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, 1998 / / 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, 1998 was 100,534,662 shares.
2 TABLE OF CONTENTS Page ---- PART I Financial Information Consolidated Balance Sheets July 31, 1998 and April 30, 1998 ........................... 1 Consolidated Statements of Operations Three Months Ended July 31, 1998 and 1997 .................. 2 Consolidated Statements of Cash Flows Three Months Ended July 31, 1998 and 1997 .................. 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..... 11 PART II Other Information.............................................. 12 SIGNATURES ............................................................... 13
3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS <TABLE> <CAPTION> JULY 31, APRIL 30, 1998 1998 ---- ---- ASSETS (UNAUDITED) (AUDITED) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 696,210 $ 900,856 Marketable securities 139,657 346,158 Receivables, less allowance for doubtful accounts of $45,870 and $45,314 813,697 793,237 Prepaid expenses and other current assets 123,363 103,026 ------------- ------------- TOTAL CURRENT ASSETS 1,772,927 2,143,277 INVESTMENTS AND OTHER ASSETS Investments in marketable securities 277,369 289,096 Excess of cost over fair value of net tangible assets acquired, net of amortization 295,803 288,580 Other 108,346 105,809 ------------- ------------- 681,518 683,485 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 72,901 77,321 ------------- ------------- $ 2,527,346 $ 2,904,083 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 765,503 $ 643,002 Accounts payable, accrued expenses and deposits 97,880 114,875 Accrued salaries, wages and payroll taxes 16,254 96,168 Accrued taxes on earnings 222,933 422,847 ------------- ------------- TOTAL CURRENT LIABILITIES 1,102,570 1,276,892 LONG-TERM DEBT 249,688 249,675 OTHER NONCURRENT LIABILITIES 38,365 35,884 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Additional paid-in capital 432,165 432,335 Retained earnings 961,530 1,010,545 Accumulated other comprehensive income (loss) (30,982) (24,515) ------------- ------------- 1,363,802 1,419,454 Less cost of 5,436,964 and 1,992,043 shares of common stock in treasury 227,079 77,822 ------------- ------------- 1,136,723 1,341,632 ------------- ------------- $ 2,527,346 $ 2,904,083 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -1-
4 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS <TABLE> <CAPTION> THREE MONTHS ENDED ------------------ JULY 31, -------- 1998 1997 ---- ---- <S> <C> <C> REVENUES Service revenues $ 47,702 $ 30,360 Product revenues 28,642 6,011 Royalties 1,067 1,017 Other 1,476 1,822 ------------- ------------- 78,887 39,210 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 43,435 30,193 Occupancy and equipment 40,761 35,600 Interest 17,551 8,238 Marketing and advertising 3,798 3,299 Supplies, freight and postage 3,074 2,117 Other 28,899 20,462 ------------- ------------- 137,518 99,909 ------------- ------------- Operating loss (58,631) (60,699) OTHER INCOME Investment income, net 13,890 5,190 ------------- ------------- Loss from continuing operations before income tax benefit (44,741) (55,509) Income tax benefit (17,002) (20,648) ------------- ------------- Net loss from continuing operations (27,739) (34,861) Net loss from discontinued operations (less applicable income tax benefit of ($1,489)) - (3,274) ------------- ------------- Net loss $ (27,739) $ (38,135) ============= ============= Weighted average number of common shares outstanding 104,976 104,102 ============= ============= Basic and diluted net loss per share from continuing operations $ (.26) $ (.33) ============= ============= Basic and diluted net loss per share $ (.26) $ (.37) ============= ============= Dividends per share $ .20 $ .20 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -2-
5 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED, AMOUNTS IN THOUSANDS <TABLE> <CAPTION> THREE MONTHS ENDED JULY 31, -------- 1998 1997 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (27,739) $ (38,135) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 13,388 8,796 Other noncurrent liabilities 2,481 1,146 Changes in: Receivables (20,460) 342,147 Prepaid expenses and other current assets (20,337) (21,439) Net assets of discontinued operations - 4,177 Accounts payable, accrued expenses and deposits (16,995) (19,605) Accrued salaries, wages and payroll taxes (79,914) (96,471) Accrued taxes on earnings (200,487) (39,936) -------------- -------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (350,063) 140,680 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (117,868) (111,837) Maturities of marketable securities 337,604 138,738 Purchases of property and equipment (4,018) (4,149) Excess of cost over fair value of net tangible assets acquired, net of cash acquired (12,127) (223,209) Other, net (9,986) (5,138) -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 193,605 (205,595) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (1,762,864) (2,808,632) Proceeds from issuance of notes payable 1,885,365 2,740,059 Proceeds from issuance of long-term debt 13 - Dividends paid (21,275) (20,816) Payments to acquire treasury shares (153,788) - Proceeds from stock options exercised 4,361 1,145 -------------- -------------- NET CASH USED IN FINANCING ACTIVITIES (48,188) (88,244) -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (204,646) (153,159) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 696,210 $ 303,920 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 182,815 $ 19,950 Interest paid 13,952 5,668 </TABLE> See Notes to Consolidated Financial Statements -3-
6 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, 1998, the Consolidated Statements of Operations for the three months ended July 31, 1998 and 1997, and the Consolidated Statements of Cash Flows for the three months ended July 31, 1998 and 1997 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, 1998 and for all periods presented have been made. Reclassifications have been made to prior year amounts to conform with the current year presentation. Principles of consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries and companies that are directly or indirectly controlled by the Company through majority ownership or otherwise. 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, 1998 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 January 31, 1998, the Company completed the sale of all of its interest in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc. (WorldCom). The Consolidated Statement of Operations for the three months ended July 31, 1997 and the Consolidated Statement of Cash Flows for the three months ended July 31, 1997 have been reclassified to reflect CompuServe as discontinued operations. CompuServe's revenues for the three months ended July 31, 1997 were $205.7 million. 3. Receivables consist of the following: <TABLE> <CAPTION> July 31, April 30, -------- --------- 1998 1998 ---- ---- (Audited) <S> <C> <C> Mortgage loans held for sale $ 513,007 $ 448,102 Credit card loans 194,566 202,852 Other 151,994 187,597 -------------- --------------- 859,567 838,551 Allowance for doubtful accounts 45,870 45,314 -------------- --------------- $ 813,697 $ 793,237 ============== =============== </TABLE> -4-
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 8,669,184 shares and the conversion of 1,088 shares of preferred stock to common stock, as they are antidilutive. The weighted average shares outstanding for the first quarter of fiscal 1999 increased to 104,976,000 from 104,102,000 last year, due to stock option exercises during fiscal 1998. The increase was partially reduced by the repurchase of treasury shares by the Company during the period from February 1998 to July 1998. 6. During the three months ended July 31, 1998 and 1997, the Company issued 111,379 and 50,145 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, certain current and former officers and directors of CompuServe and the registrant 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 have been consolidated, the defendants have filed a motion to dismiss the consolidated suits, and the court has stayed all proceedings pending the outcome of the state court suits. 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 have been consolidated for discovery purposes and defendants have filed a motion for summary judgment covering all four state lawsuits. In the state lawsuits, the court entered an order in July 1998 that the suits entitled Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v. CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et al. be maintained as a class action on behalf of the following class: "All persons and entities who purchased shares of common stock of CompuServe Corporation between April 18, 1996 pursuant to the CompuServe's initial public offering or on the open market and July 16, 1996, and who were damaged thereby. All named defendants to these consolidated actions, members of their immediate families, any entity in which they have a controlling interest, and their legal representatives, heirs, successors or assigns are excluded from the class." Plaintiffs Greenfield, Schnipper and Silverglate were designated as class representatives. The Florida State Board of Administration v. CompuServe Corporation, et al. case pending in -5-
8 state court was not included in the class certification order as the plaintiff in such case did not seek class certification of its action. As a part of the sale of its interest in CompuServe, the Company has agreed to indemnify WorldCom 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. 8. Summarized financial information for Block Financial Corporation, an indirect, wholly owned subsidiary of the Company, is presented below. <TABLE> <CAPTION> July 31, April 30, 1998 1998 ---- ---- (Audited) <S> <C> <C> Condensed balance sheets: Cash and cash equivalents $ 93,138 $ 30,895 Finance receivables, net 791,901 737,005 Other assets 315,438 311,759 ---------- ---------- Total assets $1,200,477 $1,079,659 ========== ========== Commercial paper $ 765,503 $ 643,002 Long-term debt 249,688 249,675 Other liabilities 51,268 57,372 Stockholder's equity 134,018 129,610 ---------- ---------- Total liabilities and stockholder's equity $1,200,477 $1,079,659 ========== ========== </TABLE> <TABLE> <CAPTION> Three months ended ------------------ July 31, -------- 1998 1997 ---- ---- <S> <C> <C> Condensed statements of operations: Revenues $ 61,829 $ 28,609 Earnings (loss) from operations 7,148 (6,330) Net earnings (loss) 4,427 (3,887) </TABLE> 9. The Company sells short treasury securities under an open repurchase agreement that can be adjusted at any time by either party. The position on certain or all of the fixed rate mortgages is closed when the Company enters into a forward commitment to sell those mortgages. Deferred losses on the treasury securities hedging instrument amounted to $1,153 at July 31, 1998. The contract value and the market value of this hedging instrument at July 31, 1998 was $54,578 and $54,821, respectively. The contract value and market value of the forward commitment at July 31, 1998 was $335,000 and $330,913, respectively. 10. In the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires that all changes in equity during the period, except those resulting from investments by and distributions to owners, be reported as "comprehensive income" in the financial statements. 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 adoption of SFAS 130 had no effect on the Company's consolidated financial -6-
9 statements. The components of comprehensive income (loss) during the three months ended July 30, 1998 and 1997 were: <TABLE> <CAPTION> Three months ended ------------------ July 31, -------- 1998 1997 ---- ---- <S> <C> <C> Net loss $(27,739) $(38,135) Change in net unrealized gain (loss) on mkt. securities 935 463 Change in foreign currency translation adjustments (7,402) (106) -------- -------- Comprehensive income (loss) $(34,206) $(37,778) ======== ======== </TABLE> 11. In the first quarter of fiscal year 1999, the Company acquired operations that management determined to be a new reportable operating segment. The new segment, Business services, is primarily engaged in providing accounting, tax and consulting services to business clients and tax, estate planning and financial planning services to individuals. The Business services segment offers its services through a regional accounting firm based in Kansas City, Missouri. Revenues of this segment are seasonal in nature. Information concerning the Company's operations by reportable operating segments for the three months ended July 31, 1998 and 1997 is as follows: <TABLE> <CAPTION> Three months ended ------------------ July 31, -------- 1998 1997 ---- ---- <S> <C> <C> Revenues: U.S. tax operations $ 12,179 $ 11,432 International tax operations 3,437 3,380 Mortgage operations 52,705 14,208 Credit card operations 8,314 9,307 Business services 1,330 - Unallocated corporate 922 1,010 Inter-segment sales - (127) -------- -------- $ 78,887 $ 39,210 ======== ======== Earnings (loss) from continuing operations: U.S. tax operations $(57,493) $(49,338) International tax operations (5,971) (5,124) Mortgage operations 13,787 (491) Credit card operations (1,966) (2,982) Business services (114) - Unallocated corporate (2,431) (1,183) Acquisition interest expense (4,443) (1,581) Investment income, net 13,890 5,190 -------- -------- Loss from continuing operations before income tax benefit $(44,741) $(55,509) ======== ======== </TABLE> -7-
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION These comments should be read in conjunction with the Consolidated Balance Sheets and Consolidated Statements of Cash Flows found on pages 1 and 3, respectively. Working capital decreased to $670.4 million at July 31, 1998 from $866.4 million at April 30, 1998. The working capital ratio at July 31, 1998 is 1.6 to 1, compared to 1.7 to 1 at April 30, 1998. The decrease in working capital and the working capital ratio is primarily due to the repurchase of treasury shares and the seasonal nature of the Company's U.S. tax operations segment. Tax return preparation occurs almost entirely in the fourth quarter and has the effect of increasing certain assets and liabilities during this time. The Company maintains seasonal lines of credit to support short-term borrowing facilities in the United States and Canada. 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 nonconforming mortgage loan, credit card and other financial services programs. These short-term borrowings in the U.S. are supported by a $1.3 billion back-up credit facility through November 1998, 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, 1998, short-term borrowings used to fund mortgage loans, credit cards and other programs increased to $765.5 million from $643.0 million at April 30, 1998 due mainly to the funding of mortgage operations. For the three months ended July 31, 1998 and 1997, interest expense was $17.6 million and $8.2 million, respectively. The increase in interest expense is primarily attributable to the funding of mortgage operations with short-term borrowings and the long-term debt issued to fund the acquisition of Option One Mortgage Corporation (Option One). The Company announced in December 1993 its intention to repurchase from time to time up to 10 million of its shares on the open market. In July 1996, the Company announced its intention to repurchase up to 10 million additional shares in the open market over a two-year period following the separation of CompuServe. At July 31, 1998, 8.7 million shares had been repurchased. The Company plans to continue to purchase its shares on the open market in accordance with these authorizations, 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. -8-
11 RESULTS OF OPERATIONS FISCAL 1999 COMPARED TO FISCAL 1998 The analysis that follows should be read in conjunction with the table below and the Consolidated Statements of Operations found on page 2. <TABLE> <CAPTION> THREE MONTHS ENDED JULY 31, 1998 COMPARED TO -------------------------------------------- THREE MONTHS ENDED JULY 31, 1997 -------------------------------- (AMOUNTS IN THOUSANDS) Revenues Earnings (loss) -------------------------------- ------------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> U.S. tax operations $ 12,179 $ 11,432 $ (57,493) $ (49,338) International tax operations 3,437 3,380 (5,971) (5,124) Mortgage operations 52,705 14,208 13,787 (491) Credit card operations 8,314 9,307 (1,966) (2,982) Business services 1,330 - (114) - Unallocated corporate 922 1,010 (2,431) (1,183) Acquisition interest expense - - (4,443) (1,581) Investment income, net - - 13,890 5,190 Inter-segment sales - (127) - - --------------- -------------- -------------- ------------- $ 78,887 $ 39,210 (44,741) (55,509) =============== ============== Income tax benefit (17,002) (20,648) -------------- ------------- Net loss from continuing operations (27,739) (34,861) Net loss from discontinued operations - (3,274) -------------- ------------- Net loss $ (27,739) $ (38,135) ============== ============= </TABLE> Consolidated revenues for the three months ended July 31, 1998 increased 101.2% to $78.9 million from $39.2 million reported last year. The increase is primarily due to revenues from Mortgage operations of $52.7 million, a 271.0% increase over last year. The consolidated pretax loss from continuing operations for the first quarter of fiscal 1999 decreased to $44.7 million from $55.5 million in the first quarter of last year. The decrease is attributable to Mortgage operations' pretax earnings of $13.8 million compared to a pretax loss of $491 thousand in the first quarter of last year and increased investment income. The net loss from continuing operations was $27.7 million, or $.26 per share, compared to $34.9 million, or $.33 per share, for the same period last year. -9-
12 An analysis of operations by reportable operating segments follows. U.S. TAX OPERATIONS Revenues increased 6.5% to $12.2 million from $11.4 million last year, resulting primarily from higher tax preparation fees that are attributable to increases in pricing. The pretax loss increased 16.5% to $57.5 million from $49.3 million in the first quarter of last year due to normal operational increases in compensation, rent and other facility-related expenses. Also 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 1.7% to $3.4 million compared to the prior year's first quarter. The increase is principally attributable to an increase in tax preparation fees in Australia resulting from both increases in the number of returns prepared over last year and higher prices, along with increased royalities from overseas franchises. These increases were partially offset by decreased tax preparation fees in Canada due to a decline in the number of returns prepared. The pretax loss increased 16.5% to $6.0 million from $5.1 million last year. The increase is due to continued expansion in the United Kingdom, with an increase of 16 offices over the same period last year, and normal operational increases in compensation, rent and other facility-related expenses in Canada. The increased losses were partially reduced by improved results over the prior quarter in Australia. 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 271.0% to $52.7 million from $14.2 million in the same period last year. The increase is attributable to Option One, which was acquired on June 17, 1997. Option One contributed revenues of $44.3 million for the quarter compared to $9.1 million for the one-and-a-half-month period last year. Option One originated and sold $779.9 million and $705.5 million in loans, respectively, during the first quarter of fiscal 1999. Companion Mortgage also contributed improved revenues due to interest income earned on higher balances of mortgage loans held for sale. Mortgage operations contributed pretax earnings of $13.8 million this year compared to a $491 thousand pretax loss during the first quarter of fiscal 1998. Option One contributed earnings of $14.0 million, including goodwill amortization of $3.1 million. CREDIT CARD OPERATIONS Revenues decreased 10.7% to $8.3 million from $9.3 million in the prior year due to a decline in the average revolving credit card balance by 21.0% from the first quarter of fiscal 1998. -10-
