<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 OCTOBER 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 December 1, 2000 was 91,283,332 shares.
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TABLE OF CONTENTS
Page
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PART I Financial Information
Consolidated Balance Sheets
October 31, 2000 and April 30, 2000 ............................. 1
Consolidated Statements of Operations
Three Months Ended October 31, 2000 and 1999 .................... 2
Six Months Ended October 31, 2000 and 1999 ...................... 3
Consolidated Statements of Cash Flows
Six Months Ended October 31, 2000 and 1999 ...................... 4
Notes to Consolidated Financial Statements ........................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
Quantitative and Qualitative Disclosures about Market Risk......... 19
PART II Other Information.................................................. 20
SIGNATURES................................................................. 23
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
2000 2000
---- ----
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 247,679 $ 379,901
Marketable securities - available-for-sale 16,022 16,966
Marketable securities - trading 39,060 45,403
Receivables from customers, brokers, dealers and clearing organ-
izations, less allowance for doubtful accounts of $840 and $759 2,640,656 2,857,379
Receivables, less allowance for doubtful accounts of $46,075
and $49,602 354,207 434,722
Prepaid expenses and other current assets 136,553 129,172
------------- -------------
TOTAL CURRENT ASSETS 3,434,177 3,863,543
INVESTMENTS AND OTHER ASSETS
Investments in available-for-sale marketable securities 224,554 176,395
Excess of cost over fair value of net tangible assets acquired,
net of amortization 1,070,051 1,095,074
Other 331,311 303,672
------------- -------------
1,625,916 1,575,141
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 248,407 260,666
------------- -------------
$ 5,308,500 $ 5,699,350
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 914,692 $ 283,797
Accounts payable to customers, brokers and dealers 2,291,963 2,570,200
Accounts payable, accrued expenses and deposits 173,763 222,362
Accrued salaries, wages and payroll taxes 76,261 173,333
Accrued taxes on earnings 37,112 202,779
Current portion of long-term debt 43,308 67,978
------------- -------------
TOTAL CURRENT LIABILITIES 3,537,099 3,520,449
LONG-TERM DEBT 840,073 872,396
OTHER NONCURRENT LIABILITIES 96,800 87,916
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 420,003 420,594
Retained earnings 1,122,159 1,277,324
Accumulated other comprehensive income (loss) (34,029) (26,241)
------------- -------------
1,509,222 1,672,766
Less cost of 17,692,214 and 10,937,683 shares of common stock
in treasury 674,694 454,177
------------- -------------
834,528 1,218,589
------------- -------------
$ 5,308,500 $ 5,699,350
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
OCTOBER 31,
-----------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 265,934 $ 152,699
Product revenues 54,310 50,049
Royalties 3,997 3,210
Other 13,233 3,988
--------- ---------
337,474 209,946
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 172,900 118,306
Occupancy and equipment 56,234 47,560
Interest 63,973 23,344
Depreciation and amortization 48,685 24,331
Marketing and advertising 14,728 14,635
Supplies, freight and postage 10,005 8,699
Bad debt 8,733 5,933
Other 51,123 41,932
--------- ---------
426,381 284,740
--------- ---------
Operating loss (88,907) (74,794)
OTHER INCOME
Investment income, net 2,536 2,402
Other, net 15 235
--------- ---------
2,551 2,637
Loss before income tax benefit (86,356) (72,157)
Income tax benefit (36,701) (27,420)
--------- ---------
Net loss $ (49,655) $ (44,737)
========= =========
Weighted average number of common shares outstanding 91,403 97,814
========= =========
Basic and diluted net loss per share $ (.54) $ (.46)
========= =========
Dividends per share $ .30 $ .275
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
OCTOBER 31,
-----------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 506,098 $ 226,202
Product revenues 108,069 94,241
Royalties 5,158 4,140
Other 22,259 6,923
--------- ---------
641,584 331,506
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 319,440 193,658
Occupancy and equipment 116,458 88,194
Interest 127,171 34,818
Depreciation and amortization 96,142 42,731
Marketing and advertising 24,502 19,855
Supplies, freight and postage 17,584 12,891
Bad debt 14,254 10,121
Other 107,634 66,495
--------- ---------
823,185 468,763
--------- ---------
Operating loss (181,601) (137,257)
OTHER INCOME
Investment income, net 5,255 5,053
Other, net (3) 250
--------- ---------
5,252 5,303
Loss before income tax benefit (176,349) (131,954)
Income tax benefit (74,948) (50,143)
--------- ---------
Net loss $(101,401) $ (81,811)
========= =========
Weighted average number of common shares outstanding 92,332 97,764
========= =========
Basic and diluted net loss per share $ (1.10) $ (.84)
========= =========
Dividends per share $ .575 $ .525
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
OCTOBER 31,
-----------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (101,401) $ (81,811)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 96,142 42,731
Provision for bad debt 14,254 10,121
Accretion of acquisition liabilities 5,604 3,633
Changes in:
Receivables from customers, brokers, dealers and
clearing organizations 216,723 --
Receivables 9,904 14,032
Marketable securities - trading 6,343 --
Prepaid expenses and other current assets (8,181) (69,082)
Accounts payable to customers, brokers and dealers (278,237) --
Accounts payable, accrued expenses and deposits (48,599) (47,986)
Accrued salaries, wages and payroll taxes (97,072) (136,882)
Accrued taxes on earnings (175,786) (98,555)
Other, net (1,169) (7,040)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (361,475) (370,839)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (2,432) (3,987)
Maturities of available-for-sale securities 10,090 25,112
Loan to affiliate -- (62,627)
Purchases of property and equipment, net (25,647) (21,306)
Payments made for business acquisitions, net of cash acquired (10,659) (81,550)
Other, net (34,395) (1,421)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (63,043) (145,779)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (8,197,821) (25,815,955)
Proceeds from issuance of notes payable 8,828,716 26,369,682
Payments on acquisition debt (63,993) (3,000)
Dividends paid (53,764) (51,564)
Payments to acquire treasury shares (222,816) (32,366)
Proceeds from stock options exercised 1,708 24,325
Other, net 266 438
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 292,296 491,560
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (132,222) (25,058)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 379,901 193,240
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 247,679 $ 168,182
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 88,836 $ 48,956
Interest paid 118,715 38,373
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 7
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of October 31, 2000, the Consolidated
Statements of Operations for the three and six months ended October 31,
2000 and 1999, and the Consolidated Statements of Cash Flows for the six
months ended October 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 October 31,
2000 and for all periods presented have been made.
Reclassifications have been made to prior periods 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 six-month results are not
indicative of results to be expected for the year.
2. Receivables consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
----------- ---------
2000 2000
---- ----
(Unaudited) (Audited)
<S> <C> <C>
Mortgage loans held for sale $125,256 $163,033
Business services accounts receivable 159,247 148,109
Participation in refund anticipation loans 35,764 47,581
Loans to franchisees 31,659 24,888
Other 48,356 100,713
-------- --------
400,282 484,324
Allowance for doubtful accounts 46,075 49,602
-------- --------
$354,207 $434,722
======== ========
</TABLE>
3. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the Company's
current estimates of 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 for 12,188,071
shares and the conversion of 608 shares of preferred stock to common stock,
as they are antidilutive. The weighted average shares outstanding for
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<PAGE> 8
the six months ended October 31, 2000 decreased to 92,332,000 from
97,764,000 last year, due to the purchase of treasury shares by the
Company primarily during the first three months of fiscal 2001.
5. During the six months ended October 31, 2000 and 1999, the Company issued
59,669 and 617,028 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. In addition, the
Company issued 475,443 shares of its common stock for an U.S. tax
operations' major franchise acquisition in the second quarter of fiscal
2000. The issuance of common stock for the acquisition was treated as a
noncash investing activity in the Consolidated Statement of Cash Flows for
the six months ended October 31, 1999. During the six months ended October
31, 2000, the Company acquired 6,814,200 shares of its common stock at an
aggregate cost of $222,816. During the six months ended October 31, 1999,
the Company acquired 721,800 shares of its common stock at an aggregate
cost of $32,366.
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 brought by the Florida State Board of
Administration 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.
In July 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 was held on
November 30, 2000, but the court has not yet issued its ruling. 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
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<PAGE> 9
insurance carrier. 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.
The Florida State Board of Administration has opted out of the settlement
and that litigation continues separately from the state court class action.
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>
October 31, April 30,
----------- ---------
2000 2000
---- ----
(Unaudited) (Audited)
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 179,972 $ 256,823
Finance receivables, net 2,796,172 3,054,792
Other assets 1,371,893 1,247,710
---------- ----------
Total assets $4,348,037 $4,559,325
========== ==========
Notes payable $ 914,692 $ 283,797
Long-term debt 745,925 745,600
Other liabilities 2,467,389 3,304,740
Stockholder's equity 220,031 225,188
---------- ----------
Total liabilities and stockholder's equity $4,348,037 $4,559,325
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed statements of operations:
Revenues $218,964 $ 93,106 $ 431,291 $ 173,824
Earnings before income taxes 3,708 13,549 9,762 25,290
Net earnings (loss) (2,244) 12,945 (3,208) 15,136
</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 Company in the
past had applied hedge accounting treatment to the shorting of FNMA
mortgage-backed securities; however, these instruments no longer qualify
for hedge accounting treatment because the Company does not hold the
mortgage loans on its balance
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<PAGE> 10
sheet (the asset that was being hedged). These instruments are now carried
at fair market value and changes in the fair market value are recorded in
revenues on the income statement instead of being deferred. There are no
FNMA securities instruments open at October 31, 2000. The contract value
and market value of the forward commitment at October 31, 2000 were
$126,000 and $126,082, respectively.
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 marketable securities. The components of
comprehensive income (loss) during the three and six months ended October
31, 2000 and 1999 were:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ---------------
October 31, October 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(49,655) $(44,737) $(101,401) $(81,811)
Change in net unrealized
gain (loss) on mkt. securities (5,670) 4,680 (1,613) 5,257
Change in foreign currency
translation adjustments (5,017) 3,122 (6,175) 1,830
-------- -------- --------- --------
Comprehensive income (loss) $(60,342) $(36,935) $(109,189) $(74,724)
======== ======== ========= ========
</TABLE>
10. In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 140). SFAS 140 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. SFAS 140 is a
replacement of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). SFAS 140 revises the standards
for accounting for securitizations and other transfers of financial assets
and collateral and requires certain new disclosures, but carries over most
of SFAS 125's provisions without reconsideration. The Company has not
concluded its analysis to determine the effect of SFAS 140 on the
consolidated financial statements.
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<PAGE> 11
11. Information concerning the Company's operations by reportable operating
segments for the three and six months ended October 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
October 31, October 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
U.S. tax operations $ 26,403 $ 19,723 $ 37,753 $ 32,798
International tax operations 14,899 14,713 19,798 18,781
Financial services 216,263 91,503 427,530 170,957
Business services 78,267 83,180 154,364 107,359
Unallocated corporate 1,642 827 2,139 1,611
--------- --------- --------- ---------
$ 337,474 $ 209,946 $ 641,584 $ 331,506
========= ========= ========= =========
Earnings (loss) from:
U.S. tax operations $ (87,203) $ (83,663) $(175,073) $(154,733)
International tax operations (467) (1,644) (6,390) (8,165)
Financial services 32,426 20,931 67,366 39,757
Business services (781) (1,152) (3,794) (1,340)
Unallocated corporate (6,727) (3,428) (11,340) (6,777)
Interest exp. acquisition debt (24,484) (8,027) (51,772) (12,465)
--------- --------- --------- ---------
(87,236) (76,983) (181,003) (143,723)
Investment income, net 2,536 2,402 5,255 5,053
Intercompany interest (1,656) 2,424 (601) 6,716
--------- --------- --------- ---------
Loss before income tax benefit $ (86,356) $ (72,157) $(176,349) $(131,954)
========= ========= ========= =========
</TABLE>
Intercompany interest represents net interest expense charged to financial
related businesses for corporate cash that was borrowed to fund their operating
activities and, in fiscal 2001, it also includes net unallocated interest
expense attributable to commitment fees on the unused portion of the Company's
$1.89 billion credit facility.
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<PAGE> 12
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," "ANTICIPATE,"
"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 ANY PROPOSED OR POSSIBLE TRANSACTION AND 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 UNCERTAINTY
OF THE IMPACT OF SHARE REPURCHASES ON EARNINGS PER SHARE; 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 4,
respectively.
Working capital decreased to a negative $102.9 million at October 31, 2000 from
$343.1 million at April 30, 2000. The working capital ratio at October 31, 2000
is .97 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 seasonal nature of the Company's U.S. tax
operations segment, payments on Business services acquisitions, the share
repurchase program, interest, tax and dividend payments. Tax return preparation
occurs almost entirely in the fourth quarter and has the effect of increasing
certain assets and liabilities during the fourth quarter, including cash and
cash equivalents, receivables, accrued salaries, wages and payroll taxes and
accrued taxes on earnings.
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<PAGE> 13
In the U.S., the Company incurs short-term borrowings throughout the year
primarily to fund receivables associated with its mortgage loans held for sale
and Business services 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 October 2000. On October 30, 2000, the credit facility was renewed at
$1.86 billion through October 2001.
The Company annually obtains a seasonal line of credit to support a short-term
borrowing facility in Canada. The credit limit of this line fluctuates in
accordance with the seasonal need for short-term borrowings outstanding during
the year.
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). This financing, which is not guaranteed by H&R Block,
freed up excess cash and short-term borrowing capacity ($408.4 million at
October 31, 2000), improved liquidity and flexibility, and reduced balance sheet
risk, while providing stability in dealing with the secondary market for
mortgage loans. Management anticipates that the negative fiscal year earnings
per share impact of the off-balance sheet financing will be more than offset by
the increases in earnings per share resulting from share repurchases made during
the first six months of this year.
At October 31, 2000, short-term borrowings increased to $914.7 million from
$283.8 million at April 30, 2000. The Company's capital expenditures, dividend
payments, share repurchase program, Business services acquisition payments and
normal operating activities during the first six months were funded through
both internally-generated funds and short-term borrowings.
For the six months ended October 31, 2000 and 1999, interest expense was $127.2
million and $34.8 million, respectively. The increase in interest expense is due
to the first-time inclusion of operating interest expense to external parties at
OLDE Financial Corporation (OLDE) of $66.4 million and acquisition interest
expense of $37.3 million related to the OLDE acquisition in December 1999.
In March 2000, the Company's Board of Directors approved a plan to repurchase up
to 12 million shares of its common stock. At October 31, 2000, 7.2 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 liquidity and financial flexibility,
securities laws restrictions and other investment opportunities available.
However, the Company does not anticipate being as aggressive in its share
repurchase program for the reminder of the fiscal year.
-11-
<PAGE> 14
RESULTS OF OPERATIONS
Interest income and interest expense related to certain mortgage loans in
fiscal year 2001 were previously reported in the Company's press release dated
November 28, 2000 on a gross basis in Service revenues and Interest expense,
respectively. The Company is now reporting in Service revenues on the
Consolidated Statements of Operations the interest income from such mortgages
net of the related interest expense of $41.6 million for the six months ended
October 31, 2000 in accordance with Statement of Financial Acoounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This revision has no impact on the net loss
previously reported.
FISCAL 2001 COMPARED TO FISCAL 2000
The analysis that follows should be read in conjunction with the tables below
and the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
---------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 26,403 $ 19,723 $ (87,203) $ (83,663)
International tax operations 14,899 14,713 (467) (1,644)
Financial services 216,263 91,503 32,426 20,931
Business services 78,267 83,180 (781) (1,152)
Unallocated corporate 1,642 827 (6,727) (3,428)
Interest expense on acquisition debt -- -- (24,484) (8,027)
--------- --------- --------- ---------
$ 337,474 $ 209,946 (87,236) (76,983)
========= =========
Investment income, net 2,536 2,402
Intercompany interest (1,656) 2,424
--------- ---------
(86,356) (72,157)
Income tax benefit (36,701) (27,420)
--------- ---------
Net loss $ (49,655) $ (44,737)
========= =========
</TABLE>
Consolidated revenues for the three months ended October 31, 2000 increased
60.7% to $337.5 million from $209.9 million reported last year. The increase is
primarily due to revenues from Financial services of $216.3 million, a 136.3%
increase over the prior year, due to the first time inclusion of OLDE.
The consolidated pretax loss for the second quarter of fiscal 2001 increased to
$86.4 million from $72.2 million in the second quarter of last year. The
increase is attributable to the interest expense on the OLDE acquisition debt
and increased losses from U.S. tax operations and Unallocated corporate, which
was offset by improved results from Financial services.
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 68.5% to a negative $14.1 million compared to a negative $44.6 million
in the prior year's second quarter.
-12-
<PAGE> 15
The net loss was $49.7 million, or $.54 per share, compared to $44.7 million, or
$.46 per share, for the same period last year. The per share loss this year was
increased by approximately $.06 per share due to the Company's share repurchase
program that resulted in lower investment income and fewer shares outstanding
for the quarter. The effective income tax rate increased from 38.0% 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 increased 33.9% to $26.4 million from $19.7 million last year,
resulting primarily from higher revenues from the Company's Peace of Mind
program.
The pretax loss increased 4.2% to $87.2 million from $83.7 million in the second
quarter of last year due primarily to normal operating increases in
depreciation, amortization and rent expenses, as well as costs associated with
the development of new online services for the upcoming tax season. The higher
depreciation and rent expense is a result of office expansion efforts in the
prior year. Also contributing to the increase in amortization expense are
franchise acquisitions that occurred in the prior year. Due to the nature of
this segment's business, second quarter operating results are not indicative of
expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 1.3% to $14.9 million compared to $14.7 million in the prior
year's second quarter. The increase is attributable to Canadian operations. The
increase in Canadian revenues is due to higher discounted return fees, which is
the result of a 69.2% increase in the number of discounted returns prepared over
the same period last year. The increase was partially offset by lower revenues
in the United Kingdom.
The pretax loss decreased 71.6% to $467 thousand from $1.6 million last year.
The decrease is primarily due to improved performance in Canada. This improved
performance is a result of lower employee compensation and marketing and
advertising expenses. Australian operations also contributed positive results
over the prior year. Due to the nature of this segment's business, second
quarter operating results are not indicative of expected results for the entire
fiscal year.
FINANCIAL SERVICES
Revenues increased 136.3% to $216.3 million from $91.5 million in the same
period last year. The increase is primarily attributable to OLDE, which was
acquired December 1, 1999. OLDE is the parent company of H&R Block Financial
Advisors, Inc. (formally OLDE Discount Corporation) which contributed revenues
of $128.9 million for the quarter. For the three months ended October 31, 2000,
H&R Block Financial Advisors' average commission per trade was $70.52 with daily
average trades of 9,788. Option One, which includes H&R Block Mortgage
Corporation, also contributed $81.0 million in revenues an increase of 5.5% over
the same period last year. The increase in revenues is primarily due to Option
One's servicing portfolio of $16.6 billion and 162,200 loans compared to last
year's October 31 portfolio of $8.8 billion and 87,900 loans. Option One
originated and sold or securitized $1.5 billion during the second quarter of
-13-
<PAGE> 16
fiscal 2001, compared to $1.5 billion originated and $1.6 billion sold in the
second quarter last year.
Financial services pretax earnings of $32.4 million improved 54.9% this year
compared with earnings of $20.9 million during the second quarter of fiscal
2000. The increase is mainly due to OLDE contributing earnings of $12.4
million, which includes goodwill amortization of $11.3 million. Additionally,
Option One contributed $21.2 million in pretax earnings compared to $19.9
million in the prior year, which includes goodwill amortization of $3.4
million in both years. The increases at OLDE and Option One were somewhat
offset by costs associated with the winding down of certain mortgage
activities.
BUSINESS SERVICES
Business services revenues of $78.3 million decreased 5.9% from $83.2 million in
the prior year. As of October 31, 2000, the operations of all but two of the
original seven regional accounting firms acquired have been merged into RSM
McGladrey, the national accounting firm that was acquired on August 2, 1999.
Prior to the mergers, for the regional accounting firms, the Company was
required to consolidate revenues and expenses from the non-attest business that
the Company owned and the attest business of five firms located in Kansas City,
Chicago, Indianapolis, Baltimore and Philadelphia that the Company did not own,
but for whom it performed management services. Revenues are no longer
consolidated as a result of the change in organizational structure. The revenue
decline is attributable in part to the change in consolidation, as well as, to
lower technology consulting fees associated with Y2K engagements last year. RSM
McGladrey and McGladrey and Pullen, LLP have a number of common clients and
their combined revenues, including those of the regional accounting firms not
merged and the attest firms for whom they provide management services, for the
three months ended October 31, 2000 increased 12.1% over the same period in the
prior year.
The pretax loss was $781 thousand compared to $1.2 million in the prior year,
which includes goodwill amortization of $7.8 million and $5.2 million,
respectively. The improved results are due to better staff utilization during
the quarter. The change in organizational structure described above does not
impact the pretax earnings or losses of the segment. Due to the nature of this
segment's business, revenues are seasonal, while expenses are relatively fixed
throughout the year. Results for the second quarter are not indicative of the
expected results for the entire fiscal year.
UNALLOCATED CORPORATE
The Unallocated corporate pretax loss for the second quarter increased 96.2% to
$6.7 million from $3.4 million in the comparable period last year. The increase
is primarily a result of interest expense related to borrowings for funding of
operations.
Interest expense on acquisition debt increased $16.5 million to $24.5 million
from $8.0 million in the three months ended October 31, 1999. The increase is
attributable to the acquisition of OLDE in December 1999 which is somewhat
offset by lower interest expense related to the acquisition of the non-attest
assets of McGladrey & Pullen, LLP due to payment of a portion of the acquisition
debt in August 2000.
-14-
<PAGE> 17
THREE MONTHS ENDED OCTOBER 31, 2000 (SECOND QUARTER) COMPARED TO
THREE MONTHS ENDED JULY 31, 2000 (FIRST QUARTER)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
---------------------- -----------------------
2nd Qtr 1st Qtr 2nd Qtr 1st Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. tax operations $ 26,403 $ 11,350 $ (87,203) $ (87,870)
International tax operations 14,899 4,899 (467) (5,923)
Financial services 216,263 211,267 32,426 34,940
Business services 78,267 76,097 (781) (3,013)
Unallocated corporate 1,642 497 (6,727) (4,613)
Interest expense on acquisition debt -- -- (24,484) (27,288)
--------- --------- --------- ---------
$ 337,474 $ 304,110 (87,236) (93,767)
========= =========
Investment income, net 2,536 2,719
Intercompany interest (1,656) 1,055
--------- ---------
(86,356) (89,993)
Income tax benefit (36,701) (38,247)
--------- ---------
Net loss $ (49,655) $ (51,746)
========= =========
</TABLE>
Consolidated revenues for the three months ended October 31, 2000 increased
11.0% to $337.5 million from $304.1 million reported in the first quarter of
fiscal 2001. Revenues increased for all segments, however, the increase is
primarily due to U.S. tax operations and International tax operations.
The consolidated pretax loss for the second quarter of fiscal 2001 decreased to
$86.4 million from $90.0 million in the first quarter of this year. The
decreased loss is primarily attributable to improved performance from
International tax operations.
The net loss was $49.7 million, or $.54 per share, compared to $51.7 million, or
$.55 per share, for the first quarter.
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 132.6% to $26.4 million from $11.4 million in the first
quarter. The pretax loss decreased 0.8% to $87.2 million from $87.9 million in
the three months ended July 31, 2000. The improved performance in revenues is a
result of higher revenues from tuition tax school fees, which are seasonal, and
the Peace of Mind program, contributing $5.6 million and $5.4 million,
respectively. The decreased loss is primarily due to the increase in revenues
from
-15-
<PAGE> 18
the Peace of Mind program, which was partially offset by increased costs
associated with the development of new online services for the upcoming tax
season.
INTERNATIONAL TAX OPERATIONS
Revenues increased 204.1% to $14.9 million compared to first quarter revenues of
$4.9 million. The increase is entirely due to the onset of the tax season in
Australia, which contributed $11.8 million in revenues. The increase was
partially offset by a decline in tax preparation and discounted return fees in
Canada due to a decrease in the number of returns prepared and lower revenues
from the United Kingdom.
The pretax loss declined 92.1% to $467 thousand from $5.9 million in the first
quarter. The improved results are attributable to the Australian tax-filing
season, which contributed earnings of $4.9 million compared to a pretax loss of
$1.4 million in the quarter ended July 31, 2000. The improved results were
reduced by increased losses in Canada and the United Kingdom.
FINANCIAL SERVICES
Revenues increased 2.4% to $216.3 million from $211.3 million in the prior
quarter. The increase is primarily due to higher servicing income that is
attributable to a larger servicing portfolio.
Pretax earnings decreased 7.2% to $32.4 million from $34.9 million in the three
months ended July 31, 2000. The decrease is due to lower daily trading volumes.
Customer daily average trades decreased 4.6% from 10,262 to 9,788. In addition,
Option One added to the decline due to higher compensation and benefits and bad
debt expense. However, the Company's retail mortgage operations did show
improvement from the first quarter by reducing its losses by $5.6 million.
BUSINESS SERVICES
Revenues increased 2.9% to $78.3 million from $76.1 million in the three months
ended July 31, 2000 due primarily to acquisitions. The pretax loss decreased
74.1% to $781 thousand from $3.0 million in the first quarter due to the
increase in revenues from acquisitions.
UNALLOCATED CORPORATE
The Unallocated corporate pretax loss for the second quarter increased 45.8% to
$6.7 million. The increase is primarily due to interest expense related to
borrowings for funding of operations.
Interest expense on acquisition debt decreased from $27.3 million to $24.5
million in the current quarter. The decrease is attributable to payment of a
portion of the long-term debt related to the acquisition of the non-attest
assets of McGladrey & Pullen LLP in August 2000 and, with cash generated from
OLDE, the Company's payment of a portion of the short-term debt related to the
OLDE acquisition.
-16-
<PAGE> 19
SIX MONTHS ENDED OCTOBER 31, 2000 COMPARED TO
SIX MONTHS ENDED OCTOBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $ 37,753 $ 32,798 $(175,073) $(154,733)
International tax operations 19,798 18,781 (6,390) (8,165)
Financial services 427,530 170,957 67,366 39,757
Business services 154,364 107,359 (3,794) (1,340)
Unallocated corporate 2,139 1,611 (11,340) (6,777)
Interest expense on acquisition debt -- -- (51,772) (12,465)
--------- --------- --------- ---------
$ 641,584 $ 331,506 (181,003) (143,723)
========= =========
Investment income, net 5,255 5,053
Intercompany interest (601) 6,716
--------- ---------
(176,349) (131,954)
Income tax benefit (74,948) (50,143)
--------- ---------
Net loss $(101,401) $ (81,811)
========= =========
</TABLE>
Consolidated revenues for the six months ended October 31, 2000 increased 93.5%
to $641.6 million from $331.5 million reported last year. The increase is due
almost entirely to the first time inclusion of OLDE, acquired December 1, 1999.
The consolidated pretax loss for the first six months of fiscal 2001 increased
to $176.3 million from $132.0 million last year. The higher loss is largely
attributable to interest expense on the OLDE acquisition debt of $37.3 million
and increased losses from U.S. tax operations.
The net loss was $101.4 million, or $1.10 per share, compared to $81.8 million,
or $.84 per share, for the same period last year. The per share loss this year
was increased by approximately $.10 per share due to the Company's share
repurchase program that resulted in lower investment income and fewer shares
outstanding for the six months ended October 31, 2000. The effective income tax
rate increased from 38.0% last year to 42.5% this year as a result of the
non-deductible intangible amortization resulting from the OLDE acquisition, and
helped reduce the loss for the six-month period.
An analysis of operations by reportable operating segments follows.
-17-
<PAGE> 20
U.S. TAX OPERATIONS
Revenues increased 15.1% to $37.8 million from $32.8 million last year,
resulting primarily from higher revenues from the Company's Peace of Mind
program.
The pretax loss increased 13.1% to $175.1 million from $154.7 million in the
comparable period last year due to normal operational increases in depreciation,
amortization, compensation and rent expenses. The higher depreciation and rent
expense is a result of our office expansion efforts in the prior year. Also
contributing to the increase in amortization expense are franchise acquisitions
that occurred in the prior year. Due to the nature of this segment's business,
the six-month operating results are not indicative of expected results for the
entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues increased 5.4% to $19.8 million compared to $18.8 million the prior
year. The increase is primarily attributable to Canadian operations. The
increase in Canadian revenues is due to higher discounted return fees, which is
the result of a 25.4% increase in the number of discounted returns prepared over
the same period last year. Also contributing to the increase in revenues were
higher tax preparation fees in Australia and the United Kingdom.
The pretax loss decreased 21.7% to $6.4 million compared to $8.2 million last
year. The decrease is due to improved results in Canada resulting from lower
employee costs, consulting and marketing and advertising expenses. Australia and
the United Kingdom also contributed to the improvement. Due to the nature of
this segment's business, the six-month operating results are not indicative of
expected results for the entire fiscal year.
FINANCIAL SERVICES
Revenues increased 150.1% to $427.5 million from $171.0 million in the same
period last year. The increase is essentially attributable to OLDE, which
contributed revenues of $257.2 million for the six months ended October 31,
2000. For the first six months of fiscal 2001, OLDE's average commission per
trade was $66.86 with daily average trades of 10,023. Option One, which includes
H&R Block Mortgage, contributed $10.6 million of the increase. The higher
revenues are driven by the growth in the Company's servicing portfolio. Option
One's servicing portfolio at October 31, 2000 was $16.6 billion compared to $8.8
billion last October. Option One and H&R Block Mortgage originated and sold or
securitized $2.9 billion in loans during the first six months of fiscal 2001,
compared to $2.8 billion in the same period last year. These increases were
slightly offset by lower revenues at the Company's other mortgage operations.
Pretax earnings increased 69.4% to $67.4 million from $39.8 million in the
prior year. The increase is primarily due to OLDE contributing earnings of
$26.3 million, which includes $22.9 million in goodwill amortization. This
increase was partially offset by costs associated with the winding down of
certain mortgage activities.
BUSINESS SERVICES
Business services revenues increased 43.8% to $154.4 million compared to $107.4
million for the six months ended October 31, 1999. The pretax loss increased
183.1% to $3.8 million from $1.3 million for the same period last year, which
includes goodwill amortization of $14.8 million and $7.0 million, respectively.
The increase in revenues and pretax loss are primarily due to the
-18-
<PAGE> 21
inclusion of RSM McGladrey for six months in fiscal 2001 compared to three
months in fiscal 2000.
As of October 31, 2000, the operations of all but two of the original seven
regional accounting firms acquired have been merged into RSM McGladrey, the
national accounting firm that was acquired on August 2, 1999. Prior to the
mergers, for the regional accounting firms, the Company was required to
consolidate revenues and expenses from the non-attest business that the Company
owned and the attest business of five firms located in Kansas City, Chicago,
Indianapolis, Baltimore and Philadelphia that the Company did not own, but for
whom it performed management services. Revenues are no longer consolidated as a
result of the change in organizational structure. The revenue decline is
attributable in part to the change in consolidation, as well as, to lower
technology consulting fees associated with Y2K engagements last year. RSM
McGladrey and McGladrey and Pullen, LLP have a number of common clients and
their combined revenues, including those of the regional accounting firms not
merged and the attest firms for whom they provide management services, for the
six months ended October 31, 2000 increased 71.2% over the same period in the
prior year. The change in organizational structure described above does not
impact the pretax earnings or losses of the segment. Due to the nature of this
segment's business, revenues are seasonal, while expenses are relatively fixed
throughout the year. Results for the six months are not indicative of the
expected results for the entire fiscal year.
UNALLOCATED CORPORATE
The Unallocated corporate pretax loss for the six months increased 67.3% to
$11.3 million from $6.8 million in the comparable period last year. The increase
is a result of interest expense related to borrowings for funding of operations.
Interest expense on acquisition debt increased to $51.8 million from $12.5
million in the six months ended October 31, 1999. The increase is primarily
attributable to the acquisition OLDE in December 1999, and to a lesser extent,
the acquisition of the non-attest assets of McGladrey & Pullen, LLP in August
1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in market risk from those reported at April
30, 2000.
-19-
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 brought by the Florida State Board of Administration
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.
In July 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 $9.5 million 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 was held on November 30, 2000, but the court has not
yet issued its ruling. 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. 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.
The Florida State Board of Administration has opted out of the settlement and
that litigation continues separately from the state court class action.
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. The lawsuits discussed
-20-
<PAGE> 23
herein were previously reported in Forms 10-K and 10-Q filed by the Company,
including the Form 10-Q for the quarterly period ended July 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the registrant was held on September 13,
2000. At such meeting, four Class II directors were elected to serve three-year
terms, one Class I director was elected to serve a two-year term, and one Class
III director was elected to serve a one-year term. In addition, the resolutions
set forth below were submitted to a vote of shareholders. With respect to the
election of directors and the adoption of each resolution, the number of votes
cast for, against or withheld, and the number of abstentions were as follows:
Election of Class II Directors:
------------------------------
Nominee Votes FOR Votes WITHHELD
------- --------- --------------
G. Kenneth Baum 79,118,627 1,021,492
Mark A. Ernst 79,193,284 946,835
Henry F. Frigon 79,171,416 968,703
Roger W. Hale 79,212,834 927,285
Election of Class I Director:
----------------------------
Nominee Votes FOR Votes WITHHELD
------- --------- --------------
Thomas M. Bloch 79,162,877 977,242
Election of Class III Director:
------------------------------
Nominee Votes FOR Votes WITHHELD
------- --------- --------------
Rayford Wilkins, Jr. 79,018,502 1,121,617
Approval of the H&R Block, Inc. 2000 Employee Stock Purchase Plan:
-----------------------------------------------------------------
The following resolution was adopted by a vote of 77,020,390 shares in
favor of such resolution, 2,523,509 shares against such resolution, and
596,018 shares abstaining. The resolution states:
"RESOLVED, That the H&R Block, Inc. 2000 Employee Stock
Purchase Plan, included as Appendix B to the proxy statement
relating to this meeting, is hereby adopted and approved."
-21-
<PAGE> 24
Approval of the H&R Block, Inc. Short-Term Incentive Plan, as amended:
----------------------------------------------------------------------
The following resolution was adopted by a vote of 76,435,653 shares in
favor of such resolution, 2,955,058 shares against such resolution, and
749,407 shares abstaining. The resolution states:
"RESOLVED, That the H&R Block Short-Term Incentive Plan, as
amended, included in Appendix C to the proxy statement
relating to this meeting, is hereby adopted and approved."
Appointment of Auditors
-----------------------
The following resolution was adopted by a vote of 79,545,640 shares in
favor of such resolution, 191,849 shares against such resolution and
402,630 shares abstaining:
"RESOLVED, That the appointment of PricewaterhouseCoopers LLP
as the independent auditors for H&R Block, Inc., and its
subsidiaries for the year ending April 30, 2001 is hereby
ratified, approved and confirmed."
At the close of business on July 10, 2000, the record date for the annual
meeting of shareholders, there were 92,297,566 shares of Common Stock of the
registrant outstanding and entitled to vote at the meeting. There were
80,140,119 shares represented at the annual meeting of shareholders held on
September 13, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 The H&R Block Short-Term Incentive Plan, as amended September
13, 2000.
10.2 Amendment No. 7 to the H&R Block Deferred Compensation Plan
for Directors.
10.3 Amendment No. 5 to the H&R Block Deferred Compensation Plan
for Executives, as Amended and Restated.
10.4 H&R Block, Inc. Executive Survivor Plan (As Amended and
Restated).
27 Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the second quarter of
fiscal 2001.
-22-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
-----------------------------------
(Registrant)
DATE 12/15/00 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
-23-
