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 JANUARY 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 March 1, 2000 was 98,382,049 shares.
2 TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> PART I Financial Information Consolidated Balance Sheets January 31, 2000 and April 30, 1999 .................................................... 1 Consolidated Statements of Operations Three Months Ended January 31, 2000 and 1999 ........................................... 2 Nine Months Ended January 31, 2000 and 1999 ............................................ 3 Consolidated Statements of Cash Flows Nine Months Ended January 31, 2000 and 1999 ............................................ 4 Notes to Consolidated Financial Statements ................................................ 5 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 11 Quantitative and Qualitative Disclosures about Market Risk................................. 22 PART II Other Information.......................................................................... 23 SIGNATURES................................................................................................. 25 </TABLE>
3 H&R BLOCK, INC. CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS <TABLE> <CAPTION> JANUARY 31, APRIL 30, 2000 1999 ---- ---- <S> <C> <C> ASSETS (UNAUDITED) (AUDITED) CURRENT ASSETS Cash and cash equivalents $ 248,490 $ 193,240 Marketable securities 33,074 56,881 Receivables from customers, brokers, dealers and clearing organizations, less allowance for doubtful accounts of $744 2,385,785 - Receivables, less allowance for doubtful accounts of $37,474 and $61,872 1,248,065 743,301 Prepaid expenses and other current assets 163,121 94,000 ----------- ----------- TOTAL CURRENT ASSETS 4,078,535 1,087,422 INVESTMENTS AND OTHER ASSETS Investments in marketable securities 294,792 170,528 Excess of cost over fair value of net tangible assets acquired, net of accumulated amortization 1,149,546 405,534 Other 178,903 132,470 ----------- ----------- 1,623,241 708,532 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 219,594 114,222 ----------- ----------- $ 5,921,370 $ 1,910,176 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 2,094,939 $ 71,939 Accounts payable to customers, brokers and dealers 2,106,142 - Accounts payable, accrued expenses and deposits 182,842 168,641 Accrued salaries, wages and payroll taxes 80,558 161,590 Accrued taxes on earnings 6,784 151,659 Current portion of long-term debt 60,207 - ----------- ----------- TOTAL CURRENT LIABILITIES 4,531,472 553,829 LONG-TERM DEBT 356,283 249,725 OTHER NONCURRENT LIABILITIES 108,342 44,635 STOCKHOLDERS' EQUITY Common stock, no par, stated value $.01 per share 1,089 1,089 Additional paid-in capital 417,311 420,658 Retained earnings 963,212 1,130,909 Accumulated other comprehensive income (loss) (17,229) (23,400) ----------- ----------- 1,364,383 1,529,256 Less cost of 10,600,900 and 11,343,608 shares of common stock in treasury 439,110 467,269 ----------- ----------- 925,273 1,061,987 ----------- ----------- $ 5,921,370 $ 1,910,176 =========== =========== </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 ------------------ JANUARY 31, ----------- 2000 1999 ---- ---- <S> <C> <C> REVENUES Service revenues $ 406,564 $ 213,156 Product revenues 81,941 60,110 Royalties 16,124 12,961 Other 7,878 5,255 ------------- ------------- 512,507 291,482 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 230,943 124,718 Occupancy and equipment 63,842 42,950 Interest 48,826 23,689 Depreciation and amortization 36,539 18,105 Marketing and advertising 39,221 17,824 Supplies, freight and postage 26,755 22,616 Other 80,085 49,930 ------------- ------------- 526,211 299,832 ------------- ------------- Operating loss (13,704) (8,350) OTHER INCOME Investment income, net 72 4,641 Other, net 109 (879) ------------- ------------- 181 3,762 Loss from continuing operations before income tax benefit (13,523) (4,588) Income tax benefit (6,448) (1,743) ------------- ------------- Net loss from continuing operations (7,075) (2,845) Net loss from discontinued operations (less applicable income tax benefit of ($175)) - (273) Net loss on sale of discontinued operations (less applicable income tax benefit of ($12,773)) - (19,978) ------------- ------------- Net loss $ (7,075) $ (23,096) ============= ============= Weighted average number of common shares outstanding 98,358 97,481 ============= ============= Basic and diluted net loss per share from continuing operations $ (.07) $ (.03) ============= ============= Basic and diluted net loss per share $ (.07) $ (.24) ============= ============= Dividends per share $ .275 $ .25 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -2-
5 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS <TABLE> <CAPTION> NINE MONTHS ENDED ----------------- JANUARY 31, ----------- 2000 1999 ---- ---- <S> <C> <C> REVENUES Service revenues $ 632,766 $ 308,466 Product revenues 176,182 111,906 Royalties 20,264 17,023 Other 14,801 10,273 ------------- ------------- 844,013 447,668 ------------- ------------- OPERATING EXPENSES Employee compensation and benefits 424,601 216,711 Occupancy and equipment 152,036 108,229 Interest 83,644 53,889 Depreciation and amortization 79,270 44,800 Marketing and advertising 59,076 30,088 Supplies, freight and postage 39,646 31,230 Other 156,701 87,631 ------------- ------------- 994,974 572,578 ------------- ------------- Operating loss (150,961) (124,910) OTHER INCOME Investment income, net 5,125 28,177 Other, net 359 (879) ------------- ------------- 5,484 27,298 Loss from continuing operations before income tax benefit (145,477) (97,612) Income tax benefit (56,591) (37,072) ------------- ------------- Net loss from continuing operations (88,886) (60,540) Net loss from discontinued operations (less applicable income tax benefit of ($953)) - (1,490) Net loss on sale of discontinued operations (less applicable income tax benefit of ($12,773)) - (19,978) ------------- ------------- Net loss $ (88,886) $ (82,008) ============= ============= Weighted average number of common shares outstanding 97,962 100,526 ============= ============= Basic and diluted net loss per share from continuing operations $ (.91) $ (.60) ============= ============= Basic and diluted net loss per share $ (.91) $ (.82) ============= ============= Dividends per share $ .80 $ .70 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -3-
