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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-6089 H&R BLOCK, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> MISSOURI 44-0607856 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) </TABLE> 4400 MAIN STREET KANSAS CITY, MISSOURI 64111 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (816) 753-6900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's Common Stock, without par value, at September 1, 1997 was 104,178,653 shares.
2 TABLE OF CONTENTS Page <TABLE> <S> <C> PART I Financial Information Consolidated Balance Sheets July 31, 1997 and April 30, 1997 .................... 1 Consolidated Statements of Operations Three Months Ended July 31, 1997 and 1996 ........... 2 Consolidated Statements of Cash Flows Three Months Ended July 31, 1997 and 1996 ........... 3 Notes to Consolidated Financial Statements ............ 4 Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 8 PART II Other Information ..................................... 12 SIGNATURES ...................................................... 14 </TABLE>
3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS <TABLE> <CAPTION> JULY 31, APRIL 30, 1997 1997 ---------- ---------- ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 303,920 $ 457,079 Marketable securities 20,269 61,755 Receivables, less allowance for doubtful accounts of $32,198 and $30,144 518,739 407,441 Prepaid expenses and other current assets 84,299 27,681 Net assets of discontinued operations 517,928 522,144 ---------- ---------- TOTAL CURRENT ASSETS 1,445,155 1,476,100 INVESTMENTS AND OTHER ASSETS Investments in marketable securities 35,582 20,273 Excess of cost over fair value of net tangible assets acquired, net of amortization 260,991 74,794 Other 68,552 56,474 ---------- ---------- 365,125 151,541 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 66,082 65,065 ---------- ---------- $1,876,362 $1,692,706 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 657,209 $ 269,619 Accounts payable, accrued expenses and deposits 152,103 164,872 Accrued salaries, wages and payroll taxes 10,662 105,326 Accrued taxes on earnings 74,640 114,840 ---------- ---------- TOTAL CURRENT LIABILITIES 894,614 654,657 OTHER NONCURRENT LIABILITIES 40,098 38,952 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Convertible preferred stock, no par, stated value $.01 per share 4 4 Additional paid-in capital 501,528 502,308 Retained earnings 625,479 684,071 ---------- ---------- 1,128,100 1,187,472 Less cost of 4,855,276 and 4,905,421 shares of common stock in treasury 186,450 188,375 ---------- ---------- 941,650 999,097 ---------- ---------- $1,876,362 $1,692,706 ========== ========== </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, -------- 1997 1996 ---------- ---------- <S> <C> <C> REVENUES Service revenues $ 35,767 $ 19,144 Royalties 1,017 931 Other income 7,183 540 --------- ---------- 43,967 20,615 --------- ---------- OPERATING EXPENSES Employee compensation and benefits 30,193 21,555 Occupancy and equipment 35,600 29,998 Marketing and advertising 3,299 1,601 Supplies, freight and postage 2,117 1,930 Other 33,457 15,361 --------- ---------- 104,666 70,445 --------- ---------- Operating loss (60,699) (49,830) OTHER INCOME Investment income, net 5,190 3,944 --------- ---------- Loss from continuing operations before income tax benefit (55,509) (45,886) Income tax benefit (20,648) (17,391) --------- ---------- Net loss from continuing operations (34,861) (28,495) Net loss from discontinued operations (less applicable taxes of $1,488 and $14,788) (3,274) (23,731) --------- ---------- Net loss $ (38,135) $ (52,226) ========= ========== Weighted average number of common shares outstanding 104,102 103,823 ========= ========== Net loss per share from continuing operations $ (.33) $ (.27) ========= ========== Net loss per share $ (.37) $ (.50) ========= ========== Dividends per share $ .20 $ .32 ========= ========== </TABLE> 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, -------- 1997 1996 ------- ------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (38,135) $ (52,226) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 8,796 6,629 Other noncurrent liabilities 1,146 2,112 Changes in: Receivables 342,147 (19,806) Prepaid expenses and other current assets (21,439) (7,656) Net assets of discontinued operations 4,177 23,126 Accounts payable, accrued expenses and deposits (19,605) 5,369 Accrued salaries, wages and payroll taxes (96,471) (84,666) Accrued taxes on earnings (39,936) (53,232) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES 140,680 (180,350) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (111,837) (14,682) Maturities of marketable securities 138,738 1,229 Purchases of property and equipment (4,149) (3,263) Excess of cost over fair value of net tangible assets acquired, net of cash acquired (223,209) (2,226) Other, net (5,138) (2,836) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (205,595) (21,778) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (2,808,632) (1,298,813) Proceeds from issuance of notes payable 2,740,059 1,338,271 Dividends paid (20,816) (33,095) Proceeds from stock options exercised 1,145 1,862 ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (88,244) 8,225 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (153,159) (193,903) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 457,079 405,019 