Block Financial Corp $1B Shelf Rated Prelim 'A' by S&P.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 9/25/97 -- Standard & Poor's assigned its preliminary single-`A' rating to Block Financial Corp.'s $1 billion shelf registration of debt securities, which are unconditionally guaranteed by H&R Block Inc. Kansas City, Mo.-based Block Financial Corp. is a subsidiary of H&R Block Inc.

Additionally, Standard & Poor's affirmed its 'A-1' ratings on the 3(a)3 and 4(2) commercial paper programs, which are guaranteed by H&R Block.

Support for this rating derives from H&R Block's solid franchise as the largest tax preparation business in the United States; its record of predictable, recession-resistant profitability; and its conservatively managed balance sheet. Enhancing the company's position is the recent divestiture of CompuServe, which historically has been a serious drain on H&R Block's resources, both in terms of cash and management time. Offsetting these strengths is the recent acquisition of Option One Mortgage Corp., a subprime mortgage lender involved in a riskier business than H&R Block's core operations, and one as yet untried in an economic downturn.

H&R Block has consistently grown the volume of the tax returns prepared over most of its history, as well as the pricing of tax preparation fees. The business is recession-resistant. Revenues from H&R Block's core tax preparation business have grown 10.2%, and pretax earnings have increased 9.5% on average over the past 15 years. In fiscal 1997, earnings in H&R Block's core tax business improved from gains in the number and complexity of tax returns processed, as well as from increases in prices. These improvements were offset by costs incurred with the company's accounting system, bad debt expense in both credit card and refund anticipation loan programs, and expenses associated with promotions.

The company recently announced the sale of 80% owned CompuServe, adding an estimated $725 million of after-tax proceeds to H&R Block. The company will sell its CompuServe subsidiary to WorldCom, ending the drain on H&R Block's financial and managerial resources. The deal is subject to regulatory approvals and is expected to close by year-end 1997.

To quickly achieve a critical mass in the nonconforming mortgage business, in June 1997, H&R Block acquired Option One Mortgage Corp. from Fleet Financial Group Inc. for $218 million. Founded in 1992 and based in Santa Ana, Calif., Option One originates, acquires, sells, and services home equity loans. These loans are secured by first liens on one- to four-family homes. For calendar 1996, Option One had revenues of $61 million, up 56% from $39 million in 1995. Loan production in calendar 1996 was $1 billion, a gain of 33% from $750 million in 1995. Option One's primary market is sub-prime borrowers with significant equity in their homes. Option One originates 80% of loans through a network of 5,000 brokers dispersed nationally; no single broker provides more than 1% of the loan volume. The business funds itself predominately through whole loan sales rather than securitizations, rendering its reported revenues more meaningful than other subprime mortgage lenders.

OUTLOOK: STABLE

While acquiring Option One adds risk, H&R Block's strong profitability, solid capital, and high market share in its core business should support stable credit quality, Standard & Poor's said. -- CreditWire

CONTACT: Martin S. Kounitz, CFA, New York (1) 212-208-5485

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