H&R BLOCK INC — Audit Report / Information 2000

Feb 14, 2000

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (date of earliest event reported): December 1, 1999 H&R BLOCK, INC. (Exact name of registrant as specified in charter) MISSOURI 1-6089 44-0607856 -------- ------ ---------- (State of Incorporation) (Commission File Number) (I.R.S. Employer Identification Number) 4400 MAIN STREET, KANSAS CITY, MO 64111 --------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (816) 753-6900 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name or former address, if changed since last report) 2 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED The audited financial statements of Olde Financial Corporation ("Olde") for the years ended December 31, 1998 and 1997, together with the Report of Independent Auditors, and the unaudited consolidated financial statements of Olde for the six months ended September 24, 1999 and September 25, 1998 are filed as part of this Current Report on Form 8-K/A. (B) PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated balance sheet of H&R Block, Inc. as of October 31, 1999 and the pro forma consolidated statements of earnings for the year ended April 30, 1999 and the six months ended October 31, 1999 are filed as part of this Current Report on Form 8-K/A. (C) EXHIBITS Exhibit No. Description of Exhibit 23.1 Consent of Independent Auditors 99.1 Press release dated December 2, 1999 filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated December 1, 1999, is incorporated by this reference. 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 hereunto duly authorized. H&R BLOCK, INC. Date: February 14, 1999 By: /s/ Cheryl L. Givens ------------------------------- Cheryl L. Givens Vice President, Corporate Controller 3 H&R Block, Inc. Index to Financial Statements

F-1 4 OLDE Financial Corporation Consolidated Statements of Financial Condition September 24, 1999 and September 25, 1998 (Unaudited)

See Notes to Consolidated Financial Statements F-2 5 OLDE Financial Corporation Consolidated Statements of Financial Condition September 24, 1999 and September 25, 1998 (Unaudited)

See Notes to Consolidated Financial Statements F-3 6 OLDE Financial Corporation Consolidated Statements of Operations For Nine Months Ended September 24, 1999 and September 25, 1998 (Unaudited)

See Notes to Consolidated Financial Statements F-4 7 OLDE Financial Corporation Consolidated Statements of Cash Flows For Nine Months Ended September 24, 1999 and September 25, 1998 (Unaudited)

See Notes to Consolidated Financial Statements F-5 8 OLDE Financial Corporation Notes to Consolidated Financial Statements (Unaudited) The Statements of Financial Condition as of September 24, 1999 and September 25, 1998, the Statements of Operations for the six months ended September 24, 1999 and September 25, 1998 and the Statements of Cash Flows for the six months ended September 24, 1999 and September 25, 1998 have been prepared by Olde Financial Corporation ("Olde"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial condition, results of operations and cash flows at September 24, 1999 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto in Olde's December 31, 1998 audited financial statements included with this Current Report on Form 8-K/A. F-6 9 Report of Independent Auditors We have audited the accompanying consolidated financial statements of OLDE Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonableness basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OLDE Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Detroit, Michigan February 8, 1999 F-7 10 OLDE Financial Corporation Consolidated Statements of Financial Condition December 31, 1998 and December 31, 1997

F-8 11 OLDE Financial Corporation Consolidated Statements of Financial Condition December 31, 1998 and December 31, 1997

F-9 12 OLDE Financial Corporation Consolidated Statements of Operations For 1998, 1997, and 1996

(a) Including approximately $12,000,000, $12,400,000, and $12,100,000 with an affiliate in 1998, 1997, and 1996, respectively. (b) Including approximately $377,300, $383,800, and $436,500 with an affiliate in 1998, 1997, and 1996, respectively. (c) Including approximately $67,300, $807,700 and $807,700 with the Company's majority stockholder in 1998, 1997 and 1996, respectively. F-10 13 OLDE Financial Corporation Consolidated Statements of Changes in Stockholder's Equity

