Registration No. No.333-58085
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
JTH TAX, INC.
(Name of small business issuer in its charter)
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Delaware 7291 54-1828391
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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2610 Potters Road, Virginia Beach, Virginia 23452 (757) 340-7610
(Address and telephone number of principal executive office)
2610 Potters Road, Virginia Beach, Virginia 23452
(Address of principal place of business or intended principal place of business)
John T. Hewitt, 2610 Potters Road, Virginia Beach, Virginia 23452 (757) 340-7610
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act check the following box and list the Securities Act
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission and with the securities commissions for the
states in which the Issuer intends to offer the securities for sale. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ____________ September, 1998
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Prospectus
310,000 Shares
JTH TAX, INC.
Class A Common Stock
JTH Tax, Inc. (the "Company") is offering a maximum of 310,000 shares and
a minimum of 40,000 shares (the "Shares") of Class A common stock, par value
$1.00 per share (the "Class A Common Stock"), at a price of $12.50 per Share.
There is no public market for any of the Company's securities, and it is not
anticipated that a market will develop for the Shares following the completion
of this offering.
The offering will be made on a best-efforts basis by the Company through
its director and officer, John K. Seal. If at least 40,000 Shares are not sold
at a price of at least $12.50 per Share within 30 days of the date that the
registration statement relating to these securities becomes effective, the
proceeds of any sale of Shares will be returned to investors (with interest) and
the offering will be terminated. If at least 40,000 Shares are sold by that
date, subscriber funds received through that date will be released to the
Company. Members of the Company's management may, but are not obligated to
purchase Shares. See "Plan of Distribution." Any Shares purchased by the
Company's management may be counted toward the determination of whether the
minimum offering amount has been met.
The Shares entitle holders to elect one less director than the
shareholders of the Class B Common Stock are entitled to elect.
--------------
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PURCHASERS MAY EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION OF THEIR INVESTMENT AND A PROSPECTIVE PURCHASER SHOULD NOT INVEST
IN THE OFFERING UNLESS THE PURCHASER CAN AFFORD THE LOSS OF THE ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 9.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE AUTHORITIES NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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===============================================================================
Underwriting Proceeds
Price to Public Discounts(1) to Company(2)
- -------------------------------------------------------------------------------
Per Share......... $12.50 -- $12.50
===============================================================================
Total Maximum..... $3,875,000 -- $3,875,000
===============================================================================
(1) The offering is being made by the Company through its officer and
director, who will not be separately compensated for doing so.
(2) Before deducting expenses of the offering, estimated to be $100,000.
The date of this Prospectus is September __, 1998.
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AVAILABLE INFORMATION....................................................... 5
SUMMARY..................................................................... 5
RISK FACTORS................................................................ 8
USE OF PROCEEDS............................................................. 16
DILUTION.................................................................... 17
PLAN OF DISTRIBUTION........................................................ 18
LEGAL PROCEEDINGS........................................................... 19
MANAGEMENT.................................................................. 18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 22
DESCRIPTION OF CAPITAL STOCK................................................ 23
EXPERTS..................................................................... 25
INDEMNIFICATION OF DIRECTORS AND OFFICERS................................... 25
BUSINESS.................................................................... 25
MANAGEMENT DISCUSSION AND ANALYSIS.......................................... 37
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 37
EXECUTIVE COMPENSATION...................................................... 35
REPORTS TO STOCKHOLDERS..................................................... 38
<PAGE>
AVAILABLE INFORMATION
The Company is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (No. 333-) 58085) (together
with any amendments thereto, the "Registration Statement"), under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and financial
statements, notes and schedules filed as part thereof, which may be inspected at
the public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, New York, New York
10048. Copies of such documents may also be obtained through the Commission's
Internet address at http://www.sec.gov. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not necessarily
complete, and in each instance are qualified in all respects by reference to the
copy of such document filed as an exhibit to the Registration Statement.
This Prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified as such because the context of the statement includes
words such as the Company "believes," "anticipates," "expects," "estimates,"
"intends," or other words of similar intent. Similarly, statements that describe
the Company's future plans, objectives and goals are also forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from those expressed or implied in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
The Company
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services to taxpayers primarily in the
lower- to middle-income tax brackets. The Company operates in Canada through its
majority-owned subsidiary, Tax Depot Inc., a corporation organized under the
laws of the Province of Manitoba ("Tax Depot"). (Throughout this Prospectus,
references to the Company's Canadian operations and to Tax Depot's operations
are used interchangeably.) Tax Depot currently operates under the trade name
"U&R Tax Depot" but the Company intends to conduct business in both Canada and
the U.S. under the name "Liberty Tax Service" by the 1999 tax season. During the
1998 tax season, there were 207 U&R Tax Depot offices (13 of which were owned by
Tax Depot and the balance of which were owned by franchisees of Tax Depot)
extending from the Maritimes to British Columbia. In addition, the Company owned
and operated five tax preparation offices in Columbus, Ohio during the 1998 tax
season.
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The Company seeks competitive advantage in its markets by (i) providing
prompt tax return preparation at a reasonable price, (ii) providing electronic
filing services, (iii) providing ancillary services, such as audit assistance,
tax return checking and taxation seminars, and (iv) offering a refund
anticipation loan program pursuant to which the Company will arrange, for a fee,
loans to customers based upon the size of the customers' tax refunds.
The Company intends to use the proceeds of this offering to expand its
operations in the United States. Until April 30, 1999, the Company's ability to
own or franchise tax preparation offices in the U.S. is limited by certain
restrictive covenants to which John T. Hewitt, the Company's Chairman, Chief
Executive Officer, President and founder, and John K. Seal, Vice President,
Treasurer and director of the Company, are subject. The Company will seek
further expansion of its operations in the United States after the termination
of those restrictive covenants. See "Risk Factors - Existence of Restrictive
Covenants and Potential for Litigation if Violated."
The Company's principal executive offices are located at 2610 Potters
Road, Virginia Beach, VA 23452 and its telephone number is (757) 340-7610.
The Offering
Securities offered..................... 310,000 shares of Class A Common
Stock
Securities to be outstanding after
the offering........................... 710,000 shares of Class A Common
....................................... Stock 90,000 shares of Class B Common
....................................... Stock
Use of proceeds........................ The proceeds of the offering, after
the payment of offering expenses,
are expected to be used by the
Company to purchase existing
tax practices in the U.S.,
establish up to 30 new tax return
preparation offices in the U.S.,
and develop software.
Risk factors........................... An investment in the Shares
involves a high degree of risk.
See "Risk Factors" beginning on
page 8 hereof for information
that should be considered by
prospective investors.
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Shares. The cautionary statements set forth below and elsewhere in this
Prospectus should be read as accompanying forward-looking statements included
under "Business" and elsewhere herein. The risks described in the statements set
forth below could cause the Company's results to differ materially from those
expressed in or indicated by such forward-looking statements.
History of Operating Losses. The Company's operations commenced in
September 1997 with its purchase of a 60% interest in Tax Depot, an established
provider of tax preparation services in Canada. In addition, the Company
commenced tax preparation operations in Columbus, Ohio in 1998. As a recently
formed entity, the Company has minimal operating history upon which an
evaluation of its future prospects can be made. For its most recent fiscal year
ended April 30, 1998, although the Company did show a profit, its operating
expenses exceeded its revenues. A significant portion of the Company's income
was earned from gains on its investment portfolio. See "Consolidated Financial
Statements." There can be no guarantee that the Company will show a profit from
operations or from further appreciation of its investments in future years. The
Company's future viability, profitability and growth will depend upon its
ability to successfully operate and expand its Canadian operations and its
ability to commercialize its tax services through establishment of Company-owned
and franchised offices in the United States. The Company's prospects in the U.S.
must be considered in light of the risks, expenses and difficulties frequently
encountered in the establishment and development of a new business, particularly
in the tax return preparation industry which is characterized by intense
competition, two dominant national tax return preparation firms and ease of
market entry. There can be no assurance that any of the Company's efforts will
prove successful or that it will not incur operating losses in future years.
Lack of Public Market for Shares. No active market for the Shares will
exist following the closing of this offering, nor does the Company have any
immediate plans to list the Shares on an exchange. Further, information
regarding the Company and the Shares may not be readily available. Investors
should be prepared to hold their investment in the Shares indefinitely. See
"Market for Common Equity and Related Stockholder Matters."
Minimum Offering. The consummation of this offering is conditioned upon a
minimum of 40,000 Shares at a price of $12.50 per share (the "Minimum Offering
Amount") being sold within 30 days after the date of effectiveness of the
registration statement for this offering (the "Minimum Offering Date" ) and
together the "Minimum Conditions"). In the event that the Minimum Conditions are
not met, the Company is required to return the proceeds of any Shares which were
sold in this offering up to the Minimum Offering Date, with interest, and this
offering will be terminated. See "Plan of Distribution Repayment if Minimum
Conditions Not Met." If, however, the Minimum Conditions are satisfied and the
Company proceeds with this offering, there is a risk that the Company may
receive substantially less than the $3,875,000 sought in this offering. To the
extent that less than the maximum number of Shares is sold, the Company is
subject to increased risk that it will have insufficient funds to open all of
the offices and/or acquire all of the tax service practices that it anticipates
it will fund with the maximum proceeds of this offering, and to operate for the
3-year period that the Company anticipates it can operate if the maximum number
of Shares is sold. See "Risk Factors - Need for Additional Financing."
Need for Additional Financing. Although the Company expects that the net
proceeds of this offering will be sufficient to fund the Company's U.S.
operations for at least three years following its completion, this estimate is
based upon certain assumptions regarding the number of the Company's tax
preparation offices in both Canada and the United States operating during such
period, the cost of establishing and purchasing tax preparation offices,
operating expenses, revenues from tax return preparation in Canada and the
United States and similar matters, including the assumption that the maximum
number of Shares offered hereby is sold. If only the minimum number of Shares is
sold, the net proceeds together with all other sources of financing currently
available will still be able to sustain the Company's plans for three years but
at a much slower rate of growth since fewer and smaller offices would be opened.
See "Use of Proceeds." There can be no assurance that such assumptions will be
realized or that unforeseen costs will not be incurred. See "Business-Growth
Strategy." In addition, the Company will likely need additional capital in order
to expand its U.S. operations beyond the purchase of the existing practices and
the establishment of the 30 Company-owned offices that the Company plans to fund
through this offering. It is unlikely that cash flow from operations will be
sufficient to support material growth during the next several years of
operations. There can be no assurance that the Company will be able to obtain
capital as and when needed (either for operational purposes or to fund
expansion) upon terms acceptable to it.
Existence of Restrictive Covenants and Potential for Litigation if
Violated. Mr. Hewitt, the Company's Chairman, Chief Executive Officer and
President, and Mr. Seal, the Company's director, Vice President of Operations
and Treasurer, are subject to covenants not to compete with their former
employer, Jackson Hewitt Inc. ("Jackson Hewitt"), a national tax return
preparation service company, now owned by Cendant Corp., in any city, town or
county within the geographical limits of the United States, its territories and
possessions in which Jackson Hewitt or its franchises, "business partners" or
other business entities bearing its tradename were conducting business as of
December 9, 1996, or in which Jackson Hewitt had made plans or preparations, of
which Mr. Hewitt or Mr. Seal were aware, to locate a franchise or entity prior
to such date. The restrictive covenants expire on April 30, 1999. As of April
30, 1997, Jackson Hewitt had 1,296 franchised offices and 76 company-owned
offices in 41 states. The covenants pertaining to Messrs. Hewitt and Seal
effectively prohibit the Company from establishing offices in most large urban
or suburban areas, and thus from creating a national presence in the United
States, prior to the 2000 tax season. Accordingly, such covenants may adversely
affect the Company's growth, revenues and profitability at least until their
expiration.
In addition, Mr. Hewitt (and, derivatively, the Company) is subject to
covenants prohibiting his use of "confidential and proprietary information"
about or relating to Jackson Hewitt or its customers. As used in the covenant,
the term "confidential and proprietary information" is broadly defined to cover
production processes, marketing techniques, financial information, the "Hewtax"
interactive software package (the tax preparation computer software developed by
Mr. Hewitt and used by Jackson Hewitt), "operating principles," promotional
plans or strategies, sales methods and similar matters. In particular, there can
be no assurance that any proprietary computer software developed by the Company
would not be challenged by Jackson Hewitt as being derivative of the "Hewtax"
software and thus violative of the covenant. Mr. Seal and Martha O'Gorman,
Director of Marketing, are similarly prohibited from using confidential
information or trade secrets of Jackson Hewitt related to its operations and tax
preparation business. The confidentiality covenants of Messrs. Hewitt and Seal
and Ms. O'Gorman are, by their terms, perpetual.
<PAGE>
Messrs. Hewitt and Seal and Ms. O'Gorman are also subject to
"non-disparagement covenants" which prohibit them from doing or saying anything
which might reasonably be expected to materially harm the business interests of
Jackson Hewitt. The non-disparagement covenant of Ms. O'Gorman expires on
November 20, 1998 and those of Messrs. Hewitt and Seal expire on April 30, 1999.
Although the Company believes that its proposed operations (which include
creating all of its own training, sales, operating and marketing materials and
using commercial or in-house developed software), and the activities of its
officers will not violate these covenants, in view of the broad nature of the
definitions of "confidential and proprietary information" and "trade secrets"
and the breadth of the non-disparagement covenants, there can be no assurance
that Jackson Hewitt will not seek to block one or more aspects of the Company's
operations (whether by seeking injunctive relief or otherwise) as contravening
these covenants. To date, Jackson Hewitt has commenced one suit against Mr.
Hewitt and Mr. Seal, as individuals, alleging breach of their restrictive
covenants and seeking injunctive relief suspending Messrs. Hewitt's and Seal's
activities in connection with the Company's Columbus, Ohio operations. See
"Legal Proceedings." Jackson Hewitt obtained a voluntary dismissal of the suit
shortly after its initial filing, but the dismissal was without prejudice and
therefore Jackson Hewitt may file another suit asserting the same or similar
claims. Although the Company was not a party to this suit and did not
participate in Messrs. Hewitt's and Seal's defense, if the Company is named a
party to any future legal actions brought by Jackson Hewitt alleging breach, in
connection with the Company's business, of the restrictive covenants binding on
Messrs. Hewitt and Seal and Ms. O'Gorman, the Company will rigorously defend
itself. It is likely to be very costly for the Company to defend such future
actions. There can be no assurance that even if the Company were to mount such
defense, it would prevail on the merits. The granting of an injunction against
the Company or any of Mr. Hewitt, Mr. Seal or Ms. O'Gorman could materially
adversely affect the Company's financial condition and operations and, in
certain instances, require the Company to seek alternatives to its then-current
business practices or terminate operations. Jackson Hewitt could also seek and,
if successful, be awarded damages which, depending upon the nature of the claim,
a court's view of the enforceability of the covenants and the facts relating to
such damages, may be substantial. Accordingly, if Jackson Hewitt were to make a
claim, succeed on the merits and be awarded damages, it is possible that
purchasers of the Class A Common Stock could lose some portion or all of their
investment in the Company.
Limited Potential for Revenue From U.S. Operations Until Expiration of
Restrictive Covenants. The Company is effectively prohibited from establishing
offices in most large urban and suburban areas in the United States prior to the
year 2000 tax season due to the restrictive covenants which do not expire until
April 30, 1999. Until such time as the Company can establish offices in these
areas, it will be largely dependent on its Canadian operations to generate
revenues for the immediate future.
<PAGE>
Offering is Not Underwritten. The Shares are being offered by the Company
through John K. Seal, Vice President and a director. The offering is not being
conducted through an underwriter and the Shares are not being sold by a
broker-dealer registered with the Securities and Exchange Commission.
Lack of Copyright Registration of Software Program. The Company does not
expect that it will file for copyright registration for any software programs it
may develop. The Company's competitors could conceivably recreate, or "reverse
engineer," its tax preparation software and begin offering similar computerized
and standardized services. If this were to occur, the Company may not have any
practical legal recourse and could find that, in effect, it would be forced to
compete with its own system. However, because the Company's tax preparation
software will require updating at least annually to reflect changes in the tax
law, the Company believes that it would be difficult for any unauthorized party
to misappropriate the proprietary aspects of its software programs in a timely
and profitable manner. See "Business-Services Offered", -"Tax Preparation."
Importance of Refund Anticipation Loan Program and Electronic Filing. The
Company believes that its refund anticipation loan program will be an important
source of revenue in both the United States and Canada since members of its
targeted market typically desire tax refunds as quickly as possible. The success
of the program will depend, in part, on the continued availability of third
party financing for the loans. See "Business Services Offered - Refund
Anticipation Loan Program." To the extent that the Company does not recover the
full amount of a refund anticipation loan from the proceeds of the refund, the
Company's revenues may be adversely affected. While efforts will be made to
collect the shortfall from the customer, there can be no assurance that any or
all of the amount would be recovered. Additionally, an element critical to the
Company's operating strategy, and to the refund anticipation loan program in
particular, is the continuation of the IRS's and Revenue Canada's electronic
filing programs. Although the IRS has established a 98% electronic filing target
for the year 2000, the Company is aware of concerns expressed by the IRS and
certain members of Congress regarding the filing of fraudulent electronic
returns. The IRS has indicated that it has more difficulty catching fraudulent
refund claims from electronic returns than from traditional paper returns. Any
decision by either the IRS or Revenue Canada to suspend, terminate or
substantially modify its respective electronic return filing program could
materially adversely affect the Company's tax return preparation business, given
the Company's expectation that a large percentage of tax returns prepared by the
Company will be filed electronically.
Government Regulation. The Company's future results of operations will
depend in part on its ability to comply with Canadian, provincial, United States
and state regulations affecting tax return preparers. Currently, there are no
onerous Canadian, provincial, United States and or state regulations affecting
the Company's operations (see "Business-Regulation"). However, the Company is
aware of at least three states that have passed laws relating to the
implementation of refund anticipation loan programs, and that others may be
considering similar legislation. The Company has no current plans to enter
markets where these laws exist but if at a future time, it does enter any such
markets, it will assure that the refund anticipation loan program is in full
compliance with those laws. In addition, the Company expects that many of its
tax return preparers will be hired after they successfully complete a tax school
offered by the Company to the general public. Some states and provinces have
implemented, or are considering implementing, laws or regulations governing
proprietary schools. The Company does not believe that existing laws and
government regulations will materially affect the Company's operations; however,
the Company cannot predict whether a change will occur in such laws and
regulations, and if so, the economic or business effect of such change. To the
extent that any legislation has the effect of limiting the profitability of the
Company's refund anticipation loan program, or requires the Company to alter its
proposed operations to comply with proprietary school requirements, the
Company's operations could be adversely affected.
<PAGE>
Franchise Operations, United States Growth Limitation. The Company will
not be establishing a significant amount of United States franchises before the
year 2000 tax season; it expects to establish no more than 10 franchises for the
1999 tax season. Although the Company will begin the majority of its United
States operations with Company-owned tax preparation offices, the Company
anticipates that it will seek future growth primarily through establishing
franchise operations in the United States and expanding Tax Depot's franchise
operations in Canada. See "Business - Franchise Operations", -"General." There
can be no assurance that the Company will be able to sell United States
franchises or additional Canadian franchises on terms acceptable to it, or at
all, or that franchisees will be able to run franchised offices profitably. The
Company will seek to establish extensive training programs and quality-control
procedures with respect to its franchisees; however, there can be no assurance
that the programs and procedures will be effective in enabling franchisees to
run successful tax preparation businesses. In addition, failure by a franchisee
to provide service at acceptable levels may result in adverse publicity which
can materially adversely affect the Company's ability to compete in the
particular market in which the franchisee is located.
Liability for Franchisee Actions and Obligations. Both the Company and Tax
Depot will grant their franchisees a limited license to use their registered
service marks and, accordingly, there is risk that one or more of the
franchisees may be identified as being controlled by the Company or Tax Depot.
See "Business - General." In the event that a franchisee is not adequately
identified as a franchisee, the Company and/or Tax Depot could be held
vicariously liable for the debts and obligations of the franchisee so
misidentified.
Regulation of Franchise Operations. During the 1997 fiscal year, franchise
royalties accounted for 90% of Tax Depot's gross revenues. The profitability of
the Company's future operations will depend in large part on its ability to
comply with federal and state franchise regulations and Tax Depot's continued
ability to comply with Canadian and provincial franchise regulations. While
management currently believes that the Company and Tax Depot will be able to
comply with all applicable franchise regulations, there can be no assurance that
such regulations will not change and, if so, that any changes will not
materially adversely affect the Company's business. See "Business - Franchise
Operations -Regulation of Franchise Operations."
<PAGE>
Need for a Large Pool of Low Cost Seasonal Labor. In conducting their
business operations, the Company, Tax Depot and their franchisees will depend,
in part, on the availability of employees willing to work for little more than
the minimum hourly wage, with minimal benefits, for periods of less than a year.
See "Business - Tax Return Preparers." The Company's success in managing its
business and any expansion of it will depend upon the ability of it and its
franchisees to hire, train and supervise additional personnel, and to deal with
turnover rates for lower paid employees, which may be substantial. Moreover, if
the supply of this labor pool is reduced in the future for reasons within or
outside of the Company's control or if the Company is required to provide its
employees more extensive and costly benefits, either as a result of competition
or governmental regulation, the expenses associated with the Company's
operations could be substantially increased without the Company receiving
offsetting increases in revenues.
Inability of Stockholders to Vote on Tax Practice Acquisitions. The
Company will have the ability, pursuant to the affirmative vote of its Board of
Directors, to acquire new or existing tax practices with the proceeds of this
offering. The Board of Directors will use its business judgment in approving
such acquisitions which are currently unspecified and is not required to submit
each prospective acquisition to a vote of the stockholders. There is a risk that
acquisitions approved by the Company's Board of Directors will not be disclosed
to the stockholders until after consummation of the acquisitions and that such
decision would not have been acceptable to the stockholders.
Importance of Key Employees. The Company's future success will depend in
material part upon the continued services of the Company's senior management,
particularly Mr. Hewitt as well as upon its ability to attract and retain
capable middle management (such as regional and district directors for
Company-owned offices and consultants for franchised offices, as well as
training directors, tax advisors and computer personnel) with the specific
executive skills necessary to assist the Company and its franchisees. The
Company currently employs one district director in the United States and one
district director in Canada. The Company will face competition for such
personnel from numerous other entities, including competing tax return
preparation firms, most of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to attract and
retain personnel, and the inability to do so could have a material adverse
effect on the Company. The unexpected loss of the services of any of these
management personnel could have a material adverse effect upon the Company. The
Company currently maintains for its benefit a $1,000,000 key man life insurance
policy on the life of Mr. Hewitt but does not have an employment contract with
Mr. Hewitt or any other member of senior management. See "Management."
Business is Highly Seasonal. The tax preparation business is highly
seasonal, with the vast bulk of revenues being earned in the January 1 through
April 15 "tax season" in the United States and the January 1 through April 30
"tax season" in Canada in each year. The Company anticipates that 80% or more of
its gross revenues for a fiscal year will be generated in the tax season for
that year. Both the Company and Tax Depot are is on a May 1 to April 30 fiscal
year and may operate at a loss during the first eight months of each fiscal year
.(Tax Depot switched from a calendar fiscal year on December 31, 1997). There
can be no assurance that the Company's activities during the "off-season" will
not cause the cash resources of the Company to be strained on a regular basis.
If the Company were unable to obtain adequate sources of capital to fund its
operations during the "off-season," it would be forced to curtail any existing
expansions plans, cut back on its work force or take other steps to address its
cash flow needs. Moreover, in view of the very compressed time period in which
the Company's revenues arise in each year, it may have little or no time to
respond to unforeseen changes in competitive conditions, markets, pricing, new
product offerings by its competitors and similar matters which could materially
adversely affect the Company's competitive position during the relevant tax
season.
Competition. The tax return preparation industry is characterized by
intense competition among numerous tax service providers, accounting firms and
others. Most of these competitors are more established than the Company, with
substantially greater marketing, financial, personnel and other resources than
are currently available to the Company. See "Business -Fees." In the low to
mid-income taxpayer market targeted by the Company, competition is dominated in
the United States by H&R Block, Inc. ("H&R Block") and Jackson Hewitt, both of
which are large, well established national service providers. H&R Block also
operates and is a major competitor in Canada; Jackson Hewitt currently has no
Canadian operations. Additionally, many taxpayers in the Company's target market
prepare their own returns. The Company will seek to compete by providing prompt
service (generally, the Company anticipates that a customer's return can be
prepared in approximately one hour, assuming the customer has assembled all
appropriate records) at a reasonable price that is competitive in each
geographic market (the Company estimates that its average charge per return for
the 1998 tax season was $90 in the United States and C$60 in Canada). There are
few significant barriers to entry into the industry, or to the adoption by
competitors of some or all of the Company's marketing or operational strategies.
Changes in Tax Laws. The tax laws of Canada and the United States have
undergone a period of rapid and substantial change, and the Company anticipates
that this will continue for the foreseeable future. Although the Company
believes that the complexity and rapidity of the changes will provide it with an
important marketing tool, it is anticipated that the Company will incur
significant yearly costs in maintaining the currency of its tax return
preparation software and tax preparer materials. In addition, there have been
numerous proposals for simplification of United States tax laws, including "flat
tax" and "modified flat tax" proposals. Adoption of any such proposals could
reduce demand for the Company's services in the United States; adoption of a
strict flat tax could reduce demand substantially.
<PAGE>
Costs of Canadian Operations. The costs of opening additional Tax Depot
company offices and supporting franchises in Canada are not expected to be
materially less than the costs of opening or supporting comparable United States
offices. However, the Company anticipates that the average fee per return will
be approximately 33% less in Canada due to the less complex structure of
Canadian tax law. Accordingly, to achieve the same level of revenue per office
as a comparable United States office, a Canadian office will be required to
process more returns than a U.S. office. In addition, because the fees Tax Depot
will charge in Canada will be denominated in Canadian dollars there is risk that
fluctuations in the value of the Canadian dollar relative to the United States
dollar will result in losses from foreign currency exchanges. Canadian sales and
operations may also be affected by factors beyond the Company's control,
including imposition of governmental licensing or other controls or
restrictions, and changes in Canadian tax law.
Control by Principal Stockholder. The Company's common stock is divided
into two classes (see "Description of Capital Stock"). Purchasers in this
offering will own Class A Common Stock; all the outstanding Class B Common Stock
is owned by Mr. Hewitt, the President and Chief Executive Officer of the
Company. The Company's certificate of incorporation provides that the Class B
stockholders have the right to elect one more director than may be elected by
the Class A stockholders. As a consequence, Mr. Hewitt will have effective
control of the Board of Directors irrespective of how many shares of Class A
Common Stock are outstanding.
No Cash Dividends. Since its inception, the Company has not paid any cash
dividends on the Class A Common Stock or Class B Common Stock. The Company
intends to retain future earnings, if any, to provide funds for the operation of
its business and, accordingly, does not anticipate paying any cash dividends in
the reasonably foreseeable future. The payment of future dividends is within the
discretion of the Board of Directors and will depend upon the Company's future
earnings, if any, its capital requirements, financial condition and other
relevant factors.
Management Discretion in Allocating Proceeds. The Company expects to use
the proceeds of the offering to establish approximately 30 new tax preparation
offices at a cost of $50,000 each, purchase 18 existing tax practices at
approximately $100,000 each and develop new software with approximately
$475,000. See "Use of Proceeds." The Company's management, however, has the
flexibility to reallocate some or all of the proceeds among these uses as
business conditions necessitate and also to allocate some or all of the proceeds
to general corporate purposes. Accordingly, there is a risk that the proceeds
will not be used exactly as described in the Prospectus.
No Independent Directors. The Company does not currently have any
independent (non-employee) directors on its Board. It also does not have an
Audit Committee or a Compensation Committee. All decisions regarding the
business of the Company and its employee and officer compensation are currently
made by its officers. The Company expects to appoint two independent directors
before May 1999. It also intends to establish an Audit Committee and
Compensation Committee, the majority of whose members will be independent
directors.
<PAGE>
Insurance Coverage. The Company maintains $2,000,000 of general liability
insurance. The Company does not carry insurance coverage for "errors and
omissions" to cover potential IRS imposed penalties for errors on prepared tax
returns. Historically, the cost of these penalties has not been significant to
the Company, however, there is a risk that in the future a large penalty could
be imposed that would have to be borne by the Company.
Arbitrary Determination of Offering Price. The offering price of the
Shares has been determined arbitrarily by the Company based upon the Company's
capital needs and does not necessarily bear any relationship to the Company's
assets, book value or financial condition, or to any other recognized criterion
of value.
Loss of Goodwill. Tax Depot has been operating under the "U&R Tax Depot"
name since May 1994. See "Business General." By early 1999, the Company expects
to change the name of the Tax Depot owned and franchised offices to "Liberty Tax
Service." Tax Depot may suffer a loss of goodwill associated with the name if
former and potential new customers are not aware of the name change.
USE OF PROCEEDS
Assuming this offering is fully sold, the net proceeds, after deducting
estimated offering expenses of $100,000, will be approximately $3,775,000. The
Company expects to use the net proceeds as follows1:
Aggregate
Use Cost Percentage
Establishment of new tax preparation
offices (30 offices at $50,000 each)(2): $1,500,000 40%
Purchase of existing tax practices
(18 practices at $100,000 each)(3): $1,800,000 48%
Software development: 475,000 12%
========== =====
$3,775,000 100%
========== =====
In the event that only the Minimum Offering Amount is sold, the net
proceeds, after deducting estimated offering expenses of $100,000, will be
approximately $400,000. The Company expects to use the net proceeds
as follows:
Purchase of existing tax practices
(8 practices at $50,000 each (4).): $400,000 100%
The proceeds of the sale of additional Shares (above the Minimum Offering
Amount) will be applied to purchasing additional tax practices, then to software
development and finally to the establishment of new tax preparation offices.
- ------------------
1 The Company also expects to open about 100 new franchised locations (90%
in Canada and 10% in the United States), however, none of the proceeds will be
allocated to the costs of these franchises.
2 Most of these new offices are expected to be opened in Canada, however, a
small amount may be opened in the United States. The Company has not yet entered
into any agreements for these new offices.
3 Existing tax practices are expected to be opened in both the Canadian and
United States markets. The Company has not yet entered into any agreements to
purchase these practices.
4 The Company will purchase less expensive practices if only the minimum
offering proceeds are received.
<PAGE>
While the foregoing represents the Company's best estimate of its expected
use of net proceeds, the amounts actually expended for the purposes set forth
above may vary significantly depending upon numerous factors, including the
actual costs incurred in purchasing existing tax practices, leasing and
furnishing office space, and personnel costs. The Company reserves the right to
reallocate proceeds among the foregoing uses and for general corporate purposes.
DILUTION
The offering price per Share is more than the price paid per share for
the Company's securities in the past. Thus, purchasers in the offering will
experience immediate dilution of the value of their shares in the amount of
$4.65 per share.
In connection with the incorporation of the Company, Mr. Hewitt purchased
1,000 shares of Class B Common Stock for $.10 per share. In December 1996, Mr.
Hewitt capitalized the Company by contributing to it certain securities with an
aggregate market price at the time of contribution of $176,000. In return
therefor, Mr. Hewitt was issued 44,000 shares of Class B Common Stock resulting
in a price per share of $4.00. In July 1997, the Company sold 200,000 shares of
Class A Common Stock to a select group of investors for a price of $10.00 per
share. On January 10, 1997, the Company declared a stock dividend of one share
of Class A Common Stock or Class B Common Stock for each such share outstanding,
resulting in an aggregate of 400,000 shares of Class A Common Stock and 90,000
shares of Class B Common Stock outstanding as of the date of this
Prospectus.
At April 30, 1998, the net tangible book value of the Company's Class A
Common Stock combined with the Class B Common Stock (which is convertible into
Class A Common Stock) was approximately $5.12 per share. Net tangible book value
represents the amount of the Company's shareholders' equity (net tangible assets
less liabilities; $2,509,085) divided by the number of shares outstanding;
490,000.