6 H&R BLOCK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED, AMOUNTS IN THOUSANDS <TABLE> <CAPTION> NINE MONTHS ENDED ----------------- JANUARY 31, ----------- 2000 1999 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (88,886) $ (82,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 79,270 44,800 Accretion of acquisition liabilities 7,266 - Net loss on sale of discontinued operations - 19,978 Other noncurrent liabilities 5,279 3,613 Changes in: Receivables from customers, brokers, dealers and clearing organizations (423,288) - Receivables (493,884) (217,181) Prepaid expenses and other current assets (54,171) (45,195) Accounts payable to customers, brokers and dealers 403,954 - Accounts payable, accrued expenses and deposits (56,815) 14,341 Accrued salaries, wages and payroll taxes (81,032) (42,816) Accrued taxes on earnings (144,933) (386,235) -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES (847,240) (690,703) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (5,009) (227,381) Maturities of marketable securities 33,003 709,106 Purchases of property and equipment (68,855) (49,301) Payments made for business acquisitions, net of cash acquired (986,556) (90,618) Other, net (18,094) (23,738) -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,045,511) 318,068 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes payable (31,187,422) (7,301,430) Proceeds from issuance of notes payable 33,210,422 7,459,389 Dividends paid (78,811) (70,700) Payments to acquire treasury shares (32,366) (490,868) Proceeds from stock options exercised 36,178 63,728 -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,948,001 (339,881) -------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 55,250 (712,516) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 193,240 900,856 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 248,490 $ 188,340 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 87,168 $ 360,959 Interest paid 79,672 59,392 </TABLE> See Notes to Consolidated Financial Statements -4-
7 H&R BLOCK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited, dollars in thousands, except share data 1. The Consolidated Balance Sheet as of January 31, 2000, the Consolidated Statements of Operations for the three and nine months ended January 31, 2000 and 1999, and the Consolidated Statements of Cash Flows for the nine months ended January 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 January 31, 2000 and for all periods presented have been made. Reclassifications have been made to prior periods to conform with the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's April 30, 1999 Annual Report to Shareholders. Operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Thus, the nine-month results are not indicative of results to be expected for the year. 2. On December 1, 1999, the Company, through a subsidiary, Block Financial Corporation, completed the purchase of all of the issued and outstanding shares of capital stock of Olde Financial Corporation and Financial Marketing Services, Inc. (collectively, Olde) for $850,000 in cash plus an estimated tangible book value payment of $37,100. An additional cash payment of $11,372 was made in the fourth quarter based on the aggregate consolidated net book value at the acquisition date, after a final independent audit of the balance sheet. The purchase agreement also provides for possible future consideration payable for up to five years after the acquisition based upon revenues generated from certain online brokerage services. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial Corporation, based in Detroit, Michigan, offers brokerage and other financial services through its network of approximately 1,200 registered representatives located in 181 branch offices in 35 states. The transaction was accounted for as a purchase and, accordingly, Olde's results are included since the date of acquisition. The excess of cost over fair value of net tangible assets acquired at January 31, 2000 was $491,179, and will be adjusted for the additional payment made in the fourth quarter. Such is being amortized on a straight-line basis over 15 years, subject to completion of an asset valuation as of the purchase date. The acquisition was financed with short-term borrowings, and it is the intention of the Company that a portion of the acquisition will ultimately be financed with the issuance of approximately $500,000 in term debt in the fourth quarter of fiscal 2000. -5-
8 The following unaudited pro forma summary combines the consolidated results of operations of the Company and Olde as if the acquisition had occurred on May 1, 1999 and 1998, 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 informational 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> Nine months ended ----------------- January 31, ----------- 2000 1999 ---- ---- <S> <C> <C> Revenues $ 1,158,919 $ 703,152 Net loss (102,969) (84,794) Basic and diluted net loss per share $ (1.05) $ (.84) </TABLE> 3. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM), completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest accounting and consulting firm with more than 70 offices located primarily in the Eastern, Midwestern, Northern and Southwestern United States. The purchase price was $240,000 in cash payments over the next four years and the assumption of certain pension liabilities with a present value of $52,728. The purchase agreement also provides for possible future contingent consideration based on a calculation of earnings in year two, three and four after the acquisition and will be treated as purchase price when paid. In addition, the Company made cash payments of $65,453 for outstanding accounts receivable and work-in-process that have been repaid to the Company as RSM collected these amounts in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, RSM's results are included since the date of acquisition. The present value of the additional cash payments due over the next four years of $148,803 was treated as a noncash investing activity in the Consolidated Statement of Cash Flows for the nine months ended January 31, 2000. The excess of cost over the fair value of net tangible assets acquired was $240,535 and is being amortized on a straight-line basis over periods of up to 25 years. 4. Receivables consist of the following: <TABLE> <CAPTION> January 31, April 30, ----------- --------- 2000 1999 ---- ---- <S> <C> <C> (Unaudited) (Audited) Mortgage loans held for sale $ 621,578 $ 636,687 Participation in refund anticipation loans 356,659 51,074 Business services accounts receivable and work-in-process 122,397 33,015 Other 184,905 84,397 -------------- --------------- 1,285,539 805,173 Allowance for doubtful accounts 37,474 61,872 -------------- --------------- $ 1,248,065 $ 743,301 ============== =============== </TABLE> -6-
