FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

H&R Block Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRB)") else Response.Write("(NYSE: HRB)") end if %>
4410 Main Street
Kansas City, MO 64111
(816) 753-6900

UNION CITY, Ca., November 25, 1996/FOOLWIRE/ --- H&R Block released their second quarter results last Thursday. The company reported a loss for the quarter of $74 million or $(0.71) per share. They also announced a reduction in their dividend from $0.32 per share to $0.20 per share payable on January 2nd to shareholders of record on December 10th.

The second quarter loss has two components to it. First, H&R Block's loss as part of the $74 million was $27.6 million or $0.26 per share. Compuserve's loss, which was reported separately, in total was $58 million and their percent of that is $46.5 million or $0.45 per share.

THE H&R BLOCK DIVISION LOSS. Their loss was $7 million worse, on a pre-tax basis, than last year. However, it was right in line with their plan for FY 1997 so it was not unexpected. They have normal off-season increases in expense for occupancy and wasted benefits. And, very importantly, they have added 300 offices through acquisitions over the past several months, so they remain pretty optimistic about the upcoming tax season and the outlook for H&R Block.

THE COMPUSERVE DIVISION LOSS. Compuserve's loss includes $24.5 million from operations, $28.6 million from a write-down of capitalized marketing expenses related to the acquisition of subscribers, a $4.9 million one-time charge for the suspension of their WOW! service. The company commented on the loss in the context of two priorities that they have set for the company. They set the priorities to continue to develop a business plan and a number of strategic initiatives that would move them forward aggressively to achieve some financial goals and objectives they've set to grow their company at more than 15%. That effort is underway and going very well and they made some comments about that in their press release. The second priority is a commitment to improve Compuserve's financial situation so that they can get on with the separation of Compuserve from H&R Block. While they cannot predict when or how soon that will happen, they believe that the announcements, discussed below, made by Compuserve will move them in that direction.

STRATEGY WITH COMPUSERVE. As their release indicates, H&R Block has spent a lot of time working with the Compuserve management to do an assessment of their strengths and weaknesses, essentially to look at the business in terms of where they were doing poorly (which has been on the consumer side) and look at their strength (which has been on the business side in their network division) and try to take action which would enable them to restore profitability as soon as possible. Compuserve's announcement that they will shift their marketing from the mass market and return to their core strength, which is the business user, the professional user, and the technical user, are actions that will enable them to reduce costs and will also continue to enable them to put their resources into its basic strength. Compuserve has a basic data network which, according to the company, is as strong as anyone in the business with over 504 points of presence (POPs). They will continue to use that network to grow their network division in a very aggressive way. And, that business is continuing to grow at more than 30% and is a very strong part of their operation.

DIVIDEND REDUCTION. The board announced last July that they would take this action following separation of Compuserve. While they haven't separated Compuserve as yet, they felt it was a prudent course to go forward with the reduction at this time because Compuserve is obviously not contributing to their profitability. On that basis, they felt that the reduction in dividend was more in line with H&R Block's historical payout ratio.

SUMMARY. In conclusion, they think H&R Block while they reported a loss and an increase in their off-season loss, they are on track with their plan. They think the reduction in dividend is in keeping with their historical payout ratio and they think that Compuserve's shift in strategy will enable them to return the company back to profitability in the future, without being able to predict when. They are optimistic that they will be able to separate Compuserve at some future date.

QUESTIONS AND ANSWERS.

Does Compuserve need to be profitable before H&R Block is willing to separate the two or are they just looking to stem the deterioration of the business before they are willing to separate them? The company said they can't answer that specifically because the board will have to address that issue at the right time. The company indicated that the key is that they get the company moving in the right direction, back towards profitability. They believe they have stabilized the cash flow. They think the cash flow is going to improve going forward from some of the actions they have taken. So, it is not necessarily tied to having absolute profitability, but that remains a board decision.

