HR Block 2010 Annual Report Download - page 22

BUSINESS SERVICES
GENERAL –Our Business Services segment offers tax and consulting services, wealth management and capital
markets services to middle-market companies. Segment revenues constituted 22.2% of our consolidated revenues
from continuing operations for fiscal year 2010, 22.0% for fiscal year 2009 and 23.0% for fiscal year 2008.
This segment consists primarily of RSM, which provides tax and consulting services in 88 cities and 26 states
and offers services in 20 of the 25 top U.S. markets.
From time to time, we have acquired related businesses and may continue to do so if future conditions warrant
and satisfactory terms can be negotiated.
ALTERNATIVE PRACTICE STRUCTURE WITH McGLADREY & PULLEN LLP – M&P is a limited liability partnership,
owned 100% by certified public accountants (CPAs), which provides attest services to middle-market clients.
Under state accountancy regulations, a firm cannot provide attest services unless it is majority-owned and
controlled by licensed CPAs. As such, RSM is unable to provide attest services. Since 1999, RSM and M&P have
operated in what is known as an “alternative practice structure” (APS). Through the APS, RSM and M&P are able to
offer clients a full-range of attest and non-attest services in full compliance with applicable accountancy
regulations.
An administrative services agreement between RSM and M&P obligates RSM to provide M&P with
administrative services, information technology, office space, non-professional staff, and other infrastructure
in exchange for market rate fees from M&P.
On July 21, 2009, M&P provided 210 days notice of its intent to terminate the administrative services agreement,
resulting in termination of the APS unless revoked or modified prior to the expiration of the notice period. As a
protective measure, on September 15, 2009, RSM also provided notice of its intent to terminate the administrative
services agreement. Effective February 3, 2010, RSM and M&P entered into new agreements related to the
operation of the APS, withdrawing their prior notices of termination.
Pursuant to a Governance and Operations Agreement effective February 3, 2010, RSM and M&P agreed to be
bound by the final award of an arbitration panel, dated as of November 24, 2009, regarding the applicability and
enforceability of certain restrictive covenants between the parties. In the event the APS were ever terminated,
M&P would generally be prohibited as a result of these restrictive covenants, from (1) engaging in businesses in
which RSM operates in for 17 months, (2) soliciting any business with clients or potential clients of RSM or any of
its subsidiaries or affiliates for 29 months, and (3) soliciting employees of RSM or any of its subsidiaries or
affiliates for 24 months.
Although not required by the Governance and Operations Agreement, all partners of M&P, with the exception of
M&P’s Managing Partner, are also managing directors employed by RSM. Approximately 86% of RSM’s managing
directors are also partners in M&P. Certain other personnel are also employed by both M&P and RSM. M&P
partners receive distributions from M&P in their capacity as partners, as well as compensation from RSM in their
capacity as managing directors. Distributions to M&P partners are based on the profitability of M&P and are not
capped by this arrangement. Pursuant to the Governance and Operations Agreement, effective May 1, 2010, the
aggregate compensation payable to RSM managing directors by RSM in any given year shall generally equal
67 percent of the combined profits of M&P and RSM less any amounts paid in their capacity as M&P partners. RSM
followed a similar practice historically, except that the compensation pool for managing directors was based on
65 percent of combined profits. In practice, this means that variability in the amounts paid to RSM managing
directors under these contracts can cause variability in RSM’s operating results. RSM is not entitled to any profits
or residual interests of M&P, nor is it obligated to fund losses or capital deficiencies of M&P. Managing directors of
RSM have historically participated in stock-based compensation plans of H&R Block. Beginning in fiscal 2011,
participation in those plans will cease and be replaced by a non-qualified retirement plan.
See additional discussion in Item 8, note 17 to the consolidated financial statements.
SEASONALITY OF BUSINESS –Revenues for this segment are largely seasonal in nature, with peak revenues
occurring during January through April.
COMPETITIVE CONDITIONS –The tax and consulting business is highly competitive. The principal methods of
competition are price, service and reputation for quality. There are a substantial number of accounting firms
offering similar services at the international, national, regional and local levels. As our focus is on middle-market
businesses, our principal competition is with national and regional accounting firms.
GOVERNMENT REGULATION –Many of the same federal and state regulations relating to tax preparers and the
information concerning tax reform and tax preparer registration discussed previously in Tax Services apply to the
Business Services segment as well. RSM is not, and is not eligible to be, a licensed public accounting firm and takes
measures to ensure that it does not provide services prohibited by regulation, such as attest services. RSM, through
6H&R BLOCK 2010 Form 10K