9 5. 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. 6. 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 8,464,234 shares and the conversion of 608 shares of preferred stock to common stock, as they are antidilutive. The weighted average shares outstanding for the nine months ended decreased to 97,962,000 from 100,526,000 last year, due to the purchase of treasury shares by the Company during fiscal 1999 and 2000. This decrease was partially offset by stock option exercises and the issuance of stock for acquisitions. 7. During the nine months ended January 31, 2000 and 1999, the Company issued 953,865 and 1,996,012 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 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 nine months ended January 31, 2000. During the nine months ended January 31, 2000, the Company acquired 721,800 shares of its common stock at an aggregate cost of $32,366. During the nine months ended January 31, 1999, the Company acquired 11,792,500 shares of its common stock at an aggregate cost of $490,868. 8. CompuServe Corporation (CompuServe), certain current and former officers and directors of CompuServe and the registrant are named defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio since 1996. All suits allege similar violations of the Securities Act of 1933 based on assertions of omissions and misstatements of fact in connection with CompuServe's public filings related to its initial public offering in April 1996. One state lawsuit also alleges certain oral omissions and misstatements in connection with such offering. Relief sought in the lawsuits is unspecified, but includes pleas for rescission and damages. One Federal lawsuit names the lead underwriters of CompuServe's initial public offering as additional defendants and as representatives of a defendant class consisting of all underwriters who participated in such offering. The Federal suits were consolidated, the defendants filed a motion to dismiss the consolidated suits, the district court stayed all proceedings pending the outcome of the state court suits, and the United States Court of Appeals for the Sixth Circuit affirmed such stay. The four state court lawsuits allege violations of various state statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. The state lawsuits were consolidated for discovery purposes and defendants filed a motion for summary judgment covering all four state lawsuits. As a part of the sale of its interest in CompuServe, the Company agreed to indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and expenses incurred by them with respect to these lawsuits. The defendants are vigorously defending these lawsuits. In the opinion of management, the ultimate resolution of these suits will not have a material adverse impact on the Company's consolidated financial position or results of operations. -7-
10 9. Summarized financial information for Block Financial Corporation, an indirect, wholly owned subsidiary of the Company, is presented below. <TABLE> <CAPTION> January 31, April 30, ----------- --------- 2000 1999 ---- ---- <S> <C> <C> (Unaudited) (Audited) Condensed balance sheets: Cash and cash equivalents $ 147,465 $ 16,026 Finance receivables, net 3,373,268 658,882 Other assets 1,233,689 448,010 -------------- --------------- Total assets $ 4,754,422 $ 1,122,918 ============== =============== Notes payable $ 2,090,802 $ 71,939 Long-term debt 249,763 249,725 Other liabilities 2,211,510 636,330 Stockholder's equity 202,347 164,924 -------------- --------------- Total liabilities and stockholder's equity $ 4,754,422 $ 1,122,918 ============== =============== </TABLE> <TABLE> <CAPTION> Three months ended Nine months ended ------------------ ----------------- January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Condensed statements of operations: Revenues $ 220,892 $ 110,472 $ 394,716 $ 217,699 Earnings from continuing operations 26,336 19,904 51,626 35,357 Net earnings (loss) 19,710 (8,026) 34,846 233 </TABLE> 10. As part of its interest rate risk management strategy, the Company may choose to hedge its interest rate risk related to its fixed rate mortgage or debt portfolios. The effectiveness of a hedge is measured by a historical and probable future high correlation of changes in the fair value of the hedging instruments with changes in the value of the hedged item. If correlation ceases to exist, hedge accounting is terminated and the gains or losses are recorded in revenues. 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. Deferred gains on the FNMA securities hedging instrument amounted to $227 at January 31, 2000. There were no open FNMA hedging instruments at January 31, 2000. The contract value and market value of the forward commitment at January 31, 2000 were $130,000 and $130,171, respectively. In addition, the Company has hedged its interest rate risk related to the anticipated issuance of term debt in the fourth quarter of fiscal 2000 by utilizing treasury rate guarantees. The position on the treasury rate guarantees is closed on the anticipated bond issuance date. The contract value and the market value of these treasury rate guarantees as of January 31, 2000 were $300,000 and $297,873. These treasury rate guarantees expire on March 31, 2000. -8-
11 11. The Company's comprehensive income is comprised of net 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 statements. The components of comprehensive income (loss) during the three and nine months ended January 31, 2000 and 1999 were: <TABLE> <CAPTION> Three months ended Nine months ended ------------------ ----------------- January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net loss $ (7,075) $ (23,096) $ (88,886) $ (82,008) Change in net unrealized gain (loss) on mkt. securities (3,390) 2,113 1,867 3,945 Change in foreign currency translation adjustments 2,474 2,458 4,304 (6,447) ------------- ------------- -------------- --------------- Comprehensive income (loss) $ (7,991) $ (18,525) $ (82,715) $ (84,510) ============= ============= ============== =============== </TABLE> 12. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137 delays the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will now be effective for the Company's fiscal year ending April 30, 2002. 13. In the second quarter of fiscal year 2000, management redefined its Mortgage operations segment to reflect the change in how the business is analyzed and evaluated. The redefined segment, Financial services, includes all of the previous mortgage activity along with the startup of the Company's new financial services operations and the acquisition of Olde. Financial services is primarily engaged in the origination, purchase, servicing, securitization and sale of nonconforming and conforming mortgage loans, as well as offering full-service investment opportunities to the general public. Mortgage origination services are offered through a network of mortgage brokers, through H&R Block Financial Centers and through H&R Block Mortgage Corporation retail offices. Financial planning and investment advice are offered through H&R Block Financial Centers and tax offices, and stock, bonds, mutual funds and other products and securities are offered through a nationwide network of registered representatives, including representatives located at H&R Block Financial Centers and tax offices. -9-