Net book value dilution per share represents the difference between the
amount per share paid by purchasers of the Class A Common Stock in the offering,
$12.50 and the pro forma net book value per share of the Common Stock
immediately after completion of the offering. After giving effect to the sale by
the Company of 310,000 shares of Class A Common Stock in the offering (assuming
that the maximum number of shares offered is sold) and the application of the
estimated net proceeds therefrom, the pro forma net book value of the Company
would have been 6,284,085 or $7.85 per share. This represents an immediate
increase in net book value of $2.73 per share to the existing stockholders and
an immediate dilution in net book value of $4.65 per share to purchasers of the
Class A Common Stock in the offering, as illustrated in the following table.
Public offering price per share $12.50
Net book value per share as of April 30, 1998 $5.12
Increase per share attributable to new investors $2.73
Pro forma net book value per share after the offering $7.85
Net book value dilution per share to new investors $4.65
The following table sets forth the difference between the existing
stockholders and the purchasers of shares in the offering with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid:
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
Existing
Stockholders 490,000 61.25% $2,176,100 36% $ 4.44
New Investors 310,000 38.75% $3,875,000 64% $12.50
------- ------- ---------- ----
Total 800,000 100.00% $6,051,100 100%
<PAGE>
PLAN OF DISTRIBUTION
The Shares are being offered by the Company, on a best efforts basis,
through John K. Seal, a director, Vice President and Treasurer of the Company.
Mr. Seal will not receive any separate compensation for his efforts to sell the
Shares.
Minimum Offering Amount; Escrow Arrangements. The Minimum Offering Amount
is 40,000 Shares at $12.50 per Share and the Minimum Offering Date is 30 days
after the date of effectiveness of the Registration Statement. The Company has
entered into an agreement with First Union National Bank (the "Escrow Agent"), a
national bank which is not affiliated with the Company, Tax Depot, or any of the
officers or directors of the Company or Tax Depot to act as Escrow Agent. The
Escrow Agent will set up an interest bearing escrow account (the "Escrow
Account") into which the proceeds of any Shares sold through the Minimum
Offering Date will be placed.
Officers and directors of the Company may purchase Shares as part of this
offering but are not obligated to do so. Any such purchases will be on terms
identical to those applicable to other investors. The Company has been advised
that officers and directors currently intend to purchase an aggregate of
22,900 Shares in this offering (15,000 by John Hewitt, 5,000 by John Seal, 1,400
by Martha O'Gorman and 1,500 by Donna Halligan). The purchases of Shares by
officers and directors may be used to meet the Minimum Offering Amount.
Repayment if Minimum Conditions Not Met. In the event that the Minimum
Conditions are not met, either by receipt of proceeds from the sale of the
Minimum Offering Amount or by subscription commitments therefor, the Escrow
Agent will return the subscription proceeds from the sale of the Shares to
the investors with a pro rata share of earned interest. Thereafter, no more
Shares will be offered for sale and any outstanding subscriptions will become
null and void.
Satisfaction of Minimum Conditions. The Escrow Agent will determine that
the Minimum Conditions are met if, on the Minimum Offering Date, the funds in
the Escrow Account are equal to the Minimum Offering Amount or the Escrow Agent
has firm subscriptions for Shares equal to the Minimum Offering Amount or a
combination thereof. Once the Minimum Conditions have been met, the Escrow Agent
will release the funds in the Escrow Account to the Company and close the
account. Proceeds from subsequent sales of Shares will not be escrowed.
<PAGE>
LEGAL PROCEEDINGS
To date, officers of the Company have been involved in one legal
proceeding which was voluntarily dismissed by the plaintiff without prejudice
and Tax Depot was a party to one action that was recently dismissed and is a
party to one pending action which arose in the ordinary course of its business.
Management does not believe that such proceeding will, individually or in the
aggregate, have a material adverse effect on the financial condition or
operations of the Company.
In January 1998, Jackson Hewitt filed a complaint in Virginia Beach
Circuit Court against Messrs. Hewitt and Seal in their individual capacities.
The complaint alleged breach of their respective covenants not to compete (see
"Risk Factors - Existence of Restrictive Covenants and Potential for Litigation
if Violated") in connection with the operation of the Company's tax preparation
offices in Columbus, Ohio. The complaint also alleged that each of Mr. Hewitt
and Mr. Seal had tortiously interfered with Jackson Hewitt's contract with the
other man. Jackson Hewitt sought a declaratory judgment and a preliminary
injunction requiring Messrs. Hewitt and Seal to suspend their Columbus, Ohio
operations. Jackson Hewitt voluntarily dismissed both suits, without prejudice,
in early February 1998. Although the Company was not a party to the suit and did
not participate in Messrs. Hewitt's and Seal's defense, the Company intends to
vigorously defend itself if named as a party in any future legal actions that
Jackson Hewitt may bring alleging breach, in connection with the Company's
business, of the restrictive covenants binding Mr. Hewitt, Mr. Seal and Ms.
O'Gorman.
In February 1995, a predecessor to Tax Depot filed a trade mark
application with the Registrar of Trade Marks in Ottawa, Canada for the "Tax
Depot" mark. In July 1996, the registration was opposed by Ms. Heidi Gordash,
who alleged prior use. On July 17, 1998, the matter was settled. Pursuant to
such settlement, Tax Depot agreed to change its trade name to Liberty Tax
Service by May 1999 and Ms. Gordash withdrew her suit with prejudice.
Finally, a tax rebate discounting agent for Tax Depot, who acted solely as
an agent for Tax Depot in financing tax rebate discounts and not as an employee
or franchisee, has been sued by a group of clients for whom she is alleged to
have prepared inaccurate and/or fraudulent returns in order to increase their
rebates. Both H&R Block and Tax Depot were also named as parties to this suit.
Tax Depot believes it has no liability for the agent's actions and intends to
vigorously defend this suit.
<PAGE>
MANAGEMENT
The following sets forth certain information regarding the Company's
directors and executive officers.
Name Age Position with the Company
John T. Hewitt 49 Chairman of the Board of Directors, Chief
Executive Officer and President
John K. Seal 47 Director, Vice President of Operations and
Treasurer
Martha O'Gorman 40 Director and Vice President of Marketing
Donna Halligan 46 Director, Vice President of Franchise
Operations and Secretary
Kathleen Curry 35 Director, Vice President of Technology and
Legal Counsel
Karen Robinson 34 Vice President and Regional Director in the
United States
John T. Hewitt has been Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since its formation in 1996.
Before that, he was the founder of Jackson Hewitt, where he served as Chairman
of the Board of Directors and Chief Executive Officer from 1982 (and President
from 1986) to 1996. During Mr. Hewitt's tenure, Jackson Hewitt grew from six
offices to over 1,300 offices. From 1970 through 1981, Mr. Hewitt was employed
by H&R Block, becoming a Regional Director in charge of over 200 offices in
Pennsylvania, New Jersey and Delaware. Together with his father, Daniel J.
Hewitt, Mr. Hewitt created "Hewtax," the basic tax return preparation software
used by Jackson Hewitt.
John K. Seal has been Vice President of Operations, Treasurer and a
director of the Company since shortly after its formation. From 1993 through
1996, Mr. Seal served as Director of Field Operations for Jackson Hewitt. From
1990 through 1993, Mr. Seal owned and operated seven Jackson Hewitt franchise
offices in the Rochester, New York territory and until 1997, he owned and
operated four franchised Jackson Hewitt offices in Las Vegas, Nevada. Prior to
joining Jackson Hewitt, Mr. Seal served as a financial manager at General Foods
for eight years and also owned and operated a successful mini-storage business.
Martha O'Gorman has been Vice President of Marketing and a director of the
Company since its formation in 1996. From 1989 through 1996, Ms. O'Gorman served
as Director of Communications for Jackson Hewitt. Before that, Ms. O'Gorman was
a partner in an advertising firm in Virginia Beach, Virginia.
<PAGE>
Donna Halligan has been Vice President of Franchise Operations, Secretary
and a director of the Company since its formation in 1996. From 1994 to 1996 she
was employed by Jackson Hewitt as Director of Training, Director of Franchisee
Operations and, most recently, Divisional Director in charge of company stores.
Prior to joining Jackson Hewitt's headquarters operation, Ms. Halligan owned and
operated six Jackson Hewitt franchise offices in the Syracuse, New York
territory from 1987 to 1994. Before that, Ms. Halligan operated an independent
tax preparation firm and worked for H&R Block for five years as a tax preparer.
Kathleen Curry has been the Vice President of Technology, Legal Counsel
and a director of the Company since July 1997. From 1992 through 1995, Ms. Curry
served variously as Corporate Attorney, Director of Tax and Software and
Regional Director for Jackson Hewitt. For a brief period during the latter part
of 1995 and early part of 1996, Ms. Curry served as a Product Manager for Best
Programs, Inc.
Karen Robinson has been the United States Regional Director of the Company
since September 1997. From 1992 to 1997, Ms. Robinson held various positions,
including Director of Training, Franchise Operations, Liaison and Troubleshooter
for Jackson Hewitt. In 1997, Ms. Robinson obtained her master's degree from Old
Dominion University, where she served as an Adjunct Professor of Education from
1995 through 1997.
All directors (except directors appointed to fill vacancies) are elected at
each annual meeting of stockholders for a term of one year, and will hold office
until their successors are elected and duly qualified. See "Description of
Capital Stock - General" for a description of the rights of holders of each
class of Common Stock with respect to the election of directors. Directors
receive no compensation for serving as directors. All officers serve at the
discretion of the Board of Directors.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of both
Class A Common Stock and Class B Common Stock owned, as of the date of this
Prospectus, by (a) each person who, to the knowledge of the Company, is the
beneficial owner of 5% or more of the outstanding shares of Class A or Class B
Common Stock, (b) each of the Company's directors, (c) each of the Company's
executive officers, and (d) all of the Company's executive officers and
directors as a group.
<PAGE>
Common Stock
------------------------------------------------
Amount Own Percent of Class
---------------------- --------------------
Beneficial Owner Class A Class B Class A Class B
- ---------------- ------- ------- ------- -------
Directors and Executive
Officers: (1)
John T. Hewitt 141,150(2) 90,000 35% 100%
John K. Seal 13,162(3) 0 4% 0
Martha O'Gorman 4,000(4) 0 1% 0
Donna Halligan 7,000(5) 0 2% 0
Kathleen Curry 4,000(6) 0 1% 0
Karen Robinson 4,000(7) 0 1% 0
All Directors and Executive
Officers as a group
(six persons) 173,312(8) 90,000 41% 100%
Other owners of 5% or
more of outstanding Shares:
Scott Lake Holdings Ltd.(9) 100,000 0 25% 0
- --------------
(1) The address for each director and executive officer is 2610 Potters Road,
Virginia Beach, Virginia 23452.
(2) includes 5,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(3) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(4) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(5) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(6) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(7) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(8) includes 25,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(9) The address for Scott Lake Holdings, Ltd. is 280-6815 8th St. N.E.,
Calgory Alberta T2P7B7 and the beneficial owner is Gary Ibbotson, a
director of Tax Depot.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General. The Company is authorized to issue 1,000,000 shares of capital
stock, consisting of 800,000 shares of Class A Common Stock, 100,000 shares of
Class B Common Stock and 100,000 shares of Preferred Stock, all par value $1.00
per share. As of the date of this Prospectus, there were 400,000 shares of Class
A Common Stock , and 90,000 shares of Class B Common Stock outstanding. The
Preferred Stock has not yet been designated and so no shares are outstanding.
Holders of both Class A and Class B Common Stock are entitled to dividends
when, as and if declared by the Board of Directors and in such amounts as the
Board of Directors may deem advisable. See "Risk Factors - No Cash Dividends."
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of Common Stock are entitled, after
payment or provision for payment of the debts or other liabilities of the
Company, and subject to the prior rights of holders of any Preferred Stock which
may then be outstanding (none is currently designated under the Company's
certificate of incorporation), to share ratably in the remaining assets of the
Company. Neither class of Common Stock possesses preemptive rights.
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote at a meeting of stockholders. However,
with respect to the election of directors, holders of each class of Common
Stock, voting as a class, are entitled to elect directors on a pro rata basis in
proportion to the number of shares outstanding in each class, except that
holders of the Class A Common Stock are entitled to elect one less director than
the number of directors elected by holders of the Class B Common Stock. Voting
in each class is on a non-cumulative basis.
A holder of the Class B Common Stock may, at the holder's option, elect to
convert the Class B Common Stock into an equal number of fully paid and
non-assessable shares of Class A Common Stock. The right may be exercised with
respect to any portion or all of a holder's shares and at any time.
Preferred Stock may be issued in the future. If the Company's Board of
Directors does designate a class of preferred stock for issuance, it will be
offered for sale to promoters on the same terms as to existing stockholders.
Alternatively, such issuance will be approved by a majority of the Company's
independent directors who do not have an interest in the transaction and who
have access, at the Company's expense, to legal counsel.
For one year following the date of effectiveness of the offering, the
Company will not issue or reserve for issuance, more than 83,250 stock options.
There is no public market for the Company's securities and it is not
anticipated that a market will develop for the Shares following this offering.
Anti-Takeover Provisions of Delaware Law. As a Delaware corporation, the
Company is subject to certain anti-takeover provisions of the Delaware General
Corporation Law (the "Delaware Law"). Under the business combination provisions
of Section 203 of the Delaware Law ("Section 203"), a Delaware corporation may
not engage in any business combination with any interested stockholder for a
period of three years following the date such stockholder became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, or (ii) upon
completion of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, (a) shares owned by persons who are directors and also officers and
(b) employee stock plans, in certain instances), or (iii) on or after such date
the business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders by at least 66% of the outstanding
voting stock that is not owned by the interested stockholder. Section 203
defines an interested stockholder to be any person who (i) owns, directly or
indirectly, 15% or more of the outstanding voting stock of the corporation or
(ii) is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately before the date on which it is sought to be
determined whether such person (and the affiliates and the associates of such
person) is an interested stockholder. Section 203 defines business combinations
to include certain mergers, consolidations, asset sales, transfers and other
transactions resulting in a financial benefit to the interested stockholder.
<PAGE>
The restrictions imposed by Section 203 do not apply to a corporation if
(i) the corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 or (ii) the corporation, by
the action of stockholders holding a majority of outstanding stock, adopts an
amendment to its certificate of incorporation or by-laws expressly electing not
to be governed by Section 203 (such amendment will not be effective until 12
months after adoption and does not apply to any business combination between the
corporation and any person who became an interested stockholder of the
corporation on or before such adoption). The Company has not elected out of
Section 203. Section 203 could make it more difficult for a third party to gain
control of the Company, and have a depressive effect on the price obtainable for
the Class A Common Stock.
EXPERTS
The financial statements of the Company as of April 30, 1998 and April 30,
1997 included in this Prospectus or in this Registration Statement of which this
Prospectus forms a part, have been audited by Hamilton Dwyer & Company, P.C.,
independent certified public accountants whose report thereon appears herein and
elsewhere in the Registration Statement. Such financial statements are included
in reliance upon the reports of Hamilton Dwyer & Company, P.C., given upon the
authority of such firm as an expert on accounting and auditing.
The financial statements of Tax Depot for the fiscal year ended 1996 and
1997 included in this Prospectus or in this Registration Statement of which this
Prospectus forms a part, have been audited by BDO Dunwoody, independent
chartered public accountants whose report thereon appears herein and elsewhere
in the Registration Statement. Such financial statements are included in
reliance upon the reports of BDO Dunwoody, given upon the authority of such firm
as experts on accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the Delaware Law, the Company's
certificate of incorporation provides that directors of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware Law, relating
to prohibited dividends or distributions or the repurchase or redemption of
stock, or (iv) for any transaction in which the director derives an improper
personal benefit. In addition, the Company's bylaws provide for indemnification
of the Company's officers and directors to the fullest extent permitted under
Delaware law.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions or otherwise, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
The Company maintains directors' and officers' liability insurance against
any actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including such as fraudulent, dishonest or criminal acts or self-dealing.
BUSINESS
General
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services for taxpayers primarily in the
lower- to middle-income tax brackets. The Company intends to provide its
services through both Company-owned and franchised offices in selected
locations. The Company seeks competitive advantage in its markets by (i)
providing prompt tax return preparation at a reasonable price, (ii) providing
electronic filing services, (iii) providing ancillary services, such as audit
assistance, tax return checking and taxation seminars, and (iv) offering a
refund anticipation loan program under which the Company will arrange, for a
fee, loans to customers based upon the size of the customers' expected tax
refunds.
The Company owns a majority interest in Tax Depot, which has been
providing tax preparation services in Canada since 1972. During the 1998 tax
season, there were 207 Tax Depot offices, 13 of which were owned by Tax Depot
and the remainder of which were owned by Tax Depot franchisees. In addition, the
Company operated five tax preparation offices in Columbus, Ohio. All Tax Depot
offices currently operate under the "U&R Tax Depot" name, while the Company's
Columbus, Ohio offices operate under the "Liberty Tax Service" name. The Company
expects that Tax Depot Tax Depot and its franchisees will also operate their tax
return preparation offices under this service mark by early 1999 pursuant to a
license agreement that Tax Depot will enter into with the Company.
As of April 30, 1998, the Company had 32 employees and Tax Depot had 52
employees. Upon the conclusion of the tax season, as of May 15, 1998, the
Company had 21 employees and Tax Depot had 15 employees.
<PAGE>
Tax Depot. Tax Depot is a closely-held corporation incorporated under the
law of the Province of Manitoba in Winnipeg. Tax Depot was formed in May 1994 as
a wholly-owned subsidiary of Datatax Business Services, Ltd. ("Datatax") which
was also the franchisor for U&R Tax Services, Ltd. Datatax assigned and licensed
those franchises to Tax Depot which then changed the name of the franchises to
U&R Tax Depot. The Company purchased its 60% interest in Tax Depot from Datatax
in September 1997. Datatax still owns the remaining 40% interest in Tax Depot.
Pursuant to a Shareholders Agreement entered into at the time of the Company's
investment in Tax Depot, the Company has the right to nominate two of Tax
Depot's three directors, while the other shareholder has the right to nominate
one director. During the 1998 tax season, Tax Depot prepared 93,224 tax returns
and had net revenues of C$2,143,624.
Tax Depot recently entered into a management agreement with Save-Smart
Insurance and Financial Services, Inc. ("Save Smart") to share office space with
it in selected Wal-Mart stores in Canada under the name "Save Smart Tax Depot."
Tax Depot provides tax return preparation services (either directly from Tax
Depot or from one of its franchisees) while Save Smart provides insurance
products. Tax Depot pays Save Smart a monthly fee equal to the greater of
C$2,500 or 10% of its net revenues for each Save Smart Tax Depot location plus
an additional 5% of such net revenues. Most of the locations will be leased by
Tax Depot on behalf of its franchisees who will reimburse Tax Depot for the
monthly fee paid to Save Smart. The term of the management agreement is until
January 2000, subject to renewal for an additional two-year period, unless
earlier terminated because of a termination of Save Smart's agreement with
Wal-Mart. During the 1998 tax season, there were 33 Save Smart Tax Depot
offices, 28 of which were franchises. The Company expects to expand to between
60 and 80 Save Smart Tax Depot locations within the next two years, most of
which will be franchise locations. Once Tax Depot begins using the name "Liberty
Tax Service," these locations will operate under the name "Save Smart Liberty
Tax Service."
Liberty Tax Service. In December 1997, the Company purchased one existing
tax preparation office in Columbus, Ohio. During the 1998 tax season, the
Company opened four more offices in that area which operated under the "Devore
Tax Service" name. In May 1998, the Company changed the name of the offices to
"Liberty Tax Service." Liberty Tax Service provides tax return preparation
services, electronic filing services, audit assistance, tax return checking,
refund loans and tax seminars to its customers.
Services Offered
Tax Preparation. There are approximately 120,000,000 and 20,000,000
individual tax returns filed annually in the United States and Canada,
respectively. The Company will offer tax return preparation services to the
public, focussing its efforts on marketing to persons with incomes of less than
$35,000/C$35,000 per year. Based upon management's prior experience in the
industry, the Company anticipates that over 60% of its customers will have
incomes below $35,000/C$35,000, and that over 30% will have incomes below
$20,000/C$20,000 per year. The Company believes that there is a significant
market of people in these income brackets that do not wish to prepare their own
returns, or who may face relatively complex situations (such as divorce,
multiple jurisdiction filings, multiple deductions or other considerations) but
who are unwilling or unable to pay the level of fees charged by accountants or
tax attorneys.
<PAGE>
The Company's tax preparers use personal computer based software to
conduct comprehensive client interviews and to prepare tax returns. Tax Depot
offices prepare tax returns using Tax Depot proprietary software. The average
amount of time required to prepare tax returns in Canada is approximately
one-half hour, assuming the customer has all relevant records and is able to
answer all questions asked. Tax Depot is currently in the process of rewriting
and updating that software in order to keep pace with recent technological
developments. The Company used off-the-shelf software to prepare U.S. tax
returns during the 1998 tax season and plans to use similar software during the
1999 season, with appropriate updates and modifications. The Company prepares
U.S. tax returns on average in approximately one hour. The Company is in the
process of determining how to meet its software needs for the 2000 tax season:
it may develop software on its own or with a joint venture partner or it may
continue to use off-the-shelf software.
In assessing its software needs, the Company focuses on meeting four
requirements: (i) enabling the Company to provide consistent, high quality tax
preparation services, (ii) enabling the Company to utilize persons as tax return
preparers who are not as dependent upon technical tax skills as may be required
in other operations, (iii) allowing tax return preparers to concentrate more
closely upon providing quick and friendly service to customers, and (iv)
enabling the Company to electronically file a customer's tax return more rapidly
and efficiently in order to allow the customer to obtain a tax refund more
quickly.
Electronic Filing. The Company offers electronic filing services to its
customers in Canada and in the U.S. at no extra cost. Because an electronically
filed return is handled on a priority basis by both the IRS and Revenue Canada,
a client receives a tax refund much more quickly than if the return is manually
filed. The Company anticipates that speedy refunds will be a major marketing
tool for the Company both in the United States and Canada. The customer will
also receive speedy IRS or Revenue Canada acknowledgement that the return is
mathematically correct. In management's experience, over 80% of returns which
are filed electronically receive refund checks within 21 days in Canada and
within 14 days in the United States. The Company anticipates that over 80% of
the returns it prepares will be filed electronically. See "Risk Factors -
Importance of Refund Anticipation Loan Program and Electronic Filing." The
Company will also, for a fee, electronically file returns prepared by non-client
taxpayers or other tax preparers.
Refund Anticipation Loan Program. Because the Company believes that the
speed of obtaining a refund, or cash in anticipation of a refund, will be
important to the Company's targeted market, and in order to compete with other
tax return preparation firms, the Company will offer a refund anticipation loan
service. A refund anticipation loan is a loan made to a taxpayer, secured by the
anticipated tax refund payment, and with full recourse to the taxpayer. Refund
loans will either be provided directly by the Company using line of credit
financing or by a third party lender as arranged by the Company. These loans
will enable the Company's customers to receive their refunds within 24 hours of
the time the return is filed with the IRS or Revenue Canada. The Company
anticipates that as many as 25% of the Company's customers will utilize this
service.
<PAGE>
The procedure with respect to third party refund loans will generally be
as follows:
o The customer's return is prepared;
o The customer completes a refund anticipation loan application (in
which the taxpayer/borrower assigns the rights to the refund to
the lending institution);
o The tax preparer or other office worker electronically transmits the
customer's tax return to Company headquarters which files the tax
returns electronically with the IRS or Revenue Canada;
o Revenue Canada or the IRS acknowledge that the return is
mathematically correct and Revenue Canada acknowledges that no
government liens exist against the customer;
o Once approved by the IRS or Revenue Canada, the tax return is
electronically messengered to the participating bank for final
approval;
o Upon confirmation from the bank of a loan approval, the Company
electronically advises the originating office of the approval; and
o The originating office prints out a check for the amount of the
approved loan (the refund amount less bank charges and the Company's
return preparation fee which includes a loan application fee), which
can then be distributed to the customer.
Substantially the same procedures will be followed when the Company
provides the loan directly, except that no third party approval of the loan will
be required.
Typically within two to three weeks of the electronic filing, the IRS
or Revenue Canada wires the refund amount directly to the lender. Fees for the
loan and the preparation of the return are deducted from the check amount,
thereby requiring no cash outlay by the taxpayer and assuring payment to the
Company. The costs of writing off bad debt that may be incurred in the program
are factored into the fees charged for the loans, however, the Company will make
reasonable attempts to collect any unrecovered funds. See "Risk Factors -
Importance of Refund Anticipation Program."
During the 1998 tax season, the Company had arrangements with the Bank of
Montreal (for Canadian loans) and Bank One (for U.S. loans). The Bank of
Montreal provided Tax Depot with a $9.25 million line of credit to fund refund
loans. The facility bore interest at the prime rate as reported in The Wall
Street Journal plus 1%, and was personally guaranteed by Mr. Hewitt and Gary
Ibbotson, one of Tax Depot's directors. The facility expired in May 1998, but
the Company expects to renew it in January 1999 for the 1999 tax season. The
line of credit provided the funds by which Tax Depot made refund anticipation
loans generating revenues of 15% of the first C$300 loaned and 5% of
the balance. (If the loan was made by a franchisee using Tax Depot's line of
credit, Tax Depot received 48% of this revenue.) The Company's arrangement with
Bank One was established through Drake Software, a third party provider of tax
preparation software. Under the arrangement, Bank One funded the loans for a fee
of $70-80 per refund; Drake Software received a fee of $2 per refund for its IRS
transmittal services and the Company received a de minimis referral fee from
Bank One plus the $25 loan application fee from each customer.
Training Programs and Other Ancillary Services. The Company provides
extensive training for tax preparers at Company-owned offices. These employee
training sessions cover substantive tax law, policies and procedures for office
conduct, use of computer software and client interaction. Additionally, the
Company provides training to franchisees. These sessions are devoted to
operational aspects of the business. Training of franchisee employees with
respect to tax law, policies and procedures and software use is provided by the
franchisee after he or she has completed the Company's training. The Company
does not train franchisee employees.
<PAGE>
The Company will also offer certain ancillary services which will be
covered by the initial fee paid by the customer, including audit assistance, tax
return checking, taxation seminars and schools.
Growth Strategy
The Company intends to follow a growth strategy involving the
establishment of both Company- and franchisee-owned offices as well as the
acquisition of independent tax practices. Initially, the Company intends to open
up to 30 Company-owned offices and up to 10 franchise locations in the United
States for operation during the 1999 tax season. See "Use of Proceeds."
Thereafter the Company will seek to implement a more extensive franchise program
which it anticipates will be the primary source of its growth. See "Business -
Franchise Operations" and "Risk Factors - Franchise Operations, United States
Growth Limitation." The Company will also seek to grow through the acquisition
of existing tax return preparation practices. The Company anticipates that, for
the immediate future, any such acquisitions will be for cash (see "Use of
Proceeds"); however, the Company is not restricted from using securities of the
Company for such acquisitions and may do so if the opportunity arises. The
Company anticipates that growth of Tax Depot's operations will be through
franchising; Tax Depot expects to grant up to 120 new franchises for the 1999
tax season.
The Company's ability to open additional Company-owned offices and to
acquire additional tax practices, and the size of the markets and the offices in
which they are opened, will depend upon the Company's ability to generate funds
through operations, to obtain financing or to attract additional capital, while
the Company's ability to establish a franchise program will depend upon the
Company's ability to develop a franchising structure and to attract desirable
franchisees. There can be no assurance that the Company will be successful in
any such endeavors. See "Risk Factors - History of Operating Losses," " - Need
for Additional Financing," " - Competition" and " - Franchise Operations,
United States Growth Limitation."
As a result of certain restrictive covenants binding upon John T. Hewitt,
the Company's Chairman, Chief Executive Officer and President, and John K. Seal,
the Company's Director of Operations and Treasurer, the Company will only seek
to expand, through the 1999 tax season, in selected regional markets in the
United States, although such markets have not been determined as of the date
hereof. See "Risk Factors - Existence of Restrictive Covenants and Potential for
Litigation if Violated" for a description of the restrictive covenants
pertaining to Messrs. Hewitt and Seal. The Company will, however, be able to
focus its business activities more broadly in the Canadian market.
A second aspect of the Company's growth strategy involves achieving
"critical mass" in any market it enters, defined by the Company as having at
least one office for every 200,000 residents in the market area. The Company
believes that it is necessary to achieve this critical mass in order to provide
efficient marketing and advertising programs, and to effectively develop market
share. The Company intends to enter a particular market only when it believes it
can attain critical mass within one year. As a consequence of the foregoing, the
Company anticipates that it will seek to expand regionally rather than
attempting to establish a national presence.
<PAGE>
Management Structure
Both Tax Depot's and the Company's managerial control system is based upon
a central office-regional management format. The central office is responsible
for overall policy, advertising, marketing, training, software updating and
franchising. Tax Depot currently has two management offices in Canada and the
Company has its management office at the Virginia Beach headquarters. As the
Company's U.S. operations expand, the Company intends to implement its policies
through regional and district managers (who will supervise groups of
Company-owned offices) and franchise consultants (who will supervise groups of
franchised offices). Each Company-owned office will be overseen by an office
manager. Thereafter, the management structure will be implemented as the growth
in the number of Company-owned and franchised offices requires.
Fees
The Company anticipates that revenues will be derived from (i) fees for
tax preparation services, (ii) fees for electronically filing tax forms for
non-customers, (iii) fees from customers for initiating tax refund loans (and
possibly referral fees from lenders), (iv) fees and royalties from franchisees,
and (v) proceeds from selling purchased practices to franchisees.
The Company's fees for specific tax services will differ by region and by
franchisee. The Company will provide franchisees with a listing of suggested
prices for all tax preparation services provided by its offices. Franchisees,
however, will have complete pricing autonomy. Company-owned stores will adhere
to the price schedules which management recommends for their markets. The
Company estimates that the average fee per tax return will be approximately $90
in the United States and C$60 in Canada. For individuals who prepare their own
returns or have them prepared elsewhere, the Company will charge a fee,
currently C$30 in Canada and estimated to be $35 in the United States, for the
electronic filing of the return. The Company does not charge customers in
Canada, and will not charge customers in the United States, an additional fee
for filing electronically if the Company prepares the return nor does it
anticipate charging interest or late fees.
The Company anticipates that it will charge customers a fee of
approximately $70 to $80 for arranging refund anticipation loans, which the
Company will pay to the bank providing the funding. If the Company provides the
loan directly through line of credit financing, it will retain this bank fee. In
either case, however, the Company will also keep the $25 loan application fee
which will be included in the tax return preparation fee paid by the customer.
The actual amount of such fees will depend upon local competitive conditions,
the level of bank fees actually charged and customer acceptance. In Canada, the
Tax Rebate Accounting Act limits the amount that a tax service provider or
lender may charge for these loans: the taxpayer must receive not less than 85%
of the first C$300 of the anticipated refund and 95% of the balance. Most of
these loans are made by Tax Depot franchisees under an arrangement where Tax
Depot funds the loan and keeps 48% of the fee while the other 52% is kept by the
franchisees (franchisees may instead fund the loans themselves and pay royalties
to Tax Depot although it is expected that less than 10% will request this
arrangement).
<PAGE>
Property
The Company leases its Virginia Beach headquarters, consisting of 3,000
square feet of office space, at a monthly rental of $2,700 (including heat,
utilities and janitorial services). The lease expires in April 2000. Tax Depot
leases two management offices in Canada: the main office in Winnipeg, Manitoba,
consisting of approximately 2,800 square feet, at a rent of C$1,875 per month,
and a regional office in Calgary, Alberta, consisting of 600 square feet, at a
rent of C$400 per month. In addition, the Company currently leases 4 local tax
preparation offices (one in Canada and three in Columbus, Ohio). These offices
range between 400 and 600 square feet in size at rentals of between C$400 and
$1,755 per month. The Company believes that these offices are adequate for its
current needs. However, depending upon the expansion of the Company's
operations, the Company may require additional office space for its headquarters
and/or small amounts of space for its regional offices.
