As filed with the Securities and Exchange Commission on July 11, 1997
Registration No. 333-30439
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NUMBER 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------
JACKSON HEWITT INC.
(Exact Name of Registrant as Specified in Its Charter)
Virginia 7291 54-1349705
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
4575 Bonney Road
Virginia Beach, Virginia 23462
(757) 473-3300
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
KEITH E. ALESSI
Chairman, President and
Chief Executive Officer
Jackson Hewitt Inc.
4575 Bonney Road
Virginia Beach, Virginia 23462
(757) 473-3300
(Names, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-------------------------
With Copies to:
JOHN M. PARIS, JR., ESQ. BARRY H. GENKIN, ESQ.
Kaufman & Canoles Blank Rome Comisky & McCauley
P.O. Box 3037 1200 Four Penn Center Plaza
Norfolk, Virginia 23514-3037 Philadelphia, Pennsylvania 19103
(757) 624-3181 (215) 569-5514
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box.[ ]
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 delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.[ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Aggregate Amount of Registration
Securities to be Registered Registered Offering Price Per Offering Price(1)(2) Fee
Share
=================================================================================================================
<S> <C>
Common Stock, par value 1,130,790 $11.38 $12,868,390.00 $3,899.51(3)
$0.02 per share
- -----------------------------------------------------------------------------------------------------------------
Common Stock, par value 167,673 $13.81 $ 2,315,564.13 $ 701.69(3)
$0.02 per share
=================================================================================================================
</TABLE>
(1) Includes shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(3) $701.69 paid in connection with this filing, $3,899.51 having been paid in
connection with initial filing of Form S-1.
----------------------
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
Securities and Exchange Commission, acting pursuant to Section 8(a),
may determine.
<PAGE>
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. 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 STATE.
SUBJECT TO COMPLETION, DATED JULY 11, 1997
1,129,099 SHARES
[LOGO]
COMMON STOCK
------------------------
Of the 1,129,099 shares of common stock, $0.02 par value per share (the
"Common Stock"), offered hereby (the "Offering") 1,000,000 shares are being
offered by Jackson Hewitt Inc., a Virginia corporation (the "Company") and
129,099 shares are being offered by certain shareholders of the Company (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Common Stock is traded on the Nasdaq Stock Market's National Market
System (the "Nasdaq National Market") under the symbol "JTAX." As of July 10,
1997, the last reported sale price of the Common Stock was $13.625 per share.
See "Price Range of Common Stock."
------------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER "RISK FACTORS" BEGINNING ON PAGE
6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C>
Per Share................... $ $ $
Total(3).................... $ $ $
<CAPTION>
PROCEEDS TO SELLING
SHAREHOLDERS
<S> <C>
Per Share................... $
Total(3).................... $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities including certain liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses and other fees payable by the Company estimated at
$450,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 169,364 additional shares of Common Stock on
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company, and Proceeds to
Selling Shareholders will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
--------------------------
The shares of the Common Stock are offered by the several Underwriters
named herein subject to prior sale, receipt and acceptance by them, and
subject to their right to reject orders in whole or in part. It is expected
that the delivery of the certificates for such shares will be made on or
about , 1997, at the office of Janney Montgomery Scott Inc.,
Philadelphia, Pennsylvania.
--------------------------
JANNEY MONTGOMERY SCOTT INC. SCOTT & STRINGFELLOW, INC.
The date of this Prospectus is , 1997
<PAGE>
Jackson Hewitt Locations
1997 Operating Areas
[MAP of JACKSON HEWITT OFFICE NETWORK] [LOGO]
Tax Returns Prepared (000s) Office Count
[GRAPH] [GRAPH]
1993 404 1993 614
1994 570 1994 878
1995 618 1995 1,222
1996 722 1996 1,342
1997 875 1997 1,372
Average Tax Prep Fee Total Revenues (MMs)
[GRAPH] [GRAPH]
1993 $67 1993 $10.8
1994 $69 1994 $18.6
1995 $80 1995 $18.2
1996 $92 1996 $25.0
1997 $99 1997 $31.4
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING
GROUP MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING
THE NOTES THERETO, APPEARING ELSEWHERE HEREIN. UNLESS INDICATED OTHERWISE, THE
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND THE CLOSING OF THE PREFERRED STOCK RECAPITALIZATION
DESCRIBED IN "RECENT DEVELOPMENTS." REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" REFER TO JACKSON HEWITT INC. AND ITS SUBSIDIARIES AND REFERENCES TO
"JACKSON HEWITT" REFER TO THE COMPANY AND THE COMPANY'S SYSTEM OF FRANCHISED
OFFICES. YEARLY REFERENCES THROUGHOUT THIS PROSPECTUS REFER TO THE COMPANY'S
FISCAL YEAR ENDING ON APRIL 30. REFERENCES TO THE TERM "TAX SEASON" THROUGHOUT
THIS PROSPECTUS REFER TO THE PERIOD FROM JANUARY THROUGH APRIL OF EACH FISCAL
YEAR. FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS."
THE COMPANY
Jackson Hewitt is the second largest tax preparation service in the United
States, with a 41 state network comprised of 1,296 franchised and 76
Company-owned offices operating under the trade name "Jackson Hewitt Tax
Service." Office locations range from stand-alone store front offices to offices
within Wal-Mart Stores, Inc. ("Wal-Mart") and Montgomery Ward & Co., Inc.
("Montgomery Ward") locations. Through the use of proprietary interactive tax
preparation software, the Company is engaged in the preparation and electronic
filing of federal and state individual income tax returns (collectively referred
to in this Prospectus as "tax returns"). During 1997, Jackson Hewitt prepared
approximately 875,000 tax returns, which represented an increase of 21.2% from
the approximately 722,000 tax returns it prepared during 1996. To complement its
tax preparation services, the Company also offers accelerated check requests
("ACRs") and refund anticipation loans ("RALs") (ACRs and RALs, collectively,
"Bank Products") to its tax preparation customers. In 1997, Jackson Hewitt
customers purchased approximately 472,000 Bank Products, an increase of 20.1%
over the approximately 393,000 Bank Products purchased in 1996. In 1997, the
Company had total revenues of $31.4 million and net income of $5.0 million, or
$0.95 per share, an increase of 25.6%, 107.5%, and 137.5%, respectively, over
1996.
Through the innovative use of computers, the Company believes it provides
consistent, high quality tax preparation services at prices that allow the
Company to compete successfully with other businesses offering similar services.
While the quality of service provided by other tax preparers depends largely on
the individual preparer's knowledge of tax laws, Jackson Hewitt's service does
not depend solely upon the preparer's tax expertise. Jackson Hewitt's
proprietary interactive tax software, Hewtax, automatically prompts the preparer
with the relevant questions required to accurately complete a tax return. By
computerizing the tax preparation process, Jackson Hewitt is able to rapidly and
efficiently prepare and file a customer's tax return electronically. Since
electronic filings are generally processed by the Internal Revenue Service
("IRS") on a priority basis, customers who file in this manner typically receive
refunds more quickly than those who file their tax returns manually.
Jackson Hewitt's customer base currently consists primarily of low to
middle income taxpayers who typically are entitled to tax refunds and want to
receive their refund checks as quickly as possible. During the 1997 tax season,
approximately 80% of Jackson Hewitt's customers had annual gross wages under
$30,000 and over 62% had annual gross wages under $19,000. Many customers also
qualify for an increased refund as a result of the Earned Income Credit ("EIC"),
an income tax credit that can generate significant refunds for lower income
taxpayers. These customers typically file their tax returns early in the tax
season in order to receive their tax refund quickly. The Company believes that
customers are attracted to Jackson Hewitt's services because they prefer not to
prepare their own tax returns, are unwilling to pay the fees charged by most
accountants and tax attorneys, or wish to purchase a Bank Product.
As part of its electronic filing service, Jackson Hewitt offers its
customers Bank Products in cooperation with selected commercial banks. Bank
Products enable Jackson Hewitt customers to receive their tax refunds faster
than if they filed their tax returns by mail and to defer the payment of the tax
preparation and other fees until their tax refunds are actually received.
Through the ACR program, Jackson Hewitt customers are offered the opportunity to
have their tax refunds deposited directly into bank accounts established for
this purpose. Through the RAL program, Jackson Hewitt customers may apply for
loans in an amount up to their anticipated federal income tax refunds. The
borrowed funds are generally disbursed to customers within one to three days
from the time their tax returns are filed with the IRS. To obtain funds
associated with tax refunds processed through the ACR or RAL programs, customers
must return to the Jackson Hewitt office when notified that such funds are
available. Bank Products have become an increasingly important source of revenue
for the Company, accounting for 29.8% of total revenues in 1997, compared to
10.0% in 1993. During the 1997 tax season approximately 54.0% of Jackson Hewitt
customers purchased Bank Products.
The Company's growth has benefited from its ability to sell relatively
inexpensive franchises. The purchase price for a new Jackson Hewitt franchise is
currently $20,000. The franchisee receives the right to operate Jackson Hewitt
offices within a geographic territory having a population of approximately
50,000. The Company sold 166 new territories during 1997, an
3
<PAGE>
increase of 46.9% over the 113 territories sold in 1996. Franchisees are
permitted to operate as many offices within a territory as they choose. The net
number of franchised offices has increased from 546 in 1993 to 1,296 in 1997.
Net fees associated with the sale of franchises in 1997 totaled $3.2 million, or
10.2% of total revenues. Franchisees are required to pay royalties and
advertising fees to the Company equal to 18% of revenues generated by the
franchised offices. Such fees totaled $13.2 million in 1997, or 42.1% of total
revenues. Through the expansion of its franchise operations, the Company has
established a national presence, with a primary concentration in the
Mid-Atlantic region of the United States.
The Company also operates 76 Company-owned offices in selected territories
throughout the United States. Historically, the Company-owned offices were
located in territories reacquired from franchisees and thereafter were operated
on a temporary basis by the Company pending their resale as a franchised
territory. Recently, the Company re-evaluated its practice of reselling
Company-owned offices and currently plans to operate Company-owned offices as an
integral part of its business strategy. Beginning in 1997, the Company began
closely reviewing the operations of these stores and intends to close
unprofitable offices and improve operating procedures at the remaining offices.
Company-owned offices generated tax return preparation fees, net, of $3.3
million in 1997, or 10.5% of total revenues.
The Company's objective is to enhance market share through the continued
geographic expansion of its system of tax preparation offices. The Company's
management team has developed the following key strategic elements to achieve
this objective:
EXPAND THE FRANCHISE NETWORK. The Company intends to capitalize on the
recent financial performance of its franchise network by selling additional
territories to existing franchisees, as well as marketing territories to
new franchisees with a focus on those who are financially capable of
purchasing and operating multiple territories. The Company also intends to
open offices in certain territories that will be available for purchase by
franchisees who may be interested in purchasing existing businesses rather
than undeveloped territories.
EXPAND THE CORPORATE OFFICE PROGRAM. Based upon initial test results
in two markets, the Company intends to enter new markets by opening
multiple Company-owned offices in selected territories. Recognizing the
potential profitability of Company-owned offices, the Company believes it
can maximize the effectiveness of its marketing campaigns and achieve
certain economies of scale by operating clusters of Company-owned offices
in target areas.
IMPROVE EFFICIENCY OF OPERATIONS. The Company plans to continue to
increase the efficiency and consistency of its Company-owned and franchised
offices through its integrated computer systems and emphasis on
standardization of operating practices.
PROMOTE THE JACKSON HEWITT BRAND NAME. To increase market share, the
Company intends to focus its marketing efforts on improving the recognition
of the Jackson Hewitt brand name. Through its advertising campaigns, the
Company intends to expand its existing customer base to include a greater
percentage of middle to upper income taxpayers who, the Company's marketing
research indicates, tend to file their tax returns late in the tax season.
The Company believes that the successful implementation of these
initiatives, coupled with the strength of its existing franchised network, will
enable it to continue increasing its market share.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 1,000,000 shares
Common Stock offered by the Selling Shareholders........... 129,099 shares
Total Offering............................................. 1,129,099 shares
Common Stock to be outstanding after the Offering.......... 6,337,180 shares(1)
Use of Proceeds............................................ To reduce the Company's dependence on its credit facility, and
for working capital, general corporate purposes, and possible
acquisitions of complementary businesses or product lines. See
"Use of Proceeds."
Nasdaq National Market symbol.............................. JTAX
</TABLE>
- ---------------
(1) Includes 47,826 shares issued pursuant to exercises of employee stock
options subsequent to April 30, 1997. Does not include 461,609 shares
issuable upon the exercise of outstanding options as of July 10, 1997, at a
weighted average exercise price of $5.66 per share. See "Shares Eligible for
Future Sale."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands, except per share, office and fee data)
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues......................................................... $10,841 $18,640 $18,215 $25,016 $31,432
Income (loss) from operations.......................................... 1,046 1,430 (1,078) 5,278 11,768
Income before extraordinary item....................................... 677 923 840 2,402 6,232
Net income............................................................. 677 923 840 2,402 4,984
INCOME PER COMMON SHARE:
Primary:
Income before extraordinary item.................................. $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 1.22
Net income........................................................ $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 0.95
Fully diluted:
Income before extraordinary item.................................. $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 1.18
Net income........................................................ $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 0.91
Weighted average shares outstanding.................................... 3,701 4,069 4,252 4,354 4,520
SUPPLEMENTAL PRO FORMA INCOME PER COMMON SHARE(1):
Primary:
Income before extraordinary item.................................. $ 1.06
Net income........................................................ $ 0.82
Fully diluted:
Income before extraordinary item.................................. $ 1.03
Net income........................................................ $ 0.80
OTHER OPERATING DATA:
Tax returns prepared(2).............................................. 404 570 618 722 875
Refund anticipation loans (RALs) provided(2)......................... 246 331 108 102 142
Accelerated check requests (ACRs) provided(2)........................ 15 22 192 291 330
Franchised offices................................................... 546 742 1,087 1,246 1,296
Company-owned offices................................................ 68 136 135 96 76
Average tax preparation fees per return(2)........................... $ 67 $ 69 $ 80 $ 92 $ 99
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1997
--------------------
ACTUAL AS ADJUSTED (3)
------ ---------------
(in thousands)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 6,324 $ 18,647
Working capital........................................................ 5,983 18,306
Total assets........................................................... 28,160 40,483
Long-term debt......................................................... 1,262 1,262
Redeemable convertible preferred stock................................. 3,236 --
Shareholders' equity................................................... 14,740 30,299
</TABLE>
- ---------------
(1) Assumes the Company's exchange of 699,707 shares of Common Stock for 504,950
shares of Series A Convertible Preferred Stock had occurred on May 1, 1996.
See "Recent Developments" and Note 16 of the Notes to the Consolidated
Financial Statements.
(2) Includes Company-owned and franchised offices.
(3) Assumes (i) the sale of the 1,000,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $13.625 per share,
(ii) the application of the estimated net proceeds thereof as described
under the "Use of Proceeds," and (iii) the Company's exchange of 699,707
shares of Common Stock for 504,950 shares of Series A Convertible Preferred
Stock had occurred on April 30, 1997. See "Capitalization," "Recent
Developments," and Note 16 of the Notes to the Consolidated Financial
Statements.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE SPECIFIC FACTORS SET
FORTH BELOW AS WELL AS THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN THE COMMON STOCK OFFERED HEREBY. ALL STATEMENTS AND
INFORMATION HEREIN, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE
FORWARD-LOOKING STATEMENTS THAT ARE BASED UPON A NUMBER OF ASSUMPTIONS
CONCERNING FUTURE CONDITIONS THAT ULTIMATELY MAY PROVE TO BE INACCURATE. THESE
FORWARD LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS
"BELIEVE," "ANTICIPATE," AND "EXPECT," AND CONCERN, AMONG OTHER THINGS, THE
COMPANY'S EXPANSION PLANS WITH RESPECT TO FRANCHISED OFFICES; THE COMPANY'S
ABILITY TO EXPAND ITS NETWORK OF COMPANY-OWNED OFFICES PROFITABLY; THE COMPANY'S
INTENTION TO IMPROVE OPERATING EFFICIENCIES; THE COMPANY'S INTENTION TO IMPROVE
JACKSON HEWITT'S BRAND NAME IDENTITY; THE COMPANY'S PLANS TO EXPAND ITS EXISTING
CUSTOMER BASE AND MARKET SHARE; THE COMPANY'S EXPECTATIONS REGARDING FUTURE
DEMAND FOR ELECTRONIC FILING SERVICES AND BANK PRODUCTS; THE COMPANY'S ABILITY
TO ADAPT ITS BUSINESS TO CHANGES IN IRS POLICIES; AND THE COMPANY'S ABILITY TO
OFFER BANK PRODUCTS UNDER PROGRAMS THAT ADEQUATELY PROTECT THE COMPANY FROM
UNDUE RISK. MANY PHASES OF THE COMPANY'S OPERATIONS ARE SUBJECT TO INFLUENCES
OUTSIDE ITS CONTROL. ANY ONE OR ANY COMBINATION OF FACTORS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION, AND RESULTS OF
OPERATIONS. THESE FACTORS INCLUDE: COMPETITIVE PRESSURES, ECONOMIC CONDITIONS,
GOVERNMENTAL REGULATION AND POLICIES, CHANGES IN CONSUMER SPENDING, AND OTHER
CONDITIONS AFFECTING CAPITAL MARKETS. THE FOLLOWING FACTORS SHOULD BE CAREFULLY
CONSIDERED, IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS DOCUMENT.
ADVERSE IMPACT OF IRS POLICIES
From time to time, the United States Department of the Treasury (the
"Treasury Department") and the IRS initiate policy and rule changes and other
initiatives related to the electronic filing of tax returns, the treatment of
the EIC, and the methods of providing refunds to taxpayers. Since the vast
majority of the Company's revenues are derived, directly or indirectly, from the
preparation of tax returns and the sale of associated Bank Products, these
changes and initiatives can significantly impact the demand for tax return
preparation and electronic filing services, and the sale, pricing, risk of
collectibility, and profitability of Bank Products. For example, in 1995 the IRS
introduced multiple initiatives that changed the way in which tax preparers were
notified of tax refunds and the way in which EIC recipients were paid their
refunds. These changes dramatically disrupted the entire tax preparation
industry by reducing the number of electronic filings and causing unanticipated
losses on the part of RAL lenders who had relied upon former IRS practices to
assess underwriting risk. The Company and its franchisees were adversely
impacted and experienced a decrease in fee income and increased costs associated
with the Bank Product programs. The Company is unable to predict the timing or
nature of policies which may be implemented by the Treasury Department and the
IRS in the future. Any such policy changes could have a material adverse impact
on the Company's business, financial condition, and results of operations. See
"Business -- The Tax Preparation Business -- Bank Products."
DEPENDENCE ON BANKS FOR RALS AND ACRS; UNDERWRITING RISKS
A substantial portion of the Company's profitability is dependent upon its
ability to sell Bank Products to its customers. During 1997, fees associated
with Bank Products totaled $9.4 million, or 29.8% of the Company's total
revenues. The Company is currently providing Bank Products under risk sharing
and limited risk arrangements with three commercial banks. Certain of these
agreements are subject to termination by the bank upon the occurrence of certain
events, including changes in applicable law or regulations which adversely
affect the offering of Bank Products. Given the uncertainties associated with
IRS policies, including those affecting Bank Products, no assurance can be given
as to how these fee arrangements will be structured in the future, whether the
Company will be able to continue to negotiate acceptable fee arrangements with
these or other banks, or that the Company will continue to be able to otherwise
offer Bank Products to Jackson Hewitt's customers. If for any reason the Company
were unable to enter into acceptable Bank Product agreements with banks, its
business, financial condition, and results of operations would be materially
adversely affected. In addition, in those Bank Product programs in which the
Company shares the risks and benefits associated with making RALs, the Company's
operations could be materially and adversely affected if the applicable
underwriting criteria prove to be insufficient and result in a higher than
anticipated level of losses associated with RALs. See " -- Adverse Impact of IRS
Policies" and "Business -- The Tax Preparation Business -- Bank Products."
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY AND MANAGE EXPANSION
The Company's growth strategy is dependent upon its ability to increase
market share through geographic expansion. Implementation of this strategy will
depend in large part on the Company's ability to: (i) expand in profitable
markets; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) locate acceptable franchisees; (iv) hire,
6
<PAGE>
train, and retain skilled and seasonal employees; (v) successfully implement its
marketing campaigns; and (vi) continue to expand given the significant
competition in the tax preparation industry. Difficulties in connection with any
or all of these factors could impair the Company's ability to successfully
implement its growth strategy, which in turn could have a material adverse
effect on the Company's business, financial condition, and results of
operations. See "Business -- Business Strategy."
The opening and success of new offices will depend on various factors,
including the availability of suitable sites, the negotiation of acceptable
lease or purchase terms for new locations, the obtaining of applicable permits
and regulatory approvals, the ability to meet construction schedules, the
financial and other abilities of the Company's franchisees, and general economic
and business conditions. Many of the foregoing factors are outside the control
of the Company and its franchisees. The Company's ability to manage future
growth effectively will require it to expand and continue to improve its
operations and systems, and to attract, retain, motivate, and manage its
employees. There can be no assurance that the Company will do so successfully.
The Company's inability to manage such growth effectively could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
POTENTIAL CONGRESSIONAL TAX INITIATIVES
The United States Congress regularly considers a wide array of income tax
proposals. These proposals have ranged from minor revisions in the tax laws to
the adoption of a non-progressive income tax, or "flat tax." A congressional
commission has also announced proposals to overhaul the structure and
organization of the IRS, and to extend the filing deadlines for tax returns. The
most significant risk to the Company's business operations would be the passage
of any initiative, such as a national sales tax, that eliminates the requirement
to file tax returns. Although the Company is not able to predict when or if such
proposals will become law, should any of such proposals become law, it would
likely have a material adverse effect on the Company's business, financial
condition, and results of operations. In addition, since the Company's
profitability is dependent upon fees obtained from the preparation and filing of
tax returns as well as fees associated with Bank Products, the adoption of
legislation that would significantly reduce or eliminate electronic filings, the
number of tax returns filed by Jackson Hewitt's customer base of lower income
taxpayers, or the availability of accelerated refunds or EICs, would materially
adversely affect the Company's business, financial condition, and results of
operations.
RISKS ASSOCIATED WITH FRANCHISING
A significant portion of the Company's total revenues are derived from its
franchise operations. During 1997, the Company derived 10.2% of its revenues
from the sale of new franchises and 42.1% of its revenues from the receipt of
franchise royalties and advertising fees, which are based upon the total
revenues generated by franchised offices. There can be no assurance that the
Company will be able to continue its historical level of franchise sales. Any
material decrease in franchise sales in the future would materially adversely
affect the Company's business, financial condition, and results of operations.
The Company's financial success is also dependent upon its employees and
franchisees and the manner in which they operate and develop their offices to
promote and develop the Jackson Hewitt name and its reputation for quality.