12 Information concerning the Company's operations by reportable operating segments for the three and nine months ended January 31, 2000 and 1999 is as follows: <TABLE> <CAPTION> Three months ended Nine months ended January 31, January 31, ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: U.S. tax operations $ 237,851 $ 189,083 $ 270,649 $ 219,662 International tax operations 8,478 6,776 27,259 22,030 Financial services 182,419 79,350 353,376 185,005 Business services 82,806 15,341 190,165 18,205 Unallocated corporate 953 932 2,564 2,766 ------------ -------------- -------------- -------------- $ 512,507 $ 291,482 $ 844,013 $ 447,668 ============ ============== ============== ============== Earnings (loss) from continuing operations: U.S. tax operations $ (29,427) $ (18,845) $ (184,160) $ (137,977) International tax operations (7,134) (7,508) (15,299) (15,742) Financial services 43,976 24,189 83,733 48,043 Business services 2,156 (1) (169) (220) Unallocated corporate (5,226) (3,231) (12,003) (8,989) Interest exp - acquisition debt (18,472) (4,438) (29,952) (13,319) ------------ -------------- -------------- -------------- (14,127) (9,834) (157,850) (128,204) Investment income, net 72 4,641 5,125 28,177 Intercompany interest 532 605 7,248 2,415 ------------ -------------- -------------- -------------- Loss from continuing operations before income tax benefit $ (13,523) $ (4,588) $ (145,477) $ (97,612) ============ ============== ============== ============== January 31, April 30, ----------- --------- 2000 1999 ---- ---- IDENTIFIABLE ASSETS: U.S. tax operations $ 771,895 $ 268,650 International tax operations 56,937 55,684 Financial services 4,313,269 1,038,909 Business services 508,610 146,252 Unallocated corporate 270,659 400,681 -------------- -------------- $ 5,921,370 $ 1,910,176 ============== ============== </TABLE> -10-
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE INFORMATION CONTAINED IN THIS FORM 10-Q AND THE EXHIBITS HERETO MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH STATEMENTS ARE BASED UPON CURRENT INFORMATION, EXPECTATIONS, ESTIMATES AND PROJECTIONS REGARDING THE COMPANY, THE INDUSTRIES AND MARKETS IN WHICH THE COMPANY OPERATES, AND MANAGEMENT'S ASSUMPTIONS AND BELIEFS RELATING THERETO. WORDS SUCH AS "WILL," "PLAN," "EXPECT," "REMAIN," "INTEND," "ESTIMATE," "APPROXIMATE," AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE, ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND INVOLVE CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL OUTCOMES AND RESULTS COULD MATERIALLY DIFFER FROM WHAT IS EXPRESSED, IMPLIED OR FORECAST IN SUCH FORWARD-LOOKING STATEMENTS. SUCH DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS INCLUDING, BUT NOT LIMITED TO, THE UNCERTAINTY OF THE ENTRY BY THE COMPANY INTO ANY AGREEMENT REGARDING ANY SALE, JOINT VENTURE, OR OTHER STRATEGIC ACTION INVOLVING OPTION ONE MORTGAGE CORPORATION (OPTION ONE); THE UNCERTAINTY REGARDING THE COMPLETION OF ANY TRANSACTION INVOLVING OPTION ONE; THE UNCERTAINTY OF LAWS, LEGISLATION, REGULATIONS, SUPERVISION AND LICENSING BY FEDERAL, STATE AND LOCAL AUTHORITIES AND THEIR IMPACT ON ANY PROPOSED OR POSSIBLE TRANSACTION AND THE LINES OF BUSINESS IN WHICH THE COMPANY'S SUBSIDIARIES ARE INVOLVED; THE UNCERTAINTY THAT INCREASES IN THE NUMBER OF CLIENTS SERVED BY THE U.S. TAX OPERATIONS SEGMENT WILL CONTINUE AT THE RATES STATED FOR A PORTION OF THE U.S. TAX-FILING SEASON; UNFORESEEN COMPLIANCE COSTS; CHANGES IN ECONOMIC, POLITICAL OR REGULATORY ENVIRONMENTS; CHANGES IN COMPETITION AND THE EFFECTS OF SUCH CHANGES; THE INABILITY TO IMPLEMENT THE COMPANY'S STRATEGIES; CHANGES IN MANAGEMENT AND MANAGEMENT STRATEGIES; THE COMPANY'S INABILITY TO SUCCESSFULLY DESIGN, CREATE, MODIFY AND OPERATE ITS COMPUTER SYSTEMS AND NETWORKS; LITIGATION INVOLVING THE COMPANY; AND RISKS DESCRIBED FROM TIME TO TIME IN REPORTS AND REGISTRATION STATEMENTS FILED BY THE COMPANY AND ITS SUBSIDIARIES WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD TAKE THESE FACTORS INTO ACCOUNT IN EVALUATING ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. FINANCIAL CONDITION These comments should be read in conjunction with the Consolidated Balance Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4, respectively. Working capital decreased to a negative $452.9 million at January 31, 2000 from $533.6 million at April 30, 1999. The working capital ratio at January 31, 2000 is 0.90 to 1, compared to 1.96 to 1 at April 30, 1999. The decrease in working capital and the working capital ratio is due to the following: (1) purchase of Olde Financial Corporation (Olde) with short-term borrowings; (2) the increase in short-term borrowings to fund mortgage loan receivables which were funded with corporate cash at April 30, 1999 and; (3) the seasonal nature of the Company's U.S. tax -11-