The Company has established certain criteria for local tax preparation
offices in the United States and Canada as follows: offices will typically have
from 400 to 600 square feet of office space, and will be able to accommodate
anywhere from three to ten desks. As with any retail operation, the location of
an office will be important to its ultimate financial success. For this reason,
the Company will maintain control over the site selection process for all
offices (including franchisee operated offices) and will require that each
office have good visibility from a major intersection or busy street, high foot
traffic volume and proximity to shopping malls or other major food or clothing
retailers (preferably discounters). For all locations, the Company will seek
leases with terms that coincide with the tax season in order to reduce fixed
costs.
The Company will also seek to place smaller offices in shopping malls
through arrangements with large discount retail stores, similar to Tax Depot's
current arrangement with Save Smart. See "Business - General - Tax Depot."
Franchise Operations
The Company expects to expand Tax Depot's franchise program (except that
the Company does not anticipate selling franchises in Quebec) and to develop a
franchise program in the United States. In addition, the Company intends to
offer some or all of the existing tax practices it acquires to franchisees. The
following discussion is a summary of the key features of the Company's program.
The program may change as it is rolled out.
General. The Company will offer franchisees the right to operate in a
specified geographic area. The initial term of the Company's standard franchise
agreement will be for five years, with successive renewals exercisable at the
option of the franchisee for additional five-year periods as long as the terms
of the franchise agreement continue to be met. The Company does not expect it
will limit the number of offices a franchisee may open in the franchisee's
territory; however, franchisees will be required to obtain the Company's prior
approval for each location and to keep at least one office location open
throughout the year in each territory to ensure that customers in each territory
have access to a tax preparer for matters relating to late filings or any
questions they have regarding the prior or forthcoming tax year. Each franchisee
will also be required to hold tax seminars which will be offered to the general
public to attract prospective seasonal tax preparers and to enhance name
recognition in the market. (Canadian franchisees who executed franchise
agreements before July 1997 are not required to maintain off-season hours or to
provide tax seminars.)
<PAGE>
The Company has been and intends to continue to be selective in its choice
of franchisees. In addition to customary personal and financial background
checks of a franchise candidate and interviews by management personnel, each
franchise candidate will be required to successfully complete a week-long
training course. At the conclusion of the course, management will make a final
evaluation of the candidate and determine whether to accept the candidate as a
franchisee.
Franchise Fees, Royalties and Other Charges. The Company currently does
not charge Canadian franchisees an initial franchise fee. Effective January 1,
1999, it expects to charge Canadian franchisees a C$10,000 initial franchise
fee. The fee will be assessed based on each geographic area licensed by the
franchisee, rather than based on the number of office locations the franchisee
operates. In addition, the Company will require (i) a C$2,000 franchise security
deposit, which will be refundable upon the expiration of the franchise agreement
provided that the franchisee is current with all amounts due to the Company and
has been open for business by February 1 of each year, (ii) an ongoing
advertising fee of 3% of gross receipts per month (defined as gross revenues
less customer discounts and G.S.T.) and an additional advertising fee of C$3,000
if the franchisee does not prepare at least 500 tax returns per territory during
its first tax season and at least 750 tax returns during its second tax season
(the Company also recommends that franchisees spend an additional
C$3,000-C$5,000 each year on advertising), and (iii) a fee for participating in
the income tax rebate program. Franchisees currently pay a royalty to the
Company of 14% of gross receipts, reduced to 12% for gross receipts over
C$50,000, or a minimum of C$3,000 per tax season, except that franchisees who
executed franchise agreements before March 1998 pay a 10% royalty or a minimum
of C$1,500 per tax season.
The Company is currently in the process of determining the fee structure
for its United States franchise program which will likely be similar to the
structure of Tax Depot's program in Canada.
In return for the fees paid, the Company may provide some or all of the
following products and services to its franchisees: (i) a minimum of four days
of initial training in business operations, (ii) the use of the Company's tax
return preparation software and regular updates to the software, (iii) a joint
advertising program which will be funded through the advertising fees paid by
both franchisee and Company operated offices, (iv) annual tax training programs
which assist franchisees in training seasonal tax preparation employees, (v)
standardized operating manuals, (vi) field support in the areas of management,
systems, software and questions regarding tax law interpretation, and (vii)
access to the Company's refund anticipation loan program. Franchisees will be
subject to a quality control system to be developed by the Company, which will
include statistical measurements, office visits and customer interviews by
Company personnel.
<PAGE>
Regulation of Franchise Operations. The Company's United States
franchising activities will be subject both to federal and state laws and
regulations. Federal law and rules require a franchisor to give all prospective
franchisees disclosure about the nature of the franchise investment in the form
of an offering circular on the earlier of (i) the first personal meeting, (ii)
10 business days before any binding agreement is signed, or (iii) 10 business
days before any consideration is paid. The offering circular may be prepared in
accordance with the format designated by the North American Securities
Administrators Association called the Uniform Franchise Offering Circular
("UFOC"). In addition, at least five business days before signing any binding
agreement, the franchisor must provide the prospective franchisee with a
franchise agreement that reflects the specific terms on which the franchisee
will be licensed to do business. There is no private right of action available
to franchisees and prospective franchisees under the federal rules. Franchisees
who claim violations must bring their complaints to the Federal Trade
Commission. Violators are subject to civil penalties of up to $10,000 per
violation.
Federal law and rules govern franchisor conduct in all states. In
addition, California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota,
New York, North Dakota, South Dakota, Virginia, Washington and Wisconsin have
enacted state franchise laws. Federal law and rules permit state laws to govern
franchising if they provide protection that is greater than or equal to that
provided by federal law and rules. Most of these state laws require franchisors
to provide specific disclosure to franchisees, generally in the UFOC format
document.
Most state laws provide franchisees with a private right of action, in
addition to administrative penalties, if a franchisor fails to comply with a
state's franchising laws. Moreover, some states, like California, have laws that
govern the relationship between franchisor and franchisee after the franchise
agreement is signed, such as laws that (i) mandate "notice" and "right to cure"
periods before termination, (ii) restrict the grounds for termination without
the opportunity to "cure" a default, and (iii) restrict the franchisor's ability
to enforce agreements not to compete with the franchisor following termination.
Both the federal rules and the UFOC format require a franchisor to update
its offering circular to include new financial statements and in the event of
material changes, such as significant changes in financial condition, changes to
major fee structures, or a change in the business opportunity being offered.
There are no federal franchise laws in Canada. Alberta has provincial laws
requiring use of a disclosure document similar to the UFOC format document. The
Company provides every potential Canadian franchisee with a disclosure document.
Tax Return Preparers
The Company and its franchisees will utilize the services of part-time tax
preparers. The bulk of these preparers will be hired for the January through
April tax season with the number of preparers at any given time being adjusted
to the demands of that office. Peak employment is expected to occur in February.
The Company anticipates that a typical office will increase the number of tax
preparers from as few as one during the off-season to as many as ten during the
peak of tax season. See "Risk Factors - Business Is Highly Seasonal" and - "Need
for a Large Pool of Low Cost Seasonal Labor."
<PAGE>
The Company anticipates that its tax preparers will be individuals seeking
to supplement their incomes and who have flexible schedules, such as retirees,
undergraduate and graduate students and part-time employees of other firms. The
Company anticipates that many of its seasonal employees will have had prior
experience with other tax return service companies, and further anticipates
recruiting persons taking the Company's tax preparation training programs. See
"Business - Training Programs."
Although wages will vary depending on an office's regional location, the
Company expects that the average wage for seasonal tax preparers will be
approximately $6 per hour (C$6), increasing by 5% a year for each year of
service. Tax preparers will also receive 5% of the gross dollar volume they
generate as a bonus paid on April 30, effectively giving most preparers the
ability to earn from $8 to $15 (C$8 to C$15 in Canada) an hour.
Regulation
Both United States law and Canadian law require income tax return
preparers, among other things, to identify themselves as paid preparers on all
tax returns which they prepare, to provide customers with copies of their tax
returns and to retain copies of the returns they prepare for three years.
Failure to comply with these requirements may result in the imposition of
penalties. The laws also provide for assessment of penalties against a preparer
who (i) negligently or intentionally disregards federal tax rules or
regulations, (ii) takes a position on a tax return which does not have a
realistic possibility of being sustained on its merits, (iii) wilfully attempts
to understate a taxpayer's tax liability or (iv) aids or abets in the
understatement of such tax liability. In addition, several states of the United
States have enacted or are considering enactment of legislation which would
regulate tax return preparers. The Company does not carry errors and omissions
insurance to cover any penalties that may be imposed. See "Risk Factors -
Insurance Coverage."
The Company will be subject to regulation in connection with its franchise
operations in the United States and in the Province of Alberta, Canada (see
"Business - Franchise Operations: Regulation of Franchise Operations" and "Risk
Factors - Regulation of Franchise Operations"). In addition, refund anticipation
loan programs and proprietary schools (such as the Company's proposed tax
training programs) are regulated in some states.
See "Risk Factors - Government Regulation."
Competition
The tax return preparation and electronic filing business is highly
competitive. The Company believes that its competition will come primarily from
three sources: (i) large return preparation services such as H&R Block and
Jackson Hewitt, (ii) numerous small or seasonal tax preparation services,
including accounting and law firms, and (iii) individuals who prepare their own
returns. Many of the firms offering tax preparation services, and many firms not
otherwise in the tax preparation business, provide electronic filing and refund
loan services to the public. In particular, both H&R Block and Jackson Hewitt
have programs, including refund anticipation loan programs, that are
substantially similar to those the Company proposes to provide. Commercial tax
return preparers and electronic filers are highly competitive with regard to
price, service and reputation for quality. This competitiveness may restrict
growth opportunities for the Company and the prices the Company can charge for
its services.
<PAGE>
H&R Block dominates the industry. As of April 30, 1997, the date of its
most current annual report on Form 10-K, H&R Block had 9,937 offices in
operation in the United States, Canada, Australia and Europe, of which 4,722
were owned by franchisees. In the United States alone, H&R Block operated 8,554
offices. H&R Block also estimated that during its fiscal year ended April 30,
1997, it served approximately 18,190,000 taxpayers world-wide, of which
approximately 15,600,000 were in the United States, and prepared approximately
14,302,000 individual United States income tax returns (of which approximately
7,279,000 were filed electronically), constituting about 13% of the IRS's
estimate of total United States individual income tax returns filed during 1997.
In addition, as of that date H&R Block operated 1,021 offices in Canada, and
filed approximately 2,156,000 Canadian returns with Revenue Canada during the
fiscal year ended April 30, 1997. Because of its size, wide-spread name
recognition and the availability of capital to it, the Company believes that H&R
Block will offer formidable competition to the Company's efforts to establish
and expand its tax return preparation business.
Jackson Hewitt, which is now owned by Cendant Corp., is the second largest
provider of retail income tax preparation services in the United States.
According to its Annual Report on Form 10-KSB for the fiscal year ended April
30, 1997, Jackson Hewitt had 1,296 franchised offices and 76 company-owned
offices in 41 states as of that date. Jackson Hewitt filed 875,000 tax returns
in its fiscal year ended April 30, 1997, 735,000 of which were filed
electronically. Although Jackson Hewitt has no operations in Canada, the Company
believes that once the Company is able to establish a broader base of offices in
the United States (upon the expiration of the restrictive covenants pertaining
to Mr. Hewitt; see "Risk Factors - Existence of Restrictive Covenants"), Jackson
Hewitt will offer strong competition in many of the markets which the Company
will seek to enter.
Computer Systems and Year 2000 Issue
The "year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date field.
("Non-Compliant Systems"). Non-Compliant Systems which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities.
Based upon a recent assessment by the Company, the Company has in place
year 2000 capable systems. Any software purchased or developed by the Company in
the future will be year 2000 capable. Additionally, the Company will only use
transmittal services (for transmitting returns to the IRS), check printing
companies and other suppliers that have year 2000 compliant systems. As a
result, the Company does not anticipate significant expenses in this regard.
<PAGE>
JTH Tax, Inc.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Pro Forma Condensed Consolidated Financial Information reflects
financial information with respect to the acquisition of 60% of the Tax
Depot, Inc. on September 1, 1997 for approximately $728,000 in cash. The
purchase was effected by the sale of 150 previously unissued shares of Tax
Depot, Inc. resulting in a 60% ownership after the purchase of the stock.
The acquisition was accounted for under the purchase method of accounting.
The financial statements of Tax Depot, Inc., a Canadian company, acquired
and included in the Pro Forma Condensed Consolidated Financial Information
were translated from Canadian dollars to U.S. dollars at the rate of 0.723
with respect to the 1998 statement of operations.
The Pro Forma Condensed Consolidated Financial Information was prepared as
if the acquisition took place on May 1, 1997 ( the beginning of JTH Tax,
Inc.'s fiscal year). The Pro Forma Condensed Consolidated Financial
Information should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Prospectus.
The Pro Forma Condensed Consolidated Financial Information is unaudited and
is not necessarily indicative of the consolidated results which actually
would have occurred if the above transactions had been consummated at the
beginning of the period presented.
JTH Tax, Inc
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1998
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
JTH Tax Tax Depot Adjustments ProForma
Inc. (1) Inc. (2) Combined
-------- --------- ------------ ---------
<S> <C>
Revenue, principally tax
preparation and
franchise royalties $1,148 $ 56 $1,204
------ ------- ----------- ------
Total operating expenses 1,952 209 12 (3) 2,173
------ ------- ----------- -------
Operating (loss) (804) (153) 12 (969)
------ ------- ----------- -------
Other income
and (expenses) 1,718 10 1,728
------ -------- ----------- -------
Income before provision
for income taxes
and minority interest 914 (143) (12) 759
Provision
for income taxes 371 (4) 371
------ -------- ----------- -------
Income before
minority interest 543 (143) (12) 388
Minority interest
in loss of subsidiary (112) (49) (161)
------ -------- ----------- -------
Net income $ 655 $ (94) $(12) $ 549
Net income per share $ 1.83
</TABLE>
- -------------------
(1) Includes the operation of JTH Tax, Inc. for the twelve months ended
April 30, 1998 and its subsidiary, Tax Depot, Inc. for the eight month
period September 1, 1997 to April 30, 1998.
(2) Includes the operations of the Tax Depot, Inc. prior to acquisition for
the four month period of
May 1, 1997 to August 31, 1997.
(3) To record amortization of intangibles for the period prior to acquisition
arising from the acquisition on September 1, 1997. Such amortization
expense is based on a lives of 15 to 40 years.
(4) Tax depot, Inc. files tax returns in Canada and no provision for taxes has
been made for any possible benefits resulting from the loss.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
SUMMARY OPERATING DATA FROM CONSOLIDATED
OPERATIONS DEVELOPMENT
STAGE COMPANY IN 1997
4/30/97 4/30/98
------- -------
REVENUE 0 1,148,275
INCOME FROM OPERATIONS (loss) (17,500) (804,149)
OTHER INCOME 11,501 1,718,048
NET INCOME (LOSS) (5,999) 654,050
SUMMARY BALANCE SHEET FOR CONSOLIDATED OPERATIONS
4/30/97 4/30/98
------- -------
CURRENT
ASSETS 467,590 2,604,128
CASH 18,876 686,871
WORKING CAPITAL 17,323 2,171,464
TOTAL ASSETS 483,564 3,383,705
TOTAL LIABILITIES 50,267 479,850
STOCKHOLDER'S EQUITY 433,297 2,903,885
<PAGE>
The Company was a development stage company during 1997. The Company is in
the tax return preparation business which is a seasonal business. On September
1, 1997, four months into fiscal 1998, the Company purchased a 60% ownership of
the Tax Depot Inc., a Canadian income tax preparation franchiser. 1998 financial
information includes eight months of Tax Depot operations, however a substantial
portion of Tax Depot's business takes place in these eight months as Tax Depot
is a seasonal tax return preparation business. Tax Depot had 126 offices in tax
season 1997, two of which were Company owned. Prior to tax season 1998, Tax
Depot sold the two Company owned offices for a profit of $20,065. The Tax Depot
purchased one existing franchise office and opened twelve new Company owned
offices for tax season 1998. In addition, Tax Depot awarded 68 new franchise
locations.
Total revenue for 1998 was $1,148,275 compared to zero in 1997. Over 70%
of the Company's 1998 revenue was attributable to Tax Depot Inc. In an effort to
build brand name recognition in Canada and to attract new franchisees and
customers, in 1998 the Company spent $312, 700 on advertising expenses. These
advertising expenses included advertising for a Canadian home study tax course,
Canadian franchise opportunities, and a Canadian national television
advertisement for tax return preparation during the tax season. These
advertising expenses included advertising production costs. The Company's 1998
revenue included a profit of $1,665,494 on its investment portfolio. This was an
extraordinary event, due in large part to a portfolio which was then heavy in
Jackson Hewitt Inc. stock. The Jackson Hewitt Inc. stock was sold when Jackson
Hewitt Inc. was purchased by Cendant Corp. and thus the extraordinary event is
unlikely to be repeated in the future. The remainder of the income, $52,554,
which constitutes the Company's other income was realized from investment
instruments held in the Company's portfolio other than Jackson Hewitt Inc.
stock.
Revenues from tax return preparation and tax discounting fees were
$746,778 in 1998 and zero in 1997. A significant portion of this revenue is
attributed to Tax Depot. Royalties from Tax Depot franchisees were $278,342 in
1998 and zero in 1997. Tax Depot added 68 franchise locations and improved
performance in the existing franchise locations. Selling, General &
Administrative expenses increased to $1,952,424 in l998 from $17,500 in 1997
primarily from start up operations in the United States and increased expenses.
Losses from operations in 1998 were ($804,149) versus ($17,500) in 1997.
This was due primarily to our startup operations in the United States where the
Company began staffing up for future expansion by hiring four executives from
Jackson Hewitt Inc., the second largest retail tax operation in the world, and
management support for Canadian operations. The Company opened five locations in
Columbus, Ohio. Four of these five locations were new locations, one location
was opened as a result of a purchase, for $110,000, of an existing tax practice.
These five locations served over 5,000 customers in 1998. The Company believes
that a combination of purchasing tax practices and opening new locations (in the
same market) is the most effective growth strategy. Furthermore, in an effort to
attract high quality franchises, the Company will waive the $10,000 franchise
fee through December 31, 1998.
At April 30, 1998, the Company had working capital of $686,871. This was
an increase of $667,995 from $18,876 as of April 30, 1997. The increase in cash
was primarily due to the proceeds from a July 1997 private placement of stock
which generated $1,942,883 and from 1998 profits of $654,050. There was a
significant decrease in cash flow due to accounts receivable of $1,009,788. Most
of this is due to loans made to Canadian tax filers for which the Company
expects to be repaid in Fiscal 1999. The Company purchased equipment and
furniture for $178, 282. The Company also purchased investment securities with a
value of $734,898 at year-end 1998.
Currently, to maintain its working capital the Company utilizes its
investment portfolio. The Company does not have a line of credit at any banking
establishment nor does the Company intend to pursue such a line of credit or
other external means of financing for working capital purposes. The Company may
establish lines of credit for refund anticipation loan funding. Management
believes that, for the short term, current assets are sufficient to satisfy
current liabilities without the need for additional capital. In addition,
management estimates that this offering will satisfy the Company's foreseeable
long-term requirements for additional capital. However there can be no assurance
that additional financing will not be needed or, if needed, that it will be
available on terms favorable to the Company.
It is expected that the "year 2000 issue" will have little to no effect on
the Company. Software used for tax return preparation is of utmost importance to
the Company. The Company currently uses and expects to continue to rely upon
third party software for tax return preparation. The Company's assessments of
such third party software indicate that the software is capable of handling year
2000 issues without problem. Any software considered for purchase or use in the
future will be assessed to verify year 2000 compliance prior to acquisition of
such software. All of the internal software developed by the Company is year
2000 compliant. For internal accounting purposes, the Company utilizes third
party software which is year 2000 compliant.
The accompanying financial statements of JTH Tax Inc. do not reflect FAS
No. 130: Reporting for Comprehensive Income. The Company had other comprehensive
income consisting of unrealized gains on available for sale marketable
securities of $2,541 and $264,000, respectively in 1998 and 1997, as well as,
foreign currency translation adjustments of ($45,201) in 1998 and zero in 1997.
The accompanying financial statement of the Company has not addressed FAS 131:
Disclosures About Segments of an Enterprise and Related Information, nor FAS
133: Accounting for Derivative Instruments and Related Activities. The Company's
fiscal year end was April 30, 1998 and these disclosure requirements were not
effective for that time period. The Company does not expect FAS 131 to
significantly affect the future financial disclosure of the Company as the
Company intends to continue to fully disclose the effect of Tax Depot (Canadian)
operations on the Company. Furthermore, the Company does not expect FAS 133 to
significantly affect future financial results as the Company does not now, nor
does it expect to, deal in derivatives.
<PAGE>
Certain Relationships and Related Transactions
The Company has not made any loans to officers and directors, however it
has received one loan from its President, John Hewitt which is now paid off and
has made one loan to its subsidiary Tax Depot. The loan from John Hewitt for
$250,000 was made on February 13, 1998 and was repaid on February 30, 1998 with
interest. On February 6, 1998, the Company loaned Tax Depot $262,135 (C$376,634)
at 8% interest. As of July 31, 1998 none of the loan has been repaid and the
balance was $291,682. Tax Depot also owes the Company $319,783 as of July 31,
1998 for services rendered.
Ledgewood Law Firm, P.C. ("Ledgewood") acted as counsel to the Company
in connection with its organization and the offering. Ellen McDowell,
Esquire, is an associate with Whittlesey, McDowell & Holtz, P.C. which an
affiliate of Ledgewood. Ms. McDowell is the sister of John Hewitt, President
and Chief Executive Officer of the Company. She is also a stockholder (less
than 5%) of the Company. The Company has paid Ledgewood $71,665 in fees over
the last two years and fees are not expected to exceed this level in the
future.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for any of the Company's securities, and,
following this offering, it is not anticipated that a market will develop for
the Class A Common Stock offered hereby. As of the date of this Prospectus,
there were 34 holders of record of the Class A Common Stock and one holder of
record of the Class B Common Stock. All of the shares of Class A Common Stock
and Class B Common Stock outstanding as of the date of this Prospectus are
"restricted securities" as defined under Rule 144 of the Securities Act, and
none of such securities may be resold pursuant to Rule 144. As of the date of
this Prospectus, there were 31,900 shares issuable pursuant to outstanding
options.
EXECUTIVE COMPENSATION
No executive officer or director received any compensation during 1996. In
1997, Mr. Hewitt received a salary of $30,000. In 1998, Mr. Hewitt will receive
$30,000 in addition to the stock options to purchase 5,000 shares of Class A
Common Stock at $11 per share that he received earlier in 1998. The other
executive officers of the Company will receive compensation in 1998 as follows:
John Seal, $40,000; Donna Halligan, $40,000; Martha O'Gorman, $40,000; Kathleen
Curry, $45,000; and Karen Robinson, $31,000. Additionally, these other executive
officers each received stock options to purchase 4,000 shares of Class A Common
Stock at $10 per share in May 1998. No executive officer of the Company has
received an aggregate annual compensation in excess of $100,000 since the
Company's formation.
REPORTS TO STOCKHOLDERS
The Company provides annual reports with audited financial statements to
its stockholders.
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
<PAGE>
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ....................................................... 3
FINANCIAL STATEMENTS
Balance Sheet ......................................................... 4
Statement of Operations................................................ 5
Statement of Cash Flows................................................ 6
Notes to Financial Statements .........................................7-10
<PAGE>
Hamilton Dwyer
& Company, P.C.
____________________________
Certified Public Accountants
- ----------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JTH Tax Inc.
We have audited the accompanying balance sheet of JTH Tax Inc. (a
Corporation) as of April 30, 1997, and the related statements of
operations, changes in stockholder's equity, and cash flows for the seven
months then ended. 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JTH Tax Inc. as of
April 30, 1997, and the results of its operations and its cash flows for
the seven months then ended in conformity with generally accepted
accounting principles.
January 7, 1998
/s/ Hamilton Dwyer & Company, P.C.
----------------------------------
Hamilton Dwyer & Company, P.C.
Member American Institute Certified Public Accountants, Tax Division
Member of Virginia Society Certified Public Accountants
-----------------------------------------------------------------
3800 Poplar Hill Rd, Chesapeake, VA 23321 P. O. Box 6189, Ports VA 23703
(757)483-3555 Fax (757) 484-7493
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
BALANCE SHEET
APRIL 30, 1997
---------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 18,876
Prepaid expenses 850
Investment securities:
Trading securities 7,864
Available-for-sale securities 440,000
-------
Total current assets 467,590
-------
FIXED ASSETS:
Furniture and fixtures 16,506
Accumulated depreciation 532
-------
Net fixed assets 15,974
-------
TOTAL ASSETS $ 483,564
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 267
Loans from related parties 50,000
-------
Total current liabilities 50,267
-------
STOCKHOLDER'S EQUITY:
Common stock 45,000
Paid in capital 130,296
Unrealized gain on securities
available-for-sale 264,000
Retained earnings (deficit) (5,999)
-------
Total stockholder's equity 433,297
-------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 483,564
=======
See accompanying notes and accountant's report.
- 4 -
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1997
---------------------------------------------
REVENUE $ -
--------
OPERATION EXPENSES:
Payroll 1,513
Advertising 200
Business taxes and license 372
Cleaning and janitorial 240
Depreciation 532
Equipment rental 599
Insurance 488
Miscellaneous 100
Occupancy 3,160
Printing 570
Postage 640
Professional fees 1,290
Supplies 473
Telephone 907
Travel 6,048
Utilities 368
-------
Total expenses 17,500
-------
LOSS FROM OPERATIONS (17,500)
OTHER INCOME:
Gain on investments 11,501
-------
NET LOSS $ (5,999)
=======
Loss per share $ 0.13
=======
See accompanying notes and accountant's report.
- 5 -
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED APRIL 30, 1997
---------------------------------------------
Class Class
A B Additional
Common Common Paid In Retained
Stock Stock Capital Earnings
------ ------- ---------- --------
Stock issued
at incorporation $ - $ 45,000 $ 130,296 $ -
Net loss - - - (5,999)
------ ------ -------- --------
BALANCE AT
APRIL 30, 1997 $ - $ 45,000 $ 130,296 $ (5,999)
======= ========= ========= =========
See accompanying notes and accountant's report.
- 6 -
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,999)
Adjustments to reconcile total net loss to
net cash provided by operating activities:
Depreciation and amortization 532
Net realized gains on securities (11,501)
(Increase) in prepaid expenses (850)
Increase in accounts payable 267
-------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (17,551)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of trading securities 58,997
Purchases of furniture and equipment (16,506)
Purchases of trading securities (55,360)
Purchases of available-for-sale securities (176,000)
-------
NET CASH (USED) IN
INVESTING ACTIVITIES (188,869)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 50,000
Proceeds from sale of capital stock 175,296
-------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 225,296
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,876
-------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD -
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,876
=======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid (net of amount capitalized) $ -
=======
Income taxes paid $ -
=======
See accompanying notes and accountant's report.
- 7 -
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JTH Tax, Inc. is a Delaware corporation created to provide services including
personal income tax return preparation and personal income tax refund
discounting as well as sales of franchise to individuals primarily in Canada.
ACCOUNTING METHOD
The financial statements have been prepared on the accrual method of accounting
which means revenue is recognized when earned, rather than when received and
expenses are recognized when incurred rather than when paid.
INCOME TAXES
JTH, Tax, Inc. has elected S Corporation status effective with the first fiscal
year ending April 30, 1997. An S Corporation pays no federal or state income
taxes. Its separately stated items of income, loss, deduction or credit pass
through to the stockholder and is reported on his personal federal and state
income tax returns.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations; renewals and betterments that materially
extend the life of the assets are capitalized. Gains or losses on dispositions
of property and equipment are included in operations in the year of disposal.
Depreciation is computed using the straight line method with useful lives of
five to seven years.
Note 2 - CAPITAL STOCK
JTH Tax, Inc. is authorized to issue 1,000,000 shares of capital stock,
consisting of 800,000 shares of Class A Common Stock, par value $1.00 per share,
100,000 shares of Class B Common Stock, par value $1.00 per share and 100,000
shares of Preferred Stock, par value $1.00 per share. As of April 30, 1997,
there are no shares of Class A Common Stock, 45,000 shares of Class B Common
Stock outstanding and no shares of Preferred Stock outstanding.
-8-
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 3 - DEVELOPMENT STAGE OPERATIONS
JTH Tax, INC. was formed in October 1996 to provide retail income tax return
preparation services for taxpayers primarily in the lower to middle income
brackets. The Company will initially offer its services in Canada and may offer
services in the United States in the future. As of the financial statement date
the Company has not commenced offering its tax return preparation services to
the public.
Note 4- RELATED PARTY TRANSACTIONS
JTH Tax, INC. has received advances from its stockholder totaling $50,000. The
advances bear interest at the rate of 10% per annum and are payable in full on
July 1, 1997.
Note 5 - LEASE COMMITMENTS
The Company leases two offices under separate agreements which are classified as
operating leases. One lease expires on May 31, 1999 and is renewable at the
company's option. The remaining lease is on a month to month basis. During the
current seven months the occupancy expense was $3,160.
Future minimum lease payments under these agreements are as follows:
Year ending 1998 $ 11,520
1999 11,520
2000 960
--------
Total $ 24,000
========
-9-
<PAGE>
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 6 - MARKETABLE SECURITIES
The Company's marketable securities consist of equity securities that have a
readily determinable fair market value. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates such
determinations at each balance sheet date.
Securities have been classified in the balance sheet according to management's
intent as either available for sale, held to maturity or trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale and held to
maturity securities are reported as a component of stockholder's equity.
Cost and fair value of marketable securities available for sale at April 30,
1997 are as follows:
Unrealized Fair
Cost Gains Value
Securities $ 176,000 $ 264,000 $ 440,000
Note 7 - GAIN ON INVESTMENTS
The Company purchased and sold publicly traded stock through out the seven month
period of operation. These transactions resulted in a net realized gain on
investments of $11,501.
-10-
JTH TAX INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1998
<PAGE>
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ...................................................... 3
FINANCIAL STATEMENTS
Balance Sheet ........................................................ 4-5
Statement of Operations............................................... 6
Schedule of Operating Expenses........................................ 7
Statement of Changes in Stockholders' Equity.......................... 8
Statement of Cash Flows............................................... 9
Notes to Financial Statements......................................... 10-14
<PAGE>
Hamilton Dwyer
& Company, P.C.
____________________________
Certified Public Accountants
- ----------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JTH Tax Inc.
We have audited the accompanying consolidated balance sheet of JTH Tax
Inc. (a Corporation) as of April 30, 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows
for the year then ended. 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 audit. We did not audit the
financial statements of Tax Depot Inc., a subsidiary, which statements
reflect total assets and revenues constituting 37 percent and 81 percent,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Tax Depot Inc.,
is based solely on the report of other auditors.
We conducted our audit 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 audit
and the report of the other auditors provides a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of JTH Tax Inc. as of April
30, 1998 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Hamilton Dwyer & Company, P.C.
----------------------------------
Hamilton Dwyer & Company, P.C.
June 10, 1998
Member American Institute Certified Public Accountants, Tax Division
Member of Virginia Society Certified Public Accountants
-----------------------------------------------------------------
3800 Poplar Hill Rd, Chesapeake, VA 23321 P. O. Box 6189, Ports VA 23703
(757) 483-3555 Fax (757) 484-7493
<PAGE>
JTH TAX INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
---------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 686,871
Accounts receivable 1,009,788
Trading securities (Note 3) 504,507
Employee advances 94,697
Prepaid expenses 27,538
Prepaid income taxes (Note 1) 280,727
-------------
Total current assets 2,604,128
-------------
FIXED ASSETS: (Note 1)
Furniture and fixtures 179,893
Leasehold improvements 9,895
Accumulated depreciation 36,222
-------------
Net fixed assets 153,566
-------------
OTHER ASSETS:
Available for sale securities (Note 3) 230,391
Utility deposit 850
Intangibles, net of accumulated
amortization of $8,125 394,770
-------------
Total other assets 626,011
-------------
TOTAL ASSETS $ 3,383,705
=============
See accompanying notes and accountant's report.