There can be no assurance that franchisees will have the business abilities or
access to the financial resources necessary to operate their offices in a manner
consistent with the Company's philosophy and standards or to achieve or increase
the level of revenues generated in prior tax seasons. See "Business -- Franchise
Operations."
The Company's current policy is to provide financing to franchisees in
connection with the purchase of franchises. At April 30, 1997, the Company's
franchisees owed the Company $13.3 million under notes bearing interest between
10% and 12%. The terms on these notes generally range from two to five years.
The franchisees' ability to repay these loans is dependent upon franchise
performance, as well as matters affecting the Company and the tax preparation
industry. As a result of the negative impact of IRS actions in 1995, a
substantial number of these notes became delinquent and as such, resulted in
either termination of the franchisee or restructuring of the terms of the notes.
Although management believes that its recorded allowance is adequate, any
adverse changes experienced by specific franchises or the Company, or the tax
preparation industry in general, would have a material adverse effect on the
Company's business, financial condition, and results of operations. See Note 4
of the Notes to the Consolidated Financial Statements.
As a franchiser, the Company grants to its franchisees a limited license to
use the Company's registered service marks. The general public could incorrectly
identify the Company's franchisees as controlled by the Company. In the event
that a court determines the franchisee is not adequately identified as a
franchisee, the Company could be held liable for the debts and obligations of
the franchisee so misidentified.
7
<PAGE>
GOVERNMENT REGULATION
The Company's future results of operations will depend upon its continued
ability to comply with federal and state regulations affecting tax return
preparers and the Company's ability to continue offering Bank Products to its
customers on the same or similar terms and under similar fee arrangements as
currently utilized by the Company. Certain state and city governments have
adopted specific disclosure requirements related to RALs and others may consider
enacting similar requirements. In addition, some state governments have
implemented, or are considering implementing, laws or regulations governing
proprietary schools, which may include the tax seminars offered by the Company
and its franchisees. The Company is unable to predict whether certain state and
local governments will adopt regulations or whether changes will occur in such
existing laws and regulations, and if so, the business or economic effect of
such changes. Any significant changes in existing laws or the adoption of laws
in jurisdictions not having such laws that alter the Company's current
operations would have an adverse effect on the Company's business, financial
condition, and results of operations. See "Business -- Personnel/Training."
Federal law requires 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 tax
returns they prepare for three years. Failure to comply with these requirements
may result in penalties to the preparer. Federal law provides for assessing
penalties against a tax return 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) willfully attempts to understate a taxpayer's tax liability, or
(iv) aids or abets in the understatement of such tax liability. In addition,
several state governments have enacted or are considering legislation which
would regulate state tax return preparers. These types of laws could have an
adverse effect on the Company's business, financial condition, and results of
operations. In 1996, the Manhattan regional office of the IRS notified the
Company that it could not operate Company-owned offices in New York City during
the 1997 and 1998 tax seasons due to certain violations identified regarding the
Company's adherence to the IRS' electronic filing identification number
regulations during the 1996 tax season. This restriction does not apply to any
of the Company's franchised offices in this, or any other area, and management
does not believe the operating exclusion will have a material adverse effect on
the Company's business, financial condition, or results of operations. See
"Business -- Legal Proceedings."
SEASONALITY AND DISASTER RECOVERY RISKS
The Company's business is highly seasonal. Historically, the Company has
generated substantially all of its revenues during the tax season, with the
majority of tax preparation revenues generated during late January and early
February. During 1997, the Company generated 89% of its revenues during the tax
season. The Company generally operates at a loss through the first three
quarters of each fiscal year, during which periods it incurs costs of preparing
for the upcoming tax season. If for any reason the Company's revenues fall below
those normally expected during its fourth quarter, the Company's business,
financial condition, and results of operations would be adversely affected.
The Company's financial success depends in large part on the efficient and
uninterrupted operation of its processing center during the tax season. All of
the Company's critical processing operations are currently conducted in Virginia
Beach, Virginia and the Company maintains a non-exclusive right to use a site in
Ohio. The Company intends to open a site in North Carolina prior to the 1998 tax
season that would be able to duplicate the Company's processing systems in the
event a natural disaster or other unforeseen occurrence compromised the
Company's primary processing center. Notwithstanding the availability of such
alternative locations, if a disaster or other event were to disrupt operations
at the primary processing center, particularly during the peak period of the tax
season, the Company's operations could be materially adversely effected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results of Operations" and
" -- Liquidity and Capital Resources."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and is expected to continue experiencing,
quarterly variations in revenues and operating income as a result of many
factors, including the highly seasonal nature of the tax preparation business,
the timing of off-season activities, and the hiring of personnel. Due to the
foregoing factors, it is possible that the Company's results of operations,
including quarter to quarter results, will be below the expectations of public
market analysts and investors. In addition, the Company must plan its operating
expenditures based on revenue forecasts, and a revenue shortfall below such
forecasts in any quarter would likely adversely affect the Company's business,
financial condition, and results of operations for the year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results of Operations" and
" -- Liquidity and Capital Resources."
8
<PAGE>
DEPENDENCE UPON DEBT FINANCING
To fund its off-season activities, the Company has historically been
dependent upon borrowings under the Company's credit facilities. The Company's
off-season activities generally require the Company to draw most heavily on
these facilities from July through February of each year and then repay this
debt entirely by the end of each tax season. For example, during the 1997 tax
season, the Company had $6.6 million of indebtedness under a credit facility
with its primary lender outstanding at January 31, 1997, which was repaid by
April 30, 1997. To the extent that the Company is not successful in maintaining
or replacing existing financing in the future, it would have to curtail
essential off-season activities, thereby having a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent on senior
management, particularly Keith E. Alessi, the Chairman, President, and Chief
Executive Officer. The loss of the services of Mr. Alessi or certain other
executive officers, or the inability to attract and retain other qualified
employees, could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has entered into a
two-year employment agreement with Mr. Alessi that contains, among other
provisions, a covenant not to compete, a non-solicitation of employees covenant,
and confidentiality provisions. The Company does not, however, typically enter
into employment or non-compete agreements with its executive officers. The
Company does not maintain a key-man life insurance policy on Mr. Alessi. See
"Business -- Employees," "Management Directors and Executive Officers," and
"Management -- Employment Agreement."
DEPENDENCE ON RETAIL OUTLETS
During the 1997 tax season, Jackson Hewitt had 208 and 167 offices located
in Wal-Mart and Montgomery Ward stores, respectively. The Company's ability to
continue to operate in these stores is dependent on its ability to negotiate
acceptable master agreements with these retailers and the continued operation of
the particular retail stores in which the Jackson Hewitt offices are located. In
July 1997, Montgomery Ward filed a voluntary petition in the United States
Bankruptcy Court for the District of Delaware seeking to reorganize under
Chapter 11 of the U.S. Bankruptcy Code. The Company is unable to predict how the
Montgomery Ward bankruptcy will impact its ability to operate Jackson Hewitt
offices in Montgomery Ward stores during future tax seasons. In the event the
Company were unable to negotiate acceptable master agreements with these
retailers, or in the event these retailers closed a significant number of
stores, as a result of the bankruptcy or otherwise; in which Jackson Hewitt
offices were located, the Company would lose a substantial number of its offices
in a very short period of time. Such an occurrence, especially immediately prior
to or during the tax season, would have a material adverse impact on the
Company's business, financial condition, and results of operations. See
"Business -- Retail Outlets."
COMPETITION
The low-cost tax return preparation business is highly competitive. The
Company competes with nationally franchised tax preparation services, regional
tax preparation businesses, regional and national accounting firms, and
financial service institutions that prepare tax returns as part of their
businesses. The Company also competes with individuals who prepare their own tax
returns either manually or in connection with commercially packaged tax
preparation software. The IRS has also recently introduced a method by which
qualifying taxpayers can file their tax returns with the IRS by telephone. The
Company is not able to predict the extent to which its potential customers will
utilize this filing service in the future. See "Business -- The Tax Preparation
Business -- Electronic Filing of Tax Returns."
Of the Company's competitors, H&R Block, Inc. ("H&R Block") dominates the
low-cost tax preparation business. H&R Block is substantially larger than the
Company and has significantly greater financial and other resources. Based on
information released by H&R Block in May 1997, H&R Block currently operates an
international tax preparation system through approximately 10,000 company
operated and franchised offices, approximately 8,000 of which are located in the
United States. H&R Block has also been in business much longer than the Company
and has significantly greater name recognition throughout the United States,
including the geographic areas in which the Company currently operates and in
which it intends to expand. The ability of the Company to successfully compete
with H&R Block and other tax preparation businesses is dependent in large part
on the geographic area, specific site location, local economic conditions, and
quality of on-site office management. There can be no assurance that the Company
will be able to compete successfully with these competitors. In addition, to the
extent the Company is required to reduce the fee charged per tax return prepared
for competitive reasons, its business, financial condition, and results of
operations could be materially adversely affected. See
"Business -- Competition."
9
<PAGE>
DEPENDENCE ON AVAILABILITY OF LARGE POOL OF TRAINED SEASONAL EMPLOYEES
In conducting its business operations, both the Company and its franchisees
depend on the availability of employees willing to work for a period of
approximately three months for relatively low hourly wages, and minimal
benefits. The Company's success in managing the expansion of its business will
depend in large part upon its and its franchisees' ability to hire, train, and
supervise seasonal personnel. If this labor pool is reduced in the future or if
the Company is required to provide its employees higher wages or more extensive
and costly benefits, either for competitive reasons or as a result of changes in
governmental regulation, the expenses associated with the Company's operations
could be substantially increased without the Company receiving offsetting
increases in revenues. There can be no assurance that the Company or its
franchisees will be able to hire, train, and supervise an adequate number of
such seasonal personnel. See "Business -- Franchise Operations."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT
Although the Company believes its proprietary interactive tax software
constitutes a "trade secret," the Company has not filed for copyright
registration for its software programs. Unauthorized parties may attempt to copy
aspects of the Company's software or to obtain and use information that the
Company regards as proprietary. Policing the unauthorized use of the Company's
software is difficult. The Company generally controls the access to and the
distribution of its software, documentation, and other proprietary information,
but has not entered into confidentiality agreements with any of its executive
officers other than Mr. Alessi. It may be possible for a third party to copy or
otherwise obtain and use the Company's services or technology without
authorization, or to develop similar services or technology independently. There
can be no assurance that the legal remedies available to the Company will
effectively prevent disclosure of, or provide meaningful protection for, its
confidential information or that the Company's trade secrets or proprietary
information will not be developed independently by the Company's competitors.
Litigation may be necessary for the Company to defend itself against claims of
infringement, or to protect trade secrets and could result in substantial costs
to, and diversion of management efforts by, the Company. There can be no
assurance that the Company would prevail in any such litigation, should it
occur. The Company is not aware that any of its software, trademarks, or other
proprietary rights infringe on the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, with or without merit, can
be time consuming and expensive to defend and may require the Company to enter
into royalty or licensing agreements or cease the alleged infringing activities.
The failure to obtain such royalty agreements, if required, and the Company's
involvement in such litigation could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business -- Proprietary Information and Computer Technology."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
The net proceeds of the Offering will be used to reduce the Company's
dependence on its credit facility to fund off-season operations, and for working
capital, general corporate purposes, and possible acquisitions of complementary
businesses or product lines. If the Company were to make any such acquisition,
it might use a significant portion of the net proceeds in connection with such
acquisition. Although the Company has from time to time considered various
acquisition opportunities, currently it has no specific agreements or plans with
respect to such acquisitions. Accordingly, there can be no assurance the Company
will consummate any acquisitions. Consequently, there can be no assurance as to
when or how the net proceeds from the Offering will be used, and the Company's
management will retain broad discretion as to the allocation of a significant
portion of the net proceeds from the Offering. If the Company is unable to
invest such proceeds in operating and expanding its current business or
acquisitions of similar or related businesses, the returns realized from holding
such proceeds may be substantially less than the returns that could be realized
if the proceeds were invested successfully in the Company's business. See "Use
of Proceeds" and "Business -- Business Strategy."
TECHNOLOGICAL CHANGE
The Company's future success will depend significantly on its ability to
enhance its proprietary interactive tax preparation and processing software, as
well as to respond to changes in customers' technological needs. There can be no
assurance that the Company will be successful in developing or acquiring
technologically advanced product enhancements or new products to address
changing technologies and customer requirements. See "Business -- Proprietary
Information and Computer Technology."
ABSENCE OF PAYMENT OF CASH DIVIDENDS
The Company has never declared a cash dividend on its Common Stock. The
Company intends to retain any future earnings for the operation and expansion of
its business and does not currently anticipate declaring or paying any cash
dividends on the Common Stock. The payment of future dividends will be at the
discretion of the Board of Directors and will
10
<PAGE>
depend, among other things, on the earnings, capital requirements, and financial
condition of the Company. No assurance can be given that the Company's results
of operations will ever permit the payment of such dividends. In addition,
future borrowings or issuances of preferred stock may prohibit or restrict the
Company's ability to pay or declare dividends. In addition, the Company's credit
facility with its primary lender prohibits the payment of any dividends without
the lender's consent. See "Dividend Policy."
LIMITED PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
The average daily trading volume of the Common Stock generally has been
limited. As a result, historical market prices may not be indicative of market
prices in a more liquid market in which a greater number of shares are publicly
traded. Although it is anticipated that an increase in the number of publicly
traded shares will improve the liquidity of the Common Stock, there can be no
assurance that an active trading market for the Common Stock will develop as a
result of the Offering or be sustained in the future. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations
that often have been unrelated to the operating performance of particular
companies. Changes in earnings estimates by analysts and economic and other
external factors, as well as the highly seasonal nature of the Company's
business and period-to-period fluctuations in financial results of the Company,
may have a significant impact on the market price of the Common Stock.
Fluctuations or decreases in the trading price of the Common Stock may adversely
affect the liquidity of the trading market for the Common Stock and the
Company's ability to raise capital through future equity financing. See "Price
Range of Common Stock."
EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the 1,129,099 shares offered hereby
(1,298,463 shares if the over-allotment option is exercised in full) will be
eligible for immediate sale in the public market without restriction unless they
are held by affiliates of the Company. Approximately 5,192,665 of the remaining
shares of outstanding Common Stock were issued and sold by the Company in
private transactions and may be publicly sold only if registered under the
Securities Act of 1933, as amended (the "Securities Act"), or sold in accordance
with an applicable exemption from registration such as Rule 144 ("Rule 144")
promulgated under the Securities Act. Approximately 5,015,374 shares of Common
Stock are currently eligible for sale under Rule 144, of which 4,410,355 are
subject to no restrictions and can be freely sold upon the removal of a
restrictive legend from the share certificates. In addition, as of July 10,
1997, there were outstanding options to purchase 461,609 shares of Common Stock,
of which options to purchase 67,290 shares are currently exercisable, and
options to purchase an additional 386,391 shares of Common Stock may be granted.
All of the shares underlying the options are covered by effective registration
statements. In addition, the Company has outstanding certain convertible notes
and warrants that are currently convertible into an aggregate of 57,671 shares
of Common Stock. All of such shares are eligible for sale under Rule 144. The
Company, its directors and executive officers, and the Selling Shareholders have
agreed not to sell or otherwise dispose of any shares of the Company's Common
Stock owned by them for at least 150 days after the effective date of the
registration statement relating to the Offering without the prior written
consent of the Underwriters. The Company has not obtained agreements restricting
the sale of shares of its Common Stock from certain of its larger shareholders
who own significant amounts of the Company's Common Stock. Accordingly, such
individuals may sell a significant number of shares of the Company's Common
Stock in the public market at any time. No prediction can be made as to the
effect, if any, that public sales of shares or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of the Common Stock in the
public market, particularly by directors and officers of the Company, or
shareholders owning a significant number of shares, or the perception that such
sales could occur, could have an adverse impact on the market price of the
Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
POSSIBLE ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation authorize the Board of Directors to
issue, without shareholder approval, 1,000,000 shares of preferred stock with
voting, conversion, and other rights and preferences that could materially and
adversely affect the voting power or other rights of the holders of the Common
Stock. The Company presently has no plans or commitments to issue any shares of
preferred stock. The issuance of preferred stock or of rights to purchase
preferred stock, as well as certain provisions of the Company's Articles of
Incorporation and Virginia law, could delay, discourage, hinder, or preclude an
unsolicited acquisition of the Company, make it less likely that shareholders
receive a premium for their shares as a result of any such attempt and adversely
affect the market price of, and voting and other rights of, the holders of the
Common Stock. See "Description of Capital Stock."
11
<PAGE>
THE COMPANY
The Company, which was incorporated under the laws of the Commonwealth of
Virginia in 1985, is engaged in the business of computerized preparation of tax
returns under the name Jackson Hewitt Tax Service. The Company's founders began
operating tax preparation offices in Virginia Beach, Virginia in 1982. By the
1986 tax season, the Company operated 25 offices in Virginia under the service
mark "Mel Jackson Income Tax Service." During 1986, the Company began its
franchise program by selling 22 territories to franchisees. After operating 49
offices during the 1988 tax season, the Company changed its name to Jackson
Hewitt Inc. and all franchisees began using the "Jackson Hewitt Tax Service"
service mark. During 1989, the Company acquired the right to operate 102 tax
preparation offices within Montgomery Ward stores, and in 1995, the Company
entered into an agreement with Wal-Mart to operate Jackson Hewitt offices in
certain Wal-Mart stores. The Company has increased the total number of its
Company-owned and franchised offices from 614 in 1993 to 1,372 in 1997,
including 208 offices in Wal-Mart stores and 167 offices in Montgomery Ward
stores in 1997. From 1993 to 1997, the Company's total revenues increased from
$10.8 million to $31.4 million.
The address of the Company's principal executive office is 4575 Bonney
Road, Virginia Beach, Virginia 23462 and its telephone number is (757) 473-3300.
The Company's Internet e-mail address is [email protected] and its World Wide Web
site is http://www.jtax.com.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby are estimated to be approximately $12.3 million
based upon an assumed Offering price of $13.625 per share and after deducting
underwriting discounts and estimated Offering expenses payable by the Company
($14.2 million if the Underwriters' over-allotment option is exercised in full).
Shares purchased pursuant to the exercise of the Underwriters' over-allotment
option will be sold by the Company and the Selling Shareholders. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Shareholders.
The net proceeds of the Offering will be used to reduce the Company's
dependence on its credit facility, and for working capital, general corporate
purposes, including possible expansion of Company-owned offices, and possible
acquisitions of complementary businesses or product lines. Although the Company
has no specific agreements or plans with respect to such acquisitions, it is
exploring a number of strategic alternatives in an effort to enhance shareholder
value. Pending such uses, the Company intends to invest the balance of the net
proceeds in short-term investment grade securities. See "Risk Factors --
Dependence Upon Debt Financing" and " -- Broad Management Discretion as to Use
of Proceeds."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been listed on the Nasdaq National Market
under the symbol "JTAX" since January 24, 1994. Prior to such time there was no
public market for the Common Stock. The following table sets forth certain high
and low sales prices of the Common Stock.
STOCK PRICE
---------------
HIGH LOW
------ -----
Fiscal 1996:
First quarter............................................... $ 5.25 $2.75
Second quarter.............................................. 4.00 2.75
Third quarter............................................... 3.75 2.25
Fourth quarter.............................................. 3.75 2.75
Fiscal 1997:
First quarter............................................... 6.50 3.25
Second quarter.............................................. 5.50 3.50
Third quarter............................................... 7.75 3.75
Fourth quarter.............................................. 11.25 6.50
Fiscal 1998:
First quarter (through July 10, 1997)....................... 14.25 9.50
As of July 10, 1997, the last reported sale price of the Company's Common
Stock, as reported by the Nasdaq National Market, was $13.625. On May 27, 1997,
there were 636 holders of record of the Common Stock. See "Risk Factors --
Limited Public Market for the Common Stock; Possible Volatility of Stock Price."
12
<PAGE>
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock. The Company
intends to retain any future earnings for the operation and expansion of its
business and does not currently anticipate declaring or paying any cash
dividends on the Common Stock. The declaration and payment of cash dividends on
the Common Stock in the future will be subject to the discretion of the
Company's Board of Directors and will depend on, among other things, the
earnings, capital requirements and financial condition of the Company, and
general business conditions. In addition, the Company's credit facility with its
primary lender prohibits the payment of any dividends without the lender's
consent. Future borrowings or issuances of preferred stock also may prohibit or
restrict the Company's ability to pay or declare dividends. See "Risk
Factors -- Absence of Payment of Cash Dividends" and "Description of Capital
Stock."
CAPITALIZATION
The following table sets forth, at April 30, 1997, the debt and
capitalization of the Company on an actual basis, pro forma to reflect the
exchange of 699,707 shares of Common Stock for 504,950 shares of Series A
Convertible Preferred Stock as provided in the Agreement and Plan of
Recapitalization effective as of June 18, 1997 (the "Recapitalization
Agreement") and as adjusted to give effect to (i) the sale of the 1,000,000
shares of Common Stock offered by the Company hereby at an assumed public
offering price of $13.625 per share based on the closing price of the Common
Stock on the Nasdaq National Market on July 10, 1997, (ii) the application of
the estimated net proceeds thereof as described under "Use of Proceeds," and
(iii) the exchange of the Preferred Stock as described above. This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's Consolidated Financial
Statements and the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 30, 1997
------------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED
------- -------------- -------
(IN THOUSANDS)
<S> <C>
Revolving credit facility(2)............................................................. $ -- $ -- $ --
Notes payable, including current installments............................................ 1,635 1,635 1,635
Capital leases, including current installments........................................... 852 852 852
6% convertible notes..................................................................... 763 763 763
Series A redeemable convertible preferred stock, no par value; 1,000,000 shares
authorized 504,950 shares issued and outstanding....................................... 3,236 -- --
Shareholders' equity:
Common stock; $.02 par value; 10,000,000 shares authorized; 4,589,647 shares actual,
5,289,354 shares pro forma, and 6,289,354 shares as adjusted, issued and
outstanding(3)...................................................................... 92 106 126
Additional capital....................................................................... 7,799 12,920 25,223
Stock subscription receivable............................................................ (1,276) (1,276) (1,276)
Retained earnings........................................................................ 8,125 6,226 6,226
------- -------------- -------
Total shareholders' equity........................................................ 14,740 17,976 30,299
------- -------------- -------
Total capitalization.............................................................. $21,226 $ 21,226 $33,549
------- -------------- -------
------- -------------- -------
</TABLE>
- ---------------
(1) Assumes the Company's exchange of 699,707 shares of Common Stock for 504,950
shares of Series A Convertible Preferred Stock as provided in the
Recapitalization Agreement had occurred on April 30, 1997. See "Recent
Developments" and Note 16 of the Notes to the Consolidated Financial
Statements.