Comment on the dividend cut. H&R Block has always run off-season losses and hasn't had to cut the dividend. The company indicated that this was not a correct statement. The fact that they run seasonal losses has nothing to do with the reduction in dividend. What they are looking at is an annualized earnings number, both historically and projected. They can't project earnings and looked at their historical payout rates and, on a standalone basis, they think that the $0.80 annualized level of dividend ($0.20 quarterly) is in keeping with their historical payout ratios as a standalone company (H&R Block). That was the basis of the dividend.

With the shareholders who have kept with the company through thick and thin going from $40 per share down to the current level, it would seem that possibly a return of capital through maintaining the dividend and earning through it for the next couple of years because they have the cash flow capability to do such a thing and the balance sheet as well makes sense. Wasn't that considered? The company indicated that it was factored into the decision. They looked at their business plan going forward. They have a number of new business initiatives underway, some of which they talked about in their release in terms of the mortgage business. They have some other activities on the drawing board which they will talk about in the future. They looked at their cash flow and their balance sheet and took everything into consideration. They looked at the fact that they do want to do a stock repurchase which requires cash. So, on the basis of all of those considerations they felt just as they did last July when they announced it that with the separation of Compuserve that an $0.80 dividend level is the more appropriate level.

The 10 million share repurchase was put on hold. Is there an update to that? Their plan right now is not to commence that as yet. They still would like to do it following the separation. That could change going forward, but at the moment that is where they are. [The repurchase will be for 5 million shares under an existing program plus an additional 10 million shares for a total of 15 million].

What are the company's expectations with the 300 new offices and pricing increases, if any, for the tax season? The company indicated that they cannot talk about expected profitability on any basis. The 300 offices are not new offices. They are new only in that they acquired competitors. They also will open 50 new premium offices this year, so that is the basis for the company increase in number of offices. At the moment the pricing is expected to be similar to last year.

With the $400 million in cash on the balance sheet and the prospect of free cash flow for the next couple of years, why is the company cutting the dividend now? The company answered that their cash flow varies throughout the year and as they go into their tax season, their cash flow actually goes negative. They have plans outlined above for use of the cash and that was their decision.

If the company feels that Compuserve is undervalued and that H&R Block stock is undervalued why won't they buy stock under those conditions, especially now that they have cut the dividend and are preserving even more cash? The company replied that they said they will commence the stock repurchase with the separation and that is still their position. They continuously evaluate the decision of when to repurchase. Considering the separation in terms of the spin-off the concern has been that even though either of the securities are undervalued they are looking at a massive distribution in the spinoff of Compuserve shares to the shareholder base that some portion of which is much more interested in owning the tax business while another portion is interested in owning Compuserve. The concern is that, even though from a theoretical standpoint, it will increase the value because every portion gets the distribution and a larger percentage distribution, that the market dynamics of that large of an overhang hitting the market at one time could in fact take away any net gains. So their judgement at this point has been that they are better off waiting until the separation takes place, but they are reviewing it frequently. Compuserve has dropped by $1.5-2 billion since the IPO and that has pulled the H&R Block stock down with it. Their first initiative has to be to get Compuserve moving in the right direction.

One analyst indicated that the sentiment from those asking the questions is that they are not happy with the procedures the company has taken on cutting the dividend. He asked that they take the message to the board that a lot of people are unhappy about the decision that has been made and hopefully it can be reviewed.

Recap the pricing actions taken last year and contrast that with what the plans are for this year. The company responded that last year their average price went up about 8.5%. The difference is that in prior years it was done across the board across the country. This past year they did it on a regional basis so that some markets where the cost of living is higher and income levels are higher they actually increased the prices double-digits. Other markets were increased more modestly. This coming season, they expect to have price increases, on average, in that same neighborhood and it will again be done on a regional basis.

What are the revenues and earnings goals and what is included in the strategic plan for developing that growth rate? The company answered that in terms of financial goals they have set a revenue growth rate of 15% or better and they want to maintain a pre-tax margin in excess of 20%. If they can do that they can drive a net earnings growth rate of 15% or better. In terms of shareholder value, they think the combination of dividend and price appreciation can grow at a 15% or better level. These are all objectives.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.