- 4 -
<PAGE>
---------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 336,943
Franchise deposits 85,609
Capital lease 10,112
------------
Total current liabilities 432,664
------------
LONG-TERM LIABILITIES:
Deferred income taxes 47,186
------------
STOCKHOLDERS' EQUITY (Note 4)
Common stock, class A 200,000
Common stock, class B 45,000
Additional paid in capital 1,873,179
Unrealized gain (Note 3) 2,541
Minority interest in subsidiary 180,285
Equity adjustment from foreign
currency translation (Note 1) (45,201)
Retained earnings 648,051
------------
Total stockholders' equity 2,903,885
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,383,705
=============
- 5 -
<PAGE>
JTH TAX INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1998
---------------------------------------------
REVENUE:
Tax preparation - net of discounts $ 746,778
Franchise royalties 278,342
Tuition 57,923
Franchise sales 20,065
Commission income 29,135
Miscellaneous income 16,032
-------------
Total revenue 1,148,275
-------------
OPERATING EXPENSES (see schedule) 1,952,424
-------------
NET LOSS FROM OPERATIONS (804,149)
-------------
OTHER INCOME AND (EXPENSES):
Interest income 19,417
Dividends 41,924
Gain on investment 1,665,494
Interest expense (8,787)
-------------
Total other income and expenses 1,718,048
-------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 913,899
Provision for Income Taxes (Note 6) 371,459
-------------
INCOME BEFORE MINORITY INTEREST 542,440
Minority interest in subsidiary's loss 111,610
-------------
NET INCOME $ 654,050
=============
Earnings per common share - Net Income $ 2.18
=============
See accompanying notes and accountant's report.
- 6 -
<PAGE>
JTH TAX INC.
CONSOLIDATED SCHEDULE OF OPERATING EXPENSES
YEAR ENDED APRIL 30, 1998
---------------------------------------------
OPERATING EXPENSES:
Advertising $ 312,700
Amortization 24,466
Bad debts 35,882
Bank Charges 33,847
Depreciation 15,227
Equipment rental 14,641
Insurance 65,990
License and taxes 36,014
Miscellaneous 14,797
Office supplies 23,545
Operating lease 2,017
Payroll 734,768
Postage 58,621
Practice development 8,513
Printing 8,359
Professional development 9,617
Professional fees 79,349
Repairs and maintenance 8,340
Rent 66,500
Supplies 119,645
Telephone 96,870
Temporary service 37,987
Travel 134,330
Utilities 10,399
-------------
Total operating expense $ 1,952,424
=============
See accompanying notes and accountant's report.
- 7 -
<PAGE>
JTH TAX INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED APRIL 30, 1998
---------------------------------------------
Class Class
A B Additional
Common Common Paid In Retained
Stock Stock Capital Earnings
------ ------ --------- --------
Stock issued for
cash through
April 30, 1997 $ - $ 45,000 $ 130,296 $ -
Prior years
Net loss - - - (5,999)
-------- ------ --------- --------
Balance at
April 30, 1997 - 45,000 130,296 (5,999)
Stock issued
for cash in
current year 198,500 - 1,787,304 -
Stock issued for
services in
current year 1,500 - 13,500 -
Net income for the
current year - - - 654,050
-------- ------- ---------- -------
BALANCE AT
APRIL 30, 1998 $ 200,000 $ 45,000 $ 1,931,100 $ 648,051
======== ======= ========== =======
See accompanying notes and accountant's report.
- 8 -
<PAGE>
JTH TAX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1998
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 654,050
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 43,815
Foreign currency translation (45,201)
Net gain on securities (1,665,494)
Minority interest in subsidiary's loss (111,610)
Changes in operation assets and liabilities:
Accounts receivable (1,009,788)
Prepaid expenses (27,538)
Prepaid income taxes (280,727)
Employee advances (94,697)
Franchise deposits 85,608
Accounts payable 286,676
Income taxes payable 47,186
-------------
NET CASH USED BY OPERATING ACTIVITIES (2,117,720)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (178,282)
Purchase of tax service (106,000)
Sales of trading securities 4,343,722
Purchases of trading securities (2,996,329)
Purchases of available-for-sale securities (230,391)
------------
NET CASH USED IN INVESTING ACTIVITIES 832,720
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 1,942,883
Proceeds from short-term debt 10,112
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,952,995
------------
NET INCREASE IN CASH 667,995
CASH AT BEGINNING OF YEAR 18,876
------------
CASH AT END OF YEAR $ 686,871
- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid (net of amount capitalized) $ 13,912
============
Income taxes paid $ 605,000
============
See accompanying notes and accountant's report.
- 9 -
<PAGE>
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JTH Tax, Inc. a Delaware corporation and it's subsidiary Tax Depot, Inc. is
incorporated under the Company's Act of Manitoba, Canada. Both companies are
engaged in providing services including personal income tax return preparation
and personal income tax refund discounting as well as sales of franchises to
provide these services in Canada and the United States. These services are
provided through company-owned operations and franchised agents.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
parent company JTH Tax, Inc. and its subsidiary Tax Depot, Inc. (60% ownership)
after elimination of significant intercompany accounts and transactions. These
financial statements have been prepared using the purchase method of
consolidation. All significant intercompany transactions and balances have been
eliminated on consolidation.
ACCOUNTING METHOD
The financial statements have been prepared on the accrual method of accounting
which means revenue is recognized when earned, rather than when received and
expenses are recognized when incurred rather than when paid.
TRANSLATION OF FOREIGN CURRENCIES
The financial statement is stated in United States currency. The Tax Depot, Inc.
was translated to United States dollars as of April 30, 1998 at the rate of
0.696 per dollar. A foreign currency translation adjustment of ($45,201.) is
reflected in the equity section of the Balance Sheet to recognize the changes
for the current year.
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities, as measured by the current enacted tax rates. Deferred tax
expense is the result of changes in the deferred tax asset and liability.
- 10 -
<PAGE>
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
JTH Tax, Inc. had previously elected S Corporation status that was effective
with the first fiscal year ending April 30, 1997. An S Corporation pays no
federal or state income taxes. Its separately stated items of income, loss,
deduction or credit pass through to the stockholders' and is reported on their
personal federal and state income tax returns. However, as of July 30, 1997 a
second class of stock was issued and automatically revoked the Subchapter S
election. Accordingly, the C Corporation pays federal and state income taxes on
it's profits using the cash basis of accounting. A provision for income taxes
has been established on the accompanying statements for the tax related to the
income from the last nine months of the year.
INTANGIBLE ASSETS
Intangible assets are being amortized using the straight line as follows:
Goodwill 15 to 40 years
Customer list 15 years
Covenant not to compete 15 years
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations, renewals and betterments that materially
extend the life of the assets are capitalized. Gains or losses on dispositions
of property and equipment are included in operations in the year of disposal.
Depreciation is computed using the straight line method..
Note 2 - RELATED PARTY TRANSACTIONS
The Tax Depot, Inc. has a liability of $376,634, Canadian currency, ($262,135
United States currency) that has arisen from the sale and purchase of services
from JTH Tax Inc. There is also an outstanding loan of $400,000, Canadian
currency ($280,800 United States currency) at year end. These items have been
eliminated on consolidation.
Note 3 - MARKETABLE SECURITIES
The Company's marketable securities consist of debt and equity securities that
have a readily determinable fair market value. Management determines the
appropriate classification of its investments at the time of purchase and
reevaluates such determinations at each balance sheet date.
-11-
<PAGE>
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 3 - MARKETABLE SECURITIES (Continued)
Securities have been classified in the balance sheet according to management's
intent as either available for sale, held to maturity or trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale and held to
maturity securities are reported as a component of stockholders' equity.
Since the Company does not intend to sell certain securities in the near term,
they have been classified as "available for sale" and accordingly, are carried
at fair value, with unrealized gains and losses, net of tax, reported as a
separate component within the stockholders' equity section of the balance sheet.
Realized gains and losses on all marketable securities are determined by
specific identification and are charged or credited to current earnings.
Cost and fair value of marketable securities available for sale at April 30,
1998 are as follows:
Unrealized Unrealized Fair
Cost Gains Loss Value
Securities $ 227,849 $ 2,541 $ - $ 230,391
Note 4 - CAPITAL STOCK
JTH Tax, Inc. is authorized to issue 1,000,000 shares of capital stock,
consisting of 800,000 shares of Class A Common Stock, par value $1.00 per share,
100,000 shares of Class B Common Stock, par value $1.00 per share and 100,000
shares of Preferred Stock, par value $1.00 per share. As of the date of this
report, there are 400,000 shares of Class A Common Stock, 45,000 shares of Class
B Common Stock and no shares of Preferred Stock outstanding.
In the second quarter of the fiscal year the Company issued 200,000 shares of
Class A Common Stock at $10.00 per share totaling $2,000,000.
In 1998 the Board of Directors authorized a one-for-one stock split of the A
Shares to be distributed on January 10, 1998, to shareholders of record. The
earnings per share have been adjusted for the period presented to reflect the
change in capital stock that resulted from the stock split.
-12-
<PAGE>
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 5 - PURCHASE OF TAX DEPOT, INC.
On September 1, 1997 the Company acquired a 60% interest in the Tax Depot, Inc.,
a Canadian corporation, for a cash payment of $728,463. The financial
information of Tax Depot, Inc. is accounted for in the accompanying statements
using the purchase method. The acquisition resulted in goodwill of $290,621
which is being amortized over forty years.
Note 6 - INCOME TAXES
The provision for income taxes for JTH Tax Inc. consists of the following:
Current tax expense:
Federal $ 272,827
State 51,446
-----------
Total current 324,273
------------
Deferred tax expense:
Federal 40,281
State 6,905
------------
Total deferred 47,186
------------
Total provision for income taxes $ 371,459
===========
Tax Depot Inc. (a subsidiary) had a loss from it's current operations in Canada
and that loss is available for income tax purposes as a loss carry-forward until
April 30, 2005.
Note 7 - LEASE COMMITMENTS
The Company leases various office space under separate agreements which are
classified as operating leases. These leases have initial periods which expire
at different times, with expirations ranging from 11 to 47 months. These leases
are renewable, at the Company's option. Rent expense under these agreements was
$66,500 for the current year.
-13-
<PAGE>
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 7 - LEASE COMMITMENTS (Continued)
Future minimum lease payment under these agreements are as follows:
Year ending 1999 $ 67,412
2000 38,702
2001 37,742
2002 34,597
---------
Total $ 178,453
==========
Note 8 - DEVELOPMENT STAGE OPERATIONS
JTH Tax, INC. was formed in October 1996 to provide retail income tax return
preparation services. For the year ended April 30, 1997, the Company operated as
a development stage company. Beginning in the current year, the Company started
to provide tax return preparation services and operated in both Canada and the
United States.
Note 9 - CAPITAL LEASE
The Company acquired computer equipment under the provisions of a short-term
lease. For financial reporting purposes, minimum lease payments relating to the
computer equipment have been capitalized. The lease expires in 1998. The leased
property under capital lease as of April 30, 1998 had a cost of $13,483. The
future minimum lease payments under capital lease is $10,905, with $793
representing interest. The present value of net minimum lease payments is
$10,112, which is all due in the current year.
Note 10 - INVESTMENT INCOME
The Company acquired and sold publicly traded stock through out the year. These
transactions resulted in a net gain on investments of $1,665,494. At year end,
the Company continued to hold an interest in publicly traded investments and
this is further discussed in the footnote for marketable securities.
-14-
TAX DEPOT INC.
Statement of Cash Flows
Reconcilliation of Results Reported in Accordance
With Generally Accepted Accounting Principles
(GAAP) in Canada with ("U.S.") GAAP
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
For the period ended August 31 August 31
1997 1996
- ------------------------------------------------------------------------------------------
(in Canadian Dollars)
<S> <C>
Operating Activities
Net Income for the period $ 1,924 $ 153
Adjustment to reconcile net income from operations
to net cash provided by (used in) operating activities
Amortization 9,424 -
Decrease (increase) in accounts receivable 146,091 (57,793)
Decrease (increase) in prepaids (1,636) 5,043
Increase (decrease) in accounts payable (37,821) 9,351
Increase (decrease) in income taxes payable (3,996) 348
-------- --------
113,986 (42,898)
--------- --------
Investment Activities
Purchase of capital assets (108,423) -
Purchase of goodwill (35,032) -
---------- --------
(143,455) -
---------- --------
Financing Activities
Increase (decrease) in due to related parties 13,130 (10,480)
Increase in bank overdraft 16,339 25,998
---------- --------
29,469 15,518
Decrease in cash - (27,380)
Cash, beginning of period - 27,380
---------- --------
Cash, end of period - -
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[BDO Dunwoody Chartered Accountants and Consultants LOGO]
BDO Dunwoody Chartered Accountants and Consultants
Wawanesa Building
5th Floor, 191 Broadway
Winnipeg Manitoba Canada R3C 3T8
Telephone: (204) 956-7200
Telefax: (204) 926-7201
- --------------------------------------------------------------------------------
Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders of TAX DEPOT INC.
We have audited the consolidated balance sheet of TAX DEPOT INC. as at April 30,
1998 and the consolidated statements of operations retained earnings and changes
in financial position for the period then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at April 30, 1998
and the results of its operations and the changes in its financial position for
the period then ended in accordance with Canadian generally accepted accounting
principles.
BDO DUNWOODY
/s/ BDO Dunwoody
Chartered Accountants
Winnipeg, Manitoba
June 3, 1998
<PAGE>
[BDO Dunwoody Chartered Accountants and Consultants LOGO]
BDO Dunwoody Chartered Accountants and Consultants
Wawanesa Building
5th Floor, 191 Broadway
Winnipeg Manitoba Canada R3C 3T8
Telephone: (204) 956-7200
Telefax: (204) 926-7201
- --------------------------------------------------------------------------------
Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders of TAX DEPOT INC.
We have audited the consolidated balance sheet of TAX DEPOT INC. as at August
31, 1997 and 1996 and the consolidated statements of operations, retained
earnings and changes in financial position for the years then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at August 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years then ended in accordance with Canadian generally accepted
accounting principles.
BDO DUNWOODY
/s/ BDO Dunwoody
Chartered Accountants
Winnipeg, Manitoba
November 25, 1997
<PAGE>
Tax Depot Inc.
Consolidated Financial Statements
For the year ended August 31, 1997
<PAGE>
Tax Depot Inc.
Consolidated Financial Statements
For the year ended August 31,1997
CONTENTS
Auditors' Report 2
Financial Statements
Balance Sheet 3
Statement of Retained Earnings 4
Statement of Operations 5
Statement of Changes in Financial Position 6
Summary of Significant Accounting Policies 7
Notes to Financial Statements 8
<PAGE>
Tax Depot Inc.
Consolidated Balance Sheet
August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Assets
Current
Accounts receivable $ 276,532 $ 422,622
Income taxes recoverable 1,948
Prepaid expenses 21,949 20,313
-------------------------
300,429 442,935
Capital Assets (Note 1) 102,502 -
Other Assets (Note 2) 31,528 -
-----------------------------
$ 434,459 $ 442,935
- --------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Current
Bank overdraft $ 42,337 $ 25,998
Accounts payable and accrued liabilities 6,741 44,562
Income taxes payable - 2,048
Due to related parties (Note 3) 383,240 370,110
-------------------------
$ 432,318 $ 442,718
Shareholder's equity
Share capital (Note 4) 100 100
Retained earrings 2,041 117
2,141 217
-------------------------
$ 434,459 $ 442,935
- --------------------------------------------------------------------------------
On behalf of the Board:
Director
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
<PAGE>
Tax Depot Inc.
Consolidated Statement of Retained Earnings
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Retained earnings, beginning of year $ 117 $ (36)
Net Income for the year 1,924 153
-----------------------
Retained earnings, end of year $ 2,041 $ 117
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
<PAGE>
Tax Depot Inc.
Consolidated Statement of Operations
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Sales $ 1,931,276 $ 2,058,006
----------------------------
Expenses
Advertising and promotion 132,759 123,620
Amortization 9,424 -
Bad debts 83,907 32,168
Bank charges 22,219 16,833
Consulting and other professional fees 84,891 78,936
Data processing 2,894 23,873
Equipment rental 42,568 39,383
Maintenance, taxes and insurance 51,395 63,715
Postage and delivery 56,542 53,083
Supplies 127,123 136,015
Tax discounting 746,532 884,021
Tax discounting - financing costs 30,167 81,601
Telephone 51,987 53,283
Travel and auto 42,111 107,574
Wages and benefits 444,833 361,700
----------------------------
1,929,352 2,055,805
----------------------------
Income before income taxes 1,924 2,201
Income taxes - 2,048
----------------------------
Net income for the year $ 1,924 $ 153
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
<PAGE>
Tax Depot Inc.
Consolidated Statement of Changes in Financial Position
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Cash provided by (used in)
Operating activities
Net income for the year $ 1,924 $ 153
Items not involving cash
Amortization 9,424 -
--------------------------
11,348 153
Changes in non-cash working capital balances
Accounts receivable 146,091 (57,793)
Prepaid expenses (1,636) 5,043
Due from related parties 3,130 (10,480)
Accounts payable and accrued liabilities (37,821) 9,351
Income taxes recoverable/payable (3,996) 348
--------------------------
127,116 (53,378)
--------------------------
Investing activities
Purchase of capital assets (108,423) -
Purchase of goodwill (35,032) -
--------------------------
(143,455) -
Increase (decrease) in cash position during the year (16,339) (53,378)
Cash position, beginning of year (25,998) 27,380
--------------------------
Cash position, end of year (42,337) (25,998)
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
<PAGE>
Tax Depot Inc.
Summary of Significant Accounting Policies
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
Nature of Business
The company is incorporated under the Companies Act of Manitoba and is engaged
in providing services including personal income tax return preparation and
personal income tax refund discounting throughout company-owned operations and
franchised agents.
Basis of Consolidation
These financial statements have been prepared using the purchase method of
consolidation. The assets and liabilities of the acquired companies are
initially recorded at their cost. The results of operations of the acquired
companies are included from the dates of acquisition. All significant
intercompany transactions and balances have been eliminated on consolidation.
The following subsidiaries' assets, liabilities, and operations are included in
these financial statements:
U & R/Tax Depot (Alberta) Inc. -100% owned
U & R Tax Services (N.S.) Limited -100% owned
Capital Assets
Capital assets are stated at cost less accumulated amortization. Amortization
based oil the estimated useful life of the asset is calculated as follows:
Office equipment ID% to 30% straight line Leasehold Improvements straight line
over term of lease
Other Assets
Goodwill is stated at cost less accumulated amortization. Amortization of
goodwill is provided on a straight line basis over its estimated useful life of
10 years.
Financial Instruments
The company's financial instruments consist of accounts receivable, income taxes
recoverable, bank overdraft, accounts payable and accrued liabilities, income
taxes payable and due to related parties. Unless otherwise noted, it is
management's opinion that the company is not exposed to significant interest,
currency or credit risks arising from these financial instruments. The fair
values of these financial instruments approximate their carrying values, unless
otherwise noted.
<PAGE>
Tax Depot Inc.
Notes to Consolidated Financial Statements
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
1. Capital Assets 1997 1996
Cost Accumulated Cost Accumulated
Amortization Amortization
Office equipment $101,336 $ 5,921 $ - $ -
- -
Leasehold Improvements 7,087 - -
----------------------------------------------------
- -
$108,423 $ 5,921 $ - $ -
----------------------------------------------------
- -
Net book value $ 102,502 $ -
---------------------------------------------
- --------------------------------------------------------------------------------
2. Other Assets 1997 1996
Cost Accumulated Cost Accumulated
Amortization Amortization
Goodwill $ 35,032 $ 3,504 $ - $ -
--------------------------------------------------------
Net book value $ 31,528 $ -
--------------------------------------
<PAGE>
Tax Depot Inc.
Notes to Consolidated Financial Statements
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
3. Related Party Transactions
The following table summarizes the company's related party transactions for the
year:
1997 1996
--------------------------
Sales of services to direct parent company $ 1,931,275 $ 2,058,006
Rental of asset from direct parent company 34,943 31,948
Interest oil, tax discounting advances from direct
parent company 30,157 81,601
These transactions are in the normal course of operations, and are measured at
the exchange amount, which is the amount of consideration established and agreed
to by the related parties.
At the end of the year, the amounts due to related entities are as follows:
1997 1996
--------------------------
Direct parent company $ 236,330 $ 362,876
Wholly-owned subsidiary of parent company 90,631 7,234
Other entity under common control 55,779 -
--------------------------
$ 333,240 $ 370,110
These balances are payable on demand and have arisen from the sale and purchase
of services referred to above.
- ------------------------------------------------------------------------------
4. Share Capital
1997 1996
------------------------
Authorized
Unlimited number of common shares
Issued
100 common shares $ 100 $ 100
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
See "Indemnification of Directors and Officers" in Prospectus
Item 25. Other Expenses of Issuance and Distribution
Registration and filing fees:
Securities and Exchange Commission: $ 1,143
Blue Sky: * 11,170
Printing: * 6,500
Accounting * 10,000
Total other expenses: * 71,187
--------
Total expenses: *$100,000 5
*____________________
*estimated
Item 26. Recent Sales of Unregistered Securities
In connection with incorporation of the Company in October 1996, John
Hewitt purchased 1,000 shares of Class B Common Stock for $.10 per share. In
December 1996, Mr. Hewitt contributed securities having an aggregate market
value of $176,000 in exchange for 44,000 shares of Class B Common Stock. In July
1997, the Company sold 200,000 shares of Class A Common Stock, at $10.00 per
share, to accredited investors in a private offering pursuant to Rule 506
promulgated under the Securities Act.
Item 27. Exhibits
10.4 Form of Franchise Agreement
10.5 Franchise Disclosure Document
23.1 Consent of Hamilton Dwyer & Company, P.C.
23.2 Consent of BDO Dunwoody
- ---------------
5 Offering expenses will comprise 3% of the maximum offering amount and 20%
of the minimum offering amount.
<PAGE>
27 Financial data schedule
99.2 Escrow Agreement
99.3 Lock-Up Agreement
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
If the Company registers securities in the future under Rule 415 of
the Securities Act, the Company will file, during any period in which it offers
or sells securities, a post-effective amendment to this Registration Statement
to: (i) include any prospectus required by section 10(a)(3) of the Securities
Act, (ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement; and notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any derivation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement, and (ii)
include any additional or changed material information in the plan of
distribution. The Company will also treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering for determining
liability under the Securities Act and file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Virginia Beach, Commonwealth of
Virginia, on August 27, 1998
<PAGE>
JTH TAX, INC.
By: /s/ John T. Hewitt
------------------------
JOHN T. HEWITT, Chairman,
Chief Executive Officer and President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
/s/ John T. Hewitt Date: August 27, 1998
- -------------------------------------
JOHN T. HEWITT, Chairman, Chief
Executive Officer and President
/s/ John K. Seal Date: August 27, 1998
- -------------------------------------
JOHN K. SEAL, Vice President of
Operations, Treasurer (Chief
Financial Officer and Chief
Accounting Officer) and Director
/s/ Martha O'Gorman Date: August 27, 1998
- ----------------------------------
MARTHA O'GORMAN, Vice President of
Marketing, and Director
/s/ Donna Halligan Date: August 27, 1998
- ----------------------------------
DONNA HALLIGAN, Vice President of
Franchise Support, Secretary
and Director
/s/ Kathleen Curry Date: August 27, 1998
- ---------------------------------
KATHLEEN CURRY, Vice President of
Technology, Legal Counsel and Director
<PAGE>
By: /s/ John T. Hewitt Date: August 27, 1998
- -----------------------------------
John T. Hewitt, as attorney-in-fact for
each such person pursuant to power of
attorney heretofore filed as part of this
Registration Statement
<PAGE>
- -------------------- COMPARISON OF NOTES --------------------
The Company also expects to open about 100 new franchised locations (90% in
Canada and 10% in the United States), however, none of the proceeds will be
allocated to the costs of these franchises.
- -Next footnote-
Most of these new offices are expected to be opened in Canada, however, a small
amount may be opened in the United States. The Company has not yet entered into
any agreements for these new offices.
- -Next footnote-
Existing tax practices are expected to be opened in both the Canadian and United
States markets. The Company has not yet entered into any agreements to purchase
these practices.
- -Next footnote-
The Company will purchase less expensive practices if only the minimum offering
proceeds are received.
- -Next footnote-
Offering expenses will comprise 3% of the maximum offering amount and 20% of the
minimum offering amount.
Liberty Tax Service
INFORMATION FOR PROSPECTIVE FRANCHISE OWNERS
REQUIRED BY THE FEDERAL TRADE COMMISSION
Liberty Tax Service
To protect you, we've required your franchiser to give you this
information. We have not checked it and we do not know if it is correct. It
should help you make up your mind. Study it carefully. While it includes some
information about your contract, do not rely on it alone to understand your
contract. Read all of your contract carefully. Buying a franchise is a
complicated investment. Take your time to decide. If possible, show your
contract and this information to an advisor, like a lawyer or accountant. If you
find anything you think may be wrong or anything important that has been left
out, you should let us know about it. It may be against the law. There may also
be laws on franchising in your state. Ask your state agencies about them.
FEDERAL TRADE COMMISSION
Washington, DC 20580
<PAGE>
Liberty Tax Service
FRANCHISE OFFERING CIRCULAR
FOR
PROSPECTIVE FRANCHISEES
Liberty Tax Service
2610 Potters Road
Virginia Beach, VA 23452
(757) 340-7610
Liberty Tax Service offers a franchise program to operate tax return
preparation offices. The Liberty Tax Service system utilizes special marketing
techniques and operating procedures to facilitate in the provision of tax,
record keeping and other related services. The initial franchise fee is $10,000,
however this fee will be waived (Zero franchise fee) for franchisees that close
by December 31, 1998. The approximate initial investment is $13,000 to $21,400
please see Items 7 and 8 of this Offering Circular for more information.
Information comparing franchisers is available. Call the state
administrators listed in Exhibit D or your public library for sources of
information.
Registration of this franchise with the state does not mean that the state
recommends it or has verified the information in this offering circular. If you
learn that anything in this offering circular is untrue, contact the Federal
Trade Commission and the state authority.
Effective Date: April 15, 1998
<PAGE>
TABLE OF CONTENTS
1. The Franchiser
2. Business Experience of Officers
3. Business Experience of Franchiser
4. Litigation
5. Bankruptcy
6. Description of Business
7. Initial Fees
8. Recurring Fees
9. Affiliations
10. Required Leases and Purchases
11. Revenue from Affiliates
12. Financing
13. Restrictions on Services and Customers
14. Obligations to Participate in the Operation of the Business
15. Term, Renewal, Termination and Transfer
16. Post Termination Obligations
17. Number of Officers
18. Site Selection
19. Training
20. Public Figures
EXHIBITS
A. Franchise Agreement
B. Promissory Note
C. Financial Statements
D. List of State Administrators
E. Receipt of Franchise Agreement
F. Receipt of Offering Circular
<PAGE>
1. THE FRANCHISER
JTH Tax Inc. is our corporate name and Liberty Tax Service is the name
under which we do business. In this document JTH Tax Inc. and Liberty Tax
Service are referred to as "Liberty", "JTH", "we", "us" and "our". We operate,
and franchise others to operate, tax return preparation offices. The Liberty Tax
Service system utilizes special marketing techniques and operating procedures to
facilitate in the provision of tax, record keeping and other related services.
Liberty Tax Service is the service mark which identifies the services to be
offered pursuant to this franchise. Our primary place of business in the United
States is 2610 Potters Road, Virginia Beach, VA 23452. We can be reached via
telephone at (757) 340-7610 and via facsimile at (757) 340-7612. Throughout this
offering circular, the terms "you" and "your" refer the person or entity that
buys this franchise.
JTH is a Delaware corporation formed in 1996 by John Hewitt. In September
1997, JTH purchased a majority interest in Tax Depot Inc., a Canadian franchiser
of tax return preparation services. Tax Depot Inc. ("Tax Depot") is jointly
owned by JTH and Datatax Business Services Limited ("Datatax"), an Ontario
corporation. Tax Depot has itself and through predecessor companies and
affiliates been in the income tax preparation services for 22 years and in the
business of selling franchises for 19 years. JTH has a contract to manage Tax
Depot Inc. In May 1998, the name under which the Canadian franchises did
business was changed from U&R Tax Depot to Liberty Tax Service. Via Tax Depot,
we are currently offering Liberty Tax Service franchises in Canada as well as in
the United States. The Canadian franchises are similar, but not identical, to
the U.S. franchises described herein.
2. BUSINESS EXPERIENCE OF OFFICERS
John Hewitt. President, CEO, and Chairman
John Hewitt is the President, CEO and Chairman of JTH Tax Inc. Mr. Hewitt
is the Chairman of Tax Depot Inc. and was the President of Tax Depot Inc. from
September 1997 through April 1998. Mr. Hewitt is the founder, and until 1996 was
the President, CEO and Chairman of Jackson Hewitt Inc. Jackson Hewitt Inc. has
been a franchiser of tax return preparation franchises since 1986. There are
over 2000 Jackson Hewitt Tax Service offices in the United States. Mr. Hewitt
has over 28 years of experience in the tax return preparation business. Mr.
Hewitt resigned as President and CEO of Jackson Hewitt Inc. at the end of 1996
and created JTH Tax Inc., a private holding corporation founded to develop tax
preparation service businesses such as Liberty Tax Service.
Martha O'Gorman. Vice-President of Marketing
Ms. O'Gorman has served as the Vice-President of Marketing of JTH since it
began operations. From 1989 until October 1996, Ms. O'Gorman served as the
Director of Marketing for Jackson Hewitt Inc.
Karen Robinson. Vice- President and Regional Director
Ms. Robinson is a Vice-President of JTH and is the Regional Director for
the United States. Ms Robinson has worked with JTH since September 1997. Ms
Robinson obtained her master's degree and served as an Adjunct Professor of
Education at Old Dominion University from 1995 through 1997. From 1992 to 1994,
Ms Robinson worked with Jackson Hewitt Inc. in various positions including
Director of Training, Franchise Operations Liaison, and Troubleshooter.
John (Jack) Seal. Vice-President of Finance
Mr. Seal has been the Vice-President of Finance since August 1997. From
December 1996 to August 1997 Mr. Seal owned a Jackson Hewitt franchise in Las
Vegas, Nevada. In August 1997, he sold that franchise to Jackson Hewitt and took
a position with JTH Tax Inc. Mr. Seal served as the Director of Field Operations
for Jackson Hewitt Inc. from May 1993 until November 1996. From 1989 to 1993 Mr.
Seal owned and operated Jackson Hewitt Tax Service franchises in Rochester New
York.
<PAGE>
Donna Halligan. Vice-President and Director of Taxation
Ms. Halligan is a Vice-President and is the Director of Taxation for JTH
Tax Inc. From July 1997 through May 1998, Ms. Halligan served as the Director of
Training. Ms. Halligan is also the Secretary of JTH Tax Inc. Prior to joining
JTH, Ms. Halligan served in a management capacity for Jackson Hewitt Inc. From
1987 through 1995, Ms. Halligan owned and operated Jackson Hewitt Tax Service
franchises in the Syracuse New York area.
Kathleen Curry. Corporate Attorney and Vice-President of Technology
Ms. Curry has been the Corporate Attorney and the Vice-President of
Technology for JTH since July 1997. Starting in 1992, Ms. Curry worked with
Jackson Hewitt Inc. in various management capacities including Corporate
Attorney, Director of Tax and Software and Regional Director. For a brief period
in 1995/1996, Ms. Curry served as a Product Manager for Best Programs Inc.