(2) For a description of the Company's credit facility, see "Management's
Discussion and Analysis of Financial Condition and Result of
Operations -- Liquidity and Capital Resources " and Notes 5 and 16 of the
Notes to the Consolidated Financial Statements.
(3) Does not include 446,085 shares subject to options outstanding as of April
30, 1997, currently exercisable at a weighted average exercise price of
$4.71 per share. See "Shares Eligible For Future Sale" and Note 11 of the
Notes to the Consolidated Financial Statements.
13
<PAGE>
RECENT DEVELOPMENTS
On June 27, 1997, the Company entered into the Recapitalization Agreement
with the holders ("Preferred Shareholders") of the 504,950 outstanding shares of
the Company's Series A Convertible Preferred Stock ("Series A Stock"). This
transaction closed on July 3, 1997, with an effective date of June 18, 1997. In
this tax-free recapitalization transaction, the Preferred Shareholders exchanged
all of their Series A Stock for 699,707 shares of Common Stock. Pursuant to the
terms of the transaction, the Preferred Shareholders retained their contractual
right to cause the Company's Board of Directors to recommend at least one
nominee of the Preferred Shareholders as a director of the Company and the
registration rights provided them upon the purchase of the Series A Stock. The
Series A Stock had been sold to three private investors in August 1993. See
"Capitalization," "Management -- Contractual Right to Nominate Director,"
"Certain Transactions," "Description of Capital Stock -- Preferred Stock,"
"Shares Eligible for Future Sale," and Notes 5 and 16 of the Notes to the
Consolidated Financial Statements.
The Company is currently in the process of negotiating the sale of
approximately $3.9 million of franchisee notes receivable to a commercial bank
at face value. The consummation of the transaction is subject to a number of
factors, many of which are outside the Company's control. There can be no
assurance that the transaction will be consummated.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for each of the years in the five-year period ended April 30,
1997. The Consolidated Statement of Operations Data and Consolidated Balance
Sheet Data as of and for the five years ended April 30, 1997 have been derived
from the Company's audited Consolidated Financial Statements. The Company's
Consolidated Financial Statements as of April 30, 1996 and April 30, 1997, and
for each of the years in the three-year period ended April 30, 1997, and KPMG
Peat Marwick LLP's audit report with respect thereto have been included
elsewhere in this Prospectus. The information below is qualified in its entirety
by the detailed information included elsewhere herein and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE, OFFICE AND FEE DATA)
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Franchise revenues......................................................... $ 7,351 $10,502 $13,372 $14,128 $18,380
Bank product fees.......................................................... 1,080 3,954 2,037 6,858 9,363
Tax return preparation fees, net........................................... 2,283 3,928 2,727 3,196 3,298
Miscellaneous income....................................................... 127 256 79 834 391
------- ------- ------- ------- -------
Total revenues........................................................... 10,841 18,640 18,215 25,016 31,432
Selling, general and administrative expenses, including depreciation and
amortization............................................................. 9,795 17,210 19,293 19,738 19,664
------- ------- ------- ------- -------
Income (loss) from operations............................................ 1,046 1,430 (1,078) 5,278 11,768
Other income, net.......................................................... 335 677 2,469 543 861
Provision for income taxes................................................. 494 680 539 1,525 4,210
Minority interest share of earnings........................................ 210 504 12 1,894 2,187
------- ------- ------- ------- -------
Income before extraordinary item......................................... 677 923 840 2,402 6,232
Extraordinary item......................................................... -- -- -- -- (1,248)
------- ------- ------- ------- -------
Net income............................................................... 677 923 840 2,402 4,984
Dividends and accretion on Series A redeemable convertible preferred
stock.................................................................... -- (265) (376) (401) (624)
------- ------- ------- ------- -------
Net income attributable to common shareholders........................... $ 677 $ 658 $ 464 $ 2,001 $ 4,360
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Income per common share:
Primary:
Income before extraordinary item....................................... $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 1.22
Net income............................................................. $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 0.95
Fully diluted:
Income before extraordinary item....................................... $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 1.18
Net income............................................................. $ 0.18 $ 0.16 $ 0.11 $ 0.40 $ 0.91
Weighted average shares outstanding........................................ 3,701 4,069 4,252 4,354 4,520
SUPPLEMENTAL PRO FORMA INCOME PER COMMON SHARE(1):
Primary:
Income before extraordinary item....................................... $ 1.06
Net income............................................................. $ 0.82
Fully diluted:
Income before extraordinary item....................................... $ 1.03
Net income............................................................. $ 0.80
OTHER OPERATING DATA:
Tax returns prepared(2).................................................... 404 570 618 722 875
Refund anticipation loans (RALs) provided(2)............................... 246 331 108 102 142
Accelerated check requests (ACRs) provided(2).............................. 15 22 192 291 330
Franchised offices......................................................... 546 742 1,087 1,246 1,296
Company-owned offices...................................................... 68 136 135 96 76
Average tax preparation fees per return(2)................................. $ 67 $ 69 $ 80 $ 92 $ 99
<CAPTION>
AS OF APRIL 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 2,033 $ 3,204 $ 1,416 $ 3,558 $ 6,324
Working capital............................................................ 1,841 3,691 2,682 4,719 5,983
Total assets............................................................... 8,915 14,991 24,892 25,956 28,160
Long-term debt............................................................. 1,703 1,518 4,882 2,843 1,262
Redeemable convertible preferred stock..................................... -- 2,783 2,876 3,278 3,236
Shareholders' equity....................................................... 4,916 6,087 7,534 9,829 14,740
</TABLE>
- ---------------
(1) Assumes the Company's exchange of 699,707 shares of Common Stock for 504,950
shares of Series A Convertible Preferred Stock had occurred on May 1, 1996.
See "Recent Developments" and Note 16 of the Notes to the Consolidated
Financial Statements.
(2) Includes Company-owned and franchised offices.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions of the Company's results of operations and
liquidity and capital resources should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements of the
Company and related Notes thereto appearing elsewhere in this Prospectus. Yearly
references contained throughout this Prospectus refer to the Company's fiscal
year ending on April 30.
OVERVIEW
The Company is the second largest income tax preparation service in the
United States with a 41 state network of 1,296 franchised and 76 Company-owned
offices. Through the use of computers and proprietary interactive tax software,
the Company is engaged in the business of computerized preparation and
electronic filing of tax returns for a customer base comprised primarily of low
to middle income individuals. The Company also offers Bank Products to customers
through arrangements with several commercial banks.
The Company operates in one industry segment with two lines of business:
franchised and Company-owned offices. The Company derives revenues from
franchise operations, Bank Product fees, and tax preparation fees generated by
Company-owned offices. During 1997, the revenue mix was 58.5% franchise revenue,
29.8% Bank Product fees, and 10.5% Company-owned offices tax preparation fees.
The Company's revenues are primarily dependent upon the successful
operations of its franchise network. Franchise revenue is comprised of royalties
and advertising fees, franchise fees, electronic filing fees, and other fees
paid by franchisees. Pursuant to the Company's agreements with its franchisees,
the Company receives royalties of 12% and advertising fees of 6% of revenues
generated by the 1,296 franchised offices. The Company is required to utilize
all advertising fees received from its franchisees on advertising programs. As a
result, the Company's Consolidated Financial Statements reflect a corresponding
expense related to these advertising costs, which is higher than the advertising
fees received from franchisees due to additional Company marketing efforts.
Franchise fees, net, and royalties and advertising fees generated from franchise
operations represented 52.3% and 50.1% of the Company's total revenues during
1997 and 1996, respectively. Franchise fees presently consist of a one-time
payment of $20,000 received from each franchisee upon the purchase of a Jackson
Hewitt territory. Franchise fees received are reduced by the Company's accrual
of 12% of such fees to the allowance for franchise fee refunds established by
the Company to provide for terminations and rescissions of agreements with
franchisees. Electronic filing fees represent fees received from franchisees in
connection with the electronic filing of tax returns with the IRS. The Company
currently charges a fee of $2.00 per return electronically filed by its
franchised offices. Other revenues generated from the Company's franchise
operations include supplemental income from the sale of computers, tax school
manuals, and other supplies to franchisees.
Revenues generated from Bank Products by the Company-owned and franchised
offices have become an increasingly significant component of the Company's total
revenues. Bank Product fees are generated when Jackson Hewitt customers purchase
Bank Products from either Company-owned or franchised offices. During the 1997
tax season, Jackson Hewitt customers paid a $24 application fee ("Application
Fee") and a document processing fee of approximately $25 ("Processing Fee") for
each Bank Product purchased. In addition, customers who purchased a RAL also
paid a fee equal to approximately 4% of the amount of the RAL ("RAL Fee"). A
portion of the royalties received from franchisees is attributable to Processing
Fees associated with the sale of Bank Products by franchised offices. In
addition, depending upon the Company's arrangement with the commercial bank
processing the Bank Product, the Company may receive a portion of the
Application Fee paid to the bank by the customer in connection with the purchase
of a Bank Product. Under the Company's fee agreements with certain commercial
banks involved in the processing of Bank Products, the Company and the
processing banks share the risks associated with such products through the
establishment of a reserve for uncollectible funds from the fees generated by
the sale of Bank Products. To the extent funds remain in the reserve, the
portion of the reserve represented by the RAL Fees is subsequently distributed
to franchisees. Funds remaining in the reserve after the distribution to
franchisees are divided pursuant to the Company's fee sharing agreements with
the processing banks. As a result, Bank Product fees reflected on the Company's
Consolidated Statements of Operations are reduced by the minority interest share
of earnings which is paid to the Company's commercial bank partner. The Company
provided approximately 421,000 Bank Products pursuant to this program in 1997.
Under an alternative fee arrangement with a different bank, the Company does not
assume any risk associated with the Bank Products and is paid a referral fee by
this bank. The Company provided approximately 51,000 Bank Products pursuant to
this program in 1997. See "Business -- The Tax Preparation Business -- Bank
Products" and " -- Results of Operations -- 1997 Compared to 1996."
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain information regarding the Company's
consolidated statement of operations as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1995 1996 1997
----- ----- -----
<S> <C>
Franchise revenues.......................................................................... 73.4% 56.5% 58.5%
Bank product fees........................................................................... 11.2 27.4 29.8
Tax return preparation fees, net............................................................ 15.0 12.8 10.5
Miscellaneous income........................................................................ 0.4 3.3 1.2
----- ----- -----
Total revenues......................................................................... 100.0 100.0 100.0
Selling, general, and administrative expenses............................................... 100.8 73.8 58.1
Depreciation and amortization............................................................... 5.1 5.1 4.4
----- ----- -----
Income (loss) from operations.......................................................... (5.9) 21.1 37.5
Other income, net........................................................................... 13.6 2.2 2.7
Provision for income taxes.................................................................. (3.0) (6.1) (13.4)
Minority interest share of earnings......................................................... (0.1) (7.6) (7.0)
----- ----- -----
Income before extraordinary item....................................................... 4.6 9.6 19.8
Extraordinary item.......................................................................... -- -- (4.0)
----- ----- -----
Net income............................................................................. 4.6% 9.6% 15.8%
----- ----- -----
----- ----- -----
</TABLE>
1997 COMPARED TO 1996
TOTAL REVENUES. The Company's total revenues were $31.4 million for 1997
compared to $25.0 million for 1996, an increase of $6.4 million or 25.6%. This
increase was primarily attributable to an increase of $4.3 million in revenues
generated by the Company's franchise operations and, to a lesser extent, as a
result of an increase of $2.2 million in other sources of revenues as described
below.
Franchise revenues were $18.4 million for 1997 compared to $14.1 million
for 1996, an increase of $4.3 million or 30.1%. This increase was primarily
attributable to an increase of $3.4 million or 34.4% in royalties and
advertising fees to $13.2 million in 1997 from $9.9 million in 1996. Royalties
and advertising fees increased due to an increase in the number of tax returns
prepared by franchised offices and an increase in the average tax preparation
fee charged per customer to $99 in 1997 from $92 in 1996. The number of tax
returns prepared by franchised offices was approximately 830,000 for 1997
compared to approximately 680,000 for 1996, an increase of approximately 150,000
or 22.1%. Franchise fees, net of the allowance for franchise fee refunds
established by the Company to provide for terminations and rescissions of
agreements with franchisees, were $3.2 million for 1997 compared to $2.7 million
for 1996, an increase of $0.5 million or 19.5%. This increase was a result of
increased franchise territory sales and the general financial success of the
Company's franchisees which resulted in reduced anticipated franchisee
terminations and rescissions. Electronic filing fees were $1.4 million for 1997
compared to $1.1 million for 1996, an increase of $0.3 million or 23.7%. This
increase was the result of the Company's electronic filing of approximately
135,000 additional tax returns for franchisees during 1997.
Bank Product fees were $9.4 million for 1997 compared to $6.9 million for
1996, an increase of $2.5 million or 36.5%. This increase was a result of the
sale of approximately 137,000 additional Bank Products in 1997.
Tax return preparation fees generated by Company-owned offices were $3.3
million for 1997 compared to $3.2 million for 1996, an increase of $0.1 million
or 3.2%. This increase was primarily attributable to an increase in the number
of tax returns prepared by these offices. The number of tax returns prepared by
Company-owned offices was approximately 46,000 for 1997 compared to
approximately 42,000 for 1996, an increase of approximately 4,000 or 9.5%.
Miscellaneous income was $0.4 million for 1997 compared to $0.8 million for
1996, a decrease of $0.4 million or 53.2%. This decrease was primarily due to
the Company's decision to terminate its unprofitable Copy, Pack and Ship
operations during 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative ("SG&A") expenses were $18.3 million for 1997 compared to $18.5
million for 1996, a decrease of $0.2 million or 1.1%. SG&A expenses related to
corporate administrative functions increased $2.1 million primarily due to
increased advertising expenses in conjunction with the Company's revised
marketing strategy and increased payroll expenses. These increases were
partially offset by a decrease in
17
<PAGE>
bad debt and legal costs of $0.8 million due to the improved financial
performance of the Company's franchised offices. Field operation expenses
decreased $2.3 million in 1997 as a result of the Company's decision to focus
its resources on the geographic expansion of its tax preparation business and
terminate its Copy, Pack & Ship operations during 1997.
OTHER INCOME AND EXPENSES, NET. Other income and expenses, net were $0.9
million for 1997 compared to $0.5 million for 1996, an increase of $0.3 million
or 58.5%. Other income and expense fluctuations resulted from reductions in
interest expense of $0.9 million primarily due to the elimination of the impact
of warrants issued in 1996, a reduction in interest rates on the Company's
credit facility, and reduced borrowings. This reduction in expenses was
partially offset by a loss on the disposal of intangible assets and property and
equipment of $0.1 million in 1997 compared to a gain of $0.6 million in 1996.
These sales were part of the Company's efforts to restructure its offices.
MINORITY INTEREST SHARE OF EARNINGS. The Company's wholly owned subsidiary,
Hewfant Inc., owns a 65% interest in Refant Partnership L.P. ("Refant"). Refant
processes Bank Products through agreements with two commercial banks, including
First Republic Bank. First Republic Bank is a 35% partner in Refant. The
minority interest share of earnings primarily consists of First Republic Bank's
share of the earnings of Refant. For 1997, the minority interest share of
earnings amounted to $2.2 million compared to $1.9 million in 1996, an increase
of $0.3 million or 15.5%. The increase is primarily a result of Refant's sale of
approximately 137,000 additional Bank Products in 1997.
EXTRAORDINARY ITEM. The 1997 results include a charge of $1.2 million (or
$0.27 per share) in the first quarter for an extraordinary item related to the
Company's retirement of a stock purchase warrant obligation to its primary
lender. In conjunction with the renewal of the Company's credit facility, on
June 7, 1996, the Company agreed to repurchase the put option on all of the then
outstanding stock purchase warrants held by the lender and redeem 572,549 of the
582,549 outstanding warrants for approximately $1.9 million. The Company
financed this transaction using funds available under its credit facility.
PROVISION FOR INCOME TAXES. The provision for income taxes was $4.2 million
for 1997 compared to $1.5 million for 1996, an increase of $2.7 million. The
Company's effective tax rate was 40.3% for 1997 compared to 38.8% for 1996.
NET INCOME. Net income was $5.0 million (or $0.95 per share) for 1997
compared to $2.4 million (or $0.40 per share) for 1996, an increase of $2.6
million or 107.5%.
1996 COMPARED TO 1995
TOTAL REVENUES. The Company's total revenues were $25.0 million for 1996
compared to $18.2 million for 1995, an increase of $6.8 million or 37.3%. This
increase was primarily attributable to an increase of $0.7 million in revenues
generated by the Company's franchise operations and as a result of an increase
of $6.1 million in other sources of revenues as described below.
Franchise revenues were $14.1 million for 1996 compared to $13.4 million in
1995, an increase of $0.7 million or 5.7%. This increase was primarily
attributable to an increase of $2.9 million or 42.5% in royalties and
advertising fees to $9.9 million in 1996 from $6.9 million in 1995. Royalties
and advertising fees increased due to increases in the number of tax returns
prepared by franchised offices and increases in the average tax preparation fee
charged per customer to $92 in 1996 from $80 in 1995. The number of tax returns
prepared by franchised offices was approximately 680,000 for 1996 compared to
approximately 569,000 for 1995, an increase of approximately 111,000 or 19.5%.
Franchise fees, net of the allowance for franchise fee refunds, were $2.7
million in 1996 compared to $4.8 million in 1995, a decrease of $2.1 million or
43.7%. This decrease was primarily a result of the difficulty in attracting new
franchisees following the 1995 tax season, during which changes in IRS policies
adversely impacted the entire tax preparation industry, including the Company
and its franchisees. In addition, the Company increased its allowance to cover
anticipated franchisee terminations and rescissions. Electronic filing fees were
$1.1 million for 1996 compared to $0.9 million in 1995, an increase of $0.2
million or 20.0%. This increase was a result of the Company's electronic filing
of approximately 96,000 additional tax returns for franchisees during 1996.
Bank Product fees were $6.9 million for 1996 compared to $2.0 million in
1995, an increase of $4.9 million or 236.7%. This increase was a result of the
sale of approximately 131,000 additional Bank Products in 1996, which was
primarily attributable to the Company's ability to provide Bank Products
throughout the tax season as compared to the 1995 tax season when the Company's
Bank Product program was terminated early in the tax season primarily due to a
change in IRS policies regarding the payment of refunds attributable to the EIC.
In addition, the Company restructured its Bank Product programs in 1996, which
resulted in a higher percentage of fees charged to customers to reflect
increased collection risks associated with the sale of Bank Products and higher
fees received by the Company. See "Risk Factors -- Adverse Impact of IRS
Policies."
18
<PAGE>
Tax return preparation fees from Company-owned offices were $3.2 million
for 1996 compared to $2.7 million for 1995, an increase of $0.5 million or
17.2%. This increase was primarily attributable to an increase in the average
tax return preparation fee to $92 in 1996 from $80 in 1995. The number of tax
returns prepared by those offices was approximately 42,000 for 1996 compared to
approximately 45,000 for 1995, a decrease of approximately 3,000 or 6.7%.
Miscellaneous income was $0.8 million for 1996 compared to $0.1 million for
1995, an increase of $0.7 million or 951.6%. This increase was primarily due to
the operation of additional Copy, Pack and Ship stores in 1996 that had been
opened at the end of the 1995 tax season.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. SG&A expenses were $18.5
million for 1996 compared to $18.4 million for 1995, an increase of $0.1 million
or 0.6%. SG&A expenses related to corporate administrative functions decreased
$0.7 million primarily due to reduced advertising expenses. These decreases were
offset by an increase of $1.1 million related to increased costs associated with
field offices due to the opening of the Copy, Pack and Ship stores in 1996. The
Company began reducing its Copy, Pack and Ship operations in April 1996 in an
effort to reduce the losses associated with these stores.
OTHER INCOME AND EXPENSES, NET. Other income and expenses, net, were $0.5
million for 1996 compared to $2.5 million for 1995, a decrease of $2.0 million
or 78.0%. This decrease was primarily attributable to a decrease in the gain on
sales of intangible assets and property and equipment of $1.2 million resulting
from the sale of 87 Company-owned offices in 1995 compared to 35 Company-owned
offices that were sold in 1996. Interest expense increased $1.3 million due to
increased borrowings to finance the Company's seasonal needs, an increase of two
percentage points in the interest rate paid to the Company's principal lender on
amounts advanced under the credit facility, and the impact of the issuance of
warrants to the Company's principal lender. This increase was partially offset
by interest income which increased $0.5 million primarily resulting from
interest earned on notes to franchisees.
MINORITY INTEREST SHARE OF EARNINGS. The minority partner's share of the
earnings of Refant was $1.9 million for 1996 compared to no earnings for 1995.
During 1995, the Company did not offer any Bank Products through Refant due to
the minority partner's decision not to assume the risk of nonpayment associated
with RALs because of the change in policies announced by the IRS just prior to
the beginning of the 1995 tax season. See "Risk Factors -- Adverse Impact of IRS
Policies."
PROVISION FOR INCOME TAXES. The provision for income taxes was $1.5 million
for 1996 compared to $0.5 million for 1995, an increase of $1.0 million. The
Company's effective tax rate was 38.8% for 1996 compared to 39.1% for 1995.
NET INCOME. Net income was $2.4 million (or $0.40 per share) for 1996
compared to $0.8 million (or $0.11 per share) for 1995, an increase of $1.6
million or 186.0%.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
Given the seasonal nature of the tax preparation business, the Company has
generated and expects to continue to generate substantially all of its revenues
during January through April of each year. During 1997, the Company generated
approximately 89% of its revenues during this period. The Company generally
operates at a loss through the first three quarters of each fiscal year, during
which it incurs costs associated with preparing for the upcoming tax season.
During these quarters, the Company relies on revenues generated during the prior
tax season and its credit facility to finance its operations. See
" -- Liquidity and Capital Resources," "Risk Factors -- Seasonality and Disaster
Recovery Risks," and Note 15 of the Notes to the Consolidated Financial
Statements.