14 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 a seasonal line of credit to support short-term borrowing facilities in Canada. The credit limit of this line fluctuates according to the amount of short-term borrowings outstanding during the year. The Company incurs short-term borrowings throughout the year to fund receivables associated with its mortgage loan and other financial services programs. These short-term borrowings in the U.S. are supported by a $1.89 billion back-up credit facility through November 2000, subject to renewal. An additional credit facility of $750 million was added in November 1999, which extends through April 2000, to support commercial paper that was issued to finance the acquisition of Olde. It's the Company's intention to ultimately finance a portion of the acquisition price with the issuance of approximately $500 million in term debt in the fourth quarter of fiscal 2000. The Company's capital expenditures, treasury share purchases and dividend payments during the first nine months were funded primarily through internally-generated funds and, to a lesser extent, short-term borrowings. At January 31, 2000, short-term borrowings used to fund mortgage loans and other programs increased to $2.1 billion from $71.9 million at April 30, 1999 due mainly to the funding of the acquisition of Olde and mortgage loan receivables which were previously funded with corporate cash. For the nine months ended January 31, 2000 and 1999, interest expense was $83.6 million and $53.9 million, respectively. The increase in interest expense is primarily attributable to interest expense related to the purchase of Olde and the non-attest assets of McGladrey & Pullen, LLP. In July 1996, the Company announced its intention to repurchase up to 10 million shares in the open market over a two-year period following the separation of CompuServe Corporation. At January 31, 2000, 7.7 million shares had been repurchased. The two-year period expired January 31, 2000. RESULTS OF OPERATIONS SIGNIFICANT EVENTS On July 21, 1999, the Company announced it was evaluating strategic alternatives for Option One, including a possible sale or joint venture with a business partner. There are no assurances that any transaction will take place. Option One is reported in the Financial services segment. On August 2, 1999, the Company, through a subsidiary, RSM McGladrey, Inc. (RSM), completed the purchase of substantially all of the non-attest assets of McGladrey & Pullen, LLP (McGladrey). McGladrey was the nation's seventh largest accounting and consulting firm with more than 70 offices located primarily in the Eastern, Midwestern, Northern and Southwestern United States. The purchase price was $240.0 million in cash payments over the next four years and the assumption of certain pension liabilities with a present value of $52.7 million. In addition, the Company made cash payments of $65.5 million for outstanding accounts receivable -12-
15 and work-in-process balances that have been repaid to the Company as RSM collected these amounts in the ordinary course of business. The acquisition was accounted for as a purchase, and accordingly, RSM's results are included since the date of acquisition. On December 1, 1999, the Company, through a subsidiary, Block Financial Corporation, completed the purchase of all of the issued and outstanding shares of capital stock of Olde for $850.0 million in cash plus an estimated tangible book value payment of $37.1 million. An additional cash payment of $11.4 million was made in the fourth quarter based on the aggregate consolidated net book value at the acquisition date, after a final independent audit of the balance sheet. Olde Discount Corporation, a wholly owned subsidiary of Olde Financial Corporation, based in Detroit, Michigan, offers brokerage and other financial services through its network of approximately 1,200 registered representatives located in 181 branch offices in 35 states. The transaction was accounted for as a purchase and, accordingly, Olde's results are included since the date of acquisition. -13-
16 FISCAL 2000 COMPARED TO FISCAL 1999 The analysis that follows should be read in conjunction with the table below and the Consolidated Statements of Operations found on pages 2 and 3. THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1999 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> U.S. tax operations $ 237,851 $ 189,083 $ (29,427) $ (18,845) International tax operations 8,478 6,776 (7,134) (7,508) Financial services 182,419 79,350 43,976 24,189 Business services 82,806 15,341 2,156 (1) Unallocated corporate 953 932 (5,226) (3,231) Interest expense on acquisition debt - - (18,472) (4,438) --------------- -------------- -------------- ------------- $ 512,507 $ 291,482 (14,127) (9,834) =============== ============== Investment income, net 72 4,641 Intercompany interest 532 605 -------------- ------------- (13,523) (4,588) Income tax benefit (6,448) (1,743) -------------- ------------- Net loss from continuing operations (7,075) (2,845) Net loss from discontinued operations - (273) Net loss on sale of discontinued operations - (19,978) -------------- ------------- Net loss $ (7,075) $ (23,096) ============== ============= </TABLE> Consolidated revenues for the three months ended January 31, 2000 increased 75.8% to $512.5 million from $291.5 million reported last year. The increase is primarily due to acquisitions. Revenues from Financial services increased 129.9% over last year, due to the acquisition of Olde, and Business services increased $67.5 million over the prior year, due mainly to the acquisition of RSM. The consolidated pretax loss from continuing operations for the third quarter of fiscal 2000 increased to $13.5 million from $4.6 million in the third quarter of last year. The increase is attributable to increased losses from U.S. tax operations. These increases were partially offset by improved results from Financial services. -14-
17 The net loss from continuing operations was $7.1 million, or $.07 per share, compared to $2.8 million, or $.03 per share, for the same period last year. An analysis of operations by reportable operating segments follows. U.S. TAX OPERATIONS Revenues increased 25.8% to $237.9 million from $189.1 million last year, resulting primarily from increased revenues from higher tax preparation fees that are attributable to an increase in the number of clients served and price increases. During the first month of the U.S. tax-filing season, the number of clients served in company-owned offices increased 11.0%. Improved software sales also contributed to the increase. The pretax loss increased 56.2% to $29.4 million from $18.8 million in the third quarter of last year due to higher expenses related to increased competitive conditions for software sales and the startup of new e-commerce initiatives, as well as normal operational increases in compensation and benefits, rent and other facilities-related expenses and marketing and advertising related to tax services. An increase in the number of tax offices over the prior year also contributed to the increased expenses in tax services. These losses were partially offset by improved performance of Refund Anticipation Loans (RALs) due to lower bad debt expense, which is believed to primarily be a result of the IRS Debt Indicator Program. Due to the nature of this segment's business, the results for the first month of the tax-filing season are not necessarily indicative of expected results for the entire tax season. INTERNATIONAL TAX OPERATIONS Revenues increased 