3. BUSINESS EXPERIENCE OF THE FRANCHISER
Liberty is a new franchise opportunity in the United States. We began
offering Liberty franchises for sale in the United States in October 1997. Prior
to May 1998, no offices were operated using the name Liberty Tax Service.
However, we did operate five tax offices in Columbus, Ohio under the name Devore
Tax Service during the 1998 tax season. We purchased Devore Tax Service from a
third party tax preparer. These five offices in Columbus now operate as company
offices under the name Liberty Tax Service.
Via Tax Depot Inc., JTH currently operates and franchises others to operate
tax return preparation offices in Canada under the name Liberty Tax Service. As
noted in Item 1, JTH owns a majority interest in Tax Depot Inc., a Manitoba
corporation. Tax Depot has itself and via predecessors operated tax service
offices in Canada for 22 years. There were over 200 U&R Tax Depot offices in
Canada during the 1998 tax season. The name U&R Tax Depot was changed to Liberty
Tax in May 1998.
We do not offer franchises in other lines of business under the Liberty Tax
Service service mark.
4. LITIGATION
Neither JTH nor any person listed in Item 2 of this offering Circular has
been convicted of, or pleaded nolo contendere to, a felony charge required to be
disclosed herein. Neither JTH nor any person listed in Item 2 of this Offering
Circular has been held liable, has settled or is party to a civil action
involving fraud, embezzlement, fraudulent conversion, misappropriation of
property, restraint of trade or any action brought by a franchisee which
involves the franchise relationship. Likewise, no such person is subject to any
state, federal or court injunctive or restrictive orders, or pending actions,
relating to franchise activities or involving fraud, embezzlement, fraudulent
conversion, misappropriation of property, restraint of trade. John Hewitt and
Jack Seal are each party to certain negotiated agreements which restrict their
ability to offer franchises or operate tax offices in certain areas of the
country.
5. BANKRUPTCY
Neither JTH nor any person listed in Item 2 has filed in bankruptcy, been
adjudicated bankrupt, been reorganized due to bankruptcy or been in any way
associated with any person that so filed, been adjudicated or reorganized.
In 1991, U & R Tax Services Ltd., a predecessor company to Tax Depot, made
a proposal under the Bankruptcy Act, which was accepted by all of its creditors,
pursuant to which Datatax, U & R Tax Services Ltd.'s parent, became its majority
shareholder through an offering made to the creditors which saw the creditors
repaid and the company re-capitalized. From 1991 to 1994, U & R Tax Services
Ltd. continued its ongoing franchise operations and activities. In May 1994,
pursuant to a corporate restructuring, U & R Tax Services Ltd. was wound up into
Datatax. At the same time, Tax Depot Inc. was formed as a wholly owned
subsidiary of Datatax. The franchise business continued throughout this
reorganization and was then assigned and licensed to Tax Depot Inc. All
franchises which had been previously granted under the U & R Tax Services Ltd.
name were transferred to Tax Depot Inc. and continued operations under the
trademark U & R Tax Depot. Note that the Liberty Tax Service franchises offered
pursuant to this document are being offered by JTH, not by Tax Depot.
<PAGE>
6. DESCRIPTION OF THE BUSINESS.
Liberty is a tax return preparation business. The Liberty Tax Service
system utilizes special marketing techniques and operating procedures to
facilitate in the provision of tax, record keeping and other related services.
In addition, our franchisees have a license to use our marks. Liberty is a new
franchise opportunity in the United States. We operate five offices in Columbus
Ohio under the Liberty name. There were over 200 Tax Depot offices in Canada
during the 1998 tax season, these offices will operate under the name Liberty
Tax Service beginning in 1998.
7. INITIAL FEES
Initial Franchise Fee. The initial franchise fee is $10,000 per territory.
For a limited time ending December 31, 1998, the initial franchise fee will be
waived. We have 10 days from the date you complete our Effective Operations
Training to approve or deny your request to become a franchise owner.
Franchise Security Deposit. You must pay a $5,000 franchise security
deposit. We will retain this deposit for the duration of your franchise
agreement and refund it to you at the expiration or termination of your
agreement, provided that your accounts with us remain current and provided that
you are open for business by January 8th.
Initial Advertising Fee. We recommend that you invest $3,000 to $5,000 in
the advertising and marketing of the franchised business in the Territory prior
to the January 31st following the effective date of the franchise agreement.
Equipment. You must purchase and maintain a computer system which meets our
then current specifications.
Other Fees. The estimated initial investment required to commence
operations is described in the following table.
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED INITIAL INVESTMENT
Expenditure Amount Method DueDate To Whom
<S> <C>
Initial Franchise Fee Zero check upon signing of Franchiser
(note 1) franchise agreement
Franchise Security Deposit $5,000 check upon signing of Franchser
Franchise agreement
Initial Advertising Fee $3,000 check/charge before opening 3rd party vendors
Equipment $1,000 to $2,000 check/ lease of equipment 3rd party vendor
(note 2) charge
Signage $500 to $2,500 check/ purchase of signage 3rd party vendor
charge
Rent Zero to $3,000 check monthly landlord
(note 3)
Payroll $1,000 to $3,000 check bi-weekly Employees
Utilities&Tele. $1000 check before opening local suppliers
Insurance Zero to $400 check before opening insurance agent
Other $1,500 (note 3) check before opening 3rd party vendors/Us
-----------------
Total: $13,000 - $21,400
Note 1: The initial franchise fee is waived, zero franchise fee, until December
31, 1998. After that time the franchise fee is $10,000.
Note 2: Standard office equipment such as computers and desks is necessary to
operate the franchised business. Such equipment may be leased. Many existing
businesses have standard office equipment and will not need to lease additional
equipment.
Note 3: Other expenses include office supplies.
</TABLE>
<PAGE>
8. RECURRING FEES
Royalty Fee. You must pay a royalty of 14% of the gross receipts of your
Franchised Business. The royalty rate will decrease to 12% of gross receipts
over $100,000 per tax season. In the event that the royalty owed for the tax
season is less than $3,000, you must pay additional royalty such that the total
royalty for the period totals $3,000. Gross receipts include all revenue from
all services and products offered, excluding customer discounts and sales tax.
The royalty fee is due on the 5th of each month for gross receipts from the
previous month. Tax season is the period extending from January 8th through
April 15th.
Advertising Fee. You must pay a continuing advertising fee of 5% of gross
receipts is due monthly, on the 5th of each month. Gross receipts include all
revenue from all services and products offered excluding discounts and sales
tax.
Equipment. You must purchase and maintain a computer system which meets our
then current specifications.
Interest. You must pay interest of 18% per year (compounded daily) or the
highest amount permitted by law, on any amounts owed to us that are more than 15
days past due.
Transfer Fee. In the event that you transfer your franchise to a third
party, you must pay us a fee of $2,500. This fee is due at the time of transfer.
Additional Advertising fee. If you have not prepared at least 500 tax
returns in your franchise territory your first tax season, you must pay us
$5,000 which we will spend in your market. If you have not prepared at least 750
tax returns in your franchise territory your second tax season, you must pay us
$5,000 which we will spend in your market. This fee must be paid to us by July
1st of the year in which you fail to attain these numbers.
9. AFFILIATIONS
In the event that we negotiate an arrangement with a third party bank for
the provision of bank products and services, we require that you use such Bank
to provide bank products to your customers. Likewise, should we provide or
recommend a source for electronically filing tax returns, we require that you
utilize this source.
10. REQUIRED LEASES AND PURCHASES
Site. You must lease retail office space sufficient to operate the
franchise. We must approve the site prior to your signing any leases or other
agreements. Provided your site is approved by us, you may lease from any lessor
which you determine to be appropriate.
Signage. You must display an exterior lighted Liberty Tax Service sign at
each of your offices. You can purchase a sign from any vendor, but the sign must
be pre-approved by us.
Furniture. You must purchase or lease our standard office furniture. You
may obtain furniture from any source provided that the manufacturer make and
model are consistent with the standard furniture described in the Policy and
Procedure Manual.
Telephone: You must maintain a Liberty telephone line and telephone number
for each office.
Insurance. In addition to procuring such insurance as is required by your
state laws, you must obtain comprehensive general liability in the amount of at
least $1,000,000 and employer's liability with a limit of at least $1,000,000.
Insurance may be purchased from any vendor. You must name as an additional
insured on such policies.
Supplies. You must purchase office supplies, including those items listed
as required in the Policy and Procedure Manual. You may purchase such supplies
from any vendor provided, however, that the supplies meet the standards set
forth in the Policy and Procedure Manual and provided that we pre-approve the
supplies.
Advertising and Marketing. You must use the Liberty trade names, service
marks and trademarks ("Marks") as we develop them. At this time, our Marks
include Liberty Tax Service. You must obtain our written consent before using
our Marks in any way. In particular, you must obtain our approval prior to using
our Marks in advertising and marketing. You cannot use any marks which could be
confused with our Marks. In the event that we replace or modify our marks, you
agree to update or replace yours signs, supplies, etc. to reflect the new marks,
at your expense. We must approve all advertising and marketing materials before
you use such materials. Such materials may be purchased from any vendor.
Software: You must use the computer software that we provide or recommend.
<PAGE>
11. REVENUE WE RECEIVE FROM AFFILIATES
At this time, we do not anticipate that we will receive any revenue from
any vendors or suppliers from whom you must purchase. No agreement for receiving
such revenue has been negotiated nor is any being contemplated.
12. FINANCING.
Franchise Fee Financing. We may, in our sole discretion, finance a portion
of your initial investment. Financing consideration will include, among other
factors, the availability of funds, your creditworthiness, your willingness to
act as guarantor, and your compliance with existing franchise agreements. The
terms of such financing will vary each year. The financing can be prepaid
without penalty. In the event that you default on amounts owed, we can terminate
your franchise. Furthermore, all financing becomes due and payable immediately
upon your default of any provision of the Franchise Agreement or if you petition
any court for bankruptcy protection. We may use any financing instrument as
collateral for lines of credit and we are free to discount such instruments to
third parties.
Leasing. Via an arrangement with a third party leasing company, we may
offer lease financing for equipment, signage and furniture. Such leasing is
subject to the availability of leasing capacity and to your creditworthiness. We
are not obligated to provide such leasing programs. If leasing is available
pursuant to third party agreements, you may lease only those items which we
indicate as eligible for leasing. We do not receive any payment from such
arrangements with third party leasing companies, though we may receive revenue
from your purchase of the leased items. The terms of such leasing programs vary
and are yet to be determined for the coming year. Of course, if we do offer a
leasing program and you elect to participate, you are obligated to make payments
as required by the third party lessor. In the event you fail to make such
payments, whether or not you sign the leasing paperwork, the entire lease amount
will become due and payable immediately. We will charge interest on the amounts
outstanding and delinquent amounts will subject you to the termination
provisions of paragraph 8 of the franchise agreement.
13. RESTRICTIONS ON SERVICES AND CUSTOMERS
For the duration of your franchise, you are restricted from offering
products or services other than the franchise services, unless you receive our
prior written consent. You may only operate the franchised business within the
geographic territory specified in Exhibit A of your franchise agreement. No
other franchisee may operate in your territory. You may not advertise outside of
your territory without our written approval. We may advertise in your territory.
However no other franchise can advertise in your territory. In the event that
your territory includes an outlet or site of a national or regional account
which we have negotiated, you may operate in that outlet or site provided that
you are in compliance with your franchise agreement. If you choose not to
operate in the national or regional account outlet or site, we may operate on
that outlet or site. While we do not intend to do so at this time, we may
distribute Liberty products and services by means other than retail or
storefront locations in your territory. Within your territory, you may offer
services to any individual or business.
You must open your franchised business by January 8th of each year. You
must be open for business during the following standard operating hours. During
the period from April 17th through January 7th, your office hours must be held
at the same day and time each week.
January 8th - April 16th Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
<PAGE>
April 17th - Jan.7th Eight hours per week between the hours of
Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
14. OBLIGATION TO PARTICIPATE IN THE OPERATION OF THE FRANCHISED BUSINESS
You must attend our four to five day Effective Operations training. This
training is free, but you are responsible for your expenses while attending
training. You will be provided with a copy of our Policy and Procedure Manual.
The Policy and Procedure Manual is a detailed extension of the franchise
agreement which covers standards to be maintained, operating procedures and
other information. You must operate according to the Policy and Procedure
Manual.
Franchise services must be provided under your direct supervision and
control and/or under the direct supervision and control of a full time general
manager who has been approved by, and not later disapproved by, us. A general
manager shall not be approved prior to the successful completion of our
Effective Operations training.
You must use your best efforts to promote the Franchised Business. You must
achieve and maintain the following target volumes.
Tax Season One 500 returns
Tax Season Two 750 returns
Tax Season Three and beyond 1000 returns
15. TERM, RENEWAL, TERMINATION, TRANSFER
The initial term of the franchise agreement is five years, unless sooner
terminated as provided in the franchise agreement. The franchise agreement may
be renewed for successive five-year terms. We will not renew the franchise
agreement if you are in default of any provision of your franchise agreement.
There is no fee for renewal but you must sign a general release of all claims
against us. If you wish to renew you must notify us in writing at least 180 days
before the expiration of the Agreement. You may terminate the franchise
agreement if you do not meet the target volume levels described in paragraph 14.
We may terminate the franchise agreement if you are in default of any
provision of your franchise agreement, including, but not limited to, the
following,
(i) If you become insolvent or take any steps to seek
protection from creditors, or if a receiver (permanent or
temporary) is appointed by a creditor or a court of
competent authority or if you make a general assignment
for the benefit of creditors
(ii) If a final judgment of record remains unsatisfied for 30
days or longer or if execution is levied against your
business or property
(iii) If you fail to submit required reports or other financial
statements or data as provided in your franchise
agreement, or if you make any false statement in
connection therewith
(iv) If you violate any law, ordinance, rule or regulation of
a governmental agency or department reasonably associated
with the operation of the franchised business.
(v) If any amount owing to Liberty Tax is more than 30 days
past due
(vi) If you discontinue the active operation of business for
five business days
(vii) If you fail to open for business by January 8th of each
year
(viii) If you operate any offices outside the franchise
territory
(ix) If you fail to use the software we provide or recommend
(x) If you do not receive an EFIN from the Internal Revenue
Service by January 15th
(xi) If you fail to achieve or have not maintained a volume of
1000 tax returns by the end of your fourth tax season and
each season thereafter, as measured on April 30th
<PAGE>
You may transfer the franchised business provided that you are in full
compliance with your franchise agreement, we approve of the transferee and all
of the conditions of assignment are satisfied. The transferee must sign the then
current franchise agreement and attend our then current training. Upon transfer,
you must pay to us a transfer of $2,500. In the event of a transfer to a
corporation, you must remain personally liable and responsible for all
obligations of the franchise agreement.
Upon your death or disability, you may transfer or bequeath the franchised
business provided that the transferee is approved by us. The transferee must
sign the then current franchise agreement and attend our then current training.
In the event that no provision for the transfer of the franchised business has
been made within 180 days of your death or disability, we may terminate your
franchise agreement..
You may not modify your franchise agreement. We cannot modify the franchise
agreement during the term of the agreement, however upon renewal you must sign
our then current franchise agreement and agree to the then current obligations.
Any year between May 1st and June 30th , we have the right to purchase your
Franchised Business for the greater of $150,000 or 200% of gross receipts for
the previous twelve months. Gross receipts include all revenue from all services
and products offered, excluding customer discounts and sales tax.
If you so desire, we will purchase your Franchised Business from you after
your first tax season provided that you satisfy the following conditions. The
purchase price will be the greater of $20,000 or 80% of gross receipts. Gross
receipts include all revenue from all services and products offered, excluding
customer discounts and sales tax.
a) Your offices must be in locations which satisfy our site
selection criteria, as outlined in the Policy and Procedure
Manual, and must have been approved by us.
b) You must have an exterior lighted sign, pre-approved by us, in
each office
c) You must have no less than a total of eight tax preparers and/or
tax technicians available for scheduling for each office.
d) You must operate during standard operating hours, as described in
the franchise agreement
e) You must offer a money back guarantee to your customers
f) You must offer free electronic filing
g) You must offer one-day turn around time on refund anticipation
loans to at least 90% of your refund anticipation loan customers.
h) You must have held a six to twelve week tax school as described
in the Policy and Procedure Manual. This school must have had at
least fifteen students.
i) You must have invested a minimum of $5,000 in marketing
j) You must use our standard computer equipment
k) You must have prepared at least 500 tax returns during the tax
season
l) You must notify us of your desire to have us purchase the
Franchised Business prior to the April 30th following the
effective date of the franchise agreement.
16. POST TERMINATION OBLIGATIONS
In the event that your franchise agreement expires, is not renewed or is
terminated for any reason, you immediately have no interest in the franchised
business. You must stop using all service marks and stop using all literature
and other items bearing our marks and/or received from us. You must pay all
amounts owing to us. You must provide us with a compete list of all customers,
including name, social security number, address, telephone and all copies of
customer tax returns and files. You may not retain any copies of customer lists
or customer files. You remain responsible for payment of monies owed to third
parties as a result of operating the franchise. You must adhere to the
provisions of the covenant not to compete.
<PAGE>
During the term of the franchise agreement, you cannot directly or
indirectly, individually, in partnership or in conjunction with any person, firm
or entity in any manner whatsoever carry on, work with, be engaged in or
connected with, be interested in or advise, invest or contribute money to, lend
money to or guarantee the debts or obligations of, or otherwise be associated
with any person, firm, association, syndicate, company or corporation engaged in
or concerned with any business competitive with or similar to the business being
carried on by Liberty or Liberty's franchisees. Likewise, for a period of two
years after the expiration or termination of the franchise agreement, you are
bound by a covenant not to compete within twenty-five miles of any Liberty
office operated in your Franchise Territory.
If you violate the covenant not to compete, you agree to pay to us
royalties and advertising amounts on revenue earned from the preparation of tax
returns and related services within the area specified in the covenant not to
compete. Such payments will continue for the greater of two years or for the
balance of the then existing term of the franchise agreement.
17. NUMBER OF OFFICES
There are five company owned Liberty Tax Service offices operating in the
United States. There are no franchise offices in the United States at this time.
In the United States, no franchises have been terminated, cancelled, refused
renewal, or reacquired by purchase.
Via Tax Depot, there are currently over 200 Liberty Tax Service offices in
Canada. The Canadian franchises are similar, but not identical, to the U.S.
franchises described herein.
18. SITE SELECTION
You must lease retail office space sufficient to operate the franchise. We
must approve the site prior to your signing any leases or other agreements.
Provided we approve your site, you may lease from any lessor which you determine
to be appropriate. The range of time between signing the franchise agreement and
selecting a site will vary depending upon the time of year when you sign the
agreement. All offices must be open by January 8th, so sites must be selected
and the approval process complete by that time. Typically, sites are chosen and
approved within two months of signing the franchise agreement.
19. TRAINING
We will provide a four to five day Effective Operations training course
which will address critical aspects of operating an income tax preparation and
account business. You must attend this training prior to operating a Liberty
office. There is no charge for this training but you are responsible for any
expenses that you incur as a result of attending training, such as travel,
lodging and entertainment. We may also provide a one to two day advanced
training forum for experienced franchisees. To attend advanced training, you
must have completed the Effective Operations training course and at least one
tax season. Advanced training is held at various sites which we select across
the country. The agenda for advanced training varies but often focuses on
improving business management skills in order to increase profitability. There
is no charge for this training but you are responsible for any expenses that you
incur as a result of attending training, such as travel, lodging and
entertainment.
20. PUBLIC FIGURES
John Hewitt is the President, CEO and Chairman of JTH Tax Inc. In some
areas, Mr. Hewitt could be considered a public figure. Mr. Hewitt is the
founder, and until 1996 was the President, CEO and Chairman of Jackson Hewitt
Inc. Jackson Hewitt Inc. has been a franchiser of tax return preparation
franchises since 1986. There are over 2000 Jackson Hewitt Tax Service offices in
the United States. Mr. Hewitt has over 28 years of experience in the tax return
preparation business. Other than John Hewitt, no public figures are used in
connection with the franchise.
<PAGE>
EXHIBIT A
FRANCHISE AGREEMENT
Liberty Tax Service
<PAGE>
TABLE OF CONTENTS
1) Grant of Franchise
2) Term, Renewal and Buyback
3) Territory
4) Fees and Payments
5) Obligations of Franchiser
6) Obligations of Franchisee
7) Reports and Review
8) Termination
9) Post Termination Obligations
10) Covenant Not to Compete
11) Independent Contractor
12) Death or Incapacity
13) Assignability
14) Non-Waiver of Breach
15) Jurisdiction and Governing Law
16) Modification
17) Release of Prior Claims
18) Notices
19) Full Understanding
20) Guaranty
LIBERTY TAX SERVICE FRANCHISE AGREEMENT
Name of Franchise : __________________________________________________
Effective Date : ___________________________
Entity Number : ___________________________
1. Grant of Franchise. Liberty Tax Service ("Liberty", "Franchiser", "we", "us",
"our") has developed a system for the operation of tax return preparation and
accounting offices. The Liberty system utilizes special marketing techniques
and operating procedures to facilitate the provision of tax, record keeping
and other related services. Our service mark is Liberty Tax Service. You have
applied for a franchise that utilizes our system and our marks (`Franchise',
"Franchised Business"). Subject to the terms of this franchise agreement
("Agreement"), we grant you a Liberty Tax Service franchise. This franchise
will allow you to operate a tax return preparation and accounting business
using our system and our marks within the territory described on Schedule A.
You accept the franchise and agree to abide by the terms of this Agreement.
2. Term, Renewal and Buyback. This Agreement will be effective for an initial
five-year term beginning on the Effective Date specified in this Agreement.
You may renew for an additional 5 year term if you have met the target
volumes specified in Paragraph 6 and are otherwise in compliance with this
Agreement. There is no fee for such a renewal, however you must exercise a
general release of all claims that you might have against us. Royalties and
advertising fees will not be raised upon renewal. If you wish to renew you
must notify us in writing at least 180 days before the expiration of this
Agreement.
Any year between May 1st and June 30th, we have the right to purchase your
Franchised Business for the greater of $150,000 or 200% of gross receipts for
the previous twelve months. Gross receipts include all revenue from all services
and products offered, excluding customer discounts and sales tax.
If you so desire, we will purchase your Franchised Business from you after
your first tax season provided that you satisfy the following conditions. The
purchase price will be the greater of $20,000 or 80% of gross receipts. Gross
receipts include all revenue from all services and products offered, excluding
customer discounts and sales tax.
<PAGE>
a) Your offices must be in locations which satisfy our site selection
criteria, as outlined in the Policy and Procedure Manual, and must have
been approved by us.
b) You must have an exterior lighted sign, pre-approved by us, in each
office
c) You must have no less than a total of eight tax preparers and/or tax
technicians available for scheduling for each office
d) You must operate during standard operating hours, as described in the
franchise agreement
e) You must offer a money back guarantee to your customers
f) You must offer free electronic filing
g) You must offer one-day turn around time on refund anticipation loans to
at least 90% of your refund anticipation loan customers
h) You must have held a six to twelve week tax school as described in
the Policy and Procedure Manual. This school must have had at least
fifteen students.
i) You must have invested at least $5,000 in marketing
j) You must use our standard computer equipment
k) You must have prepared at least 500 tax returns during the tax season
l) You must notify us of your desire to have us purchase the Franchised
Business prior to the April 30th following the Effective Date of this
Agreement.
3. Territory. Your territory is described in Schedule A of this Agreement
("Territory"). You may operate as many offices in this Territory as you
determine to be appropriate. You are responsible for selecting the locations for
your offices, however the locations must be approved by us prior to your signing
any leases.
We may negotiate agreements with national or regional retail businesses.
If there is an outlet of such a national or regional account in your Territory,
you may choose to operate that outlet. In the event that you choose not to
operate in an outlet which exists in your Territory, we may operate in that
outlet in your Territory. If we do so, all associated revenue and expenses are
ours. We will not grant any franchises for your Territory or for a portion of
your Territory to anyone else. No other franchisee may operate in your
Territory. While we do not intend to do so at this time, we may distribute
Liberty products and services by means other than retail or storefront locations
in your Territory.
<PAGE>
You may not operate outside your Territory. We may be granting franchises
for areas outside your Territory and or operating company stores in such areas.
We may advertise in your territory, but no other franchisee may advertise in
your Territory. You may not advertise in areas outside your Territory, or in
media which extend outside your Territory, without our express written approval.
4. Fees and Payments.
a. Initial Franchise Fee. The initial franchise fee is $10,000. However
this fee will be waived for franchises which close by December 31, 1998.
b. Franchise Security Deposit. You must pay a $5,000 franchise security
deposit. We will retain this deposit for the duration of your franchise
agreement. At the expiration or termination of your agreement, we will refund
the franchise security deposit to you provided that your accounts with us remain
current and provided that you are open for business by January 8th following the
Effective Date of this Agreement.
c. Approval. We have 10 days from the date you complete our Effective
Operations training to approve or deny your request to become a franchise owner.
Should we deny your request, we will refund your franchise security deposit.
d. Initial Advertising Fee. We recommend that you invest $3,000 to $5,000
in the advertising and marketing of the Franchised Business in the Territory
during the tax season.
e. Royalties. You must pay a royalty of 14% of the gross receipts of your
Franchised Business. The royalty rate will decrease to 12% of gross receipts
over $100,000 per tax season. In the event that the royalty owed for the tax
season is less than $3,000, you must pay additional royalty such that the total
royalty for the period totals $3,000. Gross receipts include all revenue from
all services and products offered, excluding customer discounts and sales tax.
The royalty fee is due on the 5th of each month for gross receipts from the
previous month. Tax season is the period extending from January 8th through
April 15th.
<PAGE>
f. Advertising. You must pay an advertising fee of 5% of the gross
receipts of your Franchised Business. Gross receipts include all revenue from
all services and products offered, excluding customer discounts and sales tax.
g. Payment Period. On the 5th of each month, you must pay the royalty and
advertising fees owed based on gross receipts for the preceding month.
h. Interest. You must pay interest of 18% (compounded daily) per year or
the highest amount permitted by law on any amounts owed to us that are more than
15 days past due.
i.Additional Advertising Fee. If you have not prepared at least 500 tax
returns in your Territory your first tax season, you must pay us $5,000 which we
will spend in your market. Likewise, if you have not prepared at least 750
returns in your Territory your second tax season, you must pay us $5,000 which
we will spend in your market. This fee must be paid to us by July 1st following
the year in which you fail to attain these numbers. Tax season extends from
January 8th through April 15th.
j. Transfer Fee. In the event that you transfer your Franchised
Business to a third party, you must pay us a fee of $2,500 at the time of
transfer.
5. Obligations of Franchiser
a. Advertising and Marketing. We will create and conduct advertising and
marketing programs. We will use the advertising fees collected from you and
other franchisees to pay for the costs of administration, development,
production and distribution. We will help you develop and implement local
advertising and marketing programs, although our help may be limited to
non-financial assistance.
<PAGE>
b. Training. We will provide a four to five day Effective Operations
Training which is required of new franchisees. We will also provide, from time
to time, advanced training and targeted training. You will be responsible for
all expenses incurred as a result of training.
c. Leasing. We may offer a leasing program which will offer an opportunity
for leasing standard signage, furniture and equipment. The leasing program, if
offered, will be financed and administered by a third party. We cannot guarantee
that you will be offered leasing, as the third party leasing company will make
individual determinations.
d. Software. We will provide or recommend a source for purchasing
computer software to be used in the preparation of tax returns and accounting
services.
e. Software support. We will provide telephone support regarding the
usage of software that is provided by us. However, we will not provide software
support or technical assistance on any equipment which does not meet our then
current specifications and standards.
f. Site Selection. We will provide you with site selection advice and
guidance, although you are responsible for selecting the site for your offices.
g. Group Discounts: From time to time we may provide you with the
opportunity to participate in group purchasing programs which offer group
discounts. The discounts and terms for such opportunities will vary.
h. Budgeting. We will advise you in the preparation of an operating
budget.
i. Supply source. We will offer for sale or locate a source for purchasing
supplies, forms and equipment that may be necessary to conduct the business of
tax return preparation, as determined by us from time to time.
j. Procedures. We will develop and implement standardized policies and
procedures and, in connection therewith, we will loan you a Policy and Procedure
Manual. We will update this Manual during the course of this Agreement.
<PAGE>
k. Financing. We may, in our sole discretion, provide financing for
the purchase of certain items such as supplies. The terms of such financing are
subject to change. You must be in compliance with your franchise agreement to
qualify for such financing, if and when financing is available.
l. Bank Products. We may offer a refund anticipation loan program. The
refund anticipation loan program, if offered, is optional and is subject to a
mutual agreement being reached between you and Liberty.
6. Obligations of Franchisee
a. Training. You must attend our four to five day Effective Operations
training before you may operate a Liberty office.
b. Use of Liberty Marks. You agree to use the Liberty trade names, service
marks and trademarks ("Marks") as we develop them. You agree to obtain our prior
written consent before using our marks in any way. In particular, you must
obtain our approval prior to using our marks in advertising and marketing. You
agree not to use any marks which could be confused with our Marks. We may
replace or modify our Marks. In the event that we replace or modify our Marks,
you agree to update or replace yours signs, supplies, etc. to reflect the new
marks, at your expense.
c. Signs. You must display an exterior lighted sign with the Liberty marks
on each of your offices. You must get this sign approved by us prior to ordering
or displaying.
d. Starting Date. You agree to begin operations and be open for business
no later than the January 8th following the Effective date of this Agreement.
e. Operating Hours. You agree to be open for business during the following
hours. During the period from April 17th through January 7th, your office hours
must be held at the same days and time each week.
<PAGE>
January 8th - April 16th Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
April 17th - Jan.7th Eight hours per week between the hours of
Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
f. Target Volumes. You must use your best efforts to promote the
Franchised Business. You must achieve and maintain the following target volumes.
Tax Season One 500 returns
Tax Season Two 750 returns
Tax Season Three and beyond 1000 returns
g. Software. You must use the software that we provide or recommend.
h. Telephone Number. You must maintain a Liberty telephone line and number
for each office in your territory.
i. Equipment. You must purchase and use a computer system which meets our
then current specifications. We may update the specifications. When the
specifications are updated, you must either purchase or upgrade a computer
system such that you meet our current specifications.
j. Insurance. During the term of this Agreement, you must procure and
maintain an insurance policy or policies with at least the following coverage:
Comprehensive General Liability $1 million
Employers Liability $1 million
Workman's Compensation as required by law
k. Bank Products. In the event that we negotiate an agreement with a third
party bank, you are required to use such bank to provide bank products to your
customers.
<PAGE>
l. Electronic Filing. In the event that we provide or recommend a source
for electronically filing tax returns, you are required to use this source
exclusively for all electronic filing.
m. Policy and Procedures. We will provided you with a copy of the Policy
and Procedure Manual. The Policy and Procedure Manual is a detailed extension of
the franchise agreement which covers standards to be maintained, operating
procedures and other information. You must operate the Franchised Business
according to the Policy and Procedure manual. We may modify the Policy and
Procedure Manual during the term of this Agreement.
n. Participation. You agree that franchise services will be provided under
your direct supervision and control and/or under the direct supervision and
control of a full time general manager who has been approved by, and not later
disapproved by, us. A general manager shall not be approved prior to the
successful completion of the Effective Operations training.
o. Return Check. You must prepare each income tax return accurately and in
accordance with federal, state and local laws. You must check each return
thoroughly.
p. Tax Preparer Training. After your first tax season, you must conduct
training courses for tax preparers each year including:
(i)A course offering in the period of September through January of
each year that shall be an intensive course of 6 to 12 weeks
duration covering the required tax training materials, as described
in the then current Policy and Procedures Manual, and
(ii)A one-week course offering during January of each year as
described in the then current Policy and Procedures Manual.
q. Employee Training. You shall require each employee to attend a
two-day employee policy and procedure training course as defined by
us.
r. Office condition. You shall maintain neat and orderly offices and shall
employ and train sufficient personnel to accommodate all customers
without undue delay.