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 303,920 $ 211,116 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 19,950 $ 12,319 Interest paid 5,668 1,329 </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, 1997, the Consolidated Statements of Operations for the three months ended July 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for the three months ended July 31, 1997 and 1996 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, 1997 and for all periods presented have been made. Reclassifications have been made to prior year amounts to conform with the current year presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's April 30, 1997 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 September 7, 1997, the Company entered into an Agreement and Plan of Merger (Merger Agreement) under which a subsidiary of WorldCom, Inc. (WorldCom) would acquire CompuServe Corporation (CompuServe). At the effective time of the merger, each of the outstanding shares of CompuServe common stock (including the 74,200,000 shares owned by the Company) are to be converted into the right to receive, and there shall be paid and issued, in exchange for each of the CompuServe shares, .40625 of a share of WorldCom stock, subject to adjustment as provided in the Merger Agreement. The transaction is subject to the satisfaction of certain conditions set forth in the Merger Agreement and is expected to close as soon as practicable after the satisfaction of all of such conditions. The consolidated financial statements have been reclassified to reflect the Company's Computer Services segment as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Revenues from Computer Services for the three months ended July 31, 1997 and 1996 were $205.7 million and $208.6 million, respectively. 3. On June 17, 1997, the Company completed the purchase of Option One Mortgage Corporation (Option One). The cash purchase price was $218.1 million, consisting of $28.1 million in adjusted stockholder's equity and a premium of $190 million. In addition, the Company made a cash payment of $456 million to Option One's parent to eliminate intercompany loans made to Option One to finance its mortgage loan operations. Both payments are subject to post-closing adjustments. The $456 million payment was recorded -4-
7 as an intercompany loan and was repaid to the Company by the end of June 1997 after Option One sold the loans to a third party in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, Option One's results are included since the date of acquisition. The fair value of tangible assets acquired and liabilities assumed was $683.8 million and $463.9 million, respectively. Liabilities assumed were treated as a noncash investing activity in the Consolidated Statement of Cash Flows for the three months ended July 31, 1997. The excess of cost over fair value of net tangible assets acquired was $183.1 million and is being amortized on a straight-line basis over 15 years. The acquisition was financed with short-term borrowings and it is the intention of the Company that the acquisition will ultimately be financed with the issuance of $250 million in medium-term debt securities in the second quarter of fiscal 1998. The following unaudited pro forma summary combines the consolidated results of operations of the Company and Option One as if the acquisition had occurred on May 1, 1997 and 1996, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt and the related income tax effects. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of those dates. In addition, the pro forma information is not intended to be a projection of future results. <TABLE> <CAPTION> Three months ended ------------------ July 31, -------- 1997 1996 ---- ---- <S> <C> <C> Revenues $ 56,017 $ 40,364 Net loss (42,036) (54,146) Net loss per share (.40) (.52) </TABLE> 4. Receivables consist of the following: <TABLE> <CAPTION> July 31, April 30, -------- --------- 1997 1997 -------- --------- <S> <C> <C> Credit card loans $ 245,806 $ 177,215 Mortgage loans held for sale 223,707 29,623 Other 81,424 230,747 --------- --------- 550,937 437,585 Allowance for doubtful accounts 32,198 30,144 --------- --------- $ 518,739 $ 407,441 ========= ========= </TABLE> 5. During the quarter ended July 31, 1997, the net unrealized holding gain on available-for-sale securities increased $463 to $1,789. 6. 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. 7. Net loss per common share is based on the weighted average number of shares outstanding during each period. The weighted average shares outstanding for the first quarter of fiscal -5-
8 1998 increased to 104,102,000 from 103,823,000 last year, due to the issuance of treasury shares for a franchise acquisition in the first quarter of fiscal 1997 and stock option exercises. 8. During the three months ended July 31, 1997 and 1996, the Company issued 50,145 and 27,406 shares, respectively, pursuant to provisions for exercise of stock options under its stock option plans. 9. During fiscal 1997, CompuServe, certain current and former officers and directors of CompuServe and the registrant were named as defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio. All but two of the original six cases were brought as putative class actions. 