13 The pretax loss declined 34.1% to $2.0 million from $3.0 million last year. The decrease is attributable to lower marketing and advertising expenses and lower service fees resulting from the decrease in the number of credit cards outstanding. BUSINESS SERVICES Business services is a new reportable operating segment for fiscal year 1999. The Company acquired its first accounting firm in May 1998, which contributed revenues of $1.3 million and a pretax loss of $114 thousand for the first quarter of fiscal 1999, including goodwill amortization of $73 thousand. Due to the nature of this segment's business, revenues are slightly 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 increased 167.6% to $13.9 million from $5.2 million last year. The increase is due to additional funds available for investment resulting from the proceeds of the monetization of WorldCom, Inc. stock during fiscal 1998. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the first quarter increased 105.5% to $2.4 million from $1.2 million in the comparable period last year. The increase is a result of the start-up of a business which offers financial planning services through the Company's tax offices, and increased employee costs, technology and shareholder-related expenses. Acquisition interest expense of $4.4 million represents the interest on the debt associated with the acquisition of Option One. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from those reported at April 30, 1998. -11-
14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. CompuServe, certain current and former officers and directors of CompuServe and the registrant have been named as defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio. All suits involve claims based on allegations of omissions and misstatements of fact in connection with CompuServe's initial public offering in April 1996. Relief sought in the lawsuits is unspecified, but includes pleas for rescission and damages. The Federal suits have been consolidated, the defendants have filed a motion to dismiss the consolidated suits, and the court has stayed all proceedings pending the outcome of the state court suits. The state lawsuits have been consolidated for discovery purposes and defendants have filed a motion for summary judgment covering all four state lawsuits. In the state lawsuits, the court entered an order in July 1998 that the suits entitled Harvey Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v. CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et al. be maintained as a class action on behalf of the following class: "All persons and entities who purchased shares of common stock of CompuServe Corporation between April 18, 1996 pursuant to the CompuServe's initial public offering or on the open market and July 16, 1996, and who were damaged thereby. All named defendants to these consolidated actions, members of their immediate families, any entity in which they have a controlling interest, and their legal representatives, heirs, successors or assigns are excluded from the class." Plaintiffs Greenfield, Schnipper and Silverglate were designated as class representatives. The Florida State Board of Administration v. CompuServe Corporation, et al. case pending in state court was not included in the class certification order as the plaintiff in such case did not seek class certification of its action. The defendants continue to vigorously defend these lawsuits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits 10(a) Employment Agreement between HRB Management, Inc. and Mark A. Ernst (27) Financial Data Schedule b) Reports on Form 8-K A Form 8-K, Current Report, dated July 20, 1998, was filed by the registrant reporting as an "Item 4" the change in the Registrant's certifying accountant. The registrant reported under "Item 7" the letter from the previous auditors, Deloitte & Touche LLP, addressed to the Securities and Exchange Commission. The registrant did not file any other reports on Form 8-K during the first quarter of fiscal 1999. -12-
15 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 9/14/98 BY /s/ Ozzie Wenich ------- ------------------------------------ Ozzie Wenich Senior Vice President and Chief Financial Officer DATE 9/14/98 BY /s/ Cheryl L. Givens ------- ------------------------------------ Cheryl L.Givens Vice President and Corporate Controller -13-