<PAGE>
s. Supplies. You agree that in order to establish a standard and
consistent delivery of Liberty services, certain items must be used in the
operation of the franchise. You must use the items set forth as required in the
Policy and Procedure Manual (i.e. client envelopes and folders, interview
worksheets, interior sign sets). You are responsible for the cost of all
supplies, furniture, equipment and other items which may be necessary to conduct
the Franchised Business.
t. Laws and Regulations: You agree to comply with all federal, state and
local laws and regulations. You will secure all necessary permits, licenses and
consents to operate your business.
u. Limitation of Services. You agree not to engage in any business other
than the Franchised Business without the prior written consent of Liberty. You
agree not to use the Marks, or marks which may be confused with the Marks, in
any way without the prior approval of Liberty.
7. Reports and Review
a. Receipt Report: On the 5th day of each month, you must send us a gross
receipt report, in the manner and form we specify. The receipt report must
include, among other things, a summary of all revenue that received during the
preceding month.
b. Profit and Loss: By May 10th of each year, you must send us an unaudited
profit and loss statement, in the manner and form we specify, for the 12 month
period ending April 30th.
c. Review: We have the right to review and inspect, during normal business
hours, all of your business records.
d. Receipts: If we request a copy of your customer receipts (paper and/or
electronic), you must send us these receipts within 5 days of receiving our
request.
<PAGE>
8. Termination
a. You may terminate this Agreement by not renewing, that is by not sending
us a written notice of your desire to renew within 180 days of the expiration of
the Agreement. You may also terminate this contract if you fail to reach the
target volume levels described in Paragraph 6. To terminate, you must send us
written notice of your intent to terminate and you must comply with all of the
post termination provisions of this Agreement.
b. We may terminate your Agreement for any violation of this Agreement,
including but not limited to the following,
(i) If you become insolvent or take any steps to seek protection
from creditors, or if a receiver (permanent or temporary) is
appointed by a creditor or a court of competent authority or
if you make a general assignment for the benefit of creditors;
(ii) If a final judgment of record remains unsatisfied for 30 days
or longer or if execution is levied against your business or
property;
(iii) If you fail to submit required reports or other financial
statements or data as provided herein, or if you make any
false statement in connection therewith;
(iv) If you violate any law, ordinance, rule or regulation of a
governmental agency or department reasonably associated with
the operation of the franchised business.
(v) If any amount owing to us is more than 30 days past due.
(vi) If you discontinue the active operation of business for five
business days;
(vii) If you fail to open for business by January 8th of each year
(viii) If you operate any offices outside the franchise territory.
<PAGE>
(ix) If you fail to achieve or have not maintained a volume of 1000
tax returns by the end of your fourth tax season and each
season thereafter, as measured on April 30th.
(x) If you fail to use the software we provide or recommend;
(xi) If you do not get an EFIN from the Internal Revenue Service by
January 8th.
9. Post Termination Obligations
In the event that this Agreement expires, is not renewed or is terminated for
any reason or by any party, you must immediately:
a. Remove all Liberty signage from all of your offices and other premises
b. Stop identifying yourself as a Liberty franchisee and cease, and not
thereafter commence, use of any marks which are likely to be confused
with Liberty marks
c. Pay us all amounts owing to us
d. Stop using all literature and other items bearing our marks and/or
received from us
e. Transfer all telephone numbers used in relation to the Franchised Business
to us
f. Give us all copies, including electronic copies, of your customer lists
g. Deliver to us all customer tax returns, files, records and all copies
thereof
h. Adhere to the provisions of the covenant not to compete as described
in this Agreement.
10. Covenant Not To Compete
a. During the term of this Agreement, you agree not to directly or indirectly,
individually, in partnership or in conjunction with any person, firm, or
entity, in any manner whatsoever carry on, work with, be engaged in or
connected with, be interested in or advise, invest or contribute money to,
lend money to or guarantee the debts or obligations of, or otherwise be
associated with any person, firm, association, syndicate, company or
corporation engaged in or concerned with in any business competitive with or
similar to the business being carried on by Liberty or Liberty's Franchisees.
<PAGE>
b. You agree that for a period of two (2) years following the termination,
expiration, transfer or other disposition of this Franchise, you will not
individually, in partnership or in conjunction with any person, firm or
entity in any manner whatsoever, carry on, work with, be engaged in or
connected with, be interested in or advise, invest or contribute money to,
lend money to or guarantee the debts or obligations of, or otherwise be
associated with any person, firm, association, syndicate, company or
corporation engaged in or concerned with any business competitive with or
similar to the business being carried on by Liberty or Liberty's Franchisees
within twenty-five miles of any Liberty office operated in your Franchise
Territory.
c. In the event that you fail to comply with the covenant not to compete, you
agree to pay to us, as a genuine pre-estimate of liquidated damages,
royalties and advertising amounts as set forth in Paragraph 4 of this
Agreement with respect to those revenues derived by you and those associated
with you from preparation of tax returns and related services within the area
specified in the covenant not to compete. Such payments will continue for two
(2) years or for the balance of the then existing term of this Agreement,
whichever is the greater. The parties expressly acknowledge and agree that
such payments shall not affect any rights or remedies Liberty may have, at
law or in equity, against you by reason of such non-compliance, including the
right to seek injunctive relief.
d. If any covenant or provision herein is determined to be void or
unenforceable, in whole or in part, it shall not be deemed to affect or
impair the validity of any other covenant or provision of this Paragraph.
e. You also agree that you will never, during or after the term of this
Agreement, divulge to or use for the benefit of any person, association or
corporation outside of the Liberty Tax Service system, any information or
knowledge concerning customers, promotion, advertising or any other systems
or methods of operation of Liberty's business or that of Liberty's
franchisees which you may have acquired by virtue of your operations and/or
training pursuant to this Agreement. You agree not to do any deliberate act
prejudicial or injurious to the goodwill or name of Liberty. Information
furnished to your employees shall be reasonably limited to that which
directly relates to such employee's duties and assists in the proper
performance of such duties.
<PAGE>
f. This Agreement is entered into between the parties hereto with the full
knowledge of its nature and extent. You hereby acknowledge that the
qualifications for a franchise by Liberty are special, unique and
extraordinary, and that this Agreement would not be entered into by Liberty
except upon condition that such restrictive covenants be embodied herein and
that, as such, the restrictive covenants are enforceable in the event of a
breach by Franchisee by injunctive relief.
g. Franchisee acknowledges and agrees that the provisions of this Paragraph are
reasonable, valid and not contrary to the public interest and all defenses to
the strict enforcement thereof by Liberty are hereby waived by Franchisee.
h. Franchisee agrees not to disparage Liberty and/or its current or former
officers, directors or employees.
i. All of the covenants contained in this Paragraph shall survive any
termination of this Agreement.
11. Independent Contractor. You are an independent contractor. You are not an
agent, partner, employee, or a participant in a joint venture. You do not
have any power to bind or obligate us. We are not and will not be liable
for any act, omission, debt, or other obligation of you.
You are responsible for all loss or damage and contractual liability
to third parties originating in or in connection with the operation of the
Franchise and for all claims or demands for damage directly or indirectly
related thereto. You agree to defend, indemnify and save harmless Liberty of and
from and with respect to any such claim, loss or damage.
12. Death or Incapacity. In the event of the death or incapacity of
Franchisee, Liberty shall be entitled, but not required, to render whatever
assistance is required to maintain franchise operations. Liberty shall be
entitled to reimbursement from Franchisee or Franchisee's estate for any
reasonable expenditures thus incurred. Death or incapacity shall not of itself
be grounds for termination of this Agreement unless either
(i) Franchisee or his/her legal representative fail for a period of 180 days
after such death or incapacity to commence action to assign this Agreement
according to the terms of this Agreement; or,
(ii) Such assignment is not completed within one year after death or incapacity.
<PAGE>
If such action or assignment is not timely taken or made as aforesaid, Liberty
shall have the right to terminate this Agreement.
13. Assignability. No sub-license or license of the Franchise is permitted.
Your interest under this Agreement or your shares in the Franchise may be
transferred and assigned provided that you comply with the following provisions.
No interest may be transferred unless or until you are in full compliance with
this Agreement.
a. If you or any shareholder, partner, assignee, or representative of the
Franchise has received and desires to accept a signed, bona fide offer to
purchase or otherwise transfer the Franchise or shares or partnership
interest in Franchisee, such individual shall grant Liberty the option (the
"Right of First Refusal") to purchase such interest, shares or partnership
interest as hereinafter provided.
b. A transfer to a "Controlled Corporation" shall not trigger the Right of
First Refusal. A "Controlled Corporation" is a corporation in which
Franchisee is the beneficial owner of 100% of each class of voting
securities. At the time of the desired transfer of interest to a Controlled
Corporation, you must notify us in writing of the name of the Controlled
Corporation and the name and address of each officer, director and
shareholder and their respective holdings. Each officer, director and
shareholder of the Controlled Corporation shall sign the then current
Liberty franchise agreement and will personally assume and be bound by all
of the terms, covenants and conditions of the agreement
c. A transfer of interest within a Franchisee which is a corporation shall not
trigger the Right of First Refusal provided that only the percentage
ownership, rather than the identity of the shareholders, is changing. At the
time of the desired transfer of interest within a corporation, you must
notify us in writing of the name and address of each officer, director and
shareholder and their respective holdings. Each officer, director and
shareholder of the Controlled Corporation shall sign the then current
Liberty franchise agreement and will personally assume and be bound by all
of the terms, covenants and conditions of the agreement.
d. The Right of First Refusal shall be offered to Liberty by notice in writing,
such notice shall include a copy of the signed offer to purchase which was
received ("Notice"). We shall have the right to purchase the Franchise or
interest or shares in the Franchise at and for the price and upon the terms
set out in the Notice, except that Liberty may substitute cash for any
non-cash form of payment proposed and Liberty shall have 60 days after the
exercise of its Right of First Refusal to close the said purchase. Should
Liberty wish to exercise its Right of First Refusal, we will notify you in
writing within 15 days from its receipt of the Notice. Upon the giving of
such notice by Liberty, there shall immediately arise between Liberty and
Franchisee or its shareholders or partners, a binding contract of purchase
and sale at the price and upon the terms contained in the Notice.
<PAGE>
e. If we do not exercise our Rights of First Refusal, you or the shareholders
or partners, may sell the said interest in the Franchise according to the
terms set forth in the Notice, provided that the following conditions are
satisfied and provided that the sale is completed within 90 days from the
day on which Liberty received the Notice. If the proposed sale transaction
is not concluded within the 90-day period, the Right of First Refusal
granted to Liberty hereunder shall continue in full force and effect.
f. Even if Liberty does not exercise its Right of First Refusal, we must
approve, in writing, the proposed transferee prior to any transfer of an
interest in the Franchise or shares or partnership interest. The proposed
transferee must complete the then current Liberty franchise application. We
will consider the qualifications of the proposed transferee in accordance
with our then current application process and using our then current
qualifications.
g. The proposed transferee must sign the then current Liberty franchise
agreement and must personally assume and be bound by all of the terms,
covenants and conditions of the agreement.
h. The proposed transferee must attend our Effective Operations training
i. You shall pay us a transfer fee of Two Thousand Five Hundred ($2,500.00)
Dollars.
14. Non-Waiver of Breach. The failure of either party hereto to enforce any one
or more of the terms or conditions of this Agreement shall not be deemed a
waiver of such terms or conditions or of either party's rights thereafter to
enforce each and every term and condition of this Agreement.
15. Jurisdiction and Governing Law. This Agreement will only be effective upon
its acceptance in Virginia Beach, Virginia by our authorized officer. You
consent to venue and personal jurisdiction in Virginia Beach Virginia State
courts and in the United States District Court in Norfolk, Virginia. You agree
that any suit or action brought against us or against you that relates to this
Agreement, the process of entering this Agreement or any termination of this
Agreement shall be brought and venue shall be proper only in the U.S. District
in Norfolk, Virginia., or if Federal jurisdiction does not exist, in the county
or state court for the City of Virginia Beach, Virginia. You agree to waive your
rights to a jury trial.
<PAGE>
16. Modification. This Agreement is the entire agreement between you and
Liberty. This Agreement supercedes all other oral and written agreements or
understandings between you and Liberty. No modifications to this Agreement will
have any effect unless such modification is in writing and signed by you and by
our authorized officer.
17. Release of Prior Claims. By executing this Agreement, Franchisee,
individually and on behalf of Franchisee's heirs, legal representatives,
successors and assigns, and each assignee of this Agreement by accepting
assignment of the same, hereby forever releases and discharges Liberty, its
officers, directors, employees, agents and servants, including Liberty's parent,
subsidiary and affiliated corporations, their respective officers, directors,
employees, agents and servants, from any and all claims relating to or arising
under any franchise agreement or any other agreement between the parties and
executed prior to the date of this Agreement.
<PAGE>
18. Any notice or request hereunder shall be given by mail or courier, postage
fully prepaid, or delivered personally or by facsimile, addressed to, in the
case of Liberty: 2610 Potters Road, Virginia Beach, VA 23452. Telephone: (757)
340-7610 Telecopier: (757) 340-7612. In the case of Franchisee to the address
indicated below Franchisee signature on this Agreement.
19. Full Understanding. This Agreement expresses fully the understanding by and
between the parties hereto. All prior understandings or commitments of any kind,
oral or written, as to this Franchise and any matter covered by this Agreement
are hereby superseded and canceled, with no further liabilities or obligations
of the parties with respect thereto except as to any monies due and unpaid
between the parties to this Agreement at the time of the execution of this
Agreement.
20. Guaranty. For and in consideration of this Agreement, the undersigned will
execute this Agreement as Guarantors. Each of the Guarantors agrees jointly and
severally to perform each and every term and obligation of this Agreement,
including but not limited to the terms regarding payment. The undersigned waive
presentment, demand or notice of non-performance and the right to require us to
proceed against the other guarantors.
<PAGE>
You acknowledge that you understand and agree to be bound by the terms,
conditions and obligations of this Agreement.
FRANCHISEE _____________________________________________________
SIGNATURE _________________________________ DATE ______________
PRINT NAME ____________________________________________
Percentage ownership (if corporation) _____________
HOME ADDRESS __________________________________________
__________________________________________
Telephone number: __________________________________
SIGNATURE _________________________________ DATE ______________
PRINT NAME ____________________________________________
Percentage ownership (if corporation)
HOME ADDRESS __________________________________________
__________________________________________
__________________________________________
Telephone number: __________________________________
LIBERTY TAX SERVICE
SIGNATURE _________________________________ DATE ______________
ADDRESS 2610 Potters Road
Virginia Beach, VA 23452
TELEPHONE (757)340-7610
<PAGE>
SCHEDULE "A" TO THE FRANCHISE AGREEMENT
The Franchise Territory is as follows:
FRANCHISE DISCLOSURE DOCUMENT
LIBERTY TAX SERVICE
1345 Pembina Highway
Winnipeg, Manitoba
R3T 2B6
(204) 949-3636
is offering franchises in CANADA
This Franchise Disclosure Document is provided to assist the prospective buyer
of the Franchise in the discovery process relating to this opportunity. This
Disclosure Document only summarizes certain important aspects of the Franchise
Agreement. The Franchise Agreement, when signed, will legally bind the
Franchisee and the Franchiser. You should read this Franchise Disclosure
Document and the Franchise Agreement carefully.
<PAGE>
TABLE OF CONTENTS
1. Franchiser
2. Business Experience of Franchiser
3. Business Experience of Officers
4. Initial Franchise Fees
5. Recurring Fees
6. Training
7. Franchise Services
8. Services Provided by Franchiser
9. Operational Requirements
10. Reports
11. Term, Renewal, Termination and Transfer
12. Covenant Not to Compete
EXHIBITS
A. Franchise Agreement
B. Additional Services Addendum
<PAGE>
1. THE FRANCHISER
Tax Depot Inc. is our corporate name and Liberty Tax Service is the name
under which we do business. In this document Tax Depot Inc. is referred to as
"Liberty", "Liberty Tax Service", "Franchiser", "we", "us" and "our". We
operate, and franchise others to operate, tax return preparation offices. The
Liberty Tax Service system utilizes special marketing techniques and operating
procedures to facilitate in the provision of tax, record keeping and other
related services. Liberty Tax Service is the service mark which identifies the
services to be offered pursuant to this franchise. Our franchisees have a
limited license to use our marks. A copy of the franchise agreement is attached
and is part of this disclosure document. An income tax rebate discounting
business may be available under a separate Additional Services Addendum. The
discounting business is optional and subject to a mutual agreement being reached
between you and Liberty.
Our primary place of business is 1345 Pembina Highway, Winnipeg, Manitoba
R3T 2B6. We can be reached via telephone at (204) 949-3636 and via facsimile at
(204) 284-9854. Throughout this offering circular, the terms "you", "your" and
"Franchisee" refer the person or entity that buys this franchise.
2. BUSINESS EXPERIENCE OF THE FRANCHISER
Tax Depot is a Manitoba corporation which has its head office in Winnipeg,
Manitoba. Tax Depot has itself, and through predecessor companies and
affiliates, been in the income tax preparation services for 22 years and in the
income tax rebate discounting business for 13 years. Tax Depot has been in the
business of selling franchises in other provinces for some 19 years.
Tax Depot Inc. is jointly owned by Datatax Business Services Limited
("Datatax"), an Ontario corporation, and JTH Tax Inc. ("JTH"), a Delaware
corporation. JTH is a closely held corporation created by John Hewitt. John
Hewitt is the founder and former President/CEO of Jackson Hewitt Inc., a tax
return preparation franchiser which has over 2000 offices throughout the United
States in 1998. In addition to offering franchises in Canada via Tax Depot, JTH
offers tax return preparation franchises in the United States under the trade
name Liberty Tax Service. Datatax, the other owner of Tax Depot, also owns a
separate corporation which conducts business under the trade name Farm Business
Consultants. Farm Business Consultants provides tax consulting services in rural
Canada to farmers and members of the agricultural business community.
Our franchise experience commenced in 1975, with the granting of the first
franchise by U & R Tax Services Ltd., a predecessor company to the Franchiser.
In 1991, U & R Tax Services Ltd. made a proposal under the Bankruptcy Act, which
was accepted by all of its creditors, pursuant to which Datatax, U & R Tax
Services Ltd.'s parent, became its majority shareholder through an offering made
to the creditors which saw the creditors repaid and the company re-capitalized.
From 1991 to 1994, U & R Tax Services Ltd. continued its ongoing franchise
operations and activities.
In May 1994, pursuant to a corporate restructuring, U & R Tax Services Ltd.
was wound up into Datatax. At the same time, Tax Depot Inc. was formed as a
wholly owned subsidiary of Datatax. The franchise business continued throughout
this reorganization and was then assigned and licensed to Tax Depot Inc. All
franchises which had been previously granted under the U & R Tax Services Ltd.
name were transferred to Tax Depot Inc. and continued operations under the
trademark U & R Tax Depot.
<PAGE>
In September 1997, JTH acquired an interest in Tax Depot Inc. by entering
into an agreement to acquire 60% of the equity ownership of Tax Depot and
collaterally entering into an agreement to manage Tax Depot and its Franchise
operations.
During the 1998 tax season, there were approximately 207 U&R Tax Depot
offices extending from the Maritimes to British Columbia. In May 1998, the trade
name U&R Tax Depot was changed to Liberty Tax Service. The company does not
engage in any other type of franchise operations.
3. BUSINESS EXPERIENCE OF OFFICERS
John Hewitt. CEO, Chairman
Mr. Hewitt has been the CEO and Chairman of Tax Depot Inc. since July 1997.
John Hewitt is also the President and Chairman of JTH Tax Inc. Mr. Hewitt is the
founder, and until 1996 was the President, CEO and Chairman, of Jackson Hewitt
Inc. Jackson Hewitt Inc. has been a franchiser of tax return preparation
franchises since 1986. There are over 2000 Jackson Hewitt Tax Service offices in
the United States. Mr. Hewitt has over 28 years of experience in the tax return
preparation business. Mr. Hewitt resigned as President and CEO of Jackson Hewitt
Inc. during 1996 and created JTH Tax Inc., a private holding corporation founded
to develop tax preparation service businesses such as Tax Depot. In September
1997, JTH Tax Inc. purchased a majority interest in Tax Depot Inc.
Steven Sardo. President
Mr. Sardo became the President of Tax Depot in April 1998. From October
1995 to April 1998, Mr. Sardo served as the President of Save-Smart Insurance &
Financial Services. Mr. Sardo was the Vice-President of Marketing for Mainway
Insurance Brokers Ltd. from January 1992 through October 1995.
Martha O'Gorman. Vice-President of Marketing
Ms. O'Gorman has served as the Director of Marketing of Tax Depot since
July 1997. Ms. O'Gorman is a Vice-President of JTH Tax Inc. From September 1989
until October 1996, Ms. O'Gorman served as the Director of Marketing for Jackson
Hewitt Inc.
Kathleen Curry. Corporate Attorney and Vice-President of Technology
Ms. Curry has been the Corporate Attorney and Vice-President of Technology
for JTH since July 1997. Ms. Curry is also a Vice-President of JTH Tax Inc.
Starting in 1992, Ms. Curry worked with Jackson Hewitt Inc. in various
management capacities including Corporate Attorney, Director of Tax and Software
and Regional Director. For a brief period in 1995/1996, Ms. Curry served as a
Product Manager for Best Programs Inc.
<PAGE>
4. INITIAL FEES
Initial Franchise Fee. The initial franchise fee is $10,000 per territory.
For a limited time ending December 31, 1998, the initial franchise fee will be
waived. We have 10 days from the date you complete our Effective Operations
Training to approve or deny your request to become a franchise owner.
Franchise Security Deposit. You must pay a $2,000 franchise security
deposit. We will retain this deposit for the duration of your franchise
agreement and refund it to you at the expiration or termination of your
agreement, provided that your accounts with us remain current and provided that
you are open for business by February 1st.
Initial Advertising Fee. We recommend that you invest between $3,000 and
$5,000 in the advertising of the franchised business in your franchise territory
during the tax season.
Other Fees. You should expect to make the following estimated initial
investments prior to the time that the franchised location is ready to conduct
business. These are estimates, actual expenditures will vary.
High Mid Low
Franchise Security Deposit $2,000 2,000 2,000
Deposits, leasehold improvements 2,500 1,250 0
Equipment and Furniture 3,500 2,000 2,500
to to to
5,500 5,000 4,500
Grand Opening Advertising 5,000 3,000 0
Opening Inventory of Supplies 200 200 200
Miscellaneous Supplies 200 100 0
Pre-opening Wages 0 0 0
Staff Training Costs
(assuming $120 per employee) 480 360 240
$120 per employee)
Franchisee Training Costs 1,000 500 50
Security Deposits and hookup fees 250 125 0
Working capital 1,500 1,000 500
-----------------------------
$16,630 $10,535 $5,490
to to to
$18,630 $13,535 $7,490
<PAGE>
5. RECURRING FEES
Royalty Fee: You must pay a royalty of 14% of the gross receipts of your
Franchised Business. The royalty rate will decrease to 12% of gross receipts
over $50,000 per tax season. In the event that the royalty owed for the period
extending from January 1 through April 30 is less than $2,000, you must pay
additional royalty such that the total royalty for the period totals $2,000.
Gross receipts include all revenue from all services and products offered,
excluding customer discounts and G.S.T. The royalty fee is due on the 5th of
each month.
Advertising Fee. An advertising fee of 3% of gross receipts is due monthly,
on the 5th of each month. Gross receipts include all revenue from all services
and products offered excluding discounts and G.S.T.
Discounting Fee. If you participate in the income tax rebate discounting
program, you will pay additional fees as outlined in the attached Additional
Services Addendum.
Equipment. You must purchase and maintain a computer system which meets our
then current specifications.
Interest. You must pay interest of 24% per year (compounded daily) or the
highest amount permitted by law, on any amounts owed to us that are more than 15
days past due.
Transfer Fee. In the event that you transfer your franchise to a third
party, you must pay us a fee of $2,000. This fee is due at the time of transfer.
Additional Advertising fee. If you have not prepared at least 500 tax
returns in your franchise territory your first tax season and 750 returns in
your territory your second tax season, you must pay us $3,000 which we will
spend in your market. This fee must be paid to us by July 1st of the year you
fail to attain these numbers.
6. TRAINING
We will provide a four to five day Effective Operations training course
which will address critical aspects of operating an income tax preparation
business. You must attend this training prior to operating a Liberty office.
There is no charge for this training but you are responsible for any expenses
that you incur as a result of attending training, such as travel, lodging and
entertainment.
We also provide a 1 to 2 day advanced training forum for experienced
franchisees. To attend advanced training, you must have completed the Effective
Operations training course and at least one tax season. Advanced training is
held at various sites which we select across the country. The agenda for
advanced training varies but often focuses on improving business management
skills in order to increase profitability. There is no charge for this training
but you are responsible for any expenses that you incur as a result of attending
training, such as travel, lodging and entertainment.
<PAGE>
7. FRANCHISE SERVICES
As a franchisee, you will be granted a franchise territory. You must lease
retail office space sufficient to operate the franchise. We will offer guidance
in the selection of an appropriate site and we must approve the site prior to
your signing any leases or other agreements. Provided we approve your site, you
may lease from any lessor which you determine to be appropriate.
No other franchisee may operate in your territory and you may not operate
outside your territory. Likewise, no other franchisee may advertise in your
territory and you may not advertise outside of your territory (unless you
receive our written approval to do so). We may advertise in your territory.
Within your territory, you may offer franchise services to any individual or
business. You cannot engage in any business other than the supply of the
franchise services without our prior written consent.
In the event that your territory includes an outlet or site of a national
or regional account which we have negotiated, you have the opportunity to
operate in that outlet or site provided that you are in compliance with your
franchise agreement. If you choose not to operate in the national/regional
account outlet or site, we may operate on that outlet or site. While we do not
intend to do so at this time, we may distribute Liberty products and services by
means other than retail or storefront locations in your territory.
You must open your franchised business by February 1st of each year. You
must be open for business during the following minimum operating hours. From May
1st through January 31st, you must hold office hours the same day each week.
<TABLE>
<CAPTION>
<S> <C>
February 1st - April 30th Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
May 1st - January 31st Eight hours per week between the hours of
Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
</TABLE>
You will be provided with a copy of our Policy and Procedure Manual. The
Policy and Procedure Manual is a detailed extension of the franchise agreement
which covers standards to be maintained, operating procedures and other
information. You must operate according to the Policy and Procedure Manual.
Franchise services must be provided under your direct supervision and control
and/or under the direct supervision and control of a full time general manager
who has been approved by, and not later disapproved by, us. A general manager
shall not be approved prior to his/her successful completion of Liberty required
training program.
8. SERVICES PROVIDED BY FRANCHISER
Training: We will provide a four to five day introductory training course.
All new franchisees must take this course. We will also provide advanced
training and one-on-one training. Training shall take place at such time and
place as we shall designate.
Advertising and Marketing. We will create and conduct advertising and
marketing programs. The advertising fees that you pay to us will be used for the
administration, development, production and distribution of such programs. We
will help you develop and implement local advertising and marketing programs,
although our help may be limited to non-financial assistance.
<PAGE>
Software: We will provide tax preparation and related software and we will
provide electronic filing transmission capabilities. You must use the software
that we provide or recommend.
Software support. We will provide telephone support regarding the usage of
software that is provided by us. However, we will not provide software support
or technical assistance on any equipment which does not meet our then current
specifications and standards.
Leasing. We may offer a leasing program which will offer an opportunity for
leasing standard signage, furniture and equipment. The leasing program, if
offered, will be financed and administered by a third party.
Group Discounts: From time to time we may provide you with the opportunity
to participate in group purchasing programs which offer group discounts. The
discounts and terms for such opportunities will vary.
Supply source. We will offer for sale or locate a source for purchasing
such supplies, forms and equipment that may be necessary to conduct the business
of tax return preparation, as determined by us from time to time. We do not
receive rebates or other benefits from suppliers.
Financing. We may, in our sole discretion, provide financing for the
purchase of certain items such as supplies. The terms of such financing are
subject to change. You must be in compliance with your franchise agreement to
qualify for such financing, if and when financing is available.
Bank Products. We may offer an income tax discounting business, although
this business is only available under a separate Additional Services Addendum
(see attached). The discounting business is optional and is subject to a mutual
agreement being reached between you and Liberty. To participate in this
business, you must comply with and/or register under the Tax Rebate Discounting
Act.
9. OPERATIONAL REQUIREMENTS
Signage. You must display an exterior lighted Liberty sign on each of your
offices. You can purchase a sign from any vendor, but the sign must be
pre-approved by us.
Telephone Number: You must maintain a Liberty telephone number and
telephone line for each office in your territory.
Liberty Marks. You must use the Liberty trade names, service marks and
trademarks ("Marks") as we develop them. At this time, our Marks include Liberty
Tax Service, Speedfile and Taxrush Refund Services. You must obtain our written
consent before using our Marks in any way. In particular, you must obtain our
approval prior to using our marks in advertising and marketing. You cannot use
any marks which could be confused with our Marks. In the event that we replace
or modify our marks, you agree to update or replace your signs, supplies, etc.
to reflect the new marks, at your expense.
<PAGE>
Target Volumes. You must use your best efforts to promote the Franchised
Business. You must achieve and maintain the following target volumes.
Tax Season Two 500 returns
Tax Season Three 750 returns
Tax Season Four and beyond 1000 returns
Insurance. You must have an insurance policy or policies with at least $1
million in comprehensive general liability coverage. You must name us as an
additional insured on these policies.
Supplies. In order to establish a standard and consistent delivery of
Liberty services, certain items must be used in the operation of the franchise.
You must use the items set forth as required in the Policy and Procedure Manual
(i.e. client envelopes and folders, interview worksheets, interior sign sets).
You are responsible for the cost of all supplies, furniture, equipment and other
items which may be necessary to conduct the franchised business.
Return Check. You must prepare each income tax return accurately and in
accordance with federal, provincial and local laws. You must check each return
thoroughly.
Tax Preparer Training. After your first tax season, you must conduct
training courses for tax preparers each year including:
(i) A course offering in the period of September through
January of each year that shall be an intensive
course of 6 to 12 weeks duration covering the
required tax training materials, as described in the
then current Policy and Procedures Manual, and
(ii) A one-week course offering during January of each
year as described in the then current Policy and
Procedures Manual.
Employee Training. You shall require each employee to attend a two-day
employee policy and procedure training course as defined by us.
Office condition. You must keep your offices neat and orderly and you must
employ and train sufficient personnel to accommodate all customers without undue
delay.
Indemnification. You must indemnify and hold us harmless from and against
all costs, expenses, losses, liabilities, damages, claims and demands, however
arising.
Laws and Regulations: You shall comply with all laws and regulations of
Canada, as well as those of your province and city. You will secure all
necessary permits, licenses and consents to operate your business.
10. REPORTS
Remittance Report. On the 5th day of each month, you must send us a
remittance report, in the manner and form we specify. The remittance report must
include, among other things, a summary of all revenue that was received during
the preceding month.
<PAGE>
Profit and Loss. By May 10th of each year, you must send us an un-audited
profit and loss statement, in the manner and form we specify, for the 12-month
period ending April 30th.
Review. We have the right to review and inspect all of your business
records, during normal business hours. If, upon audit, amounts owing to us have
been understated by more than 2%, you agree to pay us the cost of the audit in
addition to paying the amounts owed plus interest at 24% per annum compounded
daily.
Receipts. If we request a copy of your customer receipts (paper and/or
electronic), you must send us these receipts within 5 days of receiving our
request.