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. Relief sought is unspecified, but includes pleas for rescission and damages. One purported class action lawsuit was voluntarily dismissed by the plaintiffs and such plaintiffs have joined in one of the remaining class action lawsuits in Federal court. The other 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 are both subject to pending motions to dismiss filed on behalf of the defendants, and they are expected to be consolidated pursuant to a scheduling order that has been entered in the first Federal lawsuit. The first state court lawsuit also alleges violations of the Ohio Securities Code and common law of negligent misrepresentation, while another state lawsuit alleges violations of Colorado, Florida, and Ohio statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. Three of the state lawsuits have been consolidated for discovery. A fourth state lawsuit, Philip Silverglate v. CompuServe Corporation, H&R Block, Inc., etal., was filed during the first quarter of fiscal 1998, and is expected to be consolidated with the other state lawsuits in due course. The defendants are vigorously defending these lawsuits. 10. Summarized financial information for Block Financial Corporation (BFC), a wholly owned subsidiary of the Company, is presented below. <TABLE> <CAPTION> July 31, April 30, -------- --------- 1997 1997 -------- --------- <S> <C> <C> Condensed balance sheets: Cash and cash equivalents $ 29,687 $ 3,425 Finance receivables, net 503,084 380,206 Other assets 271,118 34,657 -------- -------- Total assets $803,889 $418,288 ======== ======== Commercial paper $657,209 $269,619 Other liabilities 28,762 26,867 Stockholder's equity 117,918 121,802 -------- -------- Total liabilities and stockholder's equity $803,889 $418,288 ======== ======== </TABLE> -6-
9 <TABLE> <CAPTION> Three months ended ------------------ July 31, ------------------ 1997 1996 ------- ------- <S> <C> <C> Condensed statements of operations: Revenues $28,609 $8,224 Loss from operations (6,330) (1,022) Net loss (3,887) (630) </TABLE> 11. BFC filed a $1.0 billion shelf registration statement for medium-term debt securities after the end of the first quarter and intends to draw down $250,000 on the shelf registration in the second quarter, as discussed above. As part of its interest rate risk management strategy, the Company hedged its interest rate risk related to the anticipated issuance of medium-term debt by utilizing treasury rate guarantees. The contract value and market value of these treasury rate guarantees as of July 31, 1997 was $240,000 and $234,839, respectively. -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 from $821.4 million at April 30, 1997 to $550.5 million at July 31, 1997. The working capital ratio at July 31, 1997 is 1.6 to 1, compared to 2.3 to 1 at April 30, 1997. The decrease in working capital and working capital ratio is primarily due to the following: (1) working capital was decreased by approximately $189.3 million due to the acquisition of Option One; and (2) the seasonal nature of the Company's Tax Services segment. Tax return preparation occurs almost entirely in the fourth quarter and has the effect of increasing certain assets and liabilities during this time. The Company maintains seasonal lines of credit to support short-term borrowing facilities in the United States and Canada. During the months of January through April, the Company's Canadian Tax Services regularly incurs short-term borrowings to purchase refunds due its clients from Revenue Canada. BFC incurs short-term borrowings throughout the year to fund receivables associated with its credit card, nonconforming mortgage loan and other financial service programs. BFC has a $1.0 billion back-up credit facility to support its various financial activities through December 1997, subject to renewal. At July 31, 1997, short-term borrowings totaled $657.2 million compared to $269.6 million at April 30, 1997 due mainly to the acquisition of Option One and the funding of its mortgage operations. BFC filed a $1.0 billion shelf registration statement for medium-term debt securities after the end of the first quarter of fiscal 1998. BFC intends to draw down $250 million on the shelf registration in the second quarter to pay down the commercial paper used to fund the acquisition of Option One, described below. The Company's capital expenditures, excluding the acquisition of Option One, and dividend payments during the first three months were funded through internally-generated funds. The Company will pay CompuServe Corporation (CompuServe) approximately $40 million in the second quarter for the tax benefits derived by the Company from CompuServe's operating losses in the 1996 calendar year using internally-generated funds. Such payment will be made in accordance with the Tax Sharing Agreement between the Company and CompuServe. Upon the completion of the CompuServe transaction, described below, the Company will hold an approximate 3 percent stake in WorldCom, Inc. (WorldCom) and will evaluate various alternatives to convert its holdings into cash in a timely manner. The proceeds will be used to assist the Company in growing its core tax and financial services businesses and to fund the Company's stock repurchase program discussed below. -8-