The following table presents certain unaudited quarterly consolidated
statements of operations data for each of the Company's last eight fiscal
quarters. In the opinion of the Company's management, this quarterly information
has been prepared on the same basis as the Consolidated Financial Statements
appearing elsewhere in this Prospectus and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the unaudited
quarterly results set forth herein. The Company's quarterly results have in the
past been subject to fluctuations, and thus, the operating results for any
quarter are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
QUARTER ENDED QUARTER ENDED
--------------------------------------------- --------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31,
1995 1995 1996 1996 1996 1996 1997
-------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Net revenues............................... $ 823 $ 1,318 $5,219 $17,656 $ 980 $ 1,216 $7,805
Income (loss) before extraordinary item.... (1,326) (1,599) (475) 5,802 (1,322) (1,008) 1,184
Net income (loss).......................... (1,326) (1,599) (475) 5,802 (2,570) (1,008) 1,184
Earnings per common share:
Income (loss) before extraordinary
item................................... $ (0.33) $ (0.32) $(0.11) $ 1.16 $ (0.32) $ (0.24) $ 0.24
Net income (loss)........................ (0.33) (0.32) (0.11) 1.16 (0.59) (0.24) 0.24
<CAPTION>
APRIL 30,
1997
---------
<S> <C>
Net revenues............................... $21,431
Income (loss) before extraordinary item.... 7,378
Net income (loss).......................... 7,378
Earnings per common share:
Income (loss) before extraordinary
item................................... $ 1.54
Net income (loss)........................ 1.54
</TABLE>
19
<PAGE>
The Company experiences significant quarterly fluctuations in its results
of operations. Such fluctuations may result in volatility in the price of the
Common Stock. Results of operations may fluctuate as a result of a variety of
factors, including the highly seasonal nature of the Company's business,
competitive conditions in the industry, and general economic conditions. As a
result, the Company's revenues are difficult to forecast, and the Company
believes that quarter to quarter comparisons of results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
results of operations. Due to the foregoing factors, it is possible that the
Company's results of operations, including quarter to quarter results, will be
below the expectations of public market analysts and investors. Such an event
could have a material adverse effect on the price of the Common Stock. See "Risk
Factors -- Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been, and are expected to continue to be,
highly seasonal. As a result, the Company must generate sufficient cash during
the tax season, in addition to its available bank credit facility, to fund its
operations in the following off-season. Operations in the off-season are
primarily focused on the sale of franchises and preparation for the upcoming tax
season.
In May 1997, the Company's primary lender renewed the Company's credit
facility through June 30, 1999. Under terms of the amended credit agreement (the
"Credit Agreement"), amounts available under the facility vary from $2.0 million
to $8.0 million. The amount available is $2.0 million until July 1, 1997, after
which the amount available increases in successive $1.0 million increments over
one and two month periods until the maximum of $8.0 million is reached for the
peak tax season months of January and February 1998. The amount available under
the Credit Agreement then falls to $2.0 million for the period March 1998
through June 1998 before again increasing in $1.0 million increments until the
maximum available of $8.0 million is reached in January and February 1999. In
addition, the Company is required to have a zero balance for a 30 day period
between March 1, 1998 and July 31, 1998 and between March 1, 1999 and June 30,
1999. Borrowings under the credit facility bear interest at the 30 day LIBOR
rate plus 2.5%. The Company's obligations under the Credit Agreement are
collateralized by substantially all of the Company's assets. The Credit
Agreement also requires the Company to meet certain financial ratios and
contains certain restrictive covenants, including covenants limiting
transactions with affiliates, the incurrence of additional debt, and the payment
of dividends on the Company's Common Stock. The Credit Agreement is renewable
upon expiration of the initial term on an annual basis for one year terms. The
Credit Agreement also includes a $975,000 term loan made in connection with a
mortgage held by the lender on the Company's corporate headquarters. See Notes 5
and 6 of the Notes to the Consolidated Financial Statements.
Cash flows from the Company's operating, investing, and financing
activities for 1997 and 1996 are disclosed in the Company's Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements
included elsewhere herein. In 1997, the Company generated $9.2 million in its
operating activities as compared to the $5.9 million generated in 1996. This
change was attributable to the increase in income before extraordinary item in
1997 as compared to 1996. The Company generated $2.0 million from its investing
activities in 1997 as compared to $1.1 million in 1996. This increase was
primarily attributable to an approximately $0.3 million increase in franchise
note collections, an approximately $0.3 million decrease in notes receivable
financing of franchisees, and a net decrease of approximately $0.3 million in
purchases of property and equipment and intangible assets.
The Company's financing activities for 1997 utilized $8.4 million in cash
as compared to the $4.8 million utilized in 1996. This difference was primarily
attributable to a distribution to the minority interest partner in a
consolidated partnership of $4.0 million. This distribution related to amounts
owed to the minority partner for both the 1996 and 1997 tax seasons, which were
both paid during 1997. The remainder of the increase was attributable to a
decrease in net repayments of indebtedness of $2.8 million, which were partially
offset by the payment of preferred stock dividends of $0.7 million and the
repurchase of stock purchase warrants totaling $1.9 million. Working capital at
April 30, 1997, was $6.0 million as compared to $4.7 million at April 30, 1996.
The increase in working capital was attributable to the increase in current
assets partially offset by the increase in taxes payable on the Company's
improved earnings in 1997.
The Company's total current assets at April 30, 1997 were $13.9 million as
compared to $11.2 million at April 30, 1996. the increase resulted primarily
from an increase in cash of $2.7 million. Total receivables decreased $0.9
million due to repayments of notes receivables from franchisees and the
implementation of more stringent credit guidelines regarding the extension of
credit to franchisees. The notes receivable from franchisees are generally two
to five years in duration and are due in annual installments of principal and
interest on February 28 of each year. These notes generally bear interest at
rates between 10% and 12%, are secured by the underlying franchise and are
personally guaranteed by the individual owners of each franchise.
20
<PAGE>
During 1997, the Company acquired customer lists and other assets from 31
franchisees for a total purchase price of $2.4 million. As consideration for
these acquisitions, the Company paid the franchisees cash of $0.3 million and
issued notes payable of $0.3 million while canceling notes receivable of $1.8
million.
Based on the Company's ability to generate working capital through its
operations, net proceeds from the Offering, and the amount available under its
credit facility, the Company believes these sources will provide sufficient
liquidity and financial resources to meet the Company's obligations for 1998.
Management estimates it will require approximately $8.0 million to fund its
off-season capital needs in 1998. To the extent the Company completes any
acquisitions, it may require additional debt or equity financing to meet its
capital needs.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (Statement 128).
Statement 128 supersedes APB Opinion No. 15, Earnings Per Share, and specifies
the computation, presentation, and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. Statement 128 was issued to simplify the computation of EPS and to make
the United States standard more compatible with the EPS standards of other
countries and that of the International Accounting Standards Committee (IASC).
It replaces primary EPS and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the Basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes all dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS, similar to fully
diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Statement 128 is effected for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform with Statement 128. See Note 17 of the Notes to the Consolidated
Financial Statements for further discussion of the impact of implementation of
this standard.
21
<PAGE>
BUSINESS
GENERAL
Jackson Hewitt is the second largest tax preparation service in the United
States, with a 41 state network comprised of 1,296 franchised and 76
Company-owned offices operating under the trade name "Jackson Hewitt Tax
Service." Office locations range from stand-alone store front offices to offices
within Wal-Mart and Montgomery Ward locations. Through the use of proprietary
interactive tax software, the Company is engaged in the preparation and
electronic filing of tax returns. During 1997, Jackson Hewitt prepared
approximately 875,000 tax returns, which represented an increase of 21.2% from
the approximately 722,000 tax returns it prepared during 1996. To complement its
tax preparation services, the Company also offers Bank Products to its tax
preparation customers. In 1997, Jackson Hewitt customers purchased approximately
472,000 Bank Products, an increase of 20.1% over the approximately 393,000 Bank
Products purchased in 1996. In 1997, the Company had total revenues of $31.4
million and net income of $5.0 million, or $0.95 per share, an increase of
25.6%, 107.5%, and 137.5%, respectively, over 1996.
Through the innovative use of computers, the Company believes it provides
consistent, high quality tax preparation services at prices that allow the
Company to compete successfully with other businesses offering similar services.
While the quality of service provided by other tax preparers depends largely on
the individual preparer's knowledge of tax laws, Jackson Hewitt's service does
not depend solely upon the preparer's tax expertise. Jackson Hewitt's
proprietary interactive tax software, Hewtax, automatically prompts the preparer
with the relevant questions required to accurately complete a tax return. By
computerizing the tax preparation process, Jackson Hewitt is able to rapidly and
efficiently prepare and file a customer's tax return electronically. Since
electronic filings are generally processed by the IRS on a priority basis,
customers who file in this manner typically receive refunds more quickly than
those who file their tax returns manually.
INDUSTRY OVERVIEW
The IRS reported that 114.5 million individual federal income tax returns
were filed in the United States in 1997 through June 6, 1997. According to the
IRS, approximately one-half of the tax returns filed in the United States each
year are completed by a paid preparer. Among paid preparers, H&R Block dominates
the low-cost tax preparation business with approximately 8,000 offices located
throughout the United States. According to information released by H&R Block in
May 1997, H&R Block prepared approximately 14.2 million United States tax
returns during the 1997 tax season, which represented approximately 12.4% of all
tax returns filed in the United States. Other than H&R Block and the Company,
the tax preparation industry is highly fragmented and includes regional tax
preparation services, accountants, attorneys, small independently owned
companies, and financial service institutions that prepare tax returns as
ancillary parts of their businesses. The ability to compete in this market
depends in large part on the geographical area, specific location of the tax
preparation office, local economic conditions, quality of on-site office
management, the ability to file tax returns electronically with the IRS, and the
ability to offer customers products similar to the Company's Bank Products. See
" -- Competition" and "Risk Factors -- Competition."
The IRS' administrative costs are reduced significantly when a tax return
is filed electronically rather than by mail. The IRS, therefore, has announced
its intention to increase the number of tax returns filed electronically and is
currently reviewing various proposals to encourage the growth of its electronic
filing program. Tax preparation companies must qualify with the IRS to
participate in the electronic filing program and their principals are subject to
background and credit checks by the IRS. The Company believes that taxpayers
will continue to utilize electronic filings as long as the IRS handles
electronically filed tax returns on a priority basis and refunds are received
more quickly than those associated with manually filed tax returns. In addition,
electronic filing makes it possible for the Company to offer Bank Products to
its customers. For these reasons, the Company believes electronic filing is
becoming an increasingly important factor in the tax preparation business. The
Company also believes that its proprietary interactive tax software facilitates
efficient electronic filing of tax returns with the IRS. See " -- The Tax
Preparation Business -- Electronic Filing of Tax Returns."
BUSINESS STRATEGY
The Company's objective is to expand its system of tax preparation offices
in new and existing geographic markets. The Company's management team has
developed the following business strategy to achieve this objective:
EXPAND THE FRANCHISE NETWORK. The Company intends to increase market share
by continuing to expand its franchise network in regions of the country where
people have a tendency to use electronic filing services, as well as in existing
22
<PAGE>
markets that will support additional Jackson Hewitt offices. The franchise sales
campaign effort begins each year upon completion of the tax season and typically
extends through the first half of the subsequent fiscal year. The Company
intends to capitalize on the recent financial performance of its franchise
network by seeking to sell adjacent and nearby franchise territories to existing
franchisees. In addition, the Company intends to market franchise territories to
new franchisees throughout the year, with a primary emphasis on potential
franchisees who the Company believes have the financial resources to purchase
multiple territories. The Company also believes it can further expand its
franchise network and accelerate market penetration in areas where its
franchisees currently operate by opening Company-owned offices in selected
undeveloped territories for resale as franchises. This initiative is designed to
develop territories the Company believes will be more attractive to potential
franchisees as existing businesses than as undeveloped territories. The Company
expects that by opening and developing Company-owned offices within selected
territories, it can demonstrate the economic attractiveness of those and other
nearby territories. The Company also believes that many potential franchisees
are more willing to purchase an operating business with a developed customer
list for a higher price than an undeveloped territory that will require
additional effort to open. The number of Jackson Hewitt franchised offices has
grown from 546 in 1993 to 1,296 in 1997.
EXPAND THE CORPORATE OFFICE PROGRAM. The Company intends to increase the
relative mix of its Company-owned offices through its corporate office program.
The Company believes it can supplement its franchise expansion program and
efficiently and profitably expand the Jackson Hewitt system by operating
Company-owned offices in new and existing markets. Historically, Company-owned
offices were typically located in territories reacquired from franchisees and
were operated by the Company on a temporary basis pending their resale. After
reviewing the economic opportunities potentially afforded by properly supported
Company-owned offices, the Company developed and implemented the corporate
office program during the 1997 tax season in two test markets. Under this new
program, the Company plans to open concentrated groups of Company-owned offices
in selected geographic markets. The Company believes it can maximize the
effectiveness of its marketing campaigns and achieve certain economies of scale
by opening clusters of Company-owned offices in targeted areas. During the 1997
tax season, 5.5% of the Jackson Hewitt offices were owned by the Company and
94.5% were owned by franchisees.
IMPROVE EFFICIENCY OF OPERATIONS. The Company intends to continue to
improve its system-wide controls and compliance programs to increase operating
efficiencies. The Company believes that its integrated computer systems and
policy of monitoring franchisee operating obligations allow it to better promote
communications, increase efficiencies in the electronic filing of tax returns,
improve coordination, and reduce administrative overhead throughout its
Company-owned and franchised office system. To promote compliance with Company
operating policies and procedures, management initiated an internal auditing
program during the 1997 tax season. The Company emphasizes compliance by its
franchisees with the terms and conditions of their franchise agreements,
including obtaining the Company's approval for office site selection, conducting
and attending training seminars, complying with the Company's standards and
policies, meeting acceptable customer service requirements, maintaining the
appearance of office sites, obtaining adequate insurance coverage, honoring a
covenant not to compete with the Company, and maintaining proper records and
reports. The Company also specifies certain computer hardware that franchisees
must purchase for use in their offices. Over the past year management has also
strived to strengthen and improve relationships with franchisees on a
system-wide basis.
PROMOTE THE JACKSON HEWITT BRAND NAME. The Company intends to increase
promotion of the Jackson Hewitt brand name to increase market share. During the
1997 tax season, the Company focused its advertising campaign on creating and
improving Jackson Hewitt's brand name identity. The Company's advertisements
consistently showcased the Company's name and "A.S.A.P." logo. The Company also
intends to use advertising to expand its customer base to include a greater
percentage of middle to upper income customers who tend to file their tax
returns later in the tax season as compared to low to middle income taxpayers
who tend to file their returns earlier in the season. During the 1997 tax
season, the Company began to position a portion of its advertising to reach
these types of customers, who the Company's market research indicates are
interested in an expertly prepared, reasonably priced tax return, although less
interested in obtaining Bank Products. Based upon the results of the 1997 tax
season, the Company intends to increase the focus of its advertising on this
type of customer during the 1998 tax season.
THE TAX PREPARATION BUSINESS
CUSTOMERS. Jackson Hewitt's customer base currently consists primarily of
low to middle income taxpayers who typically are entitled to tax refunds and
desire to receive their refund checks as quickly as possible. During the 1997
tax season, approximately 80% of Jackson Hewitt's customers had annual gross
wages under $30,000 and over 62% had annual gross wages under $19,000. Many of
these individuals qualify for an increased refund as a result of the EIC. These
customers typically file their tax return early in the tax season. The Company
believes that customers are attracted to Jackson Hewitt's
23
<PAGE>
services because they prefer not to prepare their own tax returns, are unwilling
to pay the fees charged by most accountants and tax attorneys, or wish to
purchase a Bank Product.
FEES. Jackson Hewitt earns fees for preparing tax returns and
electronically filing tax returns for individuals whose tax returns were not
prepared by Jackson Hewitt. The amount of a tax preparation fee is based upon
the quantity and type of the schedules that are attached to the tax return.
Jackson Hewitt also earns fees related to the sale of Bank Products, including
Application Fees, Processing Fees, and RAL Fees. The aggregate average gross fee
for Jackson Hewitt prepared tax returns, including tax preparation, electronic
filing, and Bank Product fees has increased from $67 in 1993 to $99 in 1997. See
" -- Bank Products."
ELECTRONIC FILING OF TAX RETURNS. During 1986, the IRS began testing
"electronic filing," which at that time was a new method of filing tax returns
by computer. Since 1990, the IRS has made electronic filing available throughout
the United States. The IRS' administrative costs are reduced when a tax return
is filed electronically, rather than by mail. The IRS therefore has announced
its intention to increase the number of tax returns filed electronically and is
currently reviewing various proposals to encourage the growth of its electronic
filing program. Tax preparation companies must qualify with the IRS to
participate in the electronic filing program. The Company believes that
taxpayers will prefer to utilize electronic filing as long as the IRS handles
electronic tax returns on a priority basis and refunds are received more quickly
than those associated with manually filed tax returns. The Company believes that
Jackson Hewitt customers will continue to utilize electronic filing services
because those services also make it possible for customers to purchase Bank
Products. For these reasons, the Company believes electronic filing is becoming
an increasingly important factor in the tax preparation business. More than 84%
of the tax returns prepared by Jackson Hewitt during the 1997 tax season were
filed electronically. In addition, the Company believes that its proprietary
interactive tax software facilitates the efficient electronic filing of tax
returns with the IRS.
Although Jackson Hewitt does not charge customers an additional fee for the
electronic filing of their tax returns if Jackson Hewitt prepares the tax
return, during the 1997 tax season, Jackson Hewitt received fees for filing tax
returns electronically for approximately 124,000 customers who prepared their
own tax returns or had them prepared elsewhere.
The following table shows the growth in the number of tax returns filed
electronically by computer since the inception of the electronic filing program,
as reported by the IRS, as well as the number of tax returns filed
electronically by computer by Jackson Hewitt. During the 1997 tax season,
Jackson Hewitt filed 5.1% of the 14.4 million tax returns filed electronically
by computer in the United States.
TOTAL NUMBER OF TAX RETURNS TOTAL NUMBER OF TAX RETURNS
FILED ELECTRONICALLY BY FILED ELECTRONICALLY BY
YEAR COMPUTER WITH THE IRS COMPUTER BY JACKSON HEWITT
- ----- --------------------------- ---------------------------
(IN THOUSANDS)
1987 78 5
1988 583 16
1989 1,200 36
1990 4,204 86
1991 7,567 199
1992 10,919 290
1993 12,334 358
1994 13,502 503
1995 11,127 522
1996 12,129(1) 615
1997 14,383(1),(2) 735
- ---------------
(1) The IRS recently introduced a method by which qualifying taxpayers can file
their tax returns electronically with the IRS by telephone. The figures set
forth above do not include the 2.8 million and 4.7 million tax returns that
were filed electronically by telephone with the IRS in 1996 and 1997,
respectively.
(2) Based on IRS filing statistics through June 6, 1997.
BANK PRODUCTS. The Company has implemented the Bank Product programs as
part of its electronic filing service. These programs enable customers to
receive their tax refunds faster than if they filed their tax return by mail.
Through the ACR program, the Company enables customers to have their refund
deposited directly into a bank account within two to three weeks of the filing
of the tax return, and to defer the payment of the tax preparation and Bank
Product fees until the refund is actually paid. Through the RAL program,
customers apply for the right to receive all, or a portion, of their refund less
the tax
24
<PAGE>
preparation and Bank Product fees, within one to three days of the filing of the
tax return. RALs are recourse loans secured by the taxpayer's refund. During
1997, Jackson Hewitt customers received approximately 330,000 ACRs and
approximately 42,000 RALs. Bank Product fees for 1997 totaled $9.4 million, or
29.8% of total revenues, of which $2.2 million represented the minority interest
which was paid to the minority partner in the Refant Partnership.
Each Jackson Hewitt customer is charged an Application Fee and a Processing
Fee as well as the tax preparation fee upon the purchase of a Bank Product. To
obtain an ACR or a RAL during the 1997 tax season, each Jackson Hewitt customer
paid an Application Fee of approximately $24 to the processing bank and a
Processing Fee of approximately $25 to the Jackson Hewitt office that prepared
the return. To obtain a RAL during the 1997 tax season, each Jackson Hewitt
customer paid a RAL Fee equal to 4% of the amount of the RAL.
When a customer receives a Bank Product, but the IRS does not deposit the
expected refund into the bank account established for its receipt because, among
other reasons, the customer owes back taxes or is delinquent on child care
obligations, the deferred tax preparation fee, Application Fee, Processing Fee,
and amounts due under a RAL normally will not be paid without the lender
instituting individual collection actions against the customer. The Company's
Bank Product fee arrangements apportion this risk of nonpayment among the
affected Jackson Hewitt office, the Company, and the processing banks under two
different risk-sharing arrangements.
Under one Bank Product fee sharing arrangement with a processing bank, the
Company accepts a lower profit margin in exchange for assuming less risk. Under
this fee arrangement, the Company is paid a set fee by the processing bank for
each Bank Product provided to Jackson Hewitt customers, but does not share in
the profitability of the program. In the case of an ACR, no money is paid to the
customer unless the IRS deposits the customer's tax refund with the bank that
processed the ACR. As a result, the Jackson Hewitt office that prepared the tax
return bears the risk that it will not receive the tax preparation fee and the
Processing Fee if the tax refund is not deposited electronically into the
customer's account. Under this processing bank's RAL program, the risk
associated with nonpayment of the tax preparation fee, the Application Fee, and
the Processing Fee is borne by the bank since those fees are paid to the Jackson
Hewitt office that prepared the tax return when the RAL funds are disbursed by
the processing bank. If no tax refund is received by the customer from the IRS,
the bank making the RAL is forced to attempt to recover the loan balance
directly from the customer. During 1997, approximately 10.8% of the Bank
Products provided to Jackson Hewitt customers were through this arrangement.
Under the Company's other Bank Product fee arrangement, the Company can
earn a higher profit margin in exchange for its assumption of additional risk.
Under this fee arrangement, the Jackson Hewitt office that prepares the tax
return assumes the risk of nonpayment of the Processing Fee and the tax
preparation fee and the Company and the processing bank share the risk of
nonpayment of the Application Fee associated with an ACR or a RAL. The Company
and the processing bank also share the risks associated with nonpayment of funds
advanced to the customer in connection with a RAL.
The Company and the processing banks have attempted to reduce these risks
through the establishment of a reserve for uncollectable funds from the
Application Fees and the RAL Fees collected from all Jackson Hewitt customers
who receive a RAL. Reserve funds associated with RAL Fees are utilized to cover
losses associated with the nonpayment of RALs before funds related to
Application Fees are used for this purpose. To the extent losses associated with
unpaid RALs exceed the funds maintained in this reserve, such losses are divided
between the Company and the processing bank on a 65% and 35% basis,
respectively. To the extent funds remain in the reserve, the portion of the
reserve represented by RAL Fees is distributed to franchisees at the end of the
tax season in the form of performance incentives. To the extent funds remain in
the reserve following the distributions to franchisees, 65% and 35% of such
funds are distributed to the Company and the processing bank, respectively.
Provided the loan underwriting criteria are sufficient to accurately anticipate
delinquencies in connection with the RALs, this arrangement is potentially more
profitable for the Company than the alternative Bank Product fee arrangement
discussed above which provides that the Company receives a fee and does not
share the risk associated with nonpayment of the Bank Products. Accordingly, the
Company intends to increase the relative share of Bank Products made under this
type of arrangement in the 1998 tax season. During 1997, approximately 89.2% of
the Bank Products sold to Jackson Hewitt's customers were under this
arrangement. See "Risk Factors -- Dependence on Bank for RALs and ACRs;
Underwriting Risks."