11. TERM, RENEWAL, TERMINATION, and TRANSFER
The initial term of the franchise agreement is five years, unless sooner
terminated as provided in the franchise agreement. The franchise agreement may
be renewed for successive five-year terms. There is no fee for renewal but you
must sign a general release of all claims against us. The royalty fee will not
be changed upon renewal. If you wish to renew you must notify us in writing at
least 180 days before the expiration of the Agreement. You may terminate the
franchise agreement if you do not meet the target return volumes described in
Paragraph 9 above.
We may terminate or not renew the franchise agreement if you are in default
of any provision of your franchise agreement, including, but not limited to, the
following,
(i) If you become insolvent or take any steps to seek
protection from creditors, or if a receiver
(permanent or temporary) is appointed by a creditor
or a court of competent authority or if you make a
general assignment for the benefit of creditors
(ii) If a final judgment of record remains unsatisfied for
30 days or longer or if execution is levied against
your business or property
(iii) If you fail to submit required reports or other
financial statements or data as provided in your
franchise agreement, or if you make any false
statement in connection therewith
(iv) If you violate any law, ordinance, rule or regulation
of a governmental agency or department reasonably
associated with the operation of the franchised
business.
(v) If any amount owing to Liberty Tax is more than 30
days past due
(vi) If you discontinue the active operation of business
for five business days
(vii) If you fail to open for business by February 1st of
each year
(viii) If you operate any offices outside the franchise
territory
<PAGE>
(ix) If you fail to use the software we provide or
recommend
(x) If you do not get an E-file number from Revenue
Canada by February 1st
(xi) If you fail to achieve or have not maintained a
volume of 1000 tax returns by the end of your fourth
tax season and each season thereafter, as measured on
April 30th
You may transfer the franchised business provided that you are in full
compliance with your franchise agreement, we approve of the transferee and all
of the conditions of assignment are satisfied. The transferee must sign the then
current franchise agreement and attend our then current training. Upon transfer,
you must pay to us a transfer fee of $2,000. In the event of a transfer to a
corporation, you must remain personally liable and responsible for all
obligations of the franchise agreement.
Upon your death or disability, you may transfer or bequeath the franchised
business provided that the transferee is approved by us. The transferee must
sign the then current franchise agreement and attend our then current training.
In the event that no provision for the transfer of the franchised business has
been made within 180 days of your death or disability, we may terminate your
franchise agreement.
You may not modify your franchise agreement. We cannot modify the franchise
agreement during the term of the agreement, however upon renewal you must sign
our then current franchise agreement and agree to the then current obligations.
In the event that your franchise agreement expires, is not renewed or is
terminated for any reason, you immediately have no interest in the franchised
business. You must stop using all service marks and stop using all literature
and other items bearing our marks and/or received from us. You must pay all
amounts owing to us. You must provide us with a compete list of all customers,
including name, social security number, address, telephone and all copies of
customer tax returns and files. You may not retain any copies of customer lists
or customer files. You remain responsible for payment of monies owed to third
parties as a result of operating the franchise. You must adhere to the
provisions of the covenant not to compete as described in the franchise
agreement.
12. COVENANT NOT TO COMPETE
During the term of the franchise agreement, you cannot directly or
indirectly, individually, in partnership or in conjunction with any person, firm
or entity in any manner whatsoever carry on, work with, be engaged in or
connected with, be interested in or advise, invest or contribute money to, lend
money to or guarantee the debts or obligations of, or otherwise be associated
with any person, firm, association, syndicate, company or corporation engaged in
or concerned with any business competitive with or similar to the business being
carried on by Liberty or Liberty's franchisees. Likewise, for a period of two
years after the expiration or termination of the franchise agreement, you are
bound by a covenant not to compete within forty (40) kilometres of any Liberty
office operated in your Franchise Territory.
If you violate the covenant not to compete, you agree to pay to us
royalties and advertising amounts on revenue earned from the preparation of tax
returns and related services within the area specified in the covenant not to
compete. Such payments will continue for the greater of two years or for the
balance of the then existing term of the franchise agreement.
<PAGE>
Both during and after the term of the franchise agreement, you must never
divulge to or use for the benefit of any person, association or corporation
outside of the Liberty Tax Service system any information or knowledge
concerning customers, promotion, advertising or any other systems or methods of
operation of Liberty's business or that of Liberty's franchisees which you may
have acquired by virtue of your operations and/or training pursuant to the
franchise agreement. Information furnished to your employees shall be reasonably
limited to that which directly relates to such employee's duties and assists in
the proper performance of such duties. Furthermore, you must not deliberately do
anything prejudicial or injurious to the goodwill or name of Liberty. You must
also refrain from disparaging Liberty and its current or former officers,
directors or employees.
<PAGE>
FRANCHISE AGREEMENT
LIBERTY TAX SERVICE
1345 Pembina Highway
Winnipeg, Manitoba
R3T 2B6
phone (204) 949-3636
<PAGE>
INDEX
1. Grant of Franchise
2. Term and Renewal
3. Territory
4. Fees and Payments
5. Obligations of Franchiser
6. Obligations of Franchisee
7. Reports and Review
8. Termination
9. Post-Termination Obligations
10. Covenant Not to Compete
11. Independent Contractor
12. Death or Incapacity
13. Assignability
14. Non-waiver or Breach
15. Full Understanding
16. Applicable Law
17. Partial Invalidity
18. Release of Prior Claims
19. Notices
20. Interpretation
21. Binding Effect
22. Modification
<PAGE>
Franchisee: _________________________________________________
Effective Date: _________________________________
1. GRANT OF FRANCHISE
Tax Depot Inc. ("Franchiser", "Tax Depot", "Liberty", "we", "us", "our")
has developed a system for the operation of tax return preparation offices. We
operate under the service mark Liberty Tax Service. The Liberty Tax Service
system utilizes special marketing techniques and operating procedures to
facilitate the provision of tax, record keeping and other related services. An
income tax rebate discounting business may be available under a separate
Additional Services Addendum. The discounting business is optional and subject
to a mutual agreement being reached between you and Liberty. Some of our
services are offered under proprietary marks including the trademarks Speedfile
and Taxrush Refund Services. You have applied for a franchise that utilizes our
system and our marks ("Franchise", "Franchised Business"). Subject to the terms
of this franchise agreement ("Agreement"), we grant you a Liberty Tax Service
franchise. This franchise will allow you to operate a tax return preparation
business using our system and our marks within the territory described on
Schedule A of this Agreement. You ("Franchisee", "you", "your") accept the
franchise and agree to abide by the terms of this Agreement.
2. TERM AND RENEWAL
This Agreement will be effective for an initial five-year term beginning on
the Effective Date specified in this Agreement. You will have the right to renew
for an additional 5 year term if you have met the target volumes specified in
Paragraph 6 and are otherwise in compliance with this Agreement. There is no fee
for such a renewal, however you must exercise a general release of all claims
that you might have against us. The royalty fee, (see paragraph 4(e)) will not
be raised upon renewal. If you wish to renew you must notify us in writing at
least 180 days before the expiration of this Agreement.
<PAGE>
3. TERRITORY.
Your territory is described in Schedule A of this Agreement ("Territory").
You may operate as many offices in this Territory as you determine to be
appropriate. You are responsible for selecting the locations for your offices,
however we must approve the locations prior to your signing any leases.
We may negotiate agreements with national or regional retail businesses. If
there is an outlet of such a national or regional account in your Territory, you
may choose to operate in that outlet if you are in compliance with this
Agreement. In the event that you choose not to operate in an outlet which exists
in your Territory, we may operate in that outlet in your Territory. If we do so,
all associated revenue and expenses are ours. We will not grant any franchises
for your Territory or for a portion of your Territory to anyone else. No other
franchisee may operate in your Territory. While we do not intend to do so at
this time, we may distribute Liberty products and services by means other than
retail or storefront locations in your Territory.
You may not operate outside your Territory. We may be granting franchises
for areas outside your Territory and or operating company store in such areas.
We may advertise in your territory, but no other franchisee may advertise in
your Territory. You may not advertise in areas outside your Territory, or in
media which extend outside your Territory, without our express written approval.
However, you may perform services covered by this Agreement for persons residing
outside your Territory, provided that your office is within your Territory.
4. FEES AND PAYMENTS
a. Initial Franchise Fee. The initial franchise fee is $10,000 per
territory. For a limited time ending December 31, 1998, the initial franchise
fee will be waived. We have 10 days from the date you complete our Effective
Operations training to approve or deny your request to become a Franchisee.
<PAGE>
b. Franchise Security Deposit. You must pay a $2,000 franchise security
deposit. We will retain this deposit for the duration of your franchise
agreement. At the expiration or termination of your agreement, we will refund
the franchise security deposit to you provided that your accounts with us remain
current and provided that you are open for business by February 1 following the
Effective Date of this Agreement.
c. Approval. We have 10 days from the date you complete our Effective
Operations training to approve or deny your request to become a franchise owner.
Should we deny your request, we will refund your franchise security deposit.
d. Initial Advertising Fee. We recommend that you invest between $3,000 and
$5,000 in the advertising of the franchised business in your franchise territory
during the tax season.
e. Royalty fee. You must pay a royalty of 14% of the gross receipts of your
Franchised Business. The royalty rate will decrease to 12% for gross receipts
over $50,000 per tax season. In the event that the royalties owed for the tax
season are less than $2,000, you must pay additional royalties such that the
total royalty for the period totals $2,000. Gross receipts include all revenue
from all services and products offered, excluding customer discounts and G.S.T.
Tax season is the period from February 1st through April 30th.
f. Advertising. You must pay an advertising fee of 3% of the gross receipts
of your Franchised Business. Gross receipts include all revenue from all
services and products offered, excluding customer discounts and G.S.T.
g. Discounting Fee. If you participate in the income tax rebate discounting
program, you will pay additional fees as detailed in the attached Additional
Services Addendum.
h. Payment Period: On the 5th of each month, you must remit to us the
royalty and advertising fees owed based on gross receipts for the preceding
month.
<PAGE>
i. Interest. You must pay interest of 24% (compounded daily) per year or
the highest amount permitted by law on any amounts owed to us that are more than
15 days past due.
j. Transfer Fee. In the event that you transfer your Franchised Business to
a third party, you must pay us a fee of $2,000 at the time of transfer.
k. Additional Advertising Fee. If you have not prepared at least 500 tax
returns in your Territory your first tax season, you must pay us $3,000 which we
will spend in your market. Likewise, if you have not prepared at least 750
returns in your Territory your second tax season, you must pay us $3,000 which
we will spend in your market. This fee must be paid to us by July 1st of the
year you fail to attain these numbers. Tax season extends from January 1st
through April 30th.
5. OBLIGATIONS OF FRANCHISER
a. Advertising and Marketing. We will create and conduct advertising and
marketing programs. We will use the advertising fees collected from you and
other franchisees to pay for the costs of administration, development,
production and distribution of such programs. We will help you develop and
implement local advertising and marketing programs, although our help may be
limited to non-financial assistance.
b. Training: We will provide a four to five day Effective Operations
introductory training course. All new franchisees must take this course. We will
also provide advanced training and targeted training. Training shall take place
at such time and place as we shall designate. You will be responsible for all
expenses, including travel and lodging expenses, incurred as a result of
training.
c. Leasing: We may offer a leasing program which will offer an opportunity
for leasing standard signage, furniture and equipment. The leasing program, if
offered, will be financed and administered by a third party. We cannot guarantee
that you will be offered leasing, as the third party leasing company will make
individual determinations.
<PAGE>
d. Software: We will provide tax preparation and related software and we
will provide electronic filing transmission capabilities.
e. Software support. We will provide telephone support regarding the usage
of software that is provided by us. However, we will not provide software
support or technical assistance on any equipment which does not meet our then
current specifications and standards.
f. Site Selection: We will provide you with site selection advice and
guidance, although you are responsible for selecting the site for your offices.
g. Group Discounts: From time to time we may provide you with the
opportunity to participate in group purchasing programs which offer group
discounts. The discounts and terms for such opportunities will vary.
h . Budgeting. We will advise you in the preparation of an operating
budget.
i. Supply source. We will offer for sale or locate a source for purchasing
supplies, forms and equipment that may be necessary to conduct the business of
tax return preparation, as determined by us from time to time.
j. Procedures. We will develop and implement standardized policies and
procedures and, in connection therewith, we will loan you a Policy and Procedure
Manual. We will update this Manual during the course of this Agreement.
k. Financing. We may, in our sole discretion, provide financing for the
purchase of certain items such as supplies. The terms of such financing are
subject to change. You must be in compliance with your franchise agreement to
qualify for such financing, if and when financing is available.
l. Bank Products. We may offer an income tax discounting business, although
this business is only available under a separate Additional Services Addendum.
The discounting business is optional and is subject to a mutual agreement being
reached between you and Liberty. To participate in this business, you must
comply with and/or register under the Tax Rebate Discounting Act.
<PAGE>
6. OBLIGATIONS OF FRANCHISEE
a. Training. You must attend our four to five day Effective Operations
training before you may operate a Liberty office. We have 10 days from the date
you complete our Effective Operations training to approve or deny your request
to become a Franchisee.
b. Use of Liberty Marks. You agree to use the Liberty trade names, service
marks and trademarks ("Marks") as we develop them. At this time, our Marks
include Liberty Tax Service, Speedfile and Taxrush Refund Services. You agree to
obtain our prior written consent before using our marks in any way. In
particular, you must obtain our approval prior to using our marks in advertising
and marketing. You agree not to use any marks which could be confused with our
Marks. We may replace or modify our marks. In the event that we replace or
modify our marks, you agree to update or replace yours signs, supplies, etc. to
reflect the new marks, at your expense.
c. Signs. You must display an exterior lighted sign with the Liberty marks
on each of your offices.
You must get this sign approved by us prior to ordering or displaying.
d. Starting Date. You agree to begin operations and be open for business no
later than the February 1st following the Effective Date of this Agreement.
e. Operating Hours. You agree to be open for business during the following
minimum hours. During the period from May 1st through January 31st, your office
hours must be held on the same day and times each week.
<TABLE>
<CAPTION>
<S> <C>
February 1st - April 30th Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
May 1st - January 31st Eight hours per week between the hours of
Monday-Friday 9:00-9:00pm
Saturday 9:00-5:00pm
</TABLE>
<PAGE>
f. Target Volumes. You must use your best efforts to promote the Franchised
Business. You must achieve and maintain the following target volumes.
Tax Season Two 500 returns
Tax Season Three 750 returns
Tax Season Four and beyond 1000 returns
g. Software. You must use the software that we provide or recommend.
h. Telephone Number. You must maintain a separate Liberty telephone number
and telephone line for each office in your territory.
i. Furniture. You must furnish your office with the standard office
furniture as described in the Policy and Procedure Manual.
j. Equipment. You must purchase and use a computer system which meets our
then current specifications. We may update the specifications. When the
specifications are updated, you must either purchase or upgrade a computer
system such that you meet our current specifications.
k. Insurance. During the term of this Agreement, you must procure and
maintain an insurance policy or policies with at least the following coverage:
Comprehensive General Liability $1 million
You must name us as an additional insured on these policies.
<PAGE>
l. Electronic Filing. To the extent that we provide or recommend a source
for electronically filing tax returns, you are required to use this source
exclusively for all electronic filing.
m. Policy and Procedures. We will provide you with a copy of the Policy and
Procedure Manual. The Policy and Procedure Manual is a detailed extension of the
franchise agreement which covers standards to be maintained, operating
procedures and other information. You must operate the Franchised Business
according to the Policy and Procedure manual. We may modify the Policy and
Procedure Manual during the term of this Agreement.
n. Participation. You agree that franchise services will be provided under
your direct supervision and control and/or under the direct supervision and
control of a full time general manager who has been approved by, and not later
disapproved by, us. A general manager shall not be approved prior to the
successful completion of the Liberty required training program(s).
o. Return Check. You must prepare each income tax return accurately and in
accordance with Canadian, provincial and local laws. You must check each return
thoroughly.
p. Tax Preparer Training. After your first tax season, you must conduct
training courses for tax preparers each year including:
(i) A course offering in the period of September through January
of each year that shall be an intensive course of 6 to 12
weeks duration covering the required tax training materials,
as described in the then current Policy and Procedures
Manual, and
(ii) A one-week course offering during January of each year as
described in the then current Policy and Procedures Manual.
q. Employee Training. You shall require each employee to attend a two-day
employee policy and procedure training course as defined by us.
<PAGE>
r. Office condition. You shall maintain neat and orderly offices and
shall employ and train sufficient personnel to accommodate all
customers without undue delay.
s. Supplies. You agree that in order to establish a standard and consistent
delivery of Liberty services, certain items must be used in the operation of the
franchise. You must use the items set forth as required in the Policy and
Procedure Manual (i.e. client envelopes and folders, interview worksheets,
interior sign sets). You are responsible for the cost of all supplies,
furniture, equipment and other items which may be necessary to conduct the
Franchised Business.
t. Laws and Regulations: You agree to comply with all laws and regulations
of Canada, as well as those of your province and city. You will secure all
necessary permits, licenses and consents to operate your business.
u. Limitation of Services. You agree not to engage in any business other
than the Franchised Business without the prior written consent of Liberty. You
agree not to use the Marks, or marks which may be confused with the Marks, in
any way without the prior approval of Liberty.
7. REPORTS AND REVIEW
a. Remittance Report. On the 5th day of each month, you must send us a
remittance report, in the manner and form we specify. The remittance
report must include, among other things, a summary of all revenue that
was received during the preceding month.
b. Profit and Loss. By May 10th of each year, you must send us an
unaudited profit and loss statement, in the manner and form we specify,
for the 12-month period ending April 30th.
c. Review. We have the right to review and inspect all of your business
records during normal business hours. If, upon audit, amounts owing to
us have been understated by more than 2%, you agree to pay us the cost
of the audit in addition to paying the amounts owed plus interest at
24% per annum compounded daily.
<PAGE>
d. Credit History. We have the right to request and obtain a copy of your
credit history.
e. Receipts. If we request a copy of your customer receipts (paper
and/or electronic), you must send us these receipts within 5 days of
receiving our request.
8. TERMINATION
a. You may terminate this Agreement by not renewing, that is, by not
sending us a written notice of your desire to renew within 180 days of
the expiration of the Agreement. You may also terminate this contract
if you fail to reach the target volume levels described in Paragraph 6.
To terminate, you must send us written notice of your intent to
terminate and you must comply with all of the post termination
provisions of this Agreement.
b. You acknowledge that our reputation in the business of tax, record
keeping and related services is such that a breach of any of the
provisions of this Agreement may occasion serious damage to us which
could be irreparable. We may terminate your Agreement for any
violation of this Agreement, including, but not limited to, the
following,
(i) If you become insolvent or take any steps to seek
protection from creditors, or if a receiver
(permanent or temporary) is appointed by a creditor
or a court of competent authority or if you make a
general assignment for the benefit of creditors;
(ii) If a final judgment of record remains unsatisfied for
30 days or longer or if execution is levied against
your business or property;
(iii) If you fail to submit required reports or other
financial statements or data as provided herein, or
if you make any false statement in connection
therewith;
<PAGE>
(iv) If you violate any law, ordinance, rule or regulation
of a governmental agency or department reasonably
associated with the operation of the franchised
business, and permit the same to go uncorrected after
notification thereof;
(v) If any amount owing to us is more than 30 days past
due;
(vi) If you discontinue the active operation of business
for five business days;
(vii) If you fail to open for business by February 1 of
each year;
(viii) If you operate any offices outside the franchise
territory;
(ix) If you fail to achieve or have not maintained a
volume of 1000 tax returns by the end of your fourth
tax season and each season thereafter, as measured on
April 30th;
(x) If you fail to use the software we provide or
recommend;
(xi) If you do not get an E-file number from Revenue
Canada by February 1st.
c. Except for an event of bankruptcy or receivership, Liberty shall give
Franchisee written notice of the alleged breach prior to termination.
Franchisee must rectify the breach within 5 days of receipt of
notification.
9. POST TERMINATION OBLIGATIONS
In the event that this Agreement expires, is not renewed or is terminated
for any reason or by any party, you must immediately:
a. Remove all Liberty signage from all of your offices and other premises
b. Stop identifying yourself as a Liberty franchisee and cease, and not
thereafter commence, use of any marks which are likely to be confused
with Liberty marks
c. Pay us all amounts owing to us
d. Stop using all literature and other items bearing our marks and/or
received from us
e. Transfer all telephone numbers used in relation to the Franchised
Business to us
f. Give us all copies, including electronic copies, of your customer lists
g. Deliver to us all customer tax returns, files, records and all copies
thereof
h. Adhere to the provisions of the covenant not to compete as described in
this Agreement.
<PAGE>
10. COVENANT NOT TO COMPETE
a. During the term of this Agreement, you agree not to directly or
indirectly, individually, in partnership or in conjunction with any person,
firm, or entity, in any manner whatsoever carry on, work with, be engaged
in or connected with, be interested in or advise, invest or contribute
money to, lend money to or guarantee the debts or obligations of, or
otherwise be associated with any person, firm, association, syndicate,
company or corporation engaged in or concerned with any business
competitive with or similar to the business being carried on by Liberty or
Liberty's Franchisees.
b. You agree that for a period of two (2) years following the termination,
expiration, transfer or other disposition of this Franchise, you will not
individually, in partnership or in conjunction with any person, firm or
entity in any manner whatsoever, carry on, work with, be engaged in or
connected with, be interested in or advise, invest or contribute money to,
lend money to or guarantee the debts or obligations of, or otherwise be
associated with any person, firm, association, syndicate, company or
corporation engaged in or concerned with any business competitive with or
similar to the business being carried on by Liberty or Liberty's
Franchisees within forty (40) kilometres of any Liberty office operated in
your Franchise Territory.
c. In the event that you fail to comply with the covenant not to compete, you
agree to pay to us, as a genuine pre-estimate of liquidated damages,
royalties and advertising amounts as set forth in Paragraph 4 of this
Agreement with respect to those revenues derived by you and those
associated with you from preparation of tax returns and related services
within the area specified in the covenant not to compete. Such payments
will continue for two (2) years or for the balance of the then existing
term of this Agreement, whichever is the greater. The parties expressly
acknowledge and agree that such payments shall not affect any rights or
remedies Liberty may have, at law or in equity, against you by reason of
such non-compliance, including the right to seek injunctive relief.
<PAGE>
d. If any covenant or provision herein is determined to be void or
unenforceable, in whole or in part, it shall not be deemed to affect or
impair the validity of any other covenant or provision of this Paragraph.
e. You also agree that you will never, during or after the term of this
Agreement, divulge to or use for the benefit of any person, association or
corporation outside of the Liberty Tax Service system, any information or
knowledge concerning customers, promotion, advertising or any other systems
or methods of operation of Liberty's business or that of Liberty's
franchisees which you may have acquired by virtue of your operations and/or
training pursuant to this Agreement. You agree not to do any deliberate
act prejudicial or injurious to the goodwill or name of Liberty.
Information furnished to your employees shall be reasonably limited to that
which directly relates to such employee's duties and assists in the proper
performance of such duties.
f. This Agreement is entered into between the parties hereto with the full
knowledge of its nature and extent. You hereby acknowledge that the
qualifications for a franchise by Liberty are special, unique and
extraordinary, and that this Agreement would not be entered into by Liberty
except upon condition that such restrictive covenants be embodied herein
and that, as such, the restrictive covenants are enforceable in the event
of a breach by Franchisee by injunctive relief.
g. Franchisee acknowledges and agrees that the provisions of this Paragraph
are reasonable, valid and not contrary to the public interest and all
defenses to the strict enforcement thereof by Liberty are hereby waived by
Franchisee.
h. Franchisee agrees not to disparage Liberty and/or its current or former
officers, directors or employees.
i. All of the covenants contained in this Paragraph shall survive any
termination of this Agreement.
<PAGE>
INDEPENDENT CONTRACTOR
You are an independent contractor. You are not an agent, partner, employee,
or a participant in a joint venture. You do not have any power to bind or
obligate us. We are not and will not be liable for any act, omission, debt, or
other obligation of you.
You are responsible for all loss or damage and contractual liability to
third parties originating in or in connection with the operation of the
Franchise and for all claims or demands for damage directly or indirectly
related thereto. You agree to defend, indemnify and save harmless Liberty of and
from and with respect to any such claim, loss or damage.
12. DEATH OR INCAPACITY
In the event of the death or incapacity of Franchisee, Liberty shall be
entitled, but not required, to render whatever assistance is required to
maintain franchise operations. Liberty shall be entitled to reimbursement from
Franchisee or Franchisee's estate for any reasonable expenditures thus incurred.
Death or incapacity shall not of itself be grounds for termination of this
Agreement unless either
(i) Franchisee or his/her legal representative fail for a period of 180
days after such death or incapacity to commence action to assign this
Agreement according to the terms of this Agreement; or,
(ii) Such assignment is not completed within one year after death or
incapacity.
If such action or assignment is not timely taken or made as aforesaid, Liberty
shall have the right to terminate this Agreement.
13. ASSIGNABILITY
No sub-licence or licence of the Franchise is permitted. Your interest
under this Agreement or your shares in the Franchise may be transferred and
assigned provided that you comply with the following provisions. No interest may
be transferred unless or until you are in full compliance with this Agreement.
<PAGE>
a. If you or any shareholder, partner, assignee, or representative of the
Franchise has received and desires to accept a signed, bona fide offer to
purchase or otherwise transfer the Franchise or shares or partnership
interest in Franchisee, such individual shall grant Liberty the option (the
"Right of First Refusal") to purchase such interest, shares or partnership
interest as hereinafter provided.
b. A transfer to a "Controlled Corporation" shall not trigger the Right of
First Refusal. A "Controlled Corporation" is a corporation in which
Franchisee is the beneficial owner of 100% of each class of voting
securities. At the time of the desired transfer of interest to a
Controlled Corporation, you must notify us in writing of the name of the
Controlled Corporation and the name and address of each officer, director
and shareholder and their respective holdings. Each officer, director
and shareholder of the Controlled Corporation shall sign the then current
Liberty franchise agreement and will personally assume and be bound by all
of the terms, covenants and conditions of the agreement.
c. A transfer of interest within a Franchisee which is a corporation shall not
trigger the Right of First Refusal provided that only the percentage
ownership, rather than the identity of the shareholders, is changing. At
the time of the desired transfer of interest within a corporation, you must
notify us in writing of the name and address of each officer, director and
shareholder and their respective holdings. Each officer, director and
shareholder of the Controlled Corporation shall sign the then current
Liberty franchise agreement and will personally assume and be bound by all
of the terms, covenants and conditions of the agreement.
d. The Right of First Refusal shall be offered to Liberty by notice in
writing, such notice shall include a copy of the signed offer to purchase
which was received ("Notice"). We shall have the right to purchase the
Franchise or interest or shares in the Franchise at and for the price and
upon the terms set out in the Notice, except that Liberty may substitute
cash for any non-cash form of payment proposed and Liberty shall have 60
days after the exercise of its Right of First Refusal to close the said
purchase. Should Liberty wish to exercise its Right of First Refusal, we
will notify you in writing within 15 days from its receipt of the Notice.
Upon the giving of such notice by Liberty, there shall immediately arise
between Liberty and Franchisee or its shareholders or partners, a binding
contract of purchase and sale at the price and upon the terms contained in
the Notice.
<PAGE>
e. If we do not exercise our Right of First Refusal, you or the shareholders
or partners, may sell the said interest in the Franchise according to the
terms set forth in the Notice, provided that the following conditions are
satisfied and provided that the sale is completed within 90 days from the
day on which Liberty received the Notice. If the proposed sale
transaction is not concluded within the 90-day period, the Right of First
Refusal granted to Liberty hereunder shall continue in full force and
effect.
f. Even if Liberty does not exercise its Right of First Refusal, we must
approve, in writing, the proposed transferee prior to any transfer of an
interest in the Franchise or shares or partnership interest. The proposed
transferee must complete the then current Liberty franchise application.
We will consider the qualifications of the proposed transferee in
accordance with our then current application process and using our then
current qualifications.
g. The proposed transferee must sign the then current Liberty franchise
agreement and must personally assume and be bound by all of the terms,
covenants and conditions of the agreement.
h. The proposed transferee must attend our Effective Operations training.
i. You shall pay us a transfer fee of Two Thousand ($2,000.00) Dollars.
<PAGE>
14. NON-WAIVER OR BREACH
The failure of either party hereto to enforce any one or more of the terms
or conditions of this Agreement shall not be deemed a waiver of such terms or
conditions or of either party's rights thereafter to enforce each and every term
and condition of this Agreement.
15. FULL UNDERSTANDING
This Agreement expresses fully the understanding by and between the parties
hereto. All prior understandings or commitments of any kind, oral or written, as
to this Franchise and any matter covered by this Agreement are hereby superseded
and canceled, with no further liabilities or obligations of the parties with
respect thereto except as to any monies due and unpaid between the parties to
this Agreement at the time of the execution of this Agreement.
16. APPLICABLE LAW, PARTIAL INVALIDITY
a. The parties acknowledge and agree that this Agreement shall be subject to
and construed by the laws of the Province of Manitoba;
b. Franchisee agrees that all actions or proceedings arising directly or
indirectly in connection with, out of, related to or from this Agreement,
may be litigated in courts of the Province of Manitoba and Franchisee
hereby consents, attorns and submits to the jurisdiction of all courts
located in the Province of Manitoba;
c. If any covenant or other provision herein shall be determined to be
invalid, illegal or incapable of being enforced by reason of any rule or
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect and no covenant or
provisions of this Agreement shall be deemed to be dependent upon any other
unless so expressed herein.
<PAGE>
17. RELEASE OF PRIOR CLAIMS
By executing this Agreement, Franchisee, individually and on behalf of
Franchisee's heirs, legal representatives, successors and assigns, and each
assignee of this Agreement by accepting assignment of the same, hereby forever
releases and discharges Liberty, its officers, directors, employees, agents and
servants, including Liberty's parent, subsidiary and affiliated corporations,
their respective officers, directors, employees, agents and servants, from any
and all claims relating to or arising under any franchise agreement or any other
agreement between the parties and executed prior to the date of this Agreement.
18. NOTICES
Any notice or request hereunder shall be given by mail or courier, postage
fully prepaid, or delivered personally or by facsimile, addressed to, in the
case of Liberty: 1345 Pembina Highway, WINNIPEG, Manitoba R3T 2B6. Telephone:
(204) 949-3636 Telecopier: (204) 284-8954. In the case of Franchisee to the
address indicated below Franchisee signature on this Agreement.
19. INTERPRETATION
The preamble recitals are incorporated in and made a part of this
Agreement. Titles of paragraphs are used for convenience only and are not a part
of the text. All terms used in any one number or gender shall be construed to
include any other number or gender, as the context may require. The terms "this
Agreement", "hereof", "herein", "hereunder" and similar expressions refer to
this Agreement and not to any particular paragraph, sub-paragraph or other
portion hereof.
20. GUARANTY
For and in consideration of this Agreement, the undersigned execute this
Agreement as Guarantors. Each of the Guarantors agrees jointly and severally to
perform each and every term and obligation of this Agreement, including but not
limited to the terms regarding payment. The undersigned waive presentment,
demand or notice of non-performance and the right to require us to proceed
against the other guarantors.
<PAGE>
21. BINDING EFFECT
This Agreement shall not be binding on either Liberty or Franchisee unless
and until this Agreement has been executed by Franchisee and the President of
Tax Depot Inc.
22. MODIFICATION
This Agreement is the entire agreement between you and Liberty. This
Agreement supercedes all other oral and written agreements or understandings
between you and Liberty. By signing this Agreement, you acknowledge that no
agent or representative of Liberty has made any expressed or implied warranty or
guaranty. You acknowledge that you have made an independent assessment of
Liberty and the Franchise. No modifications to this Agreement will have any
effect unless such modification is in writing and signed by you and by our
authorized officer.
<PAGE>
You acknowledge that you understand and agree to be bound by the terms,
conditions and obligations of this Agreement.
FRANCHISEE ____________________________________________________
SIGNATURE _____________________________ DATE ______________
PRINT NAME ____________________________________
Percentage ownership (if corporation) _____________
HOME ADDRESS _________________________________________
_________________________________________
Telephone number: __________________________________
SIGNATURE _____________________________ DATE ______________
PRINT NAME ____________________________________________
Percentage ownership (if corporation) ________________
HOME ADDRESS __________________________________________
__________________________________________
Telephone number: __________________________________
Tax Depot Inc.
SIGNATURE _________________________________ DATE ______________
Steven Sardo, President
ADDRESS 1345 Pembina Highway
Winnipeg, Manitoba R3T 2B6
TELEPHONE (204) 949-3636
<PAGE>
SCHEDULE "A" TO THE FRANCHISE AGREEMENT
The Franchise Territory is as follows:
Consent Of Hamilton Dwyer & Company, P.C.
We have issued our reports dated June 10, 1998, accompanying the consolidated
financial statements and schedules of JTH Tax, Inc. And subsidiaries as of April
30, 1998 which are incorporated by reference in the Registration Statement. We
consent to the incorporation by reference in the Registration Statement of the
aforementioned reports and to the use of our name as it appears under the
caption "Experts".
/s/
Hamilton Dwyer & Company, P.C.
Chesapeake, Virginia
August 24, 1998
CONSENT OF CHARTERED ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our reports dated June 3, 1998 and November 25, 1997,
relating to the financial statements of TAX DEPOT INC. which is contained in
that Prospectus.
We also consent to the reference to us under the caption 'Experts' In the
Prospectus.
BDO DUNWOODY
[GRAPHIC OMITTED]
Chartered Accountants
Winnipeg, Manitoba
August 25, 1998
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of ________________, 1998 ("Escrow
Agreement"), is by and between JTH Tax Inc, a Delaware corporation ("Issuer");
and FIRST UNION NATIONAL BANK, a national banking association, as Escrow Agent
hereunder ("Escrow Agent").
BACKGROUND
A. Issuer will be directly offering (no Underwriter) to sell up to 310,000
shares of Class A stock, $1.00 par, for $12.50 per share (the "Shares") on a
"best efforts" basis, pursuant to Registration Statement No. _____________ filed
with the Securities and Exchange Commission (the "SEC") and attached hereto as
Exhibit A (the "Offering Document").
B. In accordance with the Offering Document, subscribers to the Shares (the
"Subscribers" and individually, a "Subscriber") will be required to submit full
payment for their respective investments at the time they enter into
subscription agreements.
C. In accordance with the Offering Document, all payments received by
Issuer in connection with subscriptions for Shares shall be promptly forwarded
to Escrow Agent, and Escrow Agent has agreed to accept, hold, and disburse such
funds deposited with it and the earnings thereon in accordance with the terms of
this Escrow Agreement.
D. In order to establish the escrow of funds and to effect the provisions
of the Offering Document, the parties hereto have entered into this Escrow
Agreement.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, for
themselves, their successors and assigns, hereby agree as follows:
1. Definitions. The following terms shall have the following meanings when
used herein:
"Cash Investment" shall mean the number of Shares to be purchased by any
Subscriber multiplied by the offering price per Share of $12.50 as set forth in
the Offering Document.
"Cash Investment Instrument" shall mean a check, money order or similar
instrument, made payable to the "First Union National Bank/JTH Tax Inc.- Escrow
Account," in full payment for the Shares to be purchased by any Subscriber.
<PAGE>
"Escrow Funds" shall mean the funds deposited with the Escrow Agent
pursuant to this Agreement, together with any interest and other income thereon.
"Minimum Offering" shall mean 40,000 Shares.
"Minimum Offering Notice" shall mean a written notification, signed by
Issuer, which shall specify that subscriptions for the Minimum Offering have
been received; that, to the best of Issuer knowledge after due inquiry and
review of its records, Cash Investment Instruments in full payment for that
number of Shares equal to or greater than the Minimum Offering have been
received, deposited with and collected by Escrow Agent; and that such
subscriptions have not been withdrawn, rejected or otherwise terminated.
"Pro Rata Basis," with respect to the allocation among Subscribers of
interest and other earnings held in the Escrow Funds, shall mean, for each
Subscriber, the Subscriber's Cash Investment multiplied by the number of days
the Cash Investment of such Subscriber was held in interest-bearing investments
pursuant to Section 6 hereof, multiplied by the average yield earned on the
Escrow Funds during such period of days.
"Shares" shall have the meaning set forth in the section of this Escrow
Agreement titled "Background".
"Subscriber" or "Subscribers" shall have the meaning set forth in the
section of this Escrow Agreement titled "Background".
"Subscription Accounting" shall mean an accounting of all subscriptions for
Shares received and accepted by Issuer as of the date of such accounting,
indicating for each subscription the Subscriber's name, social security number
and address, the number and total purchase price of subscribed Shares, the date
of receipt by Issuer of the Cash Investment Instrument, and notations of any
nonpayment of the Cash Investment Instrument submitted with such subscription,
any withdrawal of such subscription by the Subscriber, any rejection of such
subscription by Issuer, or other termination, for whatever reason, of such
subscription.
2. Appointment of and Acceptance by Escrow Agent. Issuer hereby appoints
Escrow Agent to serve as escrow agent hereunder, and Escrow Agent hereby accepts
such appointment in accordance with the terms of this Escrow Agreement.
<PAGE>
3. Deposits into Escrow. a. Upon receipt by Issuer of any Cash Investment
Instrument for the purchase of Shares, Issuer shall forward to Escrow Agent, by
12:00 noon of the next business day, the Cash Investment Instrument for deposit
into the following escrow account:
First Union National Bank
ABA: #053000219
Acct: #465946
Acct Name: Corp. Trust Ops.
ATTN: B. Michie, CT-VA (804-343-6094)
Ref: JTH Tax Escrow
Each such deposit shall be accompanied by the following documents:
(1) a report containing such Subscriber's name, social security number or
taxpayer identification number, address and other information required for
withholding purposes;
(2) a Subscription Accounting; and
(3) instructions regarding the investment of such deposited funds in
accordance with Section 6 hereof.
ALL FUNDS SO DEPOSITED SHALL REMAIN THE PROPERTY OF THE SUBSCRIBERS
ACCORDING TO THEIR RESPECTIVE INTERESTS AND SHALL NOT BE SUBJECT TO ANY LIEN OR
CHARGE BY ESCROW AGENT OR BY JUDGMENT OR CREDITORS' CLAIMS AGAINST ISSUER UNTIL
RELEASED TO ISSUER IN ACCORDANCE WITH SECTION 4(a) HEREOF.
b. Issuer understands and agrees that all checks and similar instruments
received by Escrow Agent hereunder are subject to collection requirements of
presentment and final payment, and that the funds represented thereby cannot be
drawn upon or disbursed until such time as final payment has been made and is no
longer subject to dishonor. Upon receipt, Escrow Agent shall process each Cash
Investment Instrument for collection, and the proceeds thereof shall be held as
part of the Escrow Funds until disbursed in accordance with Section 4 hereof.
If, upon presentment for payment, any Cash Investment Instrument is dishonored,
Escrow Agent's sole obligation shall be to notify Issuer of such dishonor and to
return such Cash Investment Instrument to Issuer to take whatever action it
deems necessary. Notwithstanding the foregoing, if for any reason any Cash
Investment Instrument is uncollectible after payment of the funds represented
thereby has been made by Escrow Agent, Issuer shall immediately reimburse Escrow
Agent upon receipt from Escrow Agent of written notice thereof.
<PAGE>
Upon receipt of any Cash Investment Instrument that represents payment less
than or greater than the Cash Investment, Escrow Agent's sole obligation shall
be to notify Issuer of such fact and to return such Cash Investment Instrument
to Issuer.
c. All Cash Investment Instruments shall be made payable to the order of,
or endorsed to the order of, "First Union National Bank/JTH Tax Inc. - Escrow
Account," and Escrow Agent shall not be obligated to accept, or present for
payment, any Cash Investment Instrument that is not payable or endorsed in that
manner.
4. Disbursements of Escrow Funds.
a. Completion of Minimum Offering. Subject to the provisions of Section 10
hereof, Escrow Agent shall pay to Issuer the liquidated value of the Escrow
Funds, by certified or bank check or by wire transfer, no later than fifteen
(15) business days following receipt of the following documents:
(1) A Minimum Offering Notice;
(2) Subscription Accounting, substantiating the sale of the Minimum
Offering;
(3) The documents described on Exhibit B attached hereto and incorporated
herein by reference; and
(4) Such other certificates, notices or other documents as Escrow Agent
shall reasonably require.
Notwithstanding the foregoing, Escrow Agent shall not be obligated to
disburse the Escrow Funds to Issuer if Escrow Agent has grounds to believe that
(a) Cash Investment Instruments in full payment for that number of Shares equal
to or greater than the Minimum Offering have not been received, deposited with
and collected by the Escrow Agent, or (b) any of the certifications and opinions
set forth in the documents described in Exhibit B attached hereto are incorrect
or incomplete.
After the initial disbursement of Escrow Funds to Issuer pursuant to this
Section 4(a), Escrow Agent shall pay to Issuer any additional funds received
with respect to the Shares, by certified or bank check or wire transfer, no
later than fifteen (15) business days after receipt.
<PAGE>
b. Rejection of Any Subscription or Termination of the Offering. No later
than fifteen (15) business days after receipt by Escrow Agent of written notice
(i) from Issuer that Issuer intends to reject a Subscriber's subscription, (ii)
from Issuer that there will be no closing of the sale of Shares to Subscribers,
or (iii) from the SEC or any other federal or state regulatory authority that a
stop order has been issued with respect to the Offering Document and has
remained in effect for at least twenty (20) days, Escrow Agent shall pay to the
applicable Subscriber(s), by certified or bank check and by first class mail,
the amount of the Cash Investment paid by each Subscriber, and shall pay as soon
as practicable to the applicable Subscriber(s), by certified or bank check and
by first class mail, each Subscriber's share of income earned on the Escrow
Funds, each such share to be calculated on a Pro Rata Basis.
c. Expiration of Offering Period. Notwithstanding anything to the contrary
contained herein, if Escrow Agent shall not have received a Minimum Offering
Notice on or before thirty days after registration statement becomes effective,
Escrow Agent shall, within fifteen (15) business days after such date and
without any further instruction or direction from Issuer, return to each
Subscriber, by certified or bank check and by first class mail, the Cash
Investment made by such Subscriber, and shall pay as soon as practicable to the
applicable Subscriber(s), by certified or bank check and by first class mail,
each Subscriber's share of income earned on the Escrow Funds, each such share to
be calculated on a Pro Rata Basis.
5. Suspension of Performance or Disbursement Into Court. If, at any time,
there shall exist any dispute between Issuer, Escrow Agent, any Subscriber or
any other person with respect to the holding or disposition of any portion of
the Escrow Funds or any other obligations of Escrow Agent hereunder, or if at
any time Escrow Agent is unable to determine, to Escrow Agent's sole
satisfaction, the proper disposition of any portion of the Escrow Funds or
Escrow Agent's proper actions with respect to its obligations hereunder, or if
Issuer has not within 30 days of the furnishing by Escrow Agent of a notice of
resignation pursuant to Section 7 hereof appointed a successor Escrow Agent to
act hereunder, then Escrow Agent may, in its sole discretion, take either or
both of the following actions:
a. suspend the performance of any of its obligations under this Escrow
Agreement until such dispute or uncertainty shall be resolved to the sole
satisfaction of Escrow Agent or until a successor Escrow Agent shall have been
appointed (as the case may be); provided however, that Escrow Agent shall
continue to invest the Escrow Funds in accordance with Section 6 hereof; and/or
b. petition (by means of an interpleader action or any other appropriate
method) any court of competent jurisdiction in Richmond,Virginia, for
instructions with respect to such dispute or uncertainty, and pay into such
court all funds held by it in the Escrow Funds for holding and disposition in
accordance with the instructions of such court.
<PAGE>
Escrow Agent shall have no liability to Issuer, any Subscriber or any other
person with respect to any such suspension of performance or disbursement into
court, specifically including any liability or claimed liability that may arise,
or be alleged to have arisen, out of or as a result of any delay in the
disbursement of funds held in the Escrow Funds or any delay in or with respect
to any other action required or requested of Escrow Agent.
6. Investment of Funds. Escrow Agent shall invest and reinvest the Escrow
Funds as Issuer shall direct (subject to applicable minimum investment
requirements) in writing; provided, however, that no investment or reinvestment
may be made except in the following:
a. direct obligations of the United States of America or obligations the
principal of and the interest on which are unconditionally guaranteed by the
United States of America; or
b. repurchase agreements with any bank, trust company, or national banking
association (including Escrow Agent and its affiliates; or
c. any money market fund substantially all of which is invested in the
foregoing investment categories, including any money market fund managed by
Escrow Agent and any of its affiliates.
If Escrow Agent has not received written instructions from Issuer at any
time that an investment decision must be made, Escrow Agent shall invest the
Escrow Funds, or such portion thereof as to which no written instructions have
been received, in investments described in clause (c) above. Each of the
foregoing investments shall be made in the name of Escrow Agent in its stated
capacity as escrow agent. No investment shall be made in any instrument or
security that has a maturity of greater than six (6) months. Notwithstanding
anything to the contrary contained herein, Escrow Agent may, without notice to
Issuer or Issuer, sell or liquidate any of the foregoing investments at any time
if the proceeds thereof are required for any release of funds permitted or
required hereunder, and Escrow Agent shall not be liable or responsible for any
loss, cost or penalty resulting from any such sale or liquidation. With respect
to any funds received by Escrow Agent for deposit into the Escrow Funds or any
written investment instruction of Issuer received by Escrow Agent after ten
o'clock, a.m., Richmond, Virginia, time, Escrow Agent shall not be required to
invest such funds or to effect such investment instruction until the next day
upon which banks in Richmond, Virginia, are open for business.
<PAGE>
7. Resignation and Removal of Escrow Agent. Escrow Agent may resign from
the performance of its duties hereunder at any time by giving ten (10) days'
prior written notice to Issuer or may be removed, with or without cause, by
Issuer, acting jointly in writing, at any time by the giving of ten (10) days'
prior written notice to Escrow Agent. Such resignation or removal shall take
effect upon the appointment of a successor Escrow Agent as provided herein. Upon
any such notice of resignation or removal, Issuer jointly shall appoint a
successor Escrow Agent hereunder, which shall be a commercial bank, trust
company or other financial institution with a combined capital and surplus in
excess of $10,000,000. Upon the acceptance in writing of any appointment as
Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Escrow Agent, and the retiring Escrow
Agent shall be discharged from its duties and obligations under this Escrow
Agreement, but shall not be discharged from any liability for actions taken as
escrow agent hereunder prior to such succession. After any retiring Escrow
Agent's resignation or removal, the provisions of this Escrow Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Escrow Agent under this Escrow Agreement.
8. Liability of Escrow Agent.
a. Escrow Agent shall have no liability or obligation with respect to the
Escrow Funds except for Escrow Agent's willful misconduct or gross negligence.
Escrow Agent's sole responsibility shall be for the safekeeping, investment, and
disbursement of the Escrow Funds in accordance with the terms of this Escrow
Agreement. Escrow Agent shall have no implied duties or obligations and shall
not be charged with knowledge or notice of any fact or circumstance not
specifically set forth herein. Escrow Agent may rely upon any instrument, not
only as to its due execution, validity and effectiveness, but also as to the
truth and accuracy of any information contained therein which Escrow Agent shall
in good faith believe to be genuine, to have been signed or presented by the
person or parties purporting to sign the same and to conform to the provisions
of this Escrow Agreement. In no event shall Escrow Agent be liable for
incidental, indirect, special, consequential or punitive damages. Escrow Agent
shall not be obligated to take any legal action or commence any proceeding in
connection with the Escrow Funds or any account in which Escrow Funds are
deposited or this Escrow Agreement, or to appear in, prosecute or defend any
such legal action or proceeding. Without limiting the generality of the
foregoing, Escrow Agent shall not be responsible for or required to enforce any
of the terms or conditions of any subscription agreement with any Subscriber or
any other agreement between Issuer and/or any Subscriber. Escrow Agent shall not
be responsible or liable in any manner for the performance by Issuer or any
Subscriber of their respective obligations under any subscription agreement nor
shall Escrow Agent be responsible or liable in any manner for the failure of
Issuer, or any third party (including any Subscriber) to honor any of the
provisions of this Escrow Agreement. Escrow Agent may consult legal counsel
selected by it in the event of any dispute or question as to the construction of
any of the provisions hereof or of any other agreement or of its duties
hereunder, and shall incur no liability and shall be fully indemnified from any
liability whatsoever in acting in accordance with the opinion or instruction of
such counsel. Issuer shall promptly pay, upon demand, the reasonable fees and
expenses of any such counsel.
<PAGE>
b. The Escrow Agent is authorized, in its sole discretion, to comply with
orders issued or process entered by any court with respect to the Escrow Funds,
without determination by the Escrow Agent of such court's jurisdiction in the
matter. If any portion of the Escrow Funds is at any time attached, garnished or
levied upon under any court order, or in case the payment, assignment, transfer,
conveyance or delivery of any such property shall be stayed or enjoined by any
court order, or in case any order, judgment or decree shall be made or entered
by any court affecting such property or any part thereof, then and in any such
event, the Escrow Agent is authorized, in its sole discretion, to rely upon and
comply with any such order, writ, judgment or decree which it is advised by
legal counsel selected by it is binding upon it without the need for appeal or
other action; and if the Escrow Agent complies with any such order, writ,
judgment or decree, it shall not be liable to any of the parties hereto or to
any other person or entity by reason of such compliance even though such order,
writ, judgment or decree may be subsequently reversed, modified, annulled, set
aside or vacated.
9. Indemnification of Escrow Agent. From and at all times after the date of
this Escrow Agreement, Issuer shall, to the fullest extent permitted by law,
indemnify and hold harmless the Escrow Agent and each director, officer,
employee, attorney, agent and affiliate of Escrow Agent (collectively, the
"Indemnified Parties") against any and all actions, claims (whether or not
valid), losses, damages, liabilities, costs and expenses of any kind or nature
whatsoever (including without limitation reasonable attorneys' fees, costs and
expenses) incurred by or asserted against any of the Indemnified Parties from
and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit,
action or proceeding (including any inquiry or investigation) by any person,
including without limitation Issuer, whether threatened or initiated, asserting
a claim for any legal or equitable remedy against any person under any statute
or regulation, including, but not limited to, any federal or state securities
laws, or under any common law or equitable cause or otherwise, arising from or
in connection with the negotiation, preparation, execution, performance or
failure of performance of this Escrow Agreement or any transactions contemplated
herein, whether or not any such Indemnified Party is a party to any such action,
proceeding, suit or the target of any such inquiry or investigation; provided,
however, that no Indemnified Party shall have the right to be indemnified
hereunder for any liability finally determined by a court of competent
jurisdiction, subject to no further appeal, to have resulted solely from the
gross negligence or willful misconduct of such Indemnified Party. If any such
action or claim shall be brought or asserted against any Indemnified Party, such
Indemnified Party shall promptly notify Issuer in writing, and Issuer shall
assume the defense thereof, including the employment of counsel and the payment
of all expenses. Such Indemnified Party shall, in its sole discretion, have the
right to employ separate counsel (who may be selected by such Indemnified Party
in its sole discretion) in any such action and to participate in the defense
thereof, and the fees and expenses of such counsel shall be paid by such
Indemnified Party, except that Issuer shall be required to pay such fees and
expenses (a) Issuer agrees to pay such fees and expenses, or (b) Issuer shall
fail to assume the defense of such action or proceeding or shall fail, in the
reasonable discretion of such Indemnified Party, to employ counsel satisfactory
to the Indemnified Party in any such action or proceeding, (c) Issuer is the
plaintiff in any such action or proceeding or (d) the named parties to any such
action or proceeding (including any impleaded parties) include both Indemnified
Party and Issuer, and Indemnified Party shall have been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to Issuer. Issuer shall be liable to pay fees
and expenses of counsel pursuant to the preceding sentence. All such fees and
expenses payable by Issuer pursuant to the foregoing sentence shall be paid from
time to time as incurred, both in advance of and after the final disposition of
such action or claim. The obligations of Issuer under this Section 9 shall
survive any termination of this Escrow Agreement and the resignation or removal
of Escrow Agent.
<PAGE>
10. Compensation to Escrow Agent.
a. Fees and Expenses. Issuer shall compensate Escrow Agent for its services
hereunder in accordance with Exhibit C attached hereto and, in addition, shall
reimburse Escrow Agent for all of its reasonable out-of-pocket expenses,
including attorneys' fees, travel expenses, telephone and facsimile transmission
costs, postage (including express mail and overnight delivery charges), copying
charges and the like. All of the foregoing compensation and reimbursement
obligations shall be payable by Issuer upon demand by Escrow Agent. The
obligations of Issuer under this Section 10 shall survive any termination of
this Escrow Agreement and the resignation or removal of Escrow Agent.
b. Disbursements from Escrow Funds to Pay Escrow Agent. The Escrow Agent is
authorized to and may disburse from time to time, to itself or to any
Indemnified Party from the Escrow Funds (to the extent of Issuer's rights
thereto), the amount of any compensation and reimbursement of out-of-pocket
expenses due and payable hereunder (including any amount to which Escrow Agent
or any Indemnified Party is entitled to seek indemnification pursuant to Section
9 hereof). Escrow Agent shall notify Issuer of any disbursement from the Escrow
Funds to itself or to any Indemnified Party in respect of any compensation or
reimbursement hereunder and shall furnish to Issuer copies of all related
invoices and other statements.
c. Security and Offset. Issuer hereby grants to Escrow Agent and the
Indemnified Parties a security interest in and lien upon the Escrow Funds (to
the extent of Issuer's rights thereto) to secure all obligations hereunder, and
Escrow Agent and the Indemnified Parties shall have the right to offset the
amount of any compensation or reimbursement due any of them hereunder (including
any claim for indemnification pursuant to Section 9 hereof) against the Escrow
Funds (to the extent of Issuer's rights thereto.) If for any reason the Escrow
Funds available to Escrow Agent and the Indemnified Parties pursuant to such
security interest or right of offset are insufficient to cover such compensation
and reimbursement, Issuer shall promptly pay such amounts to Escrow Agent and
the Indemnified Parties upon receipt of an itemized invoice.
11. Representations and Warranties; Legal Opinions. a. Issuer makes the
following representations and warranties to Escrow Agent:
(1) Issuer is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware, and has full power and
authority to execute and deliver this Escrow Agreement and to perform its
obligations hereunder;
<PAGE>
(2) This Escrow Agreement has been duly approved by all necessary corporate
action of Issuer, including any necessary shareholder approval, has been
executed by duly authorized officers of Issuer, and constitutes a valid and
binding agreement of Issuer, enforceable in accordance with its terms.
(3) The execution, delivery, and performance by Issuer of this Escrow
Agreement will not violate, conflict with, or cause a default under the articles
of incorporation or bylaws of Issuer, any applicable law or regulation, any
court order or administrative ruling or decree to which Issuer is a party or any
of its property is subject, or any agreement, contract, indenture, or other
binding arrangement to which Issuer is a party or any of its property is
subject. The execution, delivery and performance of this Agreement is consistent
with and accurately described in the Offering Document, and the allocation of
interest and other earnings to Subscribers, as set forth in Sections 4(b) and
4(c) hereof, has been properly described therein.
(4) No party other than the parties hereto and the prospective Subscribers
have, or shall have, any lien, claim or security interest in the Escrow Funds or
any part thereof. No financing statement under the Uniform Commercial Code is on
file in any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.
(5) Issuer hereby acknowledges that the status of Escrow Agent is that of
agent only for the limited purposes set forth herein, and hereby represents and
covenants that no representation or implication shall be made that the Escrow
Agent has investigated the desirability or advisability of investment in the
Shares or has approved, endorsed or passed upon the merits of the investment
therein and that the name of the Escrow Agent has not and shall not be used in
any manner in connection with the offer or sale of the Shares other than to
state that the Escrow Agent has agreed to serve as escrow agent for the limited
purposes set forth herein.
(6) All of the representations and warranties of Issuer contained herein
are true and complete as of the date hereof and will be true and complete at the
time of any deposit to or disbursement from the Escrow Funds.
12. Consent to Jurisdiction and Venue. In the event that any party hereto
commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree that the United States District Court for
the Eastern District of Virginia shall have the sole and exclusive jurisdiction
over any such proceeding. If all such courts lack federal subject matter
jurisdiction, the parties agree that the Circuit Court of the City of Richmond,
Virginia shall have sole and exclusive jurisdiction. Any of these courts shall
be proper venue for any such lawsuit or judicial proceeding and the parties
hereto waive any objection to such venue. The parties hereto consent to and
agree to submit to the jurisdiction of any of the courts specified herein and
agree to accept service or process to vest personal jurisdiction over them in
any of these courts.
<PAGE>
13. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
after delivery to any overnight courier, or when transmitted by facsimile
transmission facilities, and addressed to the party to be notified as follows:
If to Issuer at:
JTH Tax Inc.
2610 Potters Road
Virginia Beach, VA 23452
ATTENTION: John Hewitt
Facsimile Number: (757) 340-7612
If to the Escrow
Agent at: First Union National Bank, as Escrow Agent
Bond Administration
800 East Main Street, Lower Mezzanine
Richmond, Virginia 23219
ATTENTION: ______________________
Facsimile Number: (804) 343-6699
or to such other address as each party may designate for itself by like notice.
14. Amendment or Waiver. This Escrow Agreement may be changed, waived,
discharged or terminated only by a writing signed by Issuer and Escrow Agent. No
delay or omission by any party in exercising any right with respect hereto shall
operate as a waiver. A waiver on any one occasion shall not be construed as a
bar to, or waiver of, any right or remedy on any future occasion.
15. Severability. To the extent any provision of this Escrow Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Escrow Agreement.
<PAGE>
16. Governing Law. This Escrow Agreement shall be construed and interpreted
in accordance with the internal laws of the Commonwealth of Virginia without
giving effect to the conflict of laws principles thereof.
17. Entire Agreement. This Escrow Agreement constitutes the entire
agreement between the parties relating to the acceptance, collection, holding,
investment and disbursement of the Escrow Funds and sets forth in their entirety
the obligations and duties of the Escrow Agent with respect to the Escrow Funds.
18. Binding Effect. All of the terms of this Escrow Agreement, as amended
from time to time, shall be binding upon, inure to the benefit of and be
enforceable by the respective successors and assigns of Issuer and Escrow Agent.
19. Execution in Counterparts. This Escrow Agreement may be executed in two
or more counterparts, which when so executed shall constitute one and the same
agreement.
20. Termination. Upon the first to occur of the disbursement of all amounts
in the Escrow Funds or deposit of all amounts in the Escrow Funds into court
pursuant to Section 5 hereof, this Escrow Agreement shall terminate and Escrow
Agent shall have no further obligation or liability whatsoever with respect to
this Escrow Agreement or the Escrow Funds.
21. Dealings. The Escrow Agent and any stockholder, director, officer or
employee of the Escrow Agent may buy, sell, and deal in any of the securities of
the Issuer and become pecuniarily interested in any transaction in which the
Issuer may be interested, and contract and lend money to the Issuer and
otherwise act as fully and freely as though it were not Escrow Agent under this
Agreement. Nothing herein shall preclude the Escrow Agent from acting in any
other capacity for the Issuer or any other entity.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to
be executed under seal as of the date first above written.
JTH Tax Inc. (ISSUER)
[CORPORATE SEAL] By: /s/ John T. Hewitt
------------------------------------
Title: President/CEO
------------------------------------
ATTEST:
/s/ Donna Halligan
- ------------------
Secretary
FIRST UNION NATIONAL BANK, as Escrow Agent
By: /s/ W.F. Michie, III
--------------------------------
Title: Corporate Trust Officer
--------------------------------
<PAGE>
Exhibit A
Offering Document
<PAGE>
Exhibit B
Additional Documents Required
for Release of Escrow Funds
Pursuant to Section 4(a)
1. Certificate of John T. Hewitt, President of Issuer, that (a) the
Offering Document has been declared effective under the Securities Act of 1933,
and (b) no stop order has been issued or threatened to be issued by the SEC or
any other federal or state regulatory authority in connection with the Offering
Document or the offering of Shares pursuant thereto; and
<PAGE>
Exhibit C
Fees Payable to Escrow Agent
One Thousand Five Hundred ($1,500.00)
LOCK-UP AGREEMENT
August 25, 1998
JTH Tax, Inc.
260 Potters Road
Virginia Beach, VA 23452
Ladies and Gentlemen:
The undersigned understands that you are the issuer of a public offering
of Class A Common Stock, $1.00 par value (the "Common Stock") that will be
offered and sold by John K. Seal, a director, Vice President and Treasurer of
JTH Tax, Inc. (the "Company") pursuant to the Company's Registration Statement
on Form SB-2, Registration No. 333-58085, as filed with the Securities and
Exchange Commissioner June 30, 1998, as amended (the "Offering").
As of the date of this Lock-up Agreement (the "Agreement"), the
undersigned owns 226,150 shares of the Company's Common Stock; 136,150 shares of
Class A Common Stock and 90,000 shares of Class B Common Stock which is
convertible into shares of Class A Common Stock. These Shares are considered
promotional shares pursuant to the North American Securities Administrators
Association Statement of Policy Regarding Promotional Shares and Statement of
Policy Regarding Corporate Securities Definitions (the "Policies"). Pursuant to
the Policies, 88,074 shares will be subject to the provisions of this Agreement
(the "Promotional Shares"). The undersigned also intends to purchase shares of
Class A Common Stock in the Offering (the "Offering Shares").
In consideration for the Company's agreement to make the Offering and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the undersigned hereby agrees, for the Lock-Up Period as defined
below, not to, directly or indirectly, (i) offer, pledge to secure any
obligation due within the Lock-Up Period, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option for the sale of, or otherwise dispose of or transfer (other than a
disposition or transfer by gift to an immediate family member or by will, the
laws of descent and distribution, the operation of law or by any court of
competent jurisdiction and proper venue, pursuant to which the acquiror or
transferee is subject to the restrictions on disposition and transfer set forth
in this Lock-Up Agreement to the same extent as the undersigned) any Promotional
or Offering Shares or any securities convertible into or exercisable or
exchangeable for Promotional or Offering Shares or (ii) enter into any swap or
any other agreement or transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Promotional or
Offering Shares, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Promotional or Offering Shares or
such other securities, in cash or otherwise (the "Restrictions").
The Promotional and Offering Shares shall be subject to the above
restrictions for a period of two years from the date of completion of the
Offering with the exception that one year after the completion of the Offering,
2,202 Promotional Shares may be released from the Restrictions and 2,202
additional Promotional Shares may be released from the Restrictions 90 days
thereafter, 2,202 additional Promotional Shares may be released from the
Restrictions 180 days thereafter, 2,202 additional Promotional Shares may be
released from the Restrictions 270 days thereafter and the remainder of the
Promotional Shares as well as the Offering Shares may be released from the
Restrictions on the second anniversary of the completion of the Offering (the
"Lock-up Period").
The undersigned also holds 5000 options to purchase shares of the Common
Stock (the "Option Shares"). The Option Shares shall also be subject to the
Restrictions for the Lock-Up Period.
The undersigned understands that the Promotional, Offering and Option
Shares will be released from the Restrictions, and this Agreement and all
obligations thereunder will be terminated in the event that:
1. the Offering is terminated and no securities are sold pursuant
thereto; or
2. the Common Stock becomes a "Covered Security" as defined in Section
18(b)(1) of the Securities Act of 1933.
Furthermore, the undersigned hereby agrees and consents to the entry of a
legend upon the Promotional, Offering and Option Shares to evidence the
prohibition against the transfer of such shares held by the undersigned except
in compliance with this Lock-Up Agreement.
Very truly yours,
__________/s/______________
John T. Hewitt
Accepted as of the date first set forth above:
JTH TAX, INC.
BY: /s/
Donna Halligan
sweisba\jth\lockup.hew
Securities and Exchange Commission
August 26, 1998
Page 1