11 The Company announced in December 1993 its intention to repurchase from time to time up to 10 million of its shares on the open market of which 4.8 million had been repurchased at July 31, 1997. In July 1996, the Company announced its intention to repurchase up to 10 million additional shares in the open market over a two-year period following the separation of CompuServe. Such authorization is in addition to the 1993 authorization. Following the completion of the CompuServe transaction, the Company plans to continue to purchase its shares on the open market in accordance with these authorizations. However, the repurchase program will depend on the price of the stock, availability of excess cash, the ability to maintain financial flexibility, and other investment opportunities available. RESULTS OF OPERATIONS SIGNIFICANT EVENTS On June 17, 1997, the Company completed the purchase of Option One. Option One engages in the origination, purchase, servicing, securitization and sale of nonconforming mortgage loans. Based in Santa Ana, California, Option One has a network of more than 5,000 mortgage brokers in 46 states. The cash purchase price was $218.1 million. In addition, the Company made a cash payment of $456 million to Option One's parent to eliminate intercompany loans made to Option One to finance its mortgage loan operations. Both payments are subject to post-closing adjustments. The $456 million payment was recorded as an intercompany loan and was repaid to the Company by the end of June 1997 after Option One sold the mortgage loans to a third party in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, Option One's results are included since the date of acquisition. On September 7, 1997, the Company entered into an Agreement and Plan of Merger (Merger Agreement) under which a subsidiary of WorldCom would acquire CompuServe. At the effective time of the merger, each of the outstanding shares of CompuServe common stock (including the 74,200,000 shares owned by the Company) are to be converted into the right to receive, and there shall be paid and issued, in exchange for each of the CompuServe shares, .40625 of a share of WorldCom stock, subject to adjustment as provided in the Merger Agreement. The transaction is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any foreign competition law or similar law, the receipt of other regulatory approvals and CompuServe shareholder approval and adoption of the Merger Agreement. The Company has agreed to vote all of its directly or indirectly owned shares of CompuServe common stock in favor of the merger, and such action is sufficient to approve the transaction. The transaction will be treated as a sale of assets for tax purposes and it is expected to close as soon as practicable after the satisfaction of all the conditions set forth in the Merger Agreement. The financial summary below has been reclassified to reflect CompuServe as discontinued operations. CompuServe was previously reported in the Computer Services segment. -9-
12 1997 COMPARED TO 1996 The analysis that follows should be read in conjunction with the table below and the Consolidated Statements of Operations found on page 2. THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) ------------------- ------------------ 1997 1996 1997 1996 -------- --------- -------- ------- <S> <C> <C> <C> <C> Tax services $ 14,389 $ 12,282 $(52,059) $(45,229) Financial services 29,209 8,224 (6,349) (1,022) Unallocated corporate 387 109 (2,291) (3,579) Investment income, net - - 5,190 3,944 Intersegment sales (18) - - - -------- --------- -------- ------- $ 43,967 $ 20,615 (55,509) (45,886) ======== ========= Income tax benefit (20,648) (17,391) -------- -------- Net loss from continuing operations (34,861) (28,495) Net loss from discontinued operations (3,274) (23,731) -------- -------- Net loss $(38,135) $(52,226) ======== ======== </TABLE> Consolidated revenues for the three months ended July 31, 1997 increased 113.3% to $44.0 million from $20.6 million reported last year. The increase is primarily due to the revenues of the Company's new retail mortgage operations this year of $18.4 million, which include revenues of Option One, acquired on June 17, 1997. The consolidated pretax loss from continuing operations for the first quarter of fiscal 1998 increased to $55.5 million from $45.9 million in the first quarter of last year. The increase is attributable to the Tax Services segment, which incurred a pretax loss of $52.1 million compared to $45.2 million in the first quarter of last year. The net loss from continuing operations was $34.9 million, or $.33 per share, compared to $28.5 million, or $.27 per share, for the same period last year. An analysis of operations by segment follows. TAX SERVICES Revenues increased 17.2% to $14.4 million from $12.3 million last year, resulting primarily from higher tax preparation fees that are attributable to increases in pricing and in the number of tax returns prepared. -10-
