<PAGE> 1
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, 2000
[ ] 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, 2000 was 91,524,900 shares.
<PAGE> 2
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
2000 2000
---- ----
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 219,718 $ 379,901
Marketable securities - available-for-sale 20,077 16,966
Marketable securities - trading 44,359 45,403
Receivables from customers, brokers, dealers and clearing organ-
izations, less allowance for doubtful accounts of $801 and $759 2,738,536 2,857,379
Receivables, less allowance for doubtful accounts of $45,490
and $49,602 342,446 434,722
Prepaid expenses and other current assets 146,529 129,172
----------- -----------
TOTAL CURRENT ASSETS 3,511,665 3,863,543
INVESTMENTS AND OTHER ASSETS
Investments in available-for-sale marketable securities 227,394 176,395
Excess of cost over fair value of net tangible assets acquired,
net of amortization 1,071,053 1,095,074
Other 312,480 303,672
----------- -----------
1,610,927 1,575,141
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 253,109 260,666
----------- -----------
$ 5,375,701 $ 5,699,350
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 640,076 $ 283,797
Accounts payable to customers, brokers and dealers 2,398,795 2,570,200
Accounts payable, accrued expenses and deposits 193,217 222,362
Accrued salaries, wages and payroll taxes 66,910 173,333
Accrued taxes on earnings 112,482 202,779
Current portion of long-term debt 70,582 67,978
----------- -----------
TOTAL CURRENT LIABILITIES 3,482,062 3,520,449
LONG-TERM DEBT 869,931 872,396
OTHER NONCURRENT LIABILITIES 91,660 87,916
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 421,601 420,594
Retained earnings 1,199,273 1,277,324
Accumulated other comprehensive income (loss) (23,342) (26,241)
----------- -----------
1,598,621 1,672,766
Less cost of 17,451,033 and 10,937,683 shares of common stock
in treasury 666,573 454,177
----------- -----------
932,048 1,218,589
----------- -----------
$ 5,375,701 $ 5,699,350
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 31,
--------
2000 1999
---- ----
(Restated)
<S> <C> <C>
REVENUES
Service revenues $ 231,224 $ 73,503
Product revenues 53,759 44,192
Royalties 1,161 930
Other 17,966 2,935
--------- ---------
304,110 121,560
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 146,540 75,352
Occupancy and equipment 60,224 40,634
Interest 63,198 11,474
Depreciation and amortization 47,457 18,400
Marketing and advertising 9,774 5,220
Supplies, freight and postage 7,579 4,192
Bad debt 5,521 4,188
Other 56,511 24,563
--------- ---------
396,804 184,023
--------- ---------
Operating loss (92,694) (62,463)
OTHER INCOME
Investment income, net 2,719 2,651
Other, net (18) 15
--------- ---------
2,701 2,666
Loss before income tax benefit (89,993) (59,797)
Income tax benefit (38,247) (22,723)
--------- ---------
Net loss $ (51,746) $ (37,074)
========= =========
Weighted average number of common shares outstanding 93,261 97,713
========= =========
Basic and diluted net loss per share $ (.55) $ (.38)
========= =========
Dividends per share $ .275 $ .25
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE> 4
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JULY 31,
--------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (51,746) $ (37,074)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 47,457 18,400
Provision for bad debt 5,521 4,188
Accretion of acquisition liabilities 3,234 -
Changes in:
Receivables from customers, brokers, dealers and
clearing organizations 118,843 -
Receivables 32,989 (113,026)
Marketable securities - trading 1,044 -
Prepaid expenses and other current assets (17,357) (7,879)
Accounts payable to customers, brokers and dealers (171,405) -
Accounts payable, accrued expenses and deposits (29,145) (53,353)
Accrued salaries, wages and payroll taxes (106,423) (137,427)
Accrued taxes on earnings (90,297) (40,706)
Other, net (3,043) (1,221)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (260,328) (368,098)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (536) (2,967)
Maturities of available-for-sale securities 5,602 21,964
Purchases of property and equipment, net (11,529) (2,682)
Payments made for business acquisitions, net of cash acquired (1,036) (1,509)
Other, net (8,018) (6,880)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (15,517) 7,926
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (4,536,830) (8,920,883)
Proceeds from issuance of notes payable 4,893,109 9,605,977
Payments on acquisition debt (2,628) -
Dividends paid (26,305) (24,436)
Payments to acquire treasury shares (213,107) -
Proceeds from stock options exercised 231 6,722
Other, net 1,192 219
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 115,662 667,599
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (160,183) 307,427
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 379,901 193,240
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 219,718 $ 500,667
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 51,737 $ 18,348
Interest paid 50,897 14,621
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 5
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, 2000, the Consolidated
Statements of Operations for the three months ended July 31, 2000 and 1999,
and the Consolidated Statements of Cash Flows for the three months ended
July 31, 2000 and 1999 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, 2000 and for all periods
presented have been made.
Interest income and interest expense related to certain mortgage loans in
fiscal year 2001 were previously reported in the Quarterly Report on Form
10-Q for the period ended July 31, 2000 on a gross basis in Other revenues
and Interest expense, respectively. The Company is now reporting in Other
revenues on the Consolidated Statements of Operations the interest income
from such mortgages net of the related interest expense of $16,503 in
accordance with Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This restatement has no impact on the net
loss previously reported.
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, 2000 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. Receivables consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
-------- ---------
2000 2000
---- ----
(Unaudited) (Audited)
<S> <C> <C>
Mortgage loans held for sale $ 158,664 $ 163,033
Business services accounts receivable 118,308 148,109
Participation in refund anticipation loans 40,296 47,581
Loans to franchisees 25,505 24,888
Other 45,163 100,713
-------------- ---------------
387,936 484,324
Allowance for doubtful accounts 45,490 49,602
-------------- ---------------
$ 342,446 $ 434,722
============== ===============
</TABLE>
-4-
<PAGE> 6
3. 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.
4. 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 12,620,903
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 2001 decreased to 93,261,000 from 97,713,000 last
year, due to the purchase of treasury shares by the Company during the
first three months of fiscal 2001.
5. During the three months ended July 31, 2000 and 1999, the Company issued
18,150 and 196,043 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the three
months ended July 31, 2000, the Company acquired 6,531,500 shares of its
common stock at an aggregate cost of $213,107.
6. CompuServe Corporation (CompuServe), certain current and former officers
and directors of CompuServe and the Company have been named as defendants
in six lawsuits pending before the state and Federal courts in Columbus,
Ohio. 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, 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 also 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. In July 1998,
the state court certified a plaintiff class of all persons and entities who
purchased shares of common stock of CompuServe between April 18, 1996 and
July 16, 1996 pursuant to the initial public offering or on the open
market, and who were damaged thereby, excluding the named defendants and
their affiliates. The named plaintiffs in three of the state court cases
were designated class representatives.
On July 24, 2000, the class representatives and the defendants in the class
action pending in state court, by their authorized counsel, entered into a
Stipulation of Settlement, pursuant to which the defendants will pay a
gross settlement amount of $9,500 in exchange for dismissal of the class
action suit and a release of all claims. The court preliminarily approved
the settlement in August 2000 and notices to the class were mailed and
published. The fairness hearing relating to the settlement is scheduled for
October 2000. Payment of plaintiffs' attorneys' fees and expenses are to be
paid out of the gross settlement fund. The gross settlement fund will be
paid in its entirety by the Company's insurance carrier. Among other
-5-
<PAGE> 7
things, the settlement is subject to certain contingencies relating to the
number of class members that choose to exclude themselves from the
settlement and the final approval of the settlement by the court. The
Stipulation is not an admission of the validity of any claim or any fact
alleged by the plaintiffs and defendants continue to deny any wrongdoing
and any liability. The Stipulation states that the defendants consider it
desirable to settle to avoid further expense, inconvenience, and delay,
and put to rest all controversy concerning all claims.
As a part of the sale of its interest in CompuServe, the Company agreed to
indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and
expenses incurred by them with respect to these lawsuits. In the opinion
of management, the ultimate resolution of these suits through the agreed
upon settlement or otherwise will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
7. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
July 31, April 30,
-------- ---------
2000 2000
---- ----
(Unaudited) (Audited)
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 118,567 $ 256,823
Finance receivables, net 2,927,282 3,054,792
Other assets 1,275,153 1,247,710
-------------- ---------------
Total assets $ 4,321,002 $ 4,559,325
============== ===============
Notes payable $ 640,076 $ 283,797
Long-term debt 745,763 745,600
Other liabilities 2,707,100 3,304,740
Stockholder's equity 228,063 225,188
-------------- ---------------
Total liabilities and stockholder's equity $ 4,321,002 $ 4,559,325
============== ===============
<CAPTION>
Three months ended
------------------
July 31,
--------
2000 1999
---- ----
<S> <C> <C>
Condensed statements of operations:
Revenues $ 212,327 $ 80,718
Earnings before income taxes 6,054 11,741
Net earnings (964) 6,291
</TABLE>
8. 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
-6-
<PAGE> 8
recorded in revenues. Deferred losses on the FNMA securities hedging
instrument amounted to $956 at July 31, 2000. The contract value and the
market value of this hedging instrument at July 31, 2000 were $50,112 and
$50,235, respectively. There were no forward commitments at July 31,
2000.
9. 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 available-for-sale marketable securities. The
components of comprehensive income (loss) during the three months ended
July 31, 2000 and 1999 were:
<TABLE>
<CAPTION>
Three months ended
------------------
July 31,
--------
2000 1999
---- ----
<S> <C> <C>
Net loss $ (51,746) $ (37,074)
Change in net unrealized gain (loss) on mkt. securities 4,057 577
Change in foreign currency translation adjustments (1,158) (1,292)
--------- ---------
Comprehensive income (loss) $ (48,847) $ (37,789)
========= =========
</TABLE>
10. Information concerning the Company's operations by reportable operating
segment for the three months ended July 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended
------------------
July 31,
--------
2000 1999
---- ----
<S> <C> <C>
Revenues:
U.S. tax operations $ 11,350 $ 13,075
International tax operations 4,899 4,068
Financial services 211,267 79,454
Business services 76,097 24,179
Unallocated corporate 497 784
-------- --------
$304,110 $121,560
======== ========
Earnings (loss):
U.S. tax operations $(87,870) $(71,070)
International tax operations (5,923) (6,521)
Financial services 34,940 18,826
Business services (3,013) (188)
Unallocated corporate (4,613) (3,349)
Interest expense on long-term debt (27,288) (4,438)
-------- --------
(93,767) (66,740)
Investment income, net 2,719 2,651
Intercompany interest 1,055 4,292
-------- --------
Loss before income tax benefit $(89,993) $(59,797)
======== ========
</TABLE>
-7-
<PAGE> 9
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 LAWS, LEGISLATION, REGULATIONS, SUPERVISION AND LICENSING
BY FEDERAL, STATE AND LOCAL AUTHORITIES AND THEIR IMPACT ON THE LINES OF
BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; 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; THE INABILITY
OF THE COMPANY TO PURCHASE SHARES OF ITS COMMON STOCK PURSUANT TO THE SHARE
REPURCHASE PROGRAM 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 $29.6 million at July 31, 2000 from $343.1 million
at April 30, 2000. The working capital ratio at July 31, 2000 is 1.01 to 1,
compared to 1.10 to 1 at April 30, 2000. The decrease in working capital and
the working capital ratio is primarily due to the increase in short-term
borrowings, due to the share repurchase program, dividend payments, the
seasonal nature of the Company's U.S. tax operations segment and, to a lesser
extent, the Business 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 a seasonal line of credit to support short-term borrowing
facilities in Canada. The credit limit of this line fluctuates according to
the amount of short-term borrowings outstanding during the year.
-8-
<PAGE> 10
In the U.S., the Company incurs short-term borrowings throughout the year to
fund receivables associated with its mortgage loan and other financial services
programs, and seasonal working capital needs. These short-term borrowings in
the U.S. are supported by a $1.89 billion back-up credit facility through
November 2000, subject to renewal.
In April 2000, the Company entered into third party off-balance sheet financing
arrangements and whole-loan sale arrangements for Option One Mortgage
Corporation (Option One). The financing, which is not guaranteed by H&R Block,
freed up excess cash and short-term borrowing capacity, while providing
stability in dealing with the secondary market for mortgage loans. Management
anticipates that the negative earnings per share impact of the off-balance
sheet financing will be substantially offset by the share repurchases made
during the first quarter of this year.
At July 31, 2000, short-term borrowings increased to $640.1 million from $283.8
million at April 30, 2000. The Company's capital expenditures, dividend
payments, share repurchase program and normal operating activities during the
first three months were funded through both internally-generated funds and
short-term borrowings. For the three months ended July 31, 2000 and 1999,
interest expense was $63.2 million and $11.5 million, respectively. The increase
in interest expense is due to debt incurred to fund the acquisitions of certain
assets of McGladrey & Pullen, LLP in August 1999 and of OLDE in December 1999.
In March 2000, the Company announced its intention to repurchase up to 12
million shares in the open market. At July 31, 2000, 6.9 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, securities laws restrictions and
other investment opportunities available. However, the Company announced on
August 21, 2000 that the Company does not anticipate being as aggressive in its
share repurchase program for the reminder of the fiscal year.
-9-
<PAGE> 11
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
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, 2000 COMPARED TO
--------------------------------------------
THREE MONTHS ENDED JULY 31, 1999
--------------------------------
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 11,350 $ 13,075 $ (87,870) $ (71,070)
International tax operations 4,899 4,068 (5,923) (6,521)
Financial services 211,267 79,454 34,940 18,826
Business services 76,097 24,179 (3,013) (188)
Unallocated corporate 497 784 (4,613) (3,349)
Interest expense on acquisition debt - - (27,288) (4,438)
--------------- -------------- -------------- -------------
$ 304,110 $ 121,560 (93,767) (66,740)
=============== ==============
Investment income, net 2,719 2,651
Intercompany interest 1,055 4,292
-------------- -------------
(89,993) (59,797)
Income tax benefit (38,247) (22,723)
-------------- -------------
Net loss $ (51,746) $ (37,074)
============== =============
</TABLE>
Consolidated revenues for the three months ended July 31, 2000 increased 150.2%
to $304.1 million from $121.6 million reported last year. The increase is
primarily due to revenues from Financial services of $211.3 million, a 165.9%
increase over last year, and Business services, a $51.9 million increase over
the prior year. Both increases are due to the first time inclusion of the
operations of OLDE and RSM McGladrey, Inc. (RSM), respectively, acquired during
fiscal 2000.
The consolidated pretax loss for the first quarter of fiscal 2001 increased to
$90.0 million from $59.8 million in the first quarter of last year. The higher
loss is attributable to increased interest expense on acquisition debt of $22.9
million related to the OLDE and RSM acquisitions, higher acquired intangibles
amortization expense related primarily to the OLDE and RSM acquisitions of $16.7
million and an increase in the U.S. tax operations' pretax loss of $16.8
million. These increased losses were partially offset by Financial services
pretax earnings of $34.9 million, which increased $16.1 million over the first
quarter of last year.
-10-
<PAGE> 12
The Company's performance as measured by earnings before interest (including
interest expense on acquisition debt, investment income and interest allocated
to operating business units), taxes, depreciation and amortization (EBITDA)
improved 56.7% to a negative $19.0 million compared to a negative $43.9 million
in the prior year's first quarter.
The net loss was $51.7 million, or $.55 per share, compared to $37.1 million, or
$.38 per share, for the same period last year. The per share loss this year was
increased by approximately $.03 due to the Company's share repurchase program
that resulted in lower investment income and lower shares outstanding for the
quarter. The effective income tax rate increased from 38% last year to 42.5%
this year as a result of the non-deductible intangible amortization resulting
from the OLDE acquisition, and helped reduce this quarter's net loss.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues decreased 13.2% to $11.4 million from $13.1 million last year,
resulting primarily from lower tax preparation fees that are attributable to a
decrease in the number of returns prepared.
The pretax loss increased 23.6% to $87.9 million from $71.1 million in the first
quarter of last year due to normal operational increases in rent, depreciation
and amortization and, to a lesser extent, compensation expenses. Contributing to
the increases in rent and depreciation and amortization 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 20.4% to $4.9 million compared to $4.1 million in the prior
year's first quarter. The increase is attributable to increases in tax
preparation fees from all areas of International tax operations, including
Canada, United Kingdom and Australia.
The pretax loss decreased 9.2% to $5.9 million from $6.5 million last year. The
decrease is due to improved results over the prior year primarily in Canada and
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.
FINANCIAL SERVICES
Revenues increased 165.9% to $211.3 million from $79.5 million in the same
period last year. The increase is primarily attributable to the first time
inclusion of OLDE, which was acquired December 1, 1999 and contributed revenues
of $128.3 million for the quarter. For the three months ended July 31, 2000,
OLDE's average commission per trade was $63.31 with customer daily average
trades of 10,262. Option One Mortgage Corporation (Option One), which includes
H&R Block Mortgage Corporation, also contributed $75.0 million in revenues for
the quarter, compared to $68.6 million last year. Option One originated and sold
or securitized $1.4 billion
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<PAGE> 13
during the first quarter of fiscal 2001 and $1.4 and $1.3 billion, respectively,
during the prior year.
Financial services' pretax earnings increased 85.6% to $34.9 million compared to
$18.8 million during the first quarter of fiscal 2000. The increase is primarily
due to OLDE, the parent company of H&R Block Financial Advisors (formally, OLDE
Discount Corporation), which contributed earnings of $13.9 million. While
revenues of Option One and the Company's other mortgage operations increased
5.9%, pretax earnings were only slightly improved over the prior year due
primarily to higher compensation and benefits expense which is attributable to
an increase in staffing levels.
BUSINESS SERVICES
Revenues increased 214.7% to $76.1 million from $24.2 million in the first
quarter of last year. The pretax loss increased to $3.0 million from $188
thousand last year, which includes goodwill amortization of $7.0 million and
$1.8 million, respectively. The increase in revenues and pretax loss are
primarily due to the inclusion of RSM which was acquired August 2, 1999. 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 of $2.7 million was consistent with the prior year.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first quarter
increased 37.7% to $4.6 million from $3.3 million in the comparable period last
year. The increase is due to higher employee costs and consulting expenses.
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<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1* Amendment to Employment Agreement, dated June 30, 2000,
between HRB Management, Inc. and Mark A. Ernst
(27) Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the first quarter of
fiscal 2001.
-------------
* Previously filed.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment Number 1 to the Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned thereunto duly
authorized.
H&R BLOCK, INC.
------------------------------------
(Registrant)
DATE 12/15/00 BY /s/ Frank J. Cotroneo
------------- ------------------------------------
Frank J. Cotroneo
Senior Vice President and
Chief Financial Officer
DATE 12/15/00 BY /s/ Cheryl L. Givens
------------- ------------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
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