changes in the fair value of the hedging instruments with
changes in the value of the hedged item. If correlation ceases to exist,
hedge accounting is terminated and the gains or losses are recorded in
revenues. Deferred losses on the FNMA securities hedging instrument
amounted to $250 at July 31, 1999. The contract value and the market value
of this hedging instrument at July 31, 1999 were $113,139 and $112,244,
respectively. There were no forward commitments at July 31, 1999.
10. The Company's comprehensive income is comprised of net earnings (loss),
foreign currency translation adjustments and the change in the net
unrealized gain or loss on marketable securities. The components of
comprehensive income (loss) during the three months ended July 31, 1999 and
1998 were:
<TABLE>
<CAPTION>
Three months ended
July 31,
1999 1998
---- ----
<S> <C> <C>
Net loss $ (37,074) $ (27,739)
Change in net unrealized gain (loss) on mkt. securities 577 935
Change in foreign currency translation adjustments (1,292) (7,402)
-------------- ---------------
Comprehensive income (loss) $ (37,789) $ (34,206)
============== ===============
</TABLE>
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<PAGE> 9
11. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
will now be effective for the Company's fiscal year ending April 30, 2002.
12. Information concerning the Company's operations by reportable operating
segment for the three months ended July 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended
July 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
U.S. tax operations $ 13,075 $ 12,179
International tax operations 4,068 3,437
Mortgage operations 76,079 52,705
Business services 24,172 1,330
Unallocated corporate 4,166 922
-------------- --------------
$ 121,560 $ 70,573
============== ==============
Earnings (loss) from continuing operations:
U.S. tax operations $ (71,070) $ (57,816)
International tax operations (6,521) (5,971)
Mortgage operations 21,220 13,787
Business services (185) (114)
Unallocated corporate (5,746) (3,002)
Interest expense on long-term debt (4,438) (4,443)
-------------- --------------
(66,740) (57,559)
Investment income, net 2,651 13,890
Intercompany interest 4,292 894
-------------- --------------
Loss from continuing operations before
income tax benefit $ (59,797) $ (42,775)
============== ==============
</TABLE>
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q AND THE EXHIBITS HERETO MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
STATEMENTS ARE BASED UPON CURRENT INFORMATION, EXPECTATIONS, ESTIMATES AND
PROJECTIONS REGARDING THE COMPANY, THE INDUSTRIES AND MARKETS IN WHICH THE
COMPANY OPERATES, AND MANAGEMENT'S ASSUMPTIONS AND BELIEFS RELATING THERETO.
WORDS SUCH AS "WILL," "PLAN," "EXPECT," "REMAIN," "INTEND," "ESTIMATE,"
"APPROXIMATE," AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE
DATE ON WHICH THEY ARE MADE, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND
INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THEREFORE, ACTUAL OUTCOMES AND RESULTS COULD MATERIALLY DIFFER FROM
WHAT IS EXPRESSED, IMPLIED OR FORECAST IN SUCH FORWARD-LOOKING STATEMENTS. SUCH
DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED
TO, THE UNCERTAINTY OF THE SATISFACTION OF ALL CLOSING CONDITIONS SET FORTH IN
THE AGREEMENT TO ACQUIRE THE STOCK OF OLDE FINANCIAL CORPORATION (OLDE) AND THE
COMPLETION OF THE OLDE TRANSACTION; THE UNCERTAINTY OF THE ENTRY BY THE COMPANY
INTO ANY AGREEMENT REGARDING ANY SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION
INVOLVING OPTION ONE MORTGAGE CORPORATION (OPTION ONE); THE UNCERTAINTY
REGARDING THE COMPLETION OF ANY TRANSACTION INVOLVING OPTION ONE; THE
UNCERTAINTY OF LAWS, LEGISLATION, REGULATIONS, SUPERVISION AND LICENSING BY
FEDERAL, STATE AND LOCAL AUTHORITIES AND THEIR IMPACT ON ANY PROPOSED OR
POSSIBLE TRANSACTION AND THE LINES OF BUSINESS IN WHICH THE COMPANY'S
SUBSIDIARIES ARE INVOLVED; YEAR 2000 READINESS OF THE COMPANY AND EXTERNAL
PARTIES; UNFORESEEN COMPLIANCE COSTS; CHANGES IN ECONOMIC, POLITICAL OR
REGULATORY ENVIRONMENTS; CHANGES IN COMPETITION AND THE EFFECTS OF SUCH CHANGES;
THE INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES; CHANGES IN MANAGEMENT AND
MANAGEMENT STRATEGIES; THE COMPANY'S INABILITY TO SUCCESSFULLY DESIGN, CREATE,
MODIFY AND OPERATE ITS COMPUTER SYSTEMS AND NETWORKS; LITIGATION INVOLVING THE
COMPANY; AND RISKS DESCRIBED FROM TIME TO TIME IN REPORTS AND REGISTRATION
STATEMENTS FILED BY THE COMPANY AND ITS SUBSIDIARIES WITH THE SECURITIES AND
EXCHANGE COMMISSION. READERS SHOULD TAKE THESE FACTORS INTO ACCOUNT IN
EVALUATING ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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 to $478.9 million at July 31, 1999 from $533.6 million
at April 30, 1999. The working capital ratio at July 31, 1999 is 1.47 to 1,
compared to 1.96 to 1 at April 30, 1999. The decrease in working capital and the
working capital ratio is primarily due to the increase in short-term borrowings,
due to increased mortgage loans held for sale, and the seasonal nature of the
Company's U.S. tax operations segment. Tax return preparation occurs
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<PAGE> 11
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. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its mortgage loan and other financial services programs. These
short-term borrowings in the U.S. are supported by a $1.85 billion back-up
credit facility through November 1999, subject to renewal.
The Company's capital expenditures and dividend payments during the first three
months were funded through internally-generated funds.
At July 31, 1999, short-term borrowings used to fund mortgage loans and other
programs increased to $757.0 million from $71.9 million at April 30, 1999 due
mainly to the funding of Mortgage operations. For the three months ended July
31, 1999 and 1998, interest expense was $11.5 million and $14.7 million,
respectively. The decrease in interest expense is primarily attributable to
lower interest rates and the funding of a portion of mortgage loans held for
sale with internal funds instead of short-term borrowings.
In July 1996, the Company announced its intention to repurchase up to 10 million
shares in the open market over a two-year period following the separation of
CompuServe Corporation. At July 31, 1999, 7.0 million shares had been
repurchased under this plan. The Company plans to continue to purchase its
shares on the open market in accordance with this authorization, subject to
various factors including 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 July 21, 1999, the Company announced it was evaluating strategic alternatives
for Option One, including a possible sale or joint venture with a business
partner. Option One is reported in the Mortgage operations segment.
On August 2, 1999, the Company, through a subsidiary - RSM McGladrey, Inc.
(RSM), completed the purchase of substantially all of the non-attest assets of
McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest
accounting and consulting firm with more than 70 offices located primarily in
the Eastern, Midwestern, Northern and Southwestern United States. The purchase
price was $240.0 million in cash payments over the next four years and the
assumption of certain pension liabilities with a present value of $52.7 million.
In addition, the Company made cash payment of $53.4 million for outstanding
accounts receivable balances. The acquisition was accounted for as a purchase,
and accordingly, RSM's results will be included in the second quarter of fiscal
2000.
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<PAGE> 12
On September 1, 1999, the Company announced it had entered into a definitive
agreement to acquire the stock of Olde Financial Corporation for $850.0 million
in cash. Olde, based in Detroit, Michigan, offers brokerage and other financial
services through Olde's network of approximately 1,200 registered
representatives located in 181 branch offices in 35 states. The transaction is
subject to the satisfaction of certain regulatory approvals and other normal
closing conditions. The transaction will be treated as a purchase and is
expected to close by the end of the calendar year.
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<PAGE> 13
FISCAL 2000 COMPARED TO FISCAL 1999
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, 1999 COMPARED TO
THREE MONTHS ENDED JULY 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 13,075 $ 12,179 $ (71,070) $ (57,816)
International tax operations 4,068 3,437 (6,521) (5,971)
Mortgage operations 76,079 52,705 21,220 13,787
Business services 24,172 1,330 (185) (114)
Unallocated corporate 4,166 922 (5,746) (3,002)
Interest expense on long-term debt - - (4,438) (4,443)
--------------- -------------- -------------- -------------
$ 121,560 $ 70,573 (66,740) (57,559)
=============== ==============
Investment income, net 2,651 13,890
Intercompany interest 4,292 894
-------------- -------------
(59,797) (42,775)
Income tax benefit (22,723) (16,235)
-------------- -------------
Net loss from continuing operations (37,074) (26,540)
Net loss from discontinued operations - (1,199)
-------------- -------------
Net loss $ (37,074) $ (27,739)
============== =============
</TABLE>
Consolidated revenues for the three months ended July 31, 1999 increased 72.2%
to $121.6 million from $70.6 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $76.1 million, a 44.3%
increase over last year, and Business services, a $22.8 million increase over
the prior year.
The consolidated pretax loss from continuing operations for the first quarter of
fiscal 2000 increased to $59.8 million from $42.8 million in the first quarter
of last year. The higher loss is attributable to an increase of $13.3 million in
U.S. tax operations' pretax loss and a decrease of $7.8 million in investment
income, net of intercompany interest. These increased losses were partially
offset by Mortgage operations' pretax earnings of $21.2 million, which increased
$7.4 million over the first quarter of last year.
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<PAGE> 14
The net loss from continuing operations was $37.1 million, or $.38 per share,
compared to $26.5 million, or $.25 per share, for the same period last year. The
per share loss was increased by approximately $.06 due to lower investment
income and lower shares outstanding resulting from the Company's share
repurchase program.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 7.4% to $13.1 million from $12.2 million last year, resulting
primarily from higher tax preparation fees that are attributable to increases in
pricing.
The pretax loss increased 22.9% to $71.1 million from $57.8 million in the first
quarter of last year due to normal operational increases in compensation, rent
and other facility-related expenses. In addition, the higher compensation is
related to a change in the field manager compensation structure that shifts
their compensation to salary incurred throughout the year from incentive bonuses
incurred during the fourth quarter. Contributing to the increases in rent and
other facility-related expenses is an increase in the amount of tax office space
maintained under lease during this year's off-season. Due to the nature of this
segment's business, first quarter operating results are not indicative of
expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 18.4% to $4.1 million compared to $3.4 million in the prior
year's first quarter. The increase is principally attributable to increases in
tax preparation fees and discounted return fees in Canada resulting from an
increase in the number of returns prepared over last year, as well as increased
revenues from the United Kingdom.
The pretax loss increased 9.2% to $6.5 million from $6.0 million last year. The
increase is due to normal operational increases in compensation and rent
expenses in Canada and Australia. The increased losses were partially reduced by
improved results over the prior year in the United Kingdom related to increased
revenues while expenses remained consistent with last year. Due to the nature of
this segment's business, first quarter operating results are not indicative of
expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 44.3% to $76.1 million from $52.7 million in the same period
last year. The increase is primarily attributable to Option One, which
contributed revenues of $65.4 million for the quarter compared to $44.8 million
last year. Option One's improved performance is due to increased loan sales and
interest income earned on higher balances of mortgage loans held for sale.
Option One and Assurance Mortgage originated and sold $1.4 billion and $1.3
billion in loans, respectively, during the first quarter of fiscal 2000 and
$779.9 million and $707.6 million, respectively, during the prior year. In
addition, Assurance Mortgage contributed revenues of $3.2 million, which were
partially offset, by lower revenues from Companion Mortgage.
Mortgage operations' pretax earnings increased 53.9% to $21.2 million compared
to $13.8 million during the first quarter of fiscal 1999. The increase is mainly
due to Option One, which
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<PAGE> 15
contributed earnings of $21.3 million, and earnings of $2.8 million from
Companion Mortgage. Pretax earnings were reduced by losses from other mortgage
operations.