25.1% to $8.5 million compared to $6.8 million in the prior year's third quarter. The increase is principally attributable to higher check cashing and tax preparation fees in Canada and higher tax preparation fees in Australia. The pretax loss decreased 5.0% to $7.1 million from $7.5 million last year. The decrease is due to lower freight and postage and facilities-related expenses in Canada. The lower facilities-related expense is attributable to a decrease in the number of tax offices to 537 compared to 574 in the prior year. Improved results from Australia and the United Kingdom also contributed to the decreased loss. Due to the nature of this segment's business, third quarter operating results are not indicative of expected results for the entire fiscal year. FINANCIAL SERVICES Revenues increased 129.9% to $182.4 million from $79.4 million in the same period last year. The increase is primarily attributable to the acquisition of Olde on December 1, 1999. Olde contributed revenues for the two-month period of $92.8 million. Option One, which includes H&R Block Mortgage Corporation (formally Assurance Mortgage Corporation of America), also contributed $77.2 million to revenues, an 11.8% increase over the prior year. Option One originated and sold or securitized $1.4 billion in loans during the third quarter of fiscal 2000, compared to $930.2 million originated and $1.3 billion sold or securitized in the third quarter last year. -15-
18 Financial services pretax earnings of $44.0 million increased 81.8% this year compared to $24.2 million during the third quarter of fiscal 1999. The increase is mainly due to the acquisition of Olde, which contributed earnings of $25.7 million for the two-month period. Pretax earnings were reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Business services revenues of $82.8 million increased 439.8% from $15.3 million in the third quarter last year. The increase is primarily due to the acquisition of two regional and one national accounting firm, RSM, as well as several smaller market firms since the third quarter of fiscal 1999. Pretax earnings were $2.2 million compared to a loss of $1 thousand in the prior year, which includes goodwill amortization of $5.7 million and $1.1 million, respectively. Due to the nature of this segment's business, revenues are seasonal, while expenses are relatively fixed throughout the year. Results for the third quarter are not indicative of the expected results for the entire year. INVESTMENT INCOME, NET Net investment income decreased 98.4% to $72 thousand from $4.6 million last year. The decrease is due to less funds available for investment resulting from using corporate cash to fund acquisitions and mortgage loans held for sale. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the third quarter increased 61.7% to $5.2 million from $3.2 million in the comparable period last year. The increase is due to higher employee costs and consulting fees and the timing of charitable contributions. Also contributing to the increased loss from last year are lower earnings from the Company's captive insurance company. -16-
19 THREE MONTHS ENDED JANUARY 31, 2000 (THIRD QUARTER) COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1999 (SECOND QUARTER) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- -------------------------------- 3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr ------- ------- ------- ------- <S> <C> <C> <C> <C> U.S. tax operations $ 237,851 $ 19,723 $ (29,427) $ (83,663) International tax operations 8,478 14,713 (7,134) (1,644) Financial services 182,419 91,503 43,976 20,931 Business services 82,806 83,167 2,156 (2,134) Unallocated corporate 953 840 (5,226) (3,431) Interest expense on acquisition debt - - (18,472) (7,042) --------------- -------------- -------------- ------------- $ 512,507 $ 209,946 (14,127) (76,983) =============== ============== Investment income, net 72 2,402 Intercompany interest 532 2,424 -------------- ------------- (13,523) (72,157) Income tax benefit (6,448) (27,420) -------------- ------------- Net loss from continuing operations (7,075) (44,737) Net loss from discontinued operations - - Net loss on sale of discontinued operations - - -------------- ------------- Net loss $ (7,075) $ (44,737) ============== ============= </TABLE> Consolidated revenues for the three months ended January 31, 2000 increased 144.1% to $512.5 million from $209.9 million reported in the second quarter of fiscal 2000. The increase is primarily due to revenues from U.S. tax operations related to the beginning of the U.S. tax-filing season, as well as increased revenues from Financial services related to the acquisition of Olde on December 1, 1999. The consolidated pretax loss from continuing operations for the third quarter of fiscal 2000 decreased to $13.5 million from $72.2 million in the second quarter of this year. The decrease is attributable to U.S. tax operations, which incurred a pretax loss of $29.4 million this quarter compared to a pretax loss of $83.7 million in the second quarter, and improved results from Financial services. The net loss from continuing operations was $7.1 million, or $.07 per share, compared to $44.7 million, or $.46 per share, for the second quarter. An analysis of operations by reportable operating segments follows. -17-
20 U.S. TAX OPERATIONS Revenues increased $218.2 million to $237.9 million from $19.7 million in the second quarter. The pretax loss decreased 64.8% to $29.4 million from $83.7 million in the three months ended October 31, 1999. The improved results are due to the start of the U.S. tax-filing season. INTERNATIONAL TAX OPERATIONS Revenues decreased 42.4% to $8.5 million compared to the second quarter revenues of $14.7 million. The pretax loss increased 333.9% to $7.1 million from $1.6 million in the second quarter. The decreased results are due to the timing of the tax-filing seasons in Australia and Canada. The Australian tax season ends in October while the Canadian tax season begins in late January. FINANCIAL SERVICES Revenues increased 99.4% to $182.4 million from $91.5 million in the prior quarter. Pretax earnings increased 110.1% to $44.0 million from $20.9 million in the three months ended October 31, 1999. The improved results are primarily due to the acquisition of Olde on December 1, 1999, which contributed $92.8 million in revenues and $25.7 million in pretax earnings for the two months ended January 31. The increase in pretax earnings was partially reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Revenues decreased .4% to $82.8 million from $83.2 million in the three months ended October 31, 1999. Pretax earnings were $2.2 million, compared to a pretax loss of $2.1 million in the prior quarter. The improved results are mainly due to the improved results of RSM resulting from increased revenues, due to the start of the tax and accounting season, as well as a decrease in personnel training costs and lower bad debt expense. Additionally the onset of the accounting firms' tax and accounting season improved the results of a majority of the other firms. INVESTMENT INCOME, NET Net investment income decreased 97.0% to $72 thousand from $2.4 million in the second quarter of fiscal 2000. The decrease resulted from less funds available for investment due to the use of internal cash to fund operations. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the third quarter increased 52.3% to $5.2 million from $3.4 million in the second quarter. The increase is due to higher employee costs and consulting fees and the timing of charitable contributions. Improved results at the Company's captive insurance subsidiary partially offset the increased loss. -18-
21 NINE MONTHS ENDED JANUARY 31, 2000 COMPARED TO NINE MONTHS ENDED JANUARY 31, 1999 (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Revenues Earnings (loss) -------------------------------- ------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> U.S. tax operations $ 270,649 $ 219,662 $ (184,160) $ (137,977) International tax operations 27,259 22,030 (15,299) (15,742) Financial services 353,376 185,005 83,733 48,043 Business services 190,165 18,205 (169) (220) Unallocated corporate 2,564 2,766 (12,003) (8,989) Interest expense on acquisition debt - - (29,952) (13,319) --------------- -------------- -------------- ------------- $ 844,013 $ 447,668 (157,850) (128,204) =============== ============== Investment income, net 5,125 28,177 Intercompany interest 7,248 2,415 -------------- ------------- (145,477) (97,612) Income tax benefit (56,591) (37,072) -------------- ------------- Net loss from continuing operations (88,886) (60,540) Net loss from discontinued operations - (1,490) Net loss on sale of discontinued operations - (19,978) -------------- ------------- Net loss $ (88,886) $ (82,008) ============== ============= </TABLE> Consolidated revenues for the nine months ended January 31, 2000 increased 88.5% to $844.0 million from $447.7 million reported last year. The increase is primarily due to acquisitions in the Business and Financial services segments. Revenues from Business services increased $172.0 million over last year and Financial services increased $168.4 million over the nine-month period last year. U.S tax operations also contributed to the increase. The consolidated pretax loss from continuing operations for the first nine months of fiscal 2000 increased to $145.5 million from $97.6 million last year. The increase is attributable to higher losses from U.S. tax operations and lower investment income, which were reduced by increased earnings from Financial services, resulting from the Olde acquisition. The net loss from continuing operations was $88.9 million, or $.91 per share, compared to $60.5 million, or $.60 per share, for the same period last year. An analysis of operations by reportable operating segments follows. -19-
22 U.S. TAX OPERATIONS Revenues increased 23.2% to $270.6 million from $219.7 million last year, resulting primarily from higher tax preparation fees that are attributable to a 11.0% increase in clients served during the first month of the tax season and price increases. Revenues from software sales also contributed to the increase. The pretax loss increased 33.5% to $184.2 million from $138.0 million in the comparable period last year due to normal operational increases in compensation, rent and other facility-related expenses and consulting expenses related to tax services, increased competitive conditions related to software sales and the startup of e-commerce initiatives. In addition to the normal increases, the higher compensation is related to a change in the field manager compensation structure that shifts their compensation to salary incurred throughout the year from incentive bonuses incurred during the fourth quarter. Contributing to the increases in rent and other facility-related expenses is an increase in the amount of tax office space maintained under lease during this year's off-season, as well as an additional 282 tax offices this tax season compared to last year's tax season. The increased loss was partially offset by earnings from RALs due to lower bad debt expense, which is believed to primarily be a result of the IRS Debt Indicator Program. Due to the nature of this segment's business, the nine-month operating results are not indicative of expected results for the entire fiscal year. INTERNATIONAL TAX OPERATIONS Revenues increased 23.7% to $27.3 million compared to $22.0 million in the prior year. The increase is due to Australia and Canada operations. The increase in Australian revenues is due to higher tax preparation fees which is the result of an 8.5% increase in the number of tax returns prepared over the same period last year. The increase in Canadian revenues is due to higher check cashing, tax preparation and discounted return fees. The pretax loss decreased 2.8% to $15.3 million from $15.7 million last year. The decrease is due to improved results in Australia and the United Kingdom. These results were partially offset by increased losses from Canada operations. Due to the nature of this segment's business, the nine-month operating results are not indicative of expected results for the entire fiscal year. FINANCIAL SERVICES Revenues increased 91.0% to $353.4 million from $185.0 million in the same period last year. The increase is attributable to Olde, which was acquired on December 1, 1999, and Option One. Olde contributed revenues of $92.8 million. Option One, which includes H&R Block Mortgage Corporation (formally Assurance Mortgage Corporation of America), contributed revenues of $222.6 million for the nine months, a $64.8 million increase over the same period last year. Option One originated and sold or securitized $4.2 billion in loans during the first nine months of fiscal 2000, compared to $2.5 billion in the same period last year. The Company's other mortgage operations and Birchtree Financial, a broker-dealer, contributed to the improved revenues. -20-