F-11 14 OLDE Financial Corporation Consolidated Statements of Cash Flows

F-12 15 OLDE Financial Corporation Notes to Consolidated Financial Statements December 31, 1998 1. Business The accompanying financial statements present the consolidated financial statements of the Company and its subsidiaries, OLDE Discount Corporation ("OLDE Discount"), American Brokerage Services, Inc. ("ABS"), OLDE Asset Management, Inc. ("OAM"), OLDE Realty Corporation ("ORC"), OLDE Property Corporation ("OPC"), OLDE Equipment Corporation ("OEC"), Realty Acquisitions, Inc. ("RAI"), and Smart Travel, Inc. ("STI"). Material intercompany balances have been eliminated for all periods presented. The Company is a financial services company. OLDE Discount engages in a discount securities brokerage business primarily for retail customers throughout the United States. OLDE Discount also engages in market making and specialist activities in common stocks and is a dealer in corporate and municipal bonds and U. S. Government securities. Other products and services provided to customers include: stock research and recommendations; money market funds with sweep provisions for settlement of customer transactions; fixed-income products; mutual funds; margin accounts; checking privileges; option accounts; account access/review via the internet; dividend reinvestment; and individual retirement accounts with no annual fee. OAM provides portfolio management and administrative services to the OLDE Custodian Fund, a money market fund series. ORC, OPC, and RAI are engaged in the acquisition, ownership and operation of commercial real estate, leased primarily to OLDE Discount. OEC leases computer hardware and software to OLDE Discount. STI provides travel management and purchasing services primarily to OLDE Discount. ABS a registered securities broker-dealer is currently inactive. In February 1999 SmartVest, Inc. ("SV") a newly formed Michigan Corporation wholly owned by the Company, initiated a registration and membership process with the National Association of Securities Dealers, Inc. ("NASD") to become a successor broker-dealer to ABS. It is planned that SV will introduce its customer accounts to OLDE Discount and that OLDE Discount will carry SV's accounts and provide clearing and execution service to SV on a fully disclosed basis. SV will be an on-line brokerage firm. 2. Significant accounting policies In the opinion of management, the accompanying audited consolidated financial statements contain all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position of the Company at December 31, 1998 and December 31, 1997, and the results of its operations and its cash flows for the periods ended December 31, 1998, December 31, 1997, and December 31, 1996. The Company's accounting policies have been consistently followed. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. OLDE Discount is a registered securities broker-dealer and accounts for securities transactions (and related commission revenue and expense) on the trade date basis. The risk of loss on transactions as of trade date is equivalent to the risk of loss on settlement date and relates to customers' or other brokers' inability to meet the F-13 16 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 2. Significant accounting policies (continued) terms of contracts. Credit risk is reduced by obtaining and maintaining adequate collateral until the contract is settled. The Company is a party to financial instruments with off balance sheet risk in the normal course of its business. The Company is required, in the event of the non-delivery of customers' securities owed the Company by other broker-dealers, or by its customers, to purchase identical securities in the open market. Such purchases could result in losses not reflected in the accompanying financial statements. Securities owned and securities sold, not yet purchased, are carried at market value. Unrealized gains and losses are reflected in operations. Sales of securities not yet purchased represent an obligation of the Company to deliver specified securities at a predetermined date and price. The Company will be obligated to acquire the required securities at prevailing market prices in the future to satisfy this obligation. Securities purchased under agreements to resell are treated as financing transactions and are carried at the amounts at which the securities will be subsequently resold as specified in the respective agreements. Collateral relating to investments in repurchase agreements is held by independent custodian banks. The securities are valued daily and collateral added whenever necessary to bring the market value of the underlying collateral equal to or greater than the repurchase price specified in the contracts. Depreciation and amortization are provided using both straight-line and accelerated methods over estimated useful lives of three to thirty nine years. Leasehold improvements are amortized using both straight-line and accelerated methods. The Company considers all non-segregated highly liquid investments (short-term investments) with a maturity of three months or less when purchased to be cash equivalents. 3. Special reserve account for benefit of customers U.S. Government securities purchased under agreements to resell and cash have been segregated in a special reserve account for the exclusive benefit of customers pursuant to federal regulations under Rule 15c3-3 of the Securities Exchange Act of 1934. F-14 17 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 4. Securities owned and securities sold, not yet purchased At December 31, 1998 and December 31, 1997 marketable securities owned and securities sold, net yet purchased consist of trading and investment securities at quoted market values, as follows:

1. Receivables from customers Receivables from customers include amounts due on margin and cash transactions. The receivables are collateralized by customers' securities held, which are not reflected in the financial statements. 6. Receivables and payables with brokers, dealers, and clearing organizations Receivables from brokers generally are collected within thirty days and are collateralized by securities in physical possession, on deposit, or receivable from customers or other brokers. The Company does business with brokers who for the most part are members of the major U.S. securities exchanges. The Company monitors the credit standing of broker-dealers and customers with whom it conducts business. In addition, the Company monitors the market value of collateral held and the market value of securities receivable from others. The Company seeks to obtain additional collateral if insufficient protection against loss exists. Amounts receivable from and payable to brokers, dealers, and clearing organizations as of December 31, 1998 and December 31, 1997 are as follows:

F-15 18 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued)

1. Securities lending At December 31, 1998, funds obtained under securities lending agreements, which are included with payables to broker dealers, totaled $113.9 million. At December 31, 1997, the securities lending amount was $177.7 million. Securities loaned are securities held by customers on margin. When loaning securities, OLDE Discount receives cash collateral approximately equal to the value of the securities loaned. The amount of cash collateral is adjusted daily for market fluctuations in the value of the securities loaned. Interest rates paid on the cash collateral fluctuate with short-term interest rates. 8. Property and equipment Property and equipment at cost consist of the following at December 31:

2. Bank lines of credit, debt, commitments and contingencies At December 31, 1998, bank lines of credit available to OLDE Discount amounted to $180 million. A line of credit in the amount of $80 million may be withdrawn at the discretion of the bank. The Company has a $100 million committed line of credit that expires in August 1999, and subject to the terms of the agreement, may be extended for one year at the bank's discretion. Short-term bank loans outstanding under the lines of credit are payable either on demand or upon expiration of the line of credit and are collateralized by marketable securities carried for the accounts of margin customers. Loans outstanding bear interest at broker loan rates. There were no borrowings under these lines of credit at December 31, 1998 or December 31, 1997. There are no compensating balance requirements related to these lines of credit. As of December 31, 1998, OLDE Discount had provided a clearing corporation with letters of credit totaling $82 million that satisfied margin deposit requirements of $79.7 million. These letters of credit are secured by customers' margin securities. F-16 19 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 9. Bank lines of credit, debt, commitments and contingencies (continued) OLDE Discount leases office facilities over varying periods extending to 2005. The Company's approximate minimum annual rental commitments under non-cancelable operating leases are as follows:

Certain of the office leases contain renewal options ranging from one to five years. The office leases generally provide for rent escalation resulting from increased real estate assessments for real estate taxes and other charges. Rental expense for office facilities under non-cancelable operating leases was $6.6 million, $7.1 million, and $6.6 million, respectively for the years ending December 31, 1998, 1997 and 1996. OLDE Equipment leases computer hardware. The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1998:

Computer systems financed under capital leases and hardware included in property and equipment amounted to approximately $14.5 million and $13.9 million at cost at December 31, 1998 and 1997, respectively, and accumulated amortization amounted to approximately $11.4 million and $9.4 million, respectively. Amortization of capital leases is included with depreciation and amortization expense. At December 31, 1998, OLDE Property Corporation had outstanding $14.1 million in real estate mortgages. These mortgages are secured by substantially all land, building and improvements of the Company. Mortgages outstanding bear interest at 6.25%, 7.75% and 8% per annum. These mortgages are being amortized over 7 year periods, with projected maturities of 2001, 2002, and 2005, respectively. The following is a schedule of future minimum principal mortgage payments:

F-17 20 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 9. Bank lines of credit, debt, commitments and contingencies (continued) OLDE Discount is a defendant and respondent in a number of civil actions, arbitrations, and class actions arising out of its business as a broker-dealer. The Company believes it has meritorious defenses against these claims and intends to assert them vigorously. It is management's opinion that the disposition of these claims will not have a material adverse effect on the financial condition of the Company. A consolidated certified class action in Federal court alleging that 35 securities dealers conspired to fix and maintain artificial bid-ask spreads on certain securities traded on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") over-the-counter market has been settled. The Company denies any improper activity occurred and joined the other settling brokerage firms in settling the matter to avoid the costs, expenses, and distractions of further litigation. OLDE Discount's portion of the settlement was fully reserved as of December 1997, and was paid in September 1998. The Securities and Exchange Commission ("SEC") has completed its investigation of the Nasdaq market, which focused upon the dealer conduct alleged in the consolidated class action. In January 1999, without admitting or denying liability, OLDE Discount, along with 27 other Nasdaq dealers settled the SEC's investigation. The settlement included the payment of a fine and retention of an independent consultant who will conduct a review of OLDE Discount's and the 27 other dealer firms' Nasdaq trading, compliance, and supervisory systems. The firm will implement the consultant's recommendations. The fine was fully reserved in 1998 and was paid in January 1999. OLDE Discount was the subject of an investigation by the SEC and National Association of Securities Dealers Regulation, Inc. ("NASDR"). The investigations focused on certain sales practices of the broker-dealer during the years 1992 to 1995. In September 1998, without admitting or denying liability, OLDE Discount settled both the SEC and NASDR investigations. The settlements included the payment of fines and certain undertakings to conduct an independent review of its current sales policies, practices and procedures and to adopt and implement such additional amended policies and procedures as may be recommended in the course of this review. The fines were fully reserved and were paid in September 1998. F-18 21 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 10. Subordinated Debt On August 1, 1998, the Company's $9,412,000 of 12.5% Senior Subordinated Debentures matured, and were repaid. On September 1, 1998, the Company called $17,125,000 of outstanding 9.6% Senior Subordinated Debentures due May 1, 2002 at a premium of 2% over the principal amount. 11. Net capital requirements OLDE Discount is required to maintain minimum net capital as defined under Rule 15c3-1 of the Securities Exchange Act of 1934 and has elected to comply with the alternative net capital requirement, which requires a broker-dealer to maintain minimum net capital equal to the greater of $1 million or 2% of the combined aggregate debit balances arising from customer transactions, as defined. The net capital rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than the greater of 5% of combined aggregate debit items or $1 million. At December 31, 1998, OLDE Discount's net capital of $286.2 million, which was 21% of aggregate debit items, exceeded by $259 million its minimum required net capital of $27.2 million. ABS is subject to the SEC Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital (net capital ratio), shall not exceed 15 to 1. At December 31, 1998, ABS had net capital of $1,683,489, which was $1,433,489 in excess of its required net capital $250,000. ABS's net capital ratio was .014 to 1. F-19 22 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 12. Income taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) at December 31, 1998 and 1997 are as follows:

Significant components of the provision for income taxes are as follows:

A reconciliation of the total federal income tax provision and the amount computed by applying the statutory federal income tax rate to earnings before income taxes is as follows:

Total income taxes paid approximated $25 million, $32.3 million, and $40.5 million for 1998, 1997, and 1996, respectively. F-20 23 OLDE Financial Corporation Notes to Consolidated Financial Statements (Continued) 13. Related party transactions Directors and officers of the Company and their associates maintain cash accounts and margin accounts with OLDE Discount and execute securities transactions through OLDE Discount in the ordinary course of business. OLDE Discount purchases significant advertising and promotional material from Financial Marketing Services, Inc. ("FMS"), a Michigan corporation wholly-owned by the majority shareholder of the Company, and North American Printing Company ("North American") formerly Sumner Press, Ltd., a Canadian company controlled by FMS. North American supplies FMS with substantially all of OLDE Discount's printed advertising materials. In total, the Company's advertising purchases from FMS amounted to approximately $11.5 million, $11.9 million, and $11.7 million for the years ending December 31, 1998, 1997, and 1996, respectively. Other subsidiaries of FMS charged the Company approximately $852,000, $887,700, and $850,000 in the same periods, respectively, primarily for mailing and general services. In February 1998, OLDE Property Corporation purchased the Company's two corporate headquarter buildings and a nearby warehouse facility from the Company's majority shareholder for $7 million. The buildings were then leased to OLDE Discount. In January 1998, the Board of Directors of OLDE Discount declared and paid a dividend in the amount of $3,775,003 to OLDE Financial Corporation. The Company utilized these funds to redeem shares of its capital stock in the amount of $3,970,104. OAM paid a dividend to the Company in August in the amount of $4,000,000. At December 31, 1998 and 1997, the Company held investments of $15 million and $14.2 million, respectively, in shares of money market mutual funds sponsored and managed by subsidiaries of the Company. 14. Estimated fair values of financial instruments Generally accepted accounting principles currently require disclosure of estimated fair market values of financial instruments. The Company uses present value techniques to determine the estimated values of its financial instruments where quoted market values are not available. These techniques require judgment, and the estimates may be significantly affected by the assumptions made. A portion of the Company's financial instruments are securities traded in nationally recognized financial markets. These instruments are carried in the Company's financial statements at quoted market value or the market value for comparable securities which represents estimated fair value. Changes in market values of these instruments are reflected in current operating results. A substantial portion of the Company's other financial instruments, consisting primarily of customer margin loans and customer credit balances, earn or pay rates of interest that change in accordance with general changes in short-term interest rates. Such instruments are carried in the financial statements at the amount receivable or payable on demand, which is considered to be the estimated fair value. The above disclosures do not extend to estimated fair value amounts for items not defined as financial instruments by FASB No. 107 "Disclosures About Fair Value of Financial Instruments", for example customer relationships, which possess significant value. F-21 24 H&R BLOCK, INC. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DESCRIPTION OF TRANSACTION On December 1, 1999, H&R Block, Inc. (the "Company"), through its wholly-owned subsidiary Block Financial Corporation ("BFC"), completed its acquisition of the outstanding capital stock of OLDE Financial Corporation and its subsidiaries ("Olde"). The purchase price paid by BFC was $850 million cash plus an estimated net tangible book value payment of $37.1 million. A final cash adjustment will be made based on the aggregate consolidated net tangible book value at the acquisition date, after a final independent audit of the balance sheet is completed. The acquisition will be accounted for as a purchase. The Company obtained a $750 million acquisition facility to support commercial paper issued to acquire Olde. At the closing date of December 1, 1999, the transaction was funded using the commercial paper and internal cash. It is the intent of the Company to convert approximately $500 million of the short-term commercial paper borrowings into term debt through a debt offering in the fourth quarter of fiscal 2000. In the pro forma consolidated financial statements, it is assumed that $500 million of long-term debt has been issued. PRO FORMA FINANCIAL STATEMENT ASSUMPTIONS The Company's fiscal year end is April 30. The accompanying pro forma consolidated balance sheet is as of October 31, 1999, the date of the most recent balance sheet the Company has filed with the Securities and Exchange Commission, and assumes that the acquisition of Olde occurred on that date. Included in the Company's pro forma consolidated balance sheet is financial information as of September 24, 1999 for Olde, due to a difference in fiscal year ends. The accompanying pro forma income statements are for the year ended April 30, 1999 and the six months ended October 31, 1999, and assume that the acquisition of Olde occurred on May 1, 1998. Included in the Company's pro forma consolidated statement of earnings for the year ended April 30, 1999 is financial information for the twelve months ended March 26, 1999 for Olde, derived by taking audited financial information for the year ended December 31, 1998, adding the quarter ended March 26, 1999 and deducting the quarter ended March 27, 1998. Included in the Company's pro forma consolidated statement of earnings for the six months ended October 31, 1999 is financial information for the six months ended September 24, 1999 for Olde. Since the pro forma financial statements are as of April 30 and October 31 and are based on preliminary information related to the purchase, the actual purchase adjustments will differ from those presented herein. In addition, the Company intends to have an appraisal completed for the real estate acquired. When completed, the real estate assets will be adjusted to fair market value, creating differences in the purchase price allocation, including the amount allocated to goodwill and other intangible assets, from those presented herein. These unaudited pro forma financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred had the merger been consummated on the dates indicated and are not necessarily indicative of the future operating results or financial position of the combined companies. The pro forma financial statements assume that: (i) the adjusted stockholder's equity at acquisition was $393.1 million, which is the adjusted stockholder's equity of Olde as of September 24, 1999, (ii) the Company financed the acquisition through the issuance of $500 million in ten-year long-term debt at a fixed rate of 8.25% per annum and $389.386 million in short-term notes payable at an average variable rate of 5.61% per annum for the annual period presented and 5.59% per annum for the six-month period presented (iii) the carrying value of Olde's assets and liabilities approximated fair market value on the date of acquisition, except for exchange memberships which were adjusted to fair market value (iv) goodwill and other intangible assets arising from the transaction will be amortized on a straight-line basis over 15 years and (v) the one-year non-compete agreement was expensed over 12 months in the consolidated statement of earnings for the year ended April 30, 1999. F-22 25 H&R BLOCK, INC. Pro Forma Consolidated Balance Sheet October 31, 1999 (Unaudited, amounts in thousands)