BUSINESS SERVICES
Revenues increased to $24.2 million from $1.3 million in the first quarter of
last year. The pretax loss increased to $185 thousand from $114 thousand last
year, which includes goodwill amortization of $1.8 million and $73 thousand,
respectively. Business services was a new reportable operating segment during
the first quarter of fiscal 1999, with one accounting firm acquired in May 1998.
In the first quarter of fiscal year 2000, there are seven regional accounting
firms and several smaller market firms included in Business services. Due to the
nature of this segment's business, revenues are seasonal, while expenses are
relatively fixed throughout the year. Results for the first quarter are not
indicative of the expected results for the entire year.
INVESTMENT INCOME, NET
Net investment income decreased 80.9% to $2.7 million from $13.9 million last
year. The decrease is due to less funds available for investment resulting
primarily from the stock repurchase program and the use of corporate cash to
fund mortgage loans held for sale.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first quarter
increased 91.4% to $5.7 million from $3.0 million in the comparable period last
year. The increase is due to losses from the Company's broker-dealer, acquired
in January 1999, and increased employee costs and consulting expenses.
OTHER ISSUES
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, prioritize, evaluate and
mitigate potential Year 2000 related issues. The Company has identified nine
mission critical business functions (e.g. U.S. tax preparation services,
wholesale loan services, etc.) and 28 non-mission critical business functions
(e.g. Kiplinger TaxCut(R) software, Australian tax operations, etc.). Within
each of the business functions, key information technology (IT) and non-IT
systems have been inventoried and assessed for compliance and detailed plans are
in place for required system modifications or replacements. Currently
remediation projects are at different phases of completion. One hundred and
thirty-eight remediation projects, including both IT and non-IT systems, were
identified within the nine mission critical business functions. Of these
projects, 123 are complete and successfully tested, five are in the testing
phase and 10 are still in progress. All projects are scheduled to be completed
by November 1999.
The Company has initiated communications and surveyed state, Federal and foreign
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 issues. The Company is relying on their responses to
determine if key third parties will be Year 2000 compliant. One of the Company's
key third parties is the Internal Revenue Service (IRS). The
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<PAGE> 16
Company has successfully conducted Year 2000 testing and continues to
communicate frequently with the IRS regarding its Year 2000 readiness. The
Company is also in the process of completing a survey and inventory of tax
franchisees. Some readiness issues have been identified and the Company is
consulting with its franchisees on their remediation programs to help mitigate
their risk. Assurances from franchisees of Year 2000 readiness are scheduled to
be obtained by the end of September 1999. The Company will continue to monitor
its third party relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred. Total
costs are currently estimated at $3.5 million, with approximately $2.6 million
incurred through July 31, 1999. The remaining costs to complete represent the
cost of on-going monitoring of the Company's continued readiness through the end
of the fiscal year. The costs associated with the replacement of computer
systems, hardware or equipment (currently estimated to be $14.0 million in
total, with $13.9 million incurred to date), substantially all of which would be
capitalized, are not included in the above estimates. All costs related to the
Year 2000 issue are being funded through internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will not be
Year 2000 compliant and the Company would not be able to process electronic
filings or refund anticipation loans. The Company believes that its competitors
will face the same risks.
The Company has identified and developed contingency plans for Year 2000 related
interruptions in the event that internal and/or external remediation projects
are not completed on a timely basis or that they fail to meet anticipated needs.
The Company has focused its contingency plans on accounting functions,
communications, distribution channels, facilities, insurance, suppliers,
treasury functions and tax operations (which includes franchises, Federal and
state governments, IRS and electronic filing). In addition, disaster recovery
plans and business resumption plans are being reviewed and modified for
information technology functions. While the Company does not anticipate problems
in any of these areas, the Company believes a comprehensive plan includes
preparation for continuity of its mission critical processes. The contingency
plans were substantially completed in June 1999 and are scheduled to be
completed by the end of September 1999, with on-going modifications being made
as issues requiring change, if any, are identified.
The Company's Year 2000 program is an on-going process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its business
activities, it can not make any assurances that its systems, the systems of the
state, Federal and foreign governments, tax franchisees and suppliers will be
Year 2000 compliant and will not interrupt business. While the impact can not be
fully determined, the inability of these systems to be ready could result in
significant difficulties in processing and completing fundamental transactions.