The Treasury Department and the IRS periodically initiate policy changes
related to electronic filing of tax returns and the treatment of the EIC. The
Company's Bank Product programs were adversely affected during the 1995 tax
season by IRS and Treasury Department policy changes that subsequently caused
the Company and its processing banks to modify the pricing of the Bank Products
to more accurately reflect the risks associated with these products. In 1995,
the IRS introduced multiple initiatives simultaneously that changed the way in
which tax preparers were notified of tax refunds and the way in which EIC
recipients were paid their refunds. These changes affected RALs far more than
ACRs. In particular, the IRS
25
<PAGE>
stopped providing a notification which informed RAL lenders in advance of making
RALs whether there was any reason to expect a refund would not be paid. In
addition, during the 1995 tax season, the IRS divided federal income tax refunds
owed to taxpayers who qualified for EIC into a non-EIC refund portion, which was
paid electronically to the RAL lender, and an EIC portion, which was delivered
via a check directly to the taxpayer rather than electronically to the RAL
lender. As RAL lenders had already loaned against the entire amount of the
refund, taxpayers were, in effect, paid the EIC refund portion twice, once by
the RAL lender and again by the IRS.
These changes disrupted the entire tax preparation industry by dramatically
reducing the number of electronic filings and causing significant losses on the
part of RAL lenders who had relied upon prior IRS policies to assess
underwriting risk. The Company and its franchisees were adversely impacted due
to the reduction in the number of RALs resulting from this IRS change of policy.
Following the 1995 tax season, RAL lenders adopted much more stringent
underwriting standards, instituted independent credit checks, set loan limits
based upon past history, and increased pricing to more appropriately reflect the
risk of the Bank Product program. As a result, from 1995 to 1997, the Company
has seen a major shift from RALs to the less risky, but nearly as profitable
ACRs. While the Company believes that its current policies give it the
flexibility to react to IRS changes, no assurance can be given that the IRS will
not adopt policies in the future that could materially adversely affect the
Company's business, financial condition, and results of operations. See "Risk
Factors -- Adverse Impact of IRS Policies" and " -- Dependence on Banks for RALs
and ACRs; Underwriting Risks."
To recover the money that had been loaned against the EIC portion in the
1995 tax season, the banks that made RALs available to Jackson Hewitt and its
competitors agreed to cross-check subsequent tax season customers against the
list of customers who had received double payments of the EIC in the 1995 tax
season, as well as other customers who had received RALs in prior seasons but
had not repaid such loans. Under these arrangements, the banks share information
regarding the identity of, and amounts payable by, these customers. By sharing
this information, the banks are able to identify these individuals in later tax
seasons should they purchase a Bank Product from a tax preparation company.
Customers are advised in advance that should they become identified as a
customer who owes any portion of a RAL from a prior tax season, any tax refunds
attributable to such customer will be offset first against the prior debt. Tax
preparation companies receive a commission for each customer identified in this
manner.
FRANCHISE SALES ACTIVITIES AND COMPANY-OWNED OFFICE DEVELOPMENT; 1997 OFFICE
OPERATING RESULTS
The Company owned or franchised 1,372 offices in approximately 1,000
territories during the 1997 tax season. Approximately 53% of the Company-owned
and franchised offices are no more than three years old. The Company typically
concentrates its franchise sales and development activities during the period of
March through December of each year. The following table sets forth information
regarding the Company's office development as of April 30 of each year since
1993.
SUMMARY OF OFFICE DEVELOPMENT
<TABLE>
<CAPTION>
AT APRIL 30,
-------------------------------------------
1993 1994 1995 1996 1997
---- ---- ----- ----- -----
<S> <C>
FRANCHISED OFFICES
Stand-Alone.................................................................. 402 596 828 806 929
Montgomery Ward.............................................................. 144 141 191 176 149
Wal-Mart..................................................................... 0 5 36 218 196
Other........................................................................ 0 0 32 46 22
---- ---- ----- ----- -----
Total Franchised Offices................................................ 546 742 1,087 1,246 1,296
---- ---- ----- ----- -----
COMPANY-OWNED OFFICES
Stand-Alone.................................................................. 41 84 58 37 46
Montgomery Ward.............................................................. 27 51 28 13 18
Wal-Mart..................................................................... 0 1 27 46 12
Other........................................................................ 0 0 22 0 0
---- ---- ----- ----- -----
Total Company-Owned Offices............................................. 68 136 135 96 76
---- ---- ----- ----- -----
TOTAL OFFICES.................................................................. 614 878 1,222 1,342 1,372
---- ---- ----- ----- -----
---- ---- ----- ----- -----
</TABLE>
26
<PAGE>
The Company's experience indicates that mature Jackson Hewitt offices
generally outperform newer offices. The following chart identifies the average
number of tax returns prepared by Jackson Hewitt offices at varying maturity
levels.
NUMBER OF TAX NUMBER OF JACKSON HEWITT AVERAGE NUMBER OF TAX
SEASONS OPEN OFFICES RETURNS PREPARED
- -------------- ------------------------- ----------------------
1 318 278
2 198 443
3 214 665
4 188 880
5 and above 454 862
FRANCHISE OPERATIONS
HISTORICAL GROWTH. The Company's growth has been largely attributable to
the expansion of its franchise operations. The Company has expanded its
franchise network from 49 offices in 1988 to 1,296 in 1997. During the 1997 tax
season, 5.5% of Jackson Hewitt offices were owned by the Company and 94.5% were
owned by franchisees. In 1997, the Company sold 166 new franchise territories
and increased the net number of its franchised offices by 50.
The Company believes that franchise growth has resulted from its ability to
sell relatively inexpensive franchises to franchisees. The current franchise fee
for a new Jackson Hewitt franchise is $20,000, a portion of which may be
financed over a three-year period.
The Company attempts to sell franchise territories on a geographically
concentrated basis so that it can more effectively and efficiently target
customers through its mass media advertising campaigns. Through the expansion of
its franchise operations, the Company has established a national presence while
enhancing its position in the Mid-Atlantic region of the United States.
THE FRANCHISE AGREEMENT. Under the terms of the Company's franchise
agreement ("Franchise Agreement"), each franchisee receives the right to operate
Jackson Hewitt offices within a specific geographic territory with a population
of approximately 50,000. Franchisees are permitted to operate as many offices
within a specified territory as they choose. Currently there are approximately
4,600 territories in the United States, approximately 1,000 of which are
currently served by Jackson Hewitt offices. Unlike many other franchise concepts
where the franchisee pays fees according to how many office locations the
franchisee operates, Jackson Hewitt franchisees pay one fee for each territory
they purchase. Historically, franchisees have been able to maximize their profit
potential by operating between one to four offices in a territory, with the
particular number depending largely on local economics and the population
dispersion of the region. In some instances, the opening of a second or third
office within a territory may decrease the revenues and profitability of
existing Jackson Hewitt offices, but may also increase the overall market share,
revenues, and profitability of the territory.
The initial term of the Franchise Agreement is 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 have been met. In
addition, franchisees are required to keep at least one office location open
throughout the year in each territory in which the franchisee operates unless
the franchisee owns contiguous territories, in which case only one office must
be open during the off-season for at least one day per week within those
territories. This policy is designed to ensure that customers in each territory
have access to a Jackson Hewitt tax preparer for assistance in matters relating
to late filings or previously filed or future tax returns. Each franchisee is
also required to conduct tax seminars, which are offered to the general public
to attract prospective seasonal tax preparers in order to maintain a staff of
quality tax preparation professionals and to enhance name recognition.
FRANCHISE DEVELOPMENT. The Company has historically expanded its franchise
office operations through the selective recruitment of new franchisees as well
as the sale of new territories to existing franchisees with successful operating
histories. The Company intends to emphasize selling franchise territories to
existing Company franchisees and potential franchisees capable of purchasing and
operating multiple territories. Sales of franchises to new franchisees originate
through referrals from existing franchisees, direct mail campaigns, newspaper
advertisements, and numerous franchise trade shows in which the Company
participates.
Prior to entering into the Franchise Agreement with a potential franchisee,
a credit check is performed and an interview is conducted by a Company regional
director. The regional director, who oversees between 150 and 200 franchisees,
focuses on the qualities generally found in a successful Company franchisee:
customer service values, ability to follow recommended procedure, and a strong
work ethic. Since the Company's proprietary interactive tax software greatly
facilitates the tax preparation process, tax or accounting knowledge and
experience are not prerequisites. If the applicant successfully completes the
27
<PAGE>
interview process, the applicant is required to complete a five-day training
program during which the Company provides information on staffing requirements,
operating procedures, and other matters necessary to properly manage a
franchise.
The following chart summarizes the number of new Company franchisees for
each fiscal year since 1993.
NUMBER OF FRANCHISEES
<TABLE>
<CAPTION>
PREVIOUS FISCAL
FISCAL YEAR YEAR TOTAL LEFT SYSTEM(1) NEW FRANCHISEES TOTAL FRANCHISEES
- ------------ ---------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
1993 198 24 63 237
1994 237 34 135 338
1995 338 52 189 475
1996 475 82 98 491
1997 491 67 112 536
</TABLE>
- ---------------
(1) These franchisees either sold their franchise, had it terminated by the
Company, or otherwise left the Jackson Hewitt system.
START-UP COSTS AND FRANCHISE FEES. Upon executing the Franchise Agreement,
the franchisee is required to pay the initial franchise fee of $20,000, a
portion of which may be financed over a three year period. The initial franchise
fee has increased from $15,000 in March 1993 to $20,000. Other necessary
start-up costs for a new territory budgeted to prepare 500 or fewer tax returns
for the first tax season include capital expenses, such as equipment, signs, and
leasehold improvements, which typically amount to $10,700 to $14,300. Start-up
costs relating to annual operating expenses such as travel, training, rent,
insurance, utilities, supplemental advertising, and payroll typically range from
$19,500 to $29,800 for a total initial investment ranging from approximately
$50,200 to $64,100.
ROYALTIES AND ADVERTISING FEES. In addition to the initial franchise fee
and other start-up expenses, franchisees are required to pay recurring royalties
equal to 12% of franchise territory revenues and recurring advertising fees
equal to 6% of franchise territory revenues. The Company also charges
franchisees a $2.00 fee for each tax return that is electronically filed with
the IRS. In return, the Company provides the following products and services to
its franchisees: (i) a minimum of five days of initial training in business
operations, (ii) the use of proprietary interactive tax software that aids the
franchisee in preparing tax returns, (iii) a joint advertising program that is
funded through contributions made by both franchised and Company-owned offices,
(iv) annual tax training programs that assist franchisees in hiring and training
seasonal tax preparation employees, (v) standardized operating manuals that
assist franchisees in the operation of their businesses, (vi) support in the
areas of management, systems, and software, (vii) access to Bank Products that
are not generally available to many small tax preparation businesses, and (viii)
access to electronic filing services.
The following table summarizes total royalties, advertising fees and
franchise fees, net, for each fiscal year since 1993.
FISCAL YEAR ROYALTIES ADVERTISING FEES FRANCHISE FEES, NET(1)
- ------------ --------- ---------------- ----------------------
(IN THOUSANDS)
1993 $ 2,619 $1,593 $2,066
1994 3,485 2,192 3,449
1995 4,609 2,305 4,765
1996 6,572 3,284 2,682
1997 8,832 4,416 3,204
- ---------------
(1) Represents franchise fees for new territories less an accrual of 12% of
these fees to provide for terminations and rescissions of franchised
territories.
FRANCHISEE SUPPORT. To assist franchisees in their efforts to serve their
customers, the Company's field consultants, regional directors, and home office
field support staff are available for support in areas such as management,
computer systems, and hiring. The Company provides three levels of tax courses
that franchisees can use to recruit and train seasonal employees. In addition, a
team of Company tax and software specialists is available for assistance
regarding tax law interpretations and software usage. The Company believes that
the franchisees' access to these products and services enables them to provide a
quality of services that would not otherwise be attainable on an economical
basis, and is an important element in differentiating the Company from smaller
tax preparation businesses.
28
<PAGE>
ADMINISTRATIVE SUPERVISION. The Company monitors the quality of service,
office appearance, accuracy of tax returns, and training of personnel for all
Jackson Hewitt offices, through its staff of five regional directors and by
sampling tax returns. To promote compliance with the Company's operating
standards, the Company began an internal audit program during the 1997 tax
season. Under this program, the Company audits franchisees on a random basis to
assure compliance with the Company's operating manuals. Individual Franchise
Agreements permit the Company to enforce operating standards through termination
of the Franchise Agreement after various warning periods.
REGULATION OF FRANCHISE SALES. The Company's franchising activities are
subject both to federal and state laws and regulations. Franchising is regulated
on the federal level by the Trade Regulation Rule, 16 C.F.R. 436 (the "Franchise
Rule"). The Franchise Rule requires a franchiser to give any prospective
franchisee specified information about the nature of the franchise investment 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. In addition, the franchiser must provide the prospective franchisee
with a franchise agreement that reflects the specific terms on which the
franchisee will be licensed to do business at least five business days before
signing any binding agreement. There is no private right of action available to
franchisees and prospective franchisees under the Franchise Rule. 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.
The Franchise Rule requires a franchiser to provide information in specific
areas in a specific format. This information is contained in an "offering
circular." The Franchise Rule also permits a franchiser to prepare an offering
circular in accordance with the format designed by the North American Securities
Administrators Association, called the Uniform Franchise Offering Circular
("UFOC"). The Company has selected the UFOC format for its franchise offering
circular because it is accepted in all states with franchise laws, thus avoiding
the need to prepare multiple offering circulars.
The Franchise Rule governs franchiser conduct in all states. However,
California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York,
North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin
have enacted state franchise laws. The Franchise Rule permits state laws to
govern franchising if they provide protection that is equal to or greater than
that provided by the Franchise Rule. Most of these state laws require
franchisers to provide specific information to franchisees, generally in the
UFOC format. As a general rule, these formats are similar to the UFOC and impose
no significant additional requirements on franchisers.
Most state laws provide a franchisee with a private right of action to seek
direct recourse against a franchiser, in addition to administrative penalties,
if a franchiser fails to comply with a state's franchising laws. Moreover, some
states, like California, have laws that govern the relationship between
franchiser and franchisee after the franchise agreement is signed, such as laws
that (i) mandate "notice" and "cure" periods before termination, (ii) restrict
the grounds for termination without the opportunity to "cure" a default, or
(iii) restrict the franchiser's ability to enforce a post-term competition
covenant.
Both the Franchise Rule and the UFOC format require a franchiser to update
its offering circular to include new financial statements. The Franchise Rule
and the UFOC format also require a franchiser to update its offering circular in
the event of material changes, such as significant changes in financial
condition, changes to major fee structures, or changes in business opportunities
being offered. See "Risk Factors -- Risks Associated with Franchising."
COMPANY OFFICE OPERATIONS
The Company operates 76 Company-owned offices in selected territories
throughout the United States. Historically, the Company-owned offices were
typically located in territories reacquired from franchisees and were operated
on a temporary basis pending their sale to new franchisees. The Company intends
to open and operate additional Company-owned offices in designated territories
without any anticipated sale to franchisees. The Company believes it can
maximize the effectiveness of its marketing campaigns and achieve certain
economies of scale by operating multiple Company-owned offices in targeted
areas. The Company also intends to continue to evaluate and close unprofitable
offices and improve operating procedures at the remaining offices. Company-owned
offices generated tax preparation revenues of $3.3 million in 1997, or 10.5% of
total revenues.
The Company manages its Company-owned offices through a staff of office
managers, market managers, district managers, and sectional managers. An office
manager is usually a tax preparer who has demonstrated the ability to manage the
activities of other tax preparers and who has at least one year of experience in
the Jackson Hewitt system. The office manager is responsible for operations and
customer service within the office. The office manager reports to either a
market manager or a district manager. Market managers supervise between five and
10 offices within a specific geographic region, normally in a metropolitan area.
The market manager is responsible for coordinating the operational and marketing
activities for offices
29
<PAGE>
within this specific area. A district manager is responsible for the supervision
of between 10 and 20 offices, which are more geographically dispersed than those
for which a market manager is responsible. Due to the complexities of overseeing
a large geographic area, district managers are generally required to have more
experience than market managers. Otherwise, the responsibilities of the two
positions are comparable. Market managers and district managers report to one of
three sectional managers, who in turn report to the Company's Vice President of
Franchise Sales and Corporate Offices. The sectional managers coordinate the
activities of two to four market managers or district managers. This management
structure has been implemented so that the Company can operate the 150
Company-owned offices anticipated to be open during the 1998 tax season.
OFFICE SITE SELECTION
Jackson Hewitt offices are typically 600 to 1,000 square feet in size and
are able to accommodate anywhere from three to 10 work stations. As with any
retail operation, the location of a tax preparation office is vital to its
success. For this reason, the Company maintains the right to approve the site
selection of all offices, including franchised offices, and utilizes specific
criteria to evaluate potential office locations. In particular, the Company
expects its offices to (i) be highly visible from a major intersection or busy
street, or be located within a Wal-Mart, Montgomery Ward or other large
retailer, (ii) have high levels of automobile or foot traffic, and (iii) be in
close proximity to shopping malls or other major food or clothing retailers,
preferably discounters. All franchise locations are approved by a Company
regional director and the locations of Company-owned offices are approved by a
district director.
RETAIL OUTLETS
Jackson Hewitt's office expansion and profitability have benefitted from
the Company's relationships with two large retailers. During the 1997 tax
season, Jackson Hewitt operated 208 offices within Wal-Mart stores and 167
offices within Montgomery Ward stores. Under the Company's master license
agreement with Wal-Mart, which was entered into in September 1994, all of
Jackson Hewitt's Wal-Mart locations are operated only on a seasonal basis. In
October 1988, Montgomery Ward and the Company entered into a master license
agreement granting Jackson Hewitt the right to operate offices on a seasonal
basis as well. The Company is currently negotiating with Wal-Mart and Montgomery
Ward regarding the number of stores, if any, in which Jackson Hewitt offices
will be operated during the 1998 tax season. In July 1997, Montgomery Ward filed
a voluntary petition in the United States Bankruptcy Court for the District of
Delaware seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The
Company is unable to predict how the Montgomery Ward bankruptcy will impact its
ability to operate Jackson Hewitt offices in Montgomery Ward stores during
future tax seasons. If the Company's arrangements with Montgomery Ward,
Wal-Mart, or both are terminated for any reason, the franchisee or the Company
operating from the retail location would be forced to find another location.
This could be disruptive to the business of the Company or the franchisee,
especially if the dislocation were to occur before or during the tax season. See
"Risk Factors -- Dependence on Retail Outlets."
SALES AND MARKETING
The Company has two distinct marketing programs, one of which is designed
to attract franchisees and one of which targets potential customers. The
franchisee marketing program is designed to solicit sales leads from prospective
franchisees. The Company places advertisements in national magazines as well as
local publications throughout the year, but primarily between the months of
March and October. The advertisements describe the Jackson Hewitt franchise
opportunity and encourage prospective franchisees to contact the Company by
phone, mail, or electronic mail.
The retail marketing program is directed towards the taxpaying public.
During 1997, the Company engaged an outside market research company to conduct
independent research on various aspects of tax preparation and tax preparer
advertising. Based upon this research and input from the Company's advertising
agency, the Company's current advertising campaign was designed and implemented
for the first time during the 1997 tax season. The campaign, entitled "Jackson
Hewitt A.S.A.P." encourages customers to utilize Jackson Hewitt's services so
that their tax returns can be prepared "A.S.A.P." and their refunds can be
received "A.S.A.P." The campaign includes 15 and 30 second television spots
featuring various situations in which taxpayers want their tax returns prepared
so that they can receive their tax refunds as quickly as possible. Early tax
season advertising primarily targets those individuals who desire tax refunds
quickly. Later in the tax season, the advertising message shifts to issues of
accuracy and convenience, attributes which the Company believes are more
appealing to customers who wait until later in the tax season to have their tax
returns prepared.
The Company's advertising budget is funded through a combination of
franchisee and Company contributions. Pursuant to the terms of the Franchise
Agreement, franchisees are required to remit 6% of their revenues to the Company
to fund the
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<PAGE>
Company's advertising campaigns. The Company contributes a comparable percentage
or more for advertising for all Company-owned offices. The Franchise Agreement
permits the Company to advertise at its discretion on a national, regional, and
local basis. To date, the Company has elected to utilize television
advertisements in regional markets, as well as radio commercials, direct mail,
and other advertisements. The Company believes that the 6% advertising
assessment is sufficient to support a competitive advertising program in mature,
developed markets. However, during the developmental stages of a new market
area, it has been the Company's general practice to supplement the regular
contributions to the advertising program with additional contributions from the
Company in order to enhance initial exposure and awareness of the Company's
services and to sell additional franchises in the area. See " -- Competition."
PROPRIETARY INFORMATION AND COMPUTER TECHNOLOGY
The Company owns and retains all rights to the Company's proprietary
interactive tax software, Hewtax, which allows a tax preparer to conduct a
comprehensive customer interview and complete tax calculations using a personal
computer. The Company also owns and maintains state income tax computer programs
for all states that have income tax requirements and the District of Columbia.
The Company employs tax and software experts to update the software programs as
necessary. By computerizing, and thereby standardizing, the information
gathering process, a tax return can be prepared in a Jackson Hewitt office while
the customer waits. Hewtax prompts the tax preparer to ask questions based upon
each customer's personal and financial situation. On average, Jackson Hewitt
customers are asked approximately 100 questions. Once the customer answers the
necessary questions, the tax return is automatically prepared. The entire
interview process generally takes approximately 50 minutes.
Although the Company believes its proprietary interactive tax software
constitutes a "trade secret," the Company has not filed for copyright
registration for its software programs. The Company is aware of the risk that
its competitors could recreate, or "reverse engineer" its tax software and begin
offering similar computerized and standardized services. If this were to occur,
the Company would likely investigate the circumstances under which the
competitor created the software. However, the Company may find that it has no
legal recourse to prevent the competitor from using the "reverse engineered"
software to compete with the Company. Because Jackson Hewitt's federal and state
tax software must be updated at least annually to reflect changes in the tax
law, the Company believes that it would be difficult for any unauthorized party
to effectively misappropriate its software programs in a timely and profitable
manner. See "Risk Factors -- Dependence on Intellectual Property Rights; Risks
of Infringement."
The Company protects its intellectual, trade, and operational property
through the use of trademarks and by inserting contractual restrictions in its
franchise agreements, licenses, and other consensual arrangements. The Company
owns the following service marks: "Jackson Hewitt Tax Service" service mark
registered on the Principal Register of the United States Patent and Trademark
Office ("USPTO"), August 23, 1988; and "Superfast Refund" service mark
registered on the Principal Register of the USPTO May 15, 1990.