13 The pretax loss increased 15.1% to $52.1 million from $45.2 million in the first quarter of last year due to normal operational increases in compensation, rent and utilities. Additionally, expenses associated with continued office acquisitions and expansion, which include rent, salaries and benefits, have contributed to the increased loss. Due to the seasonality of this segment's business, first quarter operating results are not indicative of expected results for the entire fiscal year. FINANCIAL SERVICES Revenues increased 255.2% to $29.2 million from $8.2 million in the same period last year. The increase is primarily related to new mortgage operations which contributed increased revenues of $18.4 million this year. New mortgage operations include revenues related to the recently acquired Option One. Credit card operations also contributed $2.4 million to the increase due to larger revolving credit card balances over the first quarter of fiscal 1997. The pretax loss increased to $6.3 million from $1.0 million in the first quarter of fiscal 1997, primarily due to increased bad debt expenses resulting from larger revolving credit card balances and operational costs related to the new retail mortgage business. In addition, higher bad debt and compensation expenses in software and online operations, respectively, contributed to the loss. INVESTMENT INCOME, NET Net investment income increased 31.6% to $5.2 million from $3.9 million last year. The increase resulted from more funds available for investment. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the first quarter decreased 36.0% to $2.3 million from $3.6 million in the comparable period last year. The decrease resulted mainly from expenses included in the first quarter of fiscal 1997 of $517 thousand related to the planned spin-off of the Company's remaining investment in CompuServe. Also contributing to the decrease were lower consultant fees, charitable contributions and insurance expenses. -11-
14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During fiscal 1997, CompuServe Corporation (CompuServe), certain current and former officers and directors of CompuServe and the registrant were named as defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio. All but two of the original six cases were brought as putative class actions. 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. Relief sought is unspecified, but includes pleas for rescission and damages. One purported class action lawsuit was voluntarily dismissed by the plaintiffs and such plaintiffs have joined in one of the remaining class action lawsuits in Federal court. The other 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 are both subject to pending motions to dismiss filed on behalf of the defendants, and they are expected to be consolidated pursuant to a scheduling order that has been entered in the first Federal lawsuit. The first state court lawsuit also alleges violations of the Ohio Securities Code and common law of negligent misrepresentation, while another state lawsuit alleges violations of Colorado, Florida, and Ohio statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. Three of the state lawsuits have been consolidated for discovery. A fourth state lawsuit, Philip Silverglate v. CompuServe Corporation, H&R Block, Inc., etal., was filed during the first quarter of fiscal 1998, and is expected to be consolidated with the other state lawsuits in due course. The defendants are vigorously defending these lawsuits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits 10(a) Amendment and Termination of the H&R Block, Inc. Retirement Plan for Non-Employee Directors 10(b) Amendment No. 8 to the H&R Block Deferred Compensation Plan for Executives 10(c) Amendment No. 3 to the H&R Block Deferred Compensation Plan for Directors 10(d) Amendment No. 4 to the H&R Block Deferred Compensation Plan for Directors 10(e) Amendment No. 4 to the H&R Block Supplemental Deferred Compensation Plan for Executives (27) Financial Data Schedule. -12-
15 b) Reports on Form 8-K A Form 8-K, Current Report, dated July 2, 1997, was filed by the registrant reporting as an "Item 2" the acquisition of Option One Mortgage Corporation on June 17, 1997. The registrant reported under "Item 7" that the financial statements of Option One Mortgage Corporation and the registrant's pro forma financial statements would be filed as soon as practicable, but no more than 60 days after that Current Report. The registrant did not file any other reports on Form 8-K during the first quarter of fiscal 1998. A Form 8-K/A, Current Report, dated July 2, 1997, was filed on August 14, 1997 by the registrant reporting as an "Item 7" the audited financial statements of Option One Mortgage Corporation for the years ended December 31, 1996 and 1995, the unaudited financial statements for the three months ended March 31, 1997 and 1996, and the unaudited pro forma financial statements of the registrant for the year ended April 30, 1997. The consent of independent auditors was included as Exhibit 23.1 to the Form 8-K/A. A Form 8-K, Current Report, dated September 7, 1997, was filed by the registrant reporting as an "Item 5" the entry by the registrant into an Agreement and Plan of Merger with H&R Block Group, Inc., CompuServe Corporation, WorldCom, Inc. and Walnut Acquisition Company, L.L.C., pursuant to which WorldCom, Inc. would acquire CompuServe Corporation through a merger of Walnut Acquisition Company, L.L.C. with and into CompuServe Corporation. The Form 8-K also reported the entry by the registrant into both a Stockholders Agreement and a Standstill Agreement with H&R Block Group, Inc. and WorldCom, Inc. in connection with the Agreement and Plan of Merger. The Agreements were exhibits to the Form 8-K, as was a copy of the joint press release of the registrant and CompuServe Corporation dated September 8, 1997. -13-
16 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 9/15/97 BY /s/ Ozzie Wenich --------- ----------------------- Ozzie Wenich Senior Vice President, Chief Financial Officer and Treasurer DATE 9/15/97 BY /s/ Patrick D. Petrie --------- ------------------------- Patrick D. Petrie Vice President and Corporate Controller -14-