In such event, the Company's results of operations and financial position could
be adversely affected in a material manner.
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<PAGE> 17
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at April
30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CompuServe Corporation (CompuServe), certain current and former officers and
directors of CompuServe and the registrant are named defendants in six lawsuits
pending before the state and Federal courts in Columbus, Ohio since 1996. All
suits allege similar violations of the Securities Act of 1933 based on
assertions of omissions and misstatements of fact in connection with
CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit also alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the lead
underwriters of CompuServe's initial public offering as additional defendants
and as representatives of a defendant class consisting of all underwriters who
participated in such offering. The Federal suits were consolidated, the
defendants filed a motion to dismiss the consolidated suits, and the district
court stayed all proceedings pending the outcome of the state court suits, and
the United States Court of Appeals for the Sixth Circuit affirmed such stay. The
four state court lawsuits allege violations of various state statutes and common
law of negligent misrepresentation in addition to the 1933 Act claims. The state
lawsuits were consolidated for discovery purposes and defendants filed a motion
for summary judgment covering all four state lawsuits. As a part of the sale of
its interest in CompuServe, the Company has agreed to indemnify WorldCom, Inc.
and CompuServe against 80.1% of any losses and expenses incurred by them with
respect to these lawsuits. The defendants are vigorously defending these
lawsuits. In the opinion of management, the ultimate resolution of these suits
will not have a material adverse impact on the Company's consolidated financial
position or results of operations. The lawsuits discussed herein were previously
reported in Forms 10-K and 10-Q filed by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10 Asset Purchase Agreement dated June 28, 1999, by and among
H&R Block, Inc., MGP Business Services, Inc., HRB Business
Services, Inc., McGladrey & Pullen, LLP, MP Active Partners
Trust, Clifford Newman, Trustee, and MP Retired Partner
Trust, Clifford Newman, Trustee, filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K dated June 28,
1999, is incorporated by reference.
(27) Financial Data Schedule
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<PAGE> 18
b) Reports on Form 8-K
A Form 8-K, Current Report, dated June 28, 1999, was filed on July 8,
1999 by the registrant reporting as an "Item 5" the asset purchase agreement
entered into by the registrant providing for the registrant's purchase of
substantially all of the non-attest assets of McGladrey & Pullen, LLP, and the
registrant's issuance of a press release announcing the same. The asset purchase
agreement was included as Exhibit 10.1 and the press release was included as
Exhibit 99 to the Form 8-K. No financial statements were filed as a part of the
Form 8-K.
A Form 8-K, Current Report, dated August 2, 1999, was filed on August
17, 1999 by the registrant reporting as an "Item 2" the acquisition of
substantially all of the non-attest assets of McGladrey & Pullen, LLP on August
2, 1999, and the registrant's issuance of a press release announcing the same.
The press release was included as Exhibit 99 to the Form 8-K. No financial
statements were filed as a part of the Form 8-K.
The registrant did not file any other reports on Form 8-K during the first
quarter of fiscal 2000.
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<PAGE> 19
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 9/13/99 BY /s/ Ozzie Wenich
---------------- --------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 9/13/99 BY /s/ Cheryl L. Givens
---------------- --------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
-17-
<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> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 500,667
<SECURITIES> 42,355
<RECEIVABLES> 916,865
<ALLOWANCES> 63,513
<INVENTORY> 0
<CURRENT-ASSETS> 1,498,312
<PP&E> 110,230<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,322,518
<CURRENT-LIABILITIES> 1,019,438
<BONDS> 0
0
0
<COMMON> 1,089
<OTHER-SE> 1,005,395
<TOTAL-LIABILITY-AND-EQUITY> 2,322,518
<SALES> 0
<TOTAL-REVENUES> 121,560
<CGS> 0
<TOTAL-COSTS> 184,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (59,797)
<INCOME-TAX> (22,723)
<INCOME-CONTINUING> (37,074)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,074)
<EPS-BASIC> (.38)
<EPS-DILUTED> (.38)
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
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