23 Pretax earnings increased 74.3% to $83.7 million from $48.0 million in the prior year. The increase is primarily due to Olde, acquired December 1, 1999, which contributed earnings of $25.7 million and Option One, which contributed earnings of $63.5 million compared to earnings of $46.7 million last year. Earnings were reduced by losses related to the startup of financial services operations that offer financial planning services in H&R Block Financial Centers and tax offices. BUSINESS SERVICES Business services contributed revenues of $190.2 million compared to $18.2 million for the nine months ended January 31, 1999. The pretax loss decreased to $169 thousand compared to $220 thousand for the same period last year, which includes goodwill amortization of $12.7 million and $1.3 million, respectively. Business services was a new reportable operating segment in fiscal 1999 with only one regional accounting firm acquired during the first six months last year and an additional four acquired in the third quarter last year. However, in the nine-month period of fiscal 2000, there are seven regional accounting firms and several smaller market firms that have been included for the full nine months and a national accounting firm, RSM, that has been included for six months. Due to the nature of this segment's business, revenues are seasonal, while expenses are relatively fixed throughout the year. Results for the nine months are not indicative of the expected results for the entire fiscal year. INVESTMENT INCOME, NET Net investment income decreased 81.8% to $5.1 million from $28.2 million last year. The decrease is due to less funds available for investment resulting from internal cash used to fund acquisitions and operations instead of short-term borrowings. UNALLOCATED CORPORATE AND ADMINISTRATIVE The unallocated corporate and administrative pretax loss for the nine months increased 33.5% to $12.0 million from $9.0 million in the comparable period last year. The increase is a result of increased employee costs and consulting fees and the timing of charitable contributions. OTHER ISSUES YEAR 2000 The Company has completed preparation for the Year 2000, and to date has successfully managed the transition without any disruption of business. The Company had estimated the cost of the Year 2000 issue to be $3.9 million and actual results through January 31, 2000 were not materially different. While the Company does not anticipate problems, the Company could still encounter unanticipated issues related to the Year 2000. The Company will continue to monitor its computer systems, services, vendor and suppliers as needed throughout 2000 to address any such issues. -21-
24 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from those reported at April 30, 1999. -22-
25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. CompuServe Corporation (CompuServe), certain current and former officers and directors of CompuServe and the registrant are named defendants in six lawsuits pending before the state and Federal courts in Columbus, Ohio since 1996. All suits allege similar violations of the Securities Act of 1933 based on assertions of omissions and misstatements of fact in connection with CompuServe's public filings related to its initial public offering in April 1996. One state lawsuit also alleges certain oral omissions and misstatements in connection with such offering. Relief sought in the lawsuits is unspecified, but includes pleas for rescission and damages. One Federal lawsuit names the lead underwriters of CompuServe's initial public offering as additional defendants and as representatives of a defendant class consisting of all underwriters who participated in such offering. The Federal suits were consolidated, the defendants filed a motion to dismiss the consolidated suits, the district court stayed all proceedings pending the outcome of the state court suits, and the United States Court of Appeals for the Sixth Circuit affirmed such stay. The four state court lawsuits allege violations of various state statutes and common law of negligent misrepresentation in addition to the 1933 Act claims. The state lawsuits were consolidated for discovery purposes and defendants filed a motion for summary judgment covering all four state lawsuits. As a part of the sale of its interest in CompuServe, the Company agreed to indemnify WorldCom, Inc. and CompuServe against 80.1% of any losses and expenses incurred by them with respect to these lawsuits. The defendants are vigorously defending these lawsuits. In the opinion of management, the ultimate resolution of these suits will not have a material adverse impact on the Company's consolidated financial position or results of operations. The lawsuits discussed herein were previously reported in the first and second quarter 2000 Forms 10-Q filed by the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits 10.1 Amendment No. 4 to the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated. 10.2 Amendment No. 6 to the H&R Block Deferred Compensation Plan for Directors. 10.3 Executive's Agreement dated January 20, 1998, between H&R Block Tax Services, Inc. and Thomas L. Zimmerman. 10.4 Employment Agreement dated September 7, 1999, between HRB Management, Inc. and Jeffery W. Yabuki. 10.5 Employment Agreement dated January 26, 2000, between HRB Management, Inc. and Frank J. Cotroneo. 27 Financial Data Schedule -23-
26 b) Reports on Form 8-K A Form 8-K, Current Report, dated December 1, 1999, was filed on December 14, 1999, by the registrant reporting under "Item 2" the acquisition of Olde Financial Corporation on December 1, 1999. The registrant reported under "Item 7" that the financial statements of Olde Financial 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 press release was included as Exhibit 99.1 to the Form 8-K. A Form 8-K/A, Current Report, dated December 1, 1999, was filed on February 14, 2000 by the registrant reporting under "Item 7" the audited financial statements of Olde Financial Corporation for the years ended December 31, 1998 and 1997, the unaudited financial statements of Olde Financial Corporation for the six months ended September 24, 1999 and September 25, 1998, and the unaudited pro forma balance sheet of the registrant as of October 31, 1999 and the statements of operations of the registrant for the year ended April 30, 1999 and the six months ended October 31, 1999. The consent of independent auditors was included as Exhibit 23.1 to the Form 8-K/A. -24-
27 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 03/16/00 BY /s/ Mark A. Ernst ---------------- ------------------------ Mark A. Ernst President and Chief Operating Officer DATE 03/16/00 BY /s/ Cheryl L. Givens ---------------- ------------------------ Cheryl L. Givens Vice President and Corporate Controller -25-