The accompanying notes are an integral part of this pro forma financial statement. F-23 26 H&R BLOCK, INC. Notes to Pro Forma Consolidated Balance Sheet October 31, 1999 (Unaudited, amounts in thousands) (1) Adjustments to the balance sheet were made to record the changes in goodwill and other intangible assets and debt financing resulting from the purchase of Olde, as if the transaction had occurred on October 31, 1999. The computation of the purchase price is as follows:

Exchange memberships were adjusted to fair market value. The computation of the amount assigned to goodwill and other intangible assets to be recorded on the purchase is as follows:

(2) The Company assumed the use of short-term notes payable and long-term debt to finance the acquisition. The Company's existing commercial paper program was used to obtain $389,386 of notes payable. The remaining purchase price will be financed with a $500,000 long-term debt offering.

F-24 27 H&R BLOCK, INC. Pro Forma Consolidated Statement of Earnings Year Ended April 30, 1999 (Unaudited, amounts in thousands)

The accompanying notes are an integral part of this pro forma financial statement. F-25 28 H&R BLOCK, INC. Pro Forma Consolidated Statement of Earnings Six Months Ended October 31, 1999 (Unaudited, amounts in thousands)

The accompanying notes are an integral part of this pro forma financial statement. F-26 29 H&R BLOCK, INC. Notes to Pro Forma Consolidated Statements of Earnings Year Ended April 30, 1999 and Six Months Ended October 31, 1999 (Unaudited, amounts in thousands) (1) Adjustments to the statements of earnings were made to reflect the change in interest expense and amortization of goodwill and other intangible assets, as if the transaction had occurred on May 1, 1998.

(a) The Company plans to issue 10-year long-term debt totaling $500,000 to fund part of the purchase of Olde. The computation of the increased interest expense uses an assumed interest rate of 8.25%, based on the current interest rate environment incorporating the Company's current investment grade rating and interest rate hedging instruments already entered into on a portion of the debt. A 1/8% increase in this rate would result in additional interest expense of $625 for the fiscal year ended April 30, 1999 and $313 for the six months ended October 31, 1999.

(b) The Company is funding part of the purchase of Olde with $389,386 of short-term notes payable, using its existing commercial paper program. The computation of the increased interest expense uses the actual daily average interest rate incurred by the Company for short-term borrowings during the period of time presented in the pro forma consolidated statements of earnings, which is variable based on the market. A 1/8% increase in this rate would result in additional interest expense of $487 for the fiscal year ended April 30, 1999 and $243 for the six months ended October 31, 1999. F-27 30 H&R BLOCK, INC. Notes to Pro Forma Consolidated Statements of Earnings Year Ended April 30, 1999 and Six Months Ended October 31, 1999 (Unaudited, amounts in thousands)

F-28 31 EXHIBIT INDEX Exhibit No. Description of Exhibit 23.1 Consent of Independent Auditors 99.1 Press release dated December 2, 1999, filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated December 1, 1999, is incorporated herein by this reference.