All Jackson Hewitt offices, as well as the Company's corporate
headquarters, are outfitted with the computer hardware and software that is
required to file tax returns electronically with the IRS. Jackson Hewitt's field
offices are outfitted with IBM-compatible personal computers and modems, while
the Company's headquarters is outfitted with a Unix mini-computer with multiple
high speed modems to interface with satellite offices, the IRS, and the banks
that participate in the Bank Product programs. The equipment maintained at the
Company's headquarters for electronic filing and the Bank Product programs is
continually updated by the Company. The Company believes that its computer
system and centralized control of customer services enhance the Company's
operational and financial control over its office network.
PERSONNEL/TRAINING
The Company employed 204 year-round employees as of April 30, 1997, 126 of
which were located in the Company's Virginia Beach corporate headquarters. In
addition, the Company employed approximately 1,000 seasonal employees during the
1997 tax season, at both the corporate headquarters and in Company-owned
offices.
The Company and its franchisees solicit, train, and hire seasonal personnel
by offering tax preparation seminars during the fall of each year. Jackson
Hewitt tax seminars include 24 three-hour lectures over a 12-week period. Course
materials are prepared and updated by the Company at least annually, or more
often if necessary. Instructor salaries are paid by the Company or franchisees,
as applicable. The Company and its franchisees recruit many of their tax
preparers from the students who attend these tax preparation seminars. In the
past, the Company and its franchisees generally have offered seasonal jobs as
tax preparers to approximately the top 25% of such classes. The Company
estimates that approximately 7,000 students were trained during 1997 at no cost
to the students in some instances and for fees ranging from $59 to $99 per
person in most
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<PAGE>
instances. The tax seminars are normally advertised in regional newspapers. The
cost of such advertising is shared by the Company and franchisees. Because of
the extent to which the Company relies upon seasonal employees who are paid
relatively modest wages and are given minimal benefits, any legislative or
regulatory changes that require the Company to pay employees higher wages or
provide more benefits could materially adversely effect the Company's results of
operations. See "Risk Factors -- Dependence on Availability of Large Pool of
Trained Seasonal Employees."
The United States Congress has enacted legislation that requires tax
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 tax returns they prepare for three years.
Failure to comply with these requirements may result in penalties. In addition,
any tax preparer that desires to file tax returns electronically, must qualify
with the IRS. The legislation also provides for assessing penalties against a
preparer which (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) willfully attempts
to understate a taxpayer's tax liability, or (iv) aids or abets in the
understatement of such tax liability. In addition, several state governments
have enacted or are considering legislation which would regulate tax return
preparers. See "Risk Factors -- Government Regulation" and " -- Legal
Proceedings."
COMPETITION
Jackson Hewitt competes primarily with other businesses offering similar
services, including nationally franchised tax preparation services, accountants,
attorneys, and small independently owned companies and financial service
institutions that prepare tax returns as ancillary parts of their businesses. In
addition, the Company competes with individuals who prepares their own tax
returns either manually or using tax preparation software. According to the IRS,
approximately one-half of the tax returns filed in the United States each year
are completed by paid preparers. Jackson Hewitt's ability to compete in this
market depends on the geographical area, specific site location, local economic
conditions, quality of on-site office management, the ability to file tax
returns electronically with the IRS, and the ability to offer Bank Products to
customers.
H&R Block dominates the low cost tax preparation business in the United
States with approximately 10,000 offices worldwide, approximately 8,000 of which
are located in the United States. No assurance can be given that new competitors
with substantially greater resources will not enter this industry and materially
adversely effect the Company's business, financial condition, and results of
operations. See "Risk Factors -- Competition."
TAX RETURN PREPARATION ERRORS
If a Jackson Hewitt tax return preparer makes an error that results in the
assessment of any interest or penalties on additional taxes due, the Company, in
the case of Company-owned offices, or the applicable franchisee, in the case of
franchised offices, reimburses the customer for the interest and penalties,
although it assumes no liability for any taxes that are owed. There are no
limitations on the amount of interest and penalties that the Company or a
franchisee would be required to reimburse customers in the event the IRS
determines that a Jackson Hewitt tax preparer made an error which resulted in a
tax deficiency. While the Company itself is not responsible for reimbursing
customers for tax returns completed at franchised offices, the Company could
become responsible for reimbursing customers for errors resulting in a tax
deficiency in the event a franchisee ceases operations or files for bankruptcy.
To date such payments by the Company have not been material.
FACILITIES
The Company leases or occupies pursuant to licensing agreements all of its
offices. Approximately 76% of these leases are full-year leases, which typically
extend over 24 months to cover two tax seasons, and 24% are for four months and
cover one tax season only. Company-owned offices occupy leased premises ranging
from 600 to 1,500 square feet at annual rental rates which range from $6 to $35
per square foot. The Company has typically negotiated lease terms of less than
three years, with a termination date of April 30. All of the Company's current
leases expire on or before April 30, 2000. The Company also leases offices for
two of its regional directors at an average monthly lease cost of approximately
$400. Additionally, the Company leases office equipment for its use and
guarantees the leases of certain franchisees under both capital and operating
lease agreements. The terms of these leases range from 36 to 39 months.
In 1995, the Company purchased its 24,000 square foot headquarters facility
at 4575 Bonney Road, Virginia Beach, Virginia.
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LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising out of
normal business operations. The Manhattan regional office of the IRS notified
the Company following the completion of the 1996 tax season that it could not
operate Company-owned offices in New York City during the 1997 and 1998 tax
seasons due to certain violations related to the Company's compliance with the
IRS' electronic filing identification number regulations during the 1996 tax
season. The Company has adopted procedures to prevent these types of alleged
violations from occurring in the future. This notification does not apply to any
of the Company's franchised offices in this, or any other area. On May 29, 1997,
the Company filed suit in the Circuit Court for the City of Norfolk against a
former executive officer who is also a current franchisee seeking a declaratory
judgment and injunctive relief arising out of alleged breaches of the former
executive's severance agreement and the current franchisee's franchise
agreements. On June 18, 1997, the former executive and current franchisee filed
cross claims in the Circuit Court for the City of Norfolk against both the
Company and Keith Alessi, the President and Chief Executive Officer of the
Company, individually. The cross claims involve allegations of intentional
interference with prospective business advantage, fraud, breach of contract, and
various statutory and other violations. Each cross claim contains several counts
and seeks unspecified compensatory damages in excess of $1.0 million punitive
damages in the maximum amount allowed by law, and costs and attorneys' fees. The
Company believes that none of these legal proceedings will have a material
adverse effect on the Company's business, financial condition, or results of
operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---------------------------------------------------------------- --- ---------------------------------------- --------
<S> <C>
Keith E. Alessi................................................. 42 Director, Chairman, President, and Chief 1996
Executive Officer
Harry W. Buckley(1),(2)......................................... 52 Director 1997
Harry S. Gruner(1),(2).......................................... 38 Director 1995
Michael E. Julian, Jr.(1),(2)................................... 46 Director 1997
William P. Veillette(1),(2)..................................... 37 Director 1993
Christopher Drake............................................... 48 Secretary, Treasurer, and Chief
Financial Officer
Martin B. Mazer................................................. 35 Vice President of Franchise Development
and Corporate Offices
Kelly A. Wagner................................................. 31 Vice President of Operations
Leslie A. Wood.................................................. 32 Vice President of Technology
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
KEITH E. ALESSI is President and Chief Executive Officer of the Company, a
position he has held since June 1996. Mr. Alessi was elected to the Board of
Directors in January 1996 and was elected Chairman of the Board in September
1996. Prior to that time, Mr. Alessi, a certified public accountant, served Farm
Fresh, Inc. ("Farm Fresh"), a leading Virginia supermarket chain, as its Vice
Chairman, Secretary, Treasurer, and Chief Financial Officer from 1994 to 1996.
From 1992 until 1994, Mr. Alessi was Chairman and Chief Executive Officer of
Virginia Supermarkets, Inc. From 1988 through 1992, Mr. Alessi was employed by
Farm Fresh and served as President and Chief Operating Officer at the time he
left the company. Mr. Alessi is also a director of Cort Business Services, Inc.,
Town Sports International, Inc., and Shoppers Food Warehouse Corp.
HARRY W. BUCKLEY was President and Chief Executive Officer of H&R Block Tax
Service, Inc., a subsidiary of H&R Block, from 1988 until 1995, at which time he
resigned. Mr. Buckley served H&R Block in various capacities for 28 years.
HARRY S. GRUNER is a General Partner of JMI Equity Fund, a private equity
investment partnership, a position he has held since November 1992. From August
1986 to October 1992, Mr. Gruner was employed by Alex. Brown & Sons Incorporated
and was a principal at the time of his departure. Mr. Gruner is also a director
of Brock International, Inc., a developer, marketer, and supporter of software
systems, The META Group, Inc., a syndicated information technology research
company, Hyperion Software, Inc., a financial software company, V-One
Corporation, a security software company, Optika Imaging, Inc., an imaging
software company, and numerous privately held companies. See " -- Special
Contractual Right to Nominate Director."
MICHAEL E. JULIAN, JR. is the President and Chief Executive Officer of
Jitney-Jungle Stores of America, Inc., a regional supermarket chain in
Mississippi, a position he has held since March 1997. Prior to that time, Mr.
Julian was employed by Farm Fresh and FF Holdings, serving as Executive Vice
President and Chief Operating Officer in 1987, as Chief Executive Officer from
1988 until 1997, and as President from 1992 until 1997. Mr. Julian continues to
serve as a director and Chairman of the Board of Farm Fresh and FF Holdings.
WILLIAM P. VEILLETTE is a District Manager for Otis Elevator Company, a
position he has held since 1992. From 1990 until 1992, he was an Account Manager
for Otis Elevator Company and from 1988 until 1990 he was a Development
Associate for the Trammell Crow Company.
CHRISTOPHER DRAKE is Secretary, Treasurer, and Chief Financial Officer of
the Company, a position he has held since May 1997. From July 1994 to May 1997,
he was Controller and Chief Financial Officer. Mr. Drake joined the Company in
January 1992 as Controller. Mr. Drake is also a franchisee of the Company.
During 1991, Mr. Drake was Senior Vice-President and Chief Financial officer of
Mulberry Phosphates, Inc. of Norfolk, Virginia f/k/a Royster Company, when that
company filed for protection under Chapter 11 of the United States Bankruptcy
Code. The case was filed on April 8, 1991 in
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<PAGE>
the Southern District of New York, Case No. 91-07012-Pi. The reorganization was
completed, and the company emerged from bankruptcy on January 5, 1993.
MARTIN B. MAZER is Vice President of Franchise Development and Corporate
Offices, a position he has held since May 1997. From May 1996 to May 1997, Mr.
Mazer was Director of Franchise Development. From May 1995 until May 1996, Mr.
Mazer served as Divisional Director in charge of Company-owned offices and from
December 1993 to April 1995, Mr. Mazer served as Regional Director of the
Company's Southeast Region. Mr. Mazer joined the Company in August 1993 as a
franchise sales representative. Before joining the Company, Mr. Mazer was an
area supervisor with Bally's Health and Tennis, where he had worked since 1981.
KELLY A. WAGNER is Vice President of Operations, a position she has held
since June 1997. From August 1991 until June 1997, Ms. Wagner was a Regional
Director of the Company. From May 1989 until August 1991, she was Assistant
Director of Training for the Company. Ms. Wagner joined the Company in January
1989.
LESLIE A. WOOD is Vice President of Technology, a position she has held
since March 1997. From April 1995 until March 1997, she served as Director of
Technology. From September 1994 to March 1995, she was Director of Field
Automation, and from July 1992 until August 1994, she served as Director of
Office Systems. From September 1990 to July 1992, she was a Systems Analyst for
Computer Data Systems, Inc.
SPECIAL CONTRACTUAL RIGHT TO NOMINATE DIRECTOR
Pursuant to the Recapitalization Agreement, the Company continues to be
obligated to use its best efforts to fix the number of directors of the Company
at between five and seven and to cause at least one nominee of the Preferred
Shareholders to be recommended to the shareholders eligible to vote thereon for
election as a director at all meetings of shareholders, or consents in lieu
thereof, for such purpose. Harry S. Gruner is currently serving as the Preferred
Shareholders' representative on the Company's Board of Directors. See "Recent
Developments."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established Audit and Compensation Committees.
The Audit Committee is empowered by the Board of Directors to, among other
things, recommend the firm to be employed by the Company as its independent
auditor and to consult with such auditor regarding audits and the adequacy of
internal accounting controls. The Compensation Committee makes recommendations
to the Board of Directors as to, among other things, the compensation of the
Chief Executive Officer and designated other members of senior management, as
well as new compensation and awards under the Company's 1994 Long-Term Incentive
Plan.
DIRECTORS' COMPENSATION
The Company pays outside directors $6,000 per year and reimburses all of
the directors' expenses relating to their activities as directors. Outside
directors also receive automatic annual option grants under the Company's
Non-Employee Director Stock Option Plan pursuant to a pre-determined formula.
Employee directors do not receive additional compensation for service on the
Board of Directors or its committees. See "Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. Buckley, Mr. Gruner, Mr. Julian,
and Mr. Veillette, none of whom are current or former officers or employees of
the Company or any of its subsidiaries. There are no compensation committee
interlocks.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid by the Company for services rendered during the years ended
April 30, 1997, 1996, and 1995, to its current Chairman, President, and Chief
Executive Officer, its former President and Chief Executive Officer, and other
current and former executive officers of the Company whose combined salary and
bonus exceeded $100,000 in 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
NUMBER OF
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
------------------------ OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)(2) COMPENSATION ($)
- --------------------------------------------- ---- ---------- --------- ------------ ----------------
<S> <C>
Keith E. Alessi.............................. 1997 $ 153,461 $ 130,000 268,065(4) $ --
Chairman, President, and Chief 1996 -- -- 10,000(5) 3,500(6)
Executive Officer(3)
Martin B. Mazer.............................. 1997 73,425 41,250 4,000 650(7)
Vice President of Franchise 1996 71,134 3,912 2,000 --
Development and Corporate 1995 67,191 -- 1,000 --
Offices
John T. Hewitt............................... 1997 75,932 -- -- 227,514(9)
Former President and 1996 107,858 115,000 20,000 --
Chief Executive Officer(8) 1995 200,299 -- 13,000 --
Thomas P. Czaplicki.......................... 1997 66,501 41,250 6,500 1,565(7)
Former Vice President 1996 39,316 15,000 -- --
of Corporate Development(10)
</TABLE>
- ---------------
(1) Does not include perquisites and other personal benefits that do not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus reported
for the Named Executive Officers.
(2) Granted pursuant to the Company's 1994 Long-Term Incentive Plan unless
otherwise indicated.
(3) Mr. Alessi became President and Chief Executive Officer in June 1996. He was
appointed to the Board of Directors in January 1996.
(4) Mr. Alessi exercised 46,226 of these options in June 1997 at an exercise
price of $4.81 per share. See " -- Employment Agreement."
(5) Granted pursuant to the Non-Employee Director Stock Option Plan when Mr.
Alessi was a non-employee director.
(6) Represents director fees paid prior to Mr. Alessi's employment with the
Company.
(7) Represents matching contributions made by the Company pursuant to its 401(k)
Plan.
(8) Mr. Hewitt resigned as President and Chief Executive Officer of the Company
in September 1996.
(9) Represents cancellation of indebtedness to the Company in the amount of
$115,827 and non-competition payments in the amount of $111,687 in
connection with Mr. Hewitt's resignation from the Company. See "Certain
Transactions."
(10) Mr. Czaplicki joined the Company in June 1995 and resigned in March 1997.
36
<PAGE>
The following table provides a summary of compensation related stock
options granted to the Named Executive Officers during 1997.
STOCK OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE GRANT DATE
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE VALUE(1)
- ---------------------------------------------------- ---------- ------------- ----------- ---------------- ----------
<S> <C>
Keith E. Alessi..................................... 268,065 69.0% $4.81 June 17, 2006(2) $1,065,140
Martin B. Mazer..................................... 4,000 1.0 5.75 May 1, 2006(3) 15,217
Thomas P. Czaplicki................................. 6,500 1.7 5.75 May 1, 2006(3) 24,728
</TABLE>
- ---------------
(1) Value determined using the Black Scholes Option-Pricing Model with the
following weighted average assumptions: no dividend yield, expected
volatility of 73%, risk free interest rate of 6.69%, and expected life of 10
years in the case of Mr. Alessi's options and six years in the case of
Messrs. Mazer's and Czaplicki's options. The actual value, if any, that may
be realized on the options will depend on the excess of the stock price over
the exercise price on the date the option is exercised. Accordingly, there
can be no assurance that the value realized on the options will be at or
near the value estimated by the Black-Scholes Model.
(2) The options vest in four equal, annual increments commencing June 18, 1997
and ending June 18, 2000. Each increment expires June 17, 2006.
(3) The options vest in five equal, annual increments commencing May 1, 1997 and
ending May 1, 2001. Each increment expires five years after vesting.
The following table sets forth information for the Named Executive Officers
concerning stock option exercises during 1997 and unexercised options held as of
April 30, 1997.
OPTION EXERCISES AND FISCAL YEAR-END OPTION
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN THE
MONEY
OPTIONS AT
NUMBER OF SECURITIES FISCAL
UNDERLYING UNEXERCISED OPTIONS YEAR- END
AT FISCAL YEAR-END (#) ($)(1)
SHARES ACQUIRED ------------------------------ -----------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- -------------------------------------------- -------------- ----------- ------------- -----------
<S> <C>
Keith E. Alessi.............. 4,000 $ 5,560(2) 0 274,065 $ 0
Martin B. Mazer.............. -- -- 400 5,600 2,650(4)
Thomas P. Czaplicki.......... -- -- 0 6,500(6) 0
<CAPTION>
NAME UNEXERCISABLE
- ----------------------------- -------------
<S> <C>
Keith E. Alessi.............. $ 1,468,355(3)
Martin B. Mazer.............. 28,100(5)
Thomas P. Czaplicki.......... 28,438(7)
</TABLE>
- ---------------
(1) The closing sale price of the Company's Common Stock on the Nasdaq National
Market on April 30, 1997 was $10.125 per share.
(2) Represents difference between exercise price of $2.86 per share and closing
sale price of Company's Common Stock on the Nasdaq National Market on date
of exercise.
(3) Represents 6,000 options exercisable at $2.86 per share and 268,065 options
exercisable at $4.81 per share.
(4) Exercisable at $3.50 per share.
(5) Represents 1,600 options exercisable at $3.50 per share and 4,000 options
exercisable at $5.75 per share.
(6) Pursuant to Mr. Czaplicki's severance arrangement with the Company, all
stock options previously granted to Mr. Czaplicki will continue to vest in
annual increments after the termination of his employment.
(7) All 6,500 options are exercisable at $5.75 per share.
EMPLOYMENT AGREEMENT
Mr. Alessi is employed as the Company's President and Chief Executive
Officer under an employment agreement dated May 29, 1997 ("Alessi Employment
Agreement"). The Alessi Employment Agreement expires on June 18, 1999. Mr.
Alessi is paid an annual salary of $250,000 and is eligible to receive a bonus
of up to $137,500 per year if certain performance objectives established by the
Board of Directors are met. The Alessi Employment Agreement includes a covenant
not to compete with the Company throughout the United States or solicit
customers, franchisees, and employees of the Company for a period of two years
following termination of such agreement, and imposes certain non-disclosure
obligations on Mr. Alessi with respect to the Company's confidential and
proprietary information. The Company may terminate the Alessi Employment
Agreement at any time, without cause, upon 30 days notice to Mr. Alessi. Upon
such termination, the Company
37
<PAGE>
is required to pay Mr. Alessi $250,000 over a one-year period. In addition, in
the event of Mr. Alessi's termination without cause, any unvested increment of
Mr. Alessi's option shares that would have vested on the succeeding June 18 will
be deemed to have vested and be available for exercise, along with all other
then vested options in accordance with the post-termination provisions of the
Company's 1994 Long Term Incentive Plan described below.
In addition, upon being named President and Chief Executive Officer, Mr.
Alessi received an option to purchase 268,065 shares of Common Stock, which on
the grant date represented 5.0% of the fully diluted Common Stock of the Company
("Alessi Option"). The exercise price for the Alessi Option is $4.81, which was
the average closing sale price of the Company's Common Stock over the 20 trading
days preceding the grant date. The Alessi Option consists of 83,160 incentive
stock options and 184,905 non-qualified stock options, which become exercisable
in four equal, annual increments commencing June 18, 1997.
STOCK OPTION PLANS
In 1994, the Board of Directors of the Company adopted, and shareholders
approved, the 1994 Long-Term Incentive Plan (the "Incentive Plan") pursuant to
which officers and other key employees of the Company are eligible to receive
options to purchase Common Stock and other awards as described below. The
maximum number of shares of Common Stock that may be issued pursuant to awards
under the Incentive Plan is 698,000 (subject to anti-dilution adjustments).
The Incentive Plan is administered by the Compensation Committee. The
Compensation Committee has the discretion to select the individuals to receive
awards and to grant such awards and has a wide degree of flexibility in
determining the terms and conditions of awards. Subject to limitations imposed
by applicable law, the Board of Directors of the Company may amend or terminate
the Incentive Plan at any time and in any manner. However, no such amendment or
termination may affect a participant's rights under an award previously granted
under the Incentive Plan without his or her consent.
Awards under the Incentive Plan may be in the form of stock options (both
nonqualified stock options and incentive stock options), stock appreciation
rights, performance shares, and restricted stock, either separately or in such
combination as the Compensation Committee may in its discretion deem
appropriate. Under the terms of the Incentive Plan, subject to certain
conditions, all outstanding awards vest and become exercisable immediately prior
to a "change of control" of the Company. A change of control is defined to
encompass different types of significant corporate transactions, including
reorganizations and mergers, acquisitions of 20% of the Company's Common Stock,
or a change in the composition of at least two-thirds of the membership of the
Company's Board of Directors over a two year period, other than by reason of
death, or the acquisition of at least 5% of the Company's Common Stock if such
acquisition is not approved by the Board of Directors. The Incentive Plan
remains in effect until all awards under the Incentive Plan have been satisfied
by the issuance of shares of Common Stock or the payment of cash. As of June 27,
1997, options to purchase up to 426,544 shares of Common Stock were outstanding
under the Incentive Plan.
In 1996, the Board of Directors of the Company adopted, and shareholders
approved, the Non-Employee Director Stock Option Plan ("Director Plan") pursuant
to which non-employee directors of the Company are eligible to receive
non-qualified stock options pursuant to a formula that grants any new directors
options to purchase 10,000 shares and existing directors 2,000 shares upon their
re-election each year. Each of these awards vests in increments over five years.
Option awards granted pursuant to the Director Plan vest automatically in the
event of death, permanent and total disability, or retirement (as defined in the
Director Plan) of the director or a change in control or potential change in
control of the Company, as defined in such plan. The terms change in control and
potential change in control have the meaning similar to those discussed above
with respect to the Incentive Plan. As of June 27, 1997, options to purchase up
to 42,400 shares of Common Stock were outstanding under the Director Plan.
Pursuant to Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), directors, executive officers, and 10% shareholders of the
Company are generally liable to the Company for repayment of any profits
realized from any non-exempt purchase and sale of Common Stock occurring within
a six-month period. Rule 16b-3 promulgated under the Exchange Act provides an
exemption from Section 16(b) liability for certain transactions by officers or
directors that comply with such rule.
38
<PAGE>
CERTAIN TRANSACTIONS
On July 11, 1994, the Company sold certain assets related to its operation
of a Company-owned office in Chesapeake, Virginia to Chestax Company, 50% of
which is owned by Christopher Drake, the Company's Secretary, Treasurer, and
Chief Financial Officer. The purchase price of $272,764 was equal to
approximately 120% of the gross revenues of the Jackson Hewitt office as of
April 30, 1994, was paid for by Mr. Drake's delivery of an 11%, five-year
promissory recourse note to the Company, and was calculated on terms comparable
to those of similar transactions with non-affiliates. The Company's gain on the
sale of these assets was $89,490. As of April 30, 1997, the unpaid balance of
the promissory note was $109,106. The Company believes that the foregoing
transaction was consummated on terms consistent with those that would apply to
transactions with non-affiliates in similar circumstances.
The Company's Consolidated Financial Statements reflect a $1.3 million
stock subscription receivable which is due from the Company's former Chairman of
the Board of Directors, John T. Hewitt. On September 9, 1996, Mr. Hewitt
resigned his position with the Company effective immediately. Mr. Hewitt
resigned from the Company's Board of Directors in December 1996. On December 12,
1996, Mr. Hewitt executed a $1.3 million promissory note, which represented all
amounts then due the Company, including accrued interest, other than the $99,000
obligation referred to below. This recourse note bears interest at 6.9% per
year. Mr. Hewitt is required to make monthly interest payments and to repay the
principal amount in one lump sum on April 30, 1999. To secure this note, Mr.
Hewitt pledged 145,050 shares of the Company's Common Stock to the Company, and
granted the Company a proxy to vote this stock until his obligation is repaid in
full. In return for 29 monthly payments of $22,337 each by the Company to Mr.
Hewitt, Mr. Hewitt also executed a covenant not to compete with the Company in
the United States through April 30, 1999, and agreed not to solicit Company
employees, conduct a solicitation of proxies, or disparage the Company or its
officers and directors during the same period. In addition, the Company forgave
a $99,000 (plus accrued interest) obligation of Mr. Hewitt to the Company, which
would have been due and payable on April 30, 1997.
In December 1996, the Company entered into a binding letter of intent with
Susan Ventresca, a former franchisee and director of the Company, to purchase
her franchised territories and all related assets (the "Territories") at the end
of the 1997 tax season. Ms. Ventresca resigned from the Board of Directors in
December 1996 and the transaction closed in June 1997. The terms of the
agreement allowed the Company to audit Ms. Ventresca's franchise operations for
the one-year period ended April 30, 1997, to determine the purchase price of the
Territories. The purchase price was determined based on a formula equal to the
lesser of (i) six times the cash flow (defined as earnings before interest,
taxes, depreciation and amortization) of the Territories or (ii) 120% of the
gross revenues of the Territories, plus $40,000 (which represents the value of
two additional territories held by Ms. Ventresca) minus all outstanding debt to
the Company. All payments on Ms. Ventresca's outstanding notes receivable due to
the Company on February 28, 1997 were deferred until the closing of the
transaction. This formula resulted in a net payment to Ms. Ventresca of
$241,289. The Company believes that the foregoing transactions with Ms.
Ventresca were consummated on terms consistent with those that would apply to
transactions with non-affiliates in similar circumstances.
On June 27, 1997, the Company entered into a tax-free recapitalization
transaction with the Preferred Shareholders pursuant to which the Company
exchanged 699,707 shares of Common Stock for the 504,950 outstanding Shares of
Series A Stock. The Preferred Shareholders include Geocapital II, L.P. and
Geocapital III, L.P., two affiliated partnerships which collectively own in
excess of 5% of the Company's issued and outstanding stock, and JMI Equity Fund,
L.P., of which Harry Gruner, a director of the Company, is a general partner.
See "Recent Developments" and "Principal and Selling Shareholders."
39
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 10, 1997, and after giving
effect to the sale of shares of Common Stock in the Offering, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each Named Executive
Officer, (iv) all directors and executive officers as a group, and (v) each
Selling Shareholder. The number of shares beneficially owned by each person
shown in the table below is determined under the rules of the Securities and
Exchange Commission (the "Commission"), and such information is not necessarily
indicative of beneficial ownership for any other purpose.
<TABLE>
<CAPTION>
OWNERSHIP AFTER
OFFERING AND
EXERCISE
SHARES BENEFICIALLY OWNED OF OVER-ALLOTMENT
PRIOR TO OFFERING(1) OPTION
NAME OF ------------------------- SHARES BEING -------------------
BENEFICIAL OWNER(3) NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- --------------------------------------------- ------------- ------- ------------ ------- -------
<S> <C>
Keith E. Alessi.............................. 120,070(4) 2.2% 20,917(5) 96,016 1.5%
Harry W. Buckley............................. 2,000(6) * -- 2,000 *
Harry S. Gruner(7)........................... 243,702(8) 4.6 -- 243,702 3.8
Michael E. Julian, Jr........................ 12,000(9) * -- 12,000 *
William P. Veillette......................... 138,562(10) 2.6 -- 138,562 2.1
Paul Grunberg(11)............................ 413,382(12) 7.7 20,000 390,382 6.0
Geocapital Partners(13)...................... 455,306(14) 8.5 -- 455,306 7.0
Martin B. Mazer.............................. 2,050(15) * -- 2,050 *
John T. Hewitt(16)........................... 256,761(17) 4.8 -- 256,761 4.0
Thomas P. Czaplicki(18)...................... 31,000(19) * -- 31,000 *
Jackson Hewitt Inc. 401(k) Plan(20).......... 24,054 * 20,917 -- --
Linda L. Hewitt(21).......................... 134,000 2.5 70,790 52,591 *
Paul W. Littman(22).......................... 58,781 1.1 13,044 43,781 *
Arline S. Littman(22)........................ 67,174 1.3 4,348 62,174 1.0
All directors and executive officers as a
group (9 persons).......................... 529,484 9.9 -- 505,430 7.7
</TABLE>
- ---------------
* Indicates ownership of less than one percent.
(1) Unless otherwise noted, sole voting and dispositive power is possessed with
respect to all shares of Common Stock shown.
(2) If the over-allotment option is exercised in full, Paul Grunberg, the
Jackson Hewitt Inc. 401(k) Plan, Linda L. Hewitt, Paul W. Littman, and
Arline S. Littman will sell an additional 3,000, 3,137, 10,619, 1,956, and
652 shares, respectively.
(3) Unless otherwise noted, the address of each of the foregoing is c/o the
Company at 4575 Bonney Road, Virginia Beach, Virginia 23462.
(4) Includes options to purchase 20,790 shares of Common Stock that were granted
pursuant to the Incentive Plan and 24,054 shares owned by the Jackson Hewitt
Inc. 401(k) Plan. As co-trustee of the Jackson Hewitt Inc. 401(k) Plan, Mr.
Alessi has shared voting and investment power with respect to such shares.
(5) Represents the 20,917 shares being offered by the Jackson Hewitt Inc. 401(k)
Plan.
(6) Represents options to purchase 2,000 shares of Common Stock that were
granted pursuant to the Company's Director Plan.
(7) Mr. Gruner's address is 1119 St. Paul's Street, Baltimore, Maryland 21202.
(8) Includes 233,202 shares owned by JMI Equity Fund, L.P. ("JMI Equity"). Mr.
Gruner is a general partner of JMI Equity, and he has shared voting and
investment power with respect to such shares.
(9) Includes options to purchase 2,000 shares of Common Stock granted pursuant
to the Director Plan.
(10) Includes (i) 29,300 shares owned jointly by Mr. William Veillette and his
wife, Tracy Veillette; (ii) 12,310 shares owned jointly by Mr. William
Veillette and his sister, Sally Veillette; (iii) 12,310 shares owned
jointly by Mr. William Veillette and his sister, Jeanne Bowerman; (iv)
50,000 shares owned by the Veillette Family Trust, of which Mr. William
Veillette shares voting and investment powers; and (v) 265 shares owned
jointly by Mr. William Veillette and his son, Peter J. Veillette. Also
includes options to purchase 4,400 shares of Common Stock granted pursuant
to the Director Plan. Does not include (i) 3,487 shares owned individually
by Mr. Veillette's wife, Tracy Veillette, or (ii) 5,000 shares owned
jointly by Tracy Veillette and Susan Veillette.
(11) Mr. Grunberg's address is Route #2, Box 171, Valatie, New York 12184.
40
<PAGE>
(12) Does not include 105,273 shares owned individually by Mr. Grunberg's wife.
Mr. Grunberg disclaims beneficial ownership of these shares.
(13) Geocapital Partners' address is 2115 Linwood Street, Fort Lee, New Jersey
07024.
(14) Consists of 222,103 shares held of record by Geocapital II, L.P. and
233,203 shares held of record by Geocapital III, L.P. The sole general
partner of Geocapital II, L.P., Softven Management, L.P., of which Stephen
J. Clearman, Irwin Lieber, James Harrison, and BVA Associates are general
partners, exercises voting and investment power with respect to the shares
held by Geocapital II, L.P. The sole general partner of Geocapital III,
L.P., Geocapital Management, L.P., of which Stephen J. Clearman, Lawrence
W. Lepard, Richard A. Vines, and BVA Associates III are general partners,
exercises voting and investment power with respect to the shares held by
Geocapital III, L.P.
(15) Includes options to purchase 1,600 shares of Common Stock that were granted
pursuant to the Incentive Plan.
(16) Mr. Hewitt's address is 2532 San Marco Court, Virginia Beach, Virginia
23456.
(17) Includes 145,050 of Mr. Hewitt's shares that have been pledged to the
Company to secure certain debt and are voted by the Company. See "Certain
Transactions."
(18) Mr. Czaplicki's address is 4907 Rambling Rose Place, Tampa, Florida 33624.
(19) Includes options to purchase 1,300 shares of Common Stock granted pursuant
to the Incentive Plan.
(20) The trustees of the Jackson Hewitt Inc. 401(k) Plan ("Plan") recently
increased the number of investment options available under the Plan, which
had formerly invested solely in the Company's Common Stock. As a result of
the new investment options available to Plan participants, which no longer
include the Company's Common Stock, the trustees have elected to liquidate
the Plan's holdings of the Company's Common Stock.
(21) Ms. Hewitt's address is 5504 Larry Avenue, Virginia Beach, Virginia 23462.
(22) Mr. and Mrs. Littman's address is 657 Riverview, Rexford, New York 12148.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, and 1,000,000 shares of preferred stock, no par value
("Preferred Stock"). Of the Common Stock, 5,337,180 shares are currently issued
and outstanding. As of May 27, 1997, outstanding shares of Common Stock were
held of record by 636 shareholders. No shares of Preferred Stock are currently
outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Articles of Incorporation
("Articles") that are included as an exhibit to the Registration Statement of
which this Prospectus is a part, and by the provisions of applicable law. See
"Additional Information."
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. Subject to
preferences that may be granted to the holders of Preferred Stock, each holder
of Common Stock is entitled to share ratably in distributions to shareholders
and to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefore, and, in the event of the
liquidation or dissolution of the Company, is entitled to share ratably in all
assets of the Company remaining after payment of liabilities. Holders of Common
Stock have no conversion, preemptive or other subscription rights and there are
no redemption rights or sinking fund provisions with respect to the Common
Stock. The outstanding Common Stock is validly issued, fully paid, and
non-assessable. Certain provisions of the Company's Articles of affect the
rights of holders of Common Stock and may have the effect of delaying, deferring
or preventing a change of control of the Company.
PREFERRED STOCK
The Board of Directors, without further action by the holders of Common
Stock, may issue shares of Preferred Stock. The Board of Directors is vested
with authority to fix by resolution the designations and the powers, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including, without
limitation, the dividend rate, conversion or exchange rights, redemption price
and liquidation preference of any series of shares of Preferred Stock, and to
fix the number of shares constituting any such series.
In July 1997, the Company exchanged 699,707 shares of its Common Stock for
all of the then outstanding shares of the Company's Series A Stock in a tax-free
recapitalization. The Company had issued the shares of Series A Stock to three
41
<PAGE>
private investors in August 1993. The former holders of the Series A Stock
retained registration rights granted them at the time they purchased their
Series A Stock. See "Recent Developments."
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest, or otherwise by
making such attempts more difficult to achieve or more costly. The Board of
Directors may issue Preferred Stock with voting and conversion rights that could
adversely affect the voting power of the holders of Common Stock. There are no
current agreements or understandings for the issuance of Preferred Stock and the
Board of Directors has no present intention to issue any shares of Preferred
Stock.
CONVERTIBLE NOTES
From November 1992 through February 1993, the Company raised $778,750 in a
private placement of 6% convertible notes ("Convertible Notes"). The Convertible
Notes bear an interest rate of 6% and are due March 1, 1998. Upon certain events
of default by the Company, the holders of not less than 25% of the Convertible
Notes may declare the principal of all Convertible Notes due and payable
immediately. The Convertible Notes are not subject to redemption by the Company
or at the option of the holders, nor are the Convertible Notes entitled to the
benefit of any sinking fund.
Holders of Convertible Notes may convert their investment into shares of
the Company's Common Stock at any time prior to March 1, 1998 at a conversion
rate of one share of Common Stock for each $16.00 principal amount of the
Convertible Notes. The conversion rate for the Convertible Notes is subject to
adjustment upon the occurrence of certain events, including the declaration by
the Company of a stock dividend or stock split.
WARRANTS
The Company's primary lender currently holds warrants ("Warrants") to
purchase 10,000 shares of Common Stock for $.01 per share. The Warrants were
granted to the lender in 1995 in connection with a credit facility made
available to the Company. A total of 999,372 Warrants were originally granted,
but all but 10,000 of such Warrants were repurchased by the Company in 1996.
ANTI-TAKEOVER STATUTES
AFFILIATED TRANSACTIONS. The Virginia Stock Corporation Act ("Virginia
Act") contains provisions governing "Affiliated Transactions." Affiliated
Transactions include certain mergers and share exchanges, certain material
dispositions of corporate assets not in the ordinary course of business, any
dissolution of a corporation proposed by or on behalf of an Interested
Shareholder (as defined below), and reclassifications, including reverse stock
splits, recapitalizations, or mergers of a corporation with its subsidiaries, or
distributions or other transactions which have the effect of increasing the
percentage of voting shares beneficially owned by an Interested Shareholder by
more than 5%. For purposes of the Virginia Act, an Interested Shareholder is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia Act as a member of a
corporation's board of directors who (i) was a member before the later of
January 1, 1998 or the date on which an Interested Shareholder became an
Interested Shareholder and (ii) was recommended for election by, or was elected
to fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the corporation's board of directors. At the
expiration of the three year period after a shareholder becomes an Interested
Shareholder, these provisions require approval of the Affiliated Transaction by
the affirmative vote of the holders of two-thirds of the outstanding shares of
the corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of: the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and
42
<PAGE>
no special financial accommodations have been accorded the Interested
Shareholder, unless approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder who has been an Interested
Shareholder continuously since the effective date of the statute (January 26,
1988) or who became an Interested Shareholder by gift or inheritance from such a
person or whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Disinterested Directors of the
corporation.
These provisions are designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Act provides that, by affirmative vote
of a majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transaction provisions shall not apply to the corporation. The
Company has not adopted such an amendment.
CONTROL SHARE ACQUISITIONS. The Virginia Control Share Acquisitions statute
also is designed to afford shareholders of a public company incorporated in
Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity, or group ("Acquiring Person") seeks to gain voting
control of that corporation. With certain enumerated exceptions, the statute
applies to acquisitions of shares of a corporation which would result in an
Acquiring Person's ownership of the corporation's shares entitled to vote in the
election of directors falling within any one of the following ranges: 20% to
33-1/3%, 33-1/3% to 50%, or 50% or more (a "Control Share Acquisition"). Shares
that are the subject of a Control Share Acquisition ("Control Shares") will not
be entitled to voting rights unless the holders of a majority of the
"Disinterested Shares" vote at an annual or special meeting of shareholders of
the corporation to accord the Control Shares with voting rights. Disinterested
Shares do not include shares owned by the Acquiring Person or by officers and
inside directors of the target company. Under certain circumstances, the statute
permits an Acquiring Person to call a special shareholders' meeting for the
purpose of considering granting voting rights to the holders of the Control
Shares. As a condition to having this matter considered at either an annual or
special meeting, the Acquiring Person must provide shareholders with detailed
disclosures about his identity, the method and financing of the Control Share
Acquisition, and any plans to engage in certain transactions with, or to make
fundamental changes to, the corporation, its management, or business. Under
certain circumstances, the statue grants dissenters' rights to shareholders who
vote against granting voting rights to the Control Shares. The Virginia Control
Share Acquisitions statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. A corporation may opt-out of
the statute, which the Company has not done, by so providing in its articles of
incorporation or bylaws. Among the acquisitions specifically excluded from the
statute are acquisitions to which the corporation is a party and which, in the
case of mergers or share exchanges, have been approved by the corporation's
shareholders under other provisions of the Virginia Act.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted under the Virginia Act, the Company's Articles provide that
the Company's officers and directors will not be liable with respect to any
proceeding brought by or in the right of the Company or brought by or on behalf
of the shareholders of the Company, provided that the officer or director has
not engaged in willful misconduct or a knowing violation of the criminal law or
of any federal or state securities law. The Company's Articles also provide that
the Company will indemnify its directors, officers, employees, and agents in the
manner provided by the Virginia Act.
The Virginia Act sets forth certain provisions regarding the
indemnification of directors and officers. Generally, these provisions of the
Virginia Act allow a corporation to indemnify directors and officers if: (i)
they conducted themselves in good faith; (ii) they believed (a) in the case of
conduct in their official capacity, that their conduct was in the corporation's
best interest, and (b) in all other cases, that their conduct was at least not
opposed to its best interest; and (iii) in the case of any criminal proceeding,
that they had no reasonable cause to believe their conduct was unlawful. Under
the Virginia Act, a corporation may not indemnify directors or officers (i) in
connection with a proceeding by or in the right of the corporation in which the
directors or officers are adjudged liable to the corporation; or (ii) in any
other proceeding charging improper personal benefit, in which they are adjudged
liable on the basis that personal benefit was improperly received.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
Union National Bank of North Carolina, 230 South Tryon Street, Charlotte, North
Carolina 28288.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,337,180 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option to purchase up to an additional 150,000 shares). The
1,129,099 shares sold in the Offering (1,298,463 shares if the Underwriters'
over-allotment option is exercised in full) and 144,515 of the shares of Common
Stock currently outstanding are freely tradable without restriction under the
Securities Act, except for any such shares held at any time by an "affiliate" of
the Company, as such term is defined under Rule 144 promulgated under the
Securities Act ("Affiliate").
The remaining 5,192,665 shares were issued and sold by the Company in
private transactions and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. Of these shares, 4,410,355 are subject to no
restrictions other than the removal of a restrictive legend from the share
certificates. In general, under Rule 144, as currently in effect, a person who
has beneficially owned shares for at least one year, including an Affiliate, is
entitled to sell, within any three-month period, a number of "restricted" shares
that does not exceed the greater of one percent (1%) of the then outstanding
shares of Common Stock (63,372 shares immediately after the Offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an Affiliate and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above. Of the 5,192,665 remaining shares outstanding, Affiliates hold
approximately 493,894 shares.
In addition, as of July 10, 1997, there were outstanding options to
purchase 461,609 shares of Common Stock, of which options to purchase 67,290
shares granted pursuant to the Company's stock option plans are currently
exercisable. In addition, as of July 10, 1997, there were 394,319 shares of
Common Stock subject to options which are not currently exercisable and 386,391
shares available for issuance under the Company's stock option plans. All of the
shares underlying the options granted under the Company's stock option plans are
covered by effective registration statements. In addition, the Convertible Notes
and Warrants are currently convertible into an aggregate of 57,671 shares of
Common Stock. All of such shares are eligible for sale under Rule 144. See
"Management -- Stock Option Plans" and "Description of Capital Stock."
As of the date of this Prospectus, the Company, its officers and directors,
and the Selling Shareholders have agreed that they will not, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of, loan, pledge or transfer (or announce any
offer, sale, offer of sale, contract of sale, grant of any options to purchase
or otherwise dispose of, loan, pledge or transfer) or grant any rights with
respect to any shares of Common Stock or similar securities of the Company or
any securities convertible into, or exercisable or exchangeable for, any shares
of Common Stock of the Company without the prior written consent of the
Representatives, for a period of 150 days from the date of this Prospectus. The
Company has not obtained agreements restricting the sale of shares of its Common
Stock from certain of its larger shareholders who own significant amounts of the
Company's Common Stock. Accordingly, such individuals may sell a significant
number of shares of the Company's Common Stock in the public market at any time.
See "Shares Eligible for Future Sale" and "Risk Factors -- Effect on Share Price
of Shares Eligible for Future Sale."
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company, the Selling Shareholders and the several Underwriters (the
"Underwriting Agreement"), the Company and the Selling Shareholders have agreed
to sell to the Underwriters named below, for whom Janney Montgomery Scott Inc.
and Scott & Stringfellow, Inc. are acting as the representatives (the
"Representatives"), and the Underwriters have severally agreed to purchase, the
number of shares of Common Stock set forth opposite their respective names in
the table below at the public offering price less the underwriting discount set
forth on the cover page of the Prospectus:
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------- ---------
Janney Montgomery Scott Inc............................
Scott & Stringfellow, Inc..............................
---------
Total.................................................. 1,129,099
---------
---------
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of the Common Stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of the Common Stock
(other than those covered by the over-allotment option described below), if any
are purchased. The Underwriting Agreement also provides for the payment of a
$150,000 nonaccountable expense allowance to the Underwriters to cover expenses
incurred by the Underwriters in connection with the Offering.
The Underwriters propose to offer the Common Stock to the public at the
public offering price set forth on the cover page of the Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow to certain
dealers a discount, not in excess of $ per share. After the Offering, the
public offering price, the concession to selected dealers and the reallowance to
other dealers may be changed by the Representatives.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable for 30 days from the date of the Prospectus, to purchase
up to 169,364 additional shares of the Common Stock, at the public offering
price less the underwriting discount. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase additional shares of Common Stock proportionate to such Underwriter's
initial commitment as indicated in the preceding table. The Underwriters may
exercise such right of purchase only for the purpose of covering over-
allotments, if any, made in connection with the sale of the shares of Common
Stock. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 1,129,099 shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933.
As of the date of this Prospectus, the Company, its officers and directors,
and the Selling Shareholders have agreed that they will not, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of, loan, pledge or transfer (or announce any
offer, sale, offer of sale, contract of sale, grant of any options to purchase
or otherwise dispose of, loan, pledge or transfer) or grant any rights with
respect to any shares of Common Stock or similar securities of the Company or
any securities convertible into, or exercisable or exchangeable for, any shares
of Common Stock of the Company without the prior written consent of the
Representatives, for a period of 150 days from the date of this Prospectus. The
Company has not obtained agreements restricting the sale of shares of its Common
Stock from certain of its larger shareholders who own significant amounts of the
Company's Common Stock. Accordingly, such individuals may sell a significant
number of shares of the Company's Common Stock in the public market at any time.
See "Shares Eligible for Future Sale" and "Risk Factors -- Effect on Share Price
of Shares Eligible for Future Sale."
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain, or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters
45
<PAGE>
may also cover all or a portion of such short position, up to 169,364 shares, by
exercising the Underwriters' over-allotment option referred to above. In
addition, the Underwriters may impose "penalty bids" under contractual
arrangements with the Underwriters whereby they may reclaim from an Underwriter
(or dealer participating in the Offering), for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
In connection with the Offering, the Underwriters and other selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Passive market making consists of displaying bids on the Nasdaq
National Market limited by the prices of independent market makers and effecting
purchases limited by such prices and in response to order flow. Net purchases by
a passive market maker on each day are limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock during a
specified prior time period and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Kaufman & Canoles, a professional
corporation, Norfolk, Virginia. Blank Rome Comisky & McCauley, Philadelphia,
Pennsylvania will pass upon certain legal matters for the Underwriters.
EXPERTS
The Consolidated Financial Statements and Schedule of the Company as of
April 30, 1997 and 1996, and for each of the years in the three-year period
ended April 30, 1997, have been included herein or in the registration statement
in reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the Consolidated Financial
Statements refers to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure, in 1996.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement, certain items of which are omitted as
permitted by the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any agreement or other document referred
to herein are not necessarily complete, and reference is made to the copy of
such agreement or other document filed as an exhibit or schedule to the
Registration Statement and each such statement shall be deemed qualified in its
entirety by such reference. For further information, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the material containing this information may be obtained
from the Commission upon payment of the prescribed fees. The Commission also
maintains a Web site that contains reports, proxy, and information statements
and other information regarding registrants that file electronically with the
Commission. The address of such Web site is http://www.sec.gov.
The Company is subject to the periodic reporting and other information
requirements of the Exchange Act. Such reports may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Stock is traded on the Nasdaq National Market, and
such material is also available for inspection and copying at the Nasdaq
National Market's Listings Department, 1735 K Street, N.W., Washington, D.C.
20006.
46
<PAGE>
JACKSON HEWITT INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................................ F-2
Consolidated Balance Sheets as of April 30, 1996 and 1997............................................................... F-3
Consolidated Statements of Operations for the years ended April 30, 1995, 1996 and 1997................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended April 30, 1995, 1996 and 1997....................... F-6
Consolidated Statements of Cash Flows for the years ended April 30, 1995, 1996 and 1997................................. F-7
Notes to Consolidated Financial Statements.............................................................................. F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Jackson Hewitt Inc.:
We have audited the consolidated balance sheets of Jackson Hewitt Inc. and
subsidiaries as of April 30, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended April 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jackson Hewitt Inc.
and subsidiaries as of April 30, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF and SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as
amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME
RECOGNITION AND DISCLOSURE, in 1996.
KPMG Peat Marwick LLP
Norfolk, Virginia
June 9, 1997, except as to Note 16, which
is as of June 27, 1997.
F-2
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C>
Assets (Note 5)
Current assets:
Cash and cash equivalents.................................................................... $ 3,557,861 $ 6,323,586
Receivables:
Trade accounts (Note 2)................................................................... 3,171,035 2,861,567
Notes receivable (Notes 2, 3, 4 and 6):
Franchisees, current portion............................................................ 3,081,201 2,789,029
Sales of franchise territories, current portion......................................... 985,692 1,744,424
Related parties, current portion........................................................ 309,445 54,553
Interest.................................................................................. 328,049 412,064
Allowance for doubtful accounts........................................................... (1,366,250) (1,203,599)
----------- -----------
Total receivables, net............................................................... 6,509,172 6,658,038
----------- -----------
Prepaid expenses and supplies................................................................ 259,591 247,778
Deferred income taxes (Note 9)............................................................... 828,000 644,000
----------- -----------
Total current assets................................................................. 11,154,624 13,873,402
----------- -----------
Property and equipment, at cost (Notes 3, 6, 8 and 13):
Land......................................................................................... 445,731 445,731
Building and building improvements........................................................... 813,022 813,022
Office furniture, fixtures and equipment..................................................... 2,566,672 2,994,125
Computer software............................................................................ 877,139 917,119
Leasehold improvements....................................................................... 131,050 77,592
----------- -----------
4,833,614 5,247,589
Less accumulated depreciation and amortization............................................... 1,802,689 2,572,084
----------- -----------
3,030,925 2,675,505
----------- -----------
Intangible assets, net (Notes 3 and 13):
Customer lists, net.......................................................................... 1,366,409 2,006,820
Other, net................................................................................... 162,215 444,102
----------- -----------
1,528,624 2,450,922
----------- -----------
Notes receivable (Notes 2, 3, 4 and 6):
Franchisees, excluding current portion....................................................... 7,409,971 6,782,358
Sales of franchise territories, excluding current portion.................................... 2,060,917 1,922,868
Related parties, excluding current portion................................................... 326,370 54,553
----------- -----------
Total notes receivable, excluding current portion.................................... 9,797,258 8,759,779
----------- -----------
Assets held for sale........................................................................... 32,022 54,408
Assets held under contractual agreements....................................................... 174,979 313,849
Other assets................................................................................... 237,429 31,912
----------- -----------
$25,955,861 $28,159,777
----------- -----------
----------- -----------
</TABLE>
F-3
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
APRIL 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C>
Liabilities, Redeemable Convertible Preferred Stock and Shareholders' Equity
Current liabilities:
Current installments of notes payable (Note 6)............................................... $ 462,166 $ 606,465
Current installments of capital lease obligations (Note 8)................................... 582,645 618,385
Convertible notes (Note 7)................................................................... -- 762,750
Accounts payable............................................................................. 3,043,019 1,924,580
Accrued payroll and related liabilities...................................................... 1,001,709 879,996
Income taxes payable......................................................................... 1,138,202 2,793,027
Deferred franchise fees...................................................................... 207,500.... 305,370
----------- -----------
Total current liabilities............................................................ 6,435,241 7,890,573
Notes payable, excluding current installments (Note 6)......................................... 1,480,873 1,028,106
Capital lease obligations, excluding current installments (Note 8)............................. 599,044 233,819
Convertible notes (Note 7)..................................................................... 762,750 --
Stock purchase warrants (Note 5)............................................................... 609,492 --
Deferred credits:
Income taxes (Note 9)........................................................................ 1,059,000 893,000
Minority interest............................................................................ 1,902,420 137,690
----------- -----------
Total liabilities.................................................................... 12,848,820 10,183,188
----------- -----------
Series A redeemable convertible preferred stock, no par value; 1,000,000 shares authorized;
504,950 shares issued and outstanding (Notes 12 and 16)...................................... 3,277,792 3,236,443
Shareholders' equity (Notes 5, 7, 11, 12 and 16):
Common stock, $.02 par value; 10,000,000 shares authorized; 4,589,647 shares in 1997 and
4,408,056 shares in 1996, issued and outstanding.......................................... 88,161 91,793
Additional capital........................................................................... 7,180,038 7,798,996
Retained earnings............................................................................ 3,765,025 8,125,414
Stock subscription receivable (Note 2)....................................................... (1,203,975) (1,276,057)
----------- -----------
Shareholders' equity................................................................. 9,829,249 14,740,146
Commitments, contingencies and subsequent events (Notes 2, 4, 8, 10, 11, 12 and 16)............
----------- -----------
$25,955,861 $28,159,777
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C>
Revenues:
Franchise revenues:
Royalties and advertising fees (Note 2).................................... $ 6,913,636 $ 9,855,299 $13,248,002
Franchise fees............................................................. 5,270,895 3,536,730 3,692,739
Allowance for franchise fee refunds........................................ (506,392) (854,613) (488,356)
Electronic transfer fees................................................... 950,993 1,141,024 1,411,097
Other franchise revenues................................................... 743,226 449,742 516,620
----------- ----------- -----------
13,372,358 14,128,182 18,380,102
----------- ----------- -----------
Bank product fees............................................................. 2,037,161 6,857,843 9,363,380
Tax return preparation fees, net of discounts................................. 2,726,512 3,195,941 3,297,729
Miscellaneous income.......................................................... 79,318 834,107 390,460
----------- ----------- -----------
Total revenues........................................................ 18,215,349 25,016,073 31,431,671
Selling, general and administrative expenses.................................... 18,360,040 18,469,321 18,273,614
Depreciation and amortization................................................... 932,941 1,269,143 1,390,190
----------- ----------- -----------
Income (loss) from operations......................................... (1,077,632) 5,277,609 11,767,867
Other income (expenses):
Interest income (Note 2)...................................................... 1,294,636 1,797,128 1,978,014
Interest expense.............................................................. (603,222) (1,853,942) (998,216)
Gain (loss) on disposals of intangible assets and property and equipment...... 1,777,826 600,209 (118,661)
----------- ----------- -----------
Income before provision for income taxes and minority interest........ 1,391,608 5,821,004 12,629,004
Provision for income taxes (Note 9)............................................. 539,470 1,525,000 4,210,000
Minority interest share of earnings............................................. 12,253 1,893,739 2,186,848
----------- ----------- -----------
Income before extraordinary item...................................... 839,885 2,402,265 6,232,156
Extraordinary item (Note 5)..................................................... -- -- (1,248,388)
----------- ----------- -----------
Net income............................................................ 839,885 2,402,265 4,983,768
Dividends accrued on Series A redeemable convertible preferred stock
(Note 12)..................................................................... (297,921) (321,236) (322,219)
Accretion of preferred stock to estimated liquidation value
(Note 12)..................................................................... (78,013) (80,382) (301,160)
----------- ----------- -----------
Net income attributable to common shareholders........................ $ 463,951 $ 2,000,647 $ 4,360,389
----------- ----------- -----------
----------- ----------- -----------
Net income per common share (Note 11):
Primary:
Income before extraordinary item...................................... $ 0.11 $ 0.40 $ 1.22
----------- ----------- -----------
----------- ----------- -----------
Net income............................................................ $ 0.11 $ 0.40 $ 0.95
----------- ----------- -----------
----------- ----------- -----------
Fully diluted:
Income before extraordinary item...................................... $ 0.11 $ 0.40 $ 1.18
----------- ----------- -----------
----------- ----------- -----------
Net income............................................................ $ 0.11 $ 0.40 $ 0.91
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding............................................. 4,251,580 4,354,018 4,520,347
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK STOCK TOTAL
-------------------- ADDITIONAL RETAINED SUBSCRIPTION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
--------- ------- ---------- ---------- ----------- ------------
<S> <C>
Balance at April 30, 1994.................. 4,119,240 $82,385 $5,359,806 $1,300,427 $ (655,426) $ 6,087,192
Shares issued (Note 3)..................... 127,674 2,553 1,498,424 -- -- 1,500,977
Exercise of stock options (Note 11)........ 99,285 1,986 405,331 -- (392,389) 14,928
Dividends accrued on redeemable convertible
preferred stock (Note 12)................ -- -- -- (297,921) -- (297,921)
Accretion of preferred stock to estimated
liquidation value (Note 12).............. -- -- -- (78,013) -- (78,013)
Accrual of interest on stock subscription
receivable (Note 2)...................... -- -- -- -- (75,072) (75,072)
Common stock repurchased................... (45,835) (917) (457,433) -- -- (458,350)
Net income................................. -- -- -- 839,885 -- 839,885
--------- ------- ---------- ---------- ----------- ------------
Balance at April 30, 1995.................. 4,300,364 86,007 6,806,128 1,764,378 (1,122,887) 7,533,626
--------- ------- ---------- ---------- ----------- ------------
Shares issued (Note 3)..................... 111,125 2,222 386,715 -- -- 388,937
Dividends accrued on redeemable convertible
preferred stock (Note 12)................ -- -- -- (321,236) -- (321,236)
Accretion of preferred stock to estimated
liquidation value (Note 12).............. -- -- -- (80,382) -- (80,382)
Accrual of interest on stock subscription
receivable (Note 2)...................... -- -- -- -- (81,088) (81,088)
Common stock redeemed in rescission of
franchisee (Note 3)...................... (3,433) (68) (12,805) -- -- (12,873)
Net income................................. -- -- -- 2,402,265 -- 2,402,265
--------- ------- ---------- ---------- ----------- ------------
Balance at April 30, 1996.................. 4,408,056 88,161 7,180,038 3,765,025 (1,203,975) 9,829,249
--------- ------- ---------- ---------- ----------- ------------
Exercise of stock options (Note 11)........ 75,090 1,502 133,313 -- -- 134,815
Dividends accrued on redeemable convertible
preferred stock (Note 12)................ -- -- -- (322,219) -- (322,219)
Accretion of preferred stock to estimated
liquidation value (Note 12).............. -- -- -- (301,160) -- (301,160)
Stock purchase warrants (Note 5)........... -- -- 7,400 -- -- 7,400
Net shares issued in acquisition of
franchisee (Note 13)..................... 106,501 2,130 478,245 -- -- 480,375
Accrual of interest on stock subscription
receivable (Note 2)...................... -- -- -- -- (72,082) (72,082)
Net income................................. -- -- -- 4,983,768 -- 4,983,768
--------- ------- ---------- ---------- ----------- ------------
Balance at April 30, 1997.................. 4,589,647 $91,793 $7,798,996 $8,125,414 $(1,276,057) $ 14,740,146
--------- ------- ---------- ---------- ----------- ------------
--------- ------- ---------- ---------- ----------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Cash flows from operating activities:
Income before extraordinary item.................................................. $ 839,885 $2,402,265 $6,232,156
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.................................................. 932,941 1,269,143 1,390,190
Allowance for doubtful accounts................................................ 905,141 331,904 72,682
Write down of impaired assets.................................................. -- 270,115 183,525
Amortization of original issue discount........................................ -- 287,391 143,694
Accretion of stock purchase warrants........................................... -- 178,406 25,487
Earnings attributable to minority interest..................................... 12,253 1,893,739 2,186,848
Loss (gain) on sales of intangible assets and property and equipment........... (1,777,826) (600,209) 118,661
Deferred tax expense (benefit)................................................. 283,322 173,398 (162,000)
Changes in assets and liabilities that increase (decrease) cash flow from
operations:
Trade accounts receivable................................................. (1,872,209) 32,382 (417,872)
Notes receivable.......................................................... (2,360,663) (543,528) (723,772)
Interest receivable....................................................... (298,175) (182,156) (291,349)
Prepaid expenses and supplies............................................. (217,720) 328,840 28,293
Accounts payable.......................................................... 1,640,441 (485,047) (1,265,007)
Accrued payroll and related liabilities................................... (218,720) 57,734 (90,197)
Income taxes payable...................................................... (476,705) 807,864 1,654,825
Deferred franchise fees................................................... 372,280 (319,538) 97,870
Other, net................................................................ 6,791 (19,858) 48,453
---------- ---------- ----------
Total adjustments................................................................... (3,068,849) 3,480,580 3,000,331
---------- ---------- ----------
Net cash provided by (used in) operating activities................................. (2,228,964) 5,882,845 9,232,487
---------- ---------- ----------
Cash flows from investing activities:
Notes receivable financing of franchisees......................................... (3,083,139) (419,785) (108,779)
Issuance of equipment notes....................................................... (975,524) -- --
Payments received from franchisees................................................ 1,996,212 1,876,961 2,191,401
Cash acquired in Oden acquisition................................................. -- -- 5,195
Purchases of customer lists and other assets...................................... (523,963) (16,917) (340,507)
Proceeds from disposal of property and equipment.................................. 16,890 8,723 --
Proceeds from sales of customer lists and other assets............................ 569,145 299,388 295,377
Purchases of property and equipment............................................... (1,448,925) (674,245) (75,225)
---------- ---------- ----------
Net cash provided by (used in) investing activities................................. (3,449,304) 1,074,125 1,967,462
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under lines of credit.............................................. 3,500,000 (3,500,000) --
Repayments of long-term debt...................................................... (717,521) (1,180,639) (1,826,260)
Proceeds from long-term debt...................................................... 1,974,654 386,885 452,500
Repayments of obligations under capital leases.................................... (151,662) (521,504) (663,006)
Issuance of common stock.......................................................... 72,000 -- 134,815
Distribution to minority interest in consolidated partnership..................... (45,501) -- (3,991,578)
Payment of preferred stock dividends.............................................. (283,229) -- (664,728)
Purchase of stock purchase warrants............................................... -- -- (1,875,967)
Purchase of common stock.......................................................... (458,350) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities................................. 3,890,391 (4,815,258) (8,434,224)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents................................ (1,787,877) 2,141,712 2,765,725
Cash and cash equivalents at beginning of year...................................... 3,204,026 1,416,149 3,557,861
---------- ---------- ----------
Cash and cash equivalents at end of year............................................ $1,416,149 $3,557,861 $6,323,586
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Cash paid during the year for:
Interest.......................................................................... $ 553,104 $1,852,576 $ 998,612
Income taxes...................................................................... $ 728,628 $ 540,188 $2,695,762
</TABLE>
Supplemental Information on Noncash Investing and Financing Activities:
During the years ended April 30, 1995, 1996 and 1997, the Company acquired
certain assets from franchisees as follows (Note 3):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Fair value of assets purchased...................................................... $3,608,702 $2,370,522 $2,418,287
Receivables forgiven................................................................ (1,155,261) (2,267,697) (1,768,022)
Notes payable issued................................................................ (410,501) (80,462) (273,195)
Deferred revenue reversed........................................................... -- 370,618 --
Common stock issued................................................................. (1,518,977) (376,064) --
Lease obligations assumed........................................................... -- -- (36,563)
---------- ---------- ----------
Cash paid to seller................................................................. $ 523,963 $ 16,917 $ 340,507
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
During the years ended April 30, 1995, 1996 and 1997, the Company sold
certain assets to franchisees as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Book value of assets sold........................................................... $7,391,513 $1,331,510 $1,738,211
Franchise fee revenue............................................................... 1,295,000 577,500 --
Gain on sale........................................................................ 1,751,791 561,685 40,720
Deferred gain on sale............................................................... (2,694,557) (51,901) --
Notes issued........................................................................ (7,174,602) (2,119,406) (1,483,554)
---------- ---------- ----------
Cash received....................................................................... $ 569,145 $ 299,388 $ 295,377
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
During the years ended April 30, 1995, 1996 and 1997, the Company entered
into capital lease obligations of $922,260, $874,845 and $333,521, respectively.
During the years ended April 30, 1995, 1996 and 1997, the stock
subscription receivable increased $75,072, $81,088 and $72,082, respectively,
for the accrual of interest.
In July 1997, the Company acquired all of the outstanding stock of Oden,
Inc., a franchisee, in exchange for 106,501 shares, net of shares retired, of
Jackson Hewitt common stock (Note 13).
F-8
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Jackson Hewitt Inc. (the Company) operates and acts as the franchiser and
operator of a system of offices engaged in computerized preparation of federal
and state personal income tax returns. The Company receives a fee for preparing
returns at Company-owned locations and receives royalties and other fees from
franchisees. The Company also purchases and sells existing and new franchise
territories and receives commissions and fees related to processing refund
anticipation loans and accelerated check requests through arrangements with
several financial institutions.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jackson
Hewitt Inc. and its wholly owned subsidiary, Hewfant, Inc. and its 60% owned
subsidiary, JH of Memphis, LLC. Hewfant Inc. is a 65% partner in Refant
Partnership (Refant). During fiscal 1997, Refant provided processing services
for refund anticipation loans with County Bank and First Republic Bank. First
Republic Bank is a 35% partner in Refant. All intercompany accounts and
transactions have been eliminated.
The minority interest reflected on the balance sheet and the minority
interest share of earnings reflected on the statement of operations reflect the
proportionate share of equity and earnings, respectively, held by the other
owners of JH of Memphis, LLC and Refant.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company had
$772,051 and $5,922,224 invested in repurchase agreements and 30-day commercial
paper at April 30, 1996 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
provided by the straight-line method over the estimated useful lives of the
assets as follows:
Building and building improvements.......................... 40 years
Office furniture, fixtures and equipment.................... 7-10 years
Computer software........................................... 5-7 years
Leasehold improvements...................................... 7-10 years
Computer software costs include the initial development costs of the
computer software and the cost of all purchased software.
INTANGIBLE ASSETS
Intangible assets primarily relate to the value assigned to customer lists
of Company-owned stores. The value of the customer lists is determined at the
time of acquisition based upon a formula applied to the tax preparation fees
generated by the underlying store or stores during the most recently completed
tax season. The Company believes this formula represents an appropriate estimate
of the fair value of the assets. Amortization is computed using the
straight-line method over five years. Accumulated amortization was $565,802 and
$948,568 at April 30, 1996 and 1997, respectively.
REVENUE RECOGNITION
Franchise fee revenue, net of allowance for franchise fee refunds of 12%,
is recognized when obligations of the Company to prepare the franchisee for
operation have been substantially completed. Franchise fees that are financed by
the Company are recorded as deferred franchise fees until such time as the
franchisee has made a significant financial commitment (20%). Royalties and
advertising fees are assessed based upon 18% of territory revenues and are
recognized currently as the franchised territory generates sales. Electronic
transfer fees, tax return preparation fees and bank product fees are
F-9
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
recognized as revenue in the period the related tax return is filed or prepared
for the customer. Discounts are recorded for promotional programs at the time
the return is prepared.
Sales of Company-owned stores which are financed by the Company, and
related gains, are not recorded until the franchisee has made a significant
financial commitment (20%). The carrying value of customer lists and other
intangibles which have been sold to franchisees that have not paid at least 20%
of the sales price are classified as assets held under contractual agreements in
the accompanying consolidated balance sheets.
The Company ceases the accrual of interest income on notes receivable which
have been past due for more than six months. On past due notes which have been
past due less than six months, an allowance for doubtful accounts is recognized
for 50% of the interest income due.
NOTES RECEIVABLE
Notes receivable are recorded at cost, less the related allowance for
doubtful accounts. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN," as amended by SFAS No. 118, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN-INCOME RECOGNITION AND DISCLOSURE" (the Statements), on May 1, 1995.
Under the provisions of the Statements, a loan is impaired when it is probable
that a creditor will be unable to collect all amounts due in accordance with the
contractual terms of the loan agreement. When a loan is impaired, a creditor has
a choice of methods to measure impairment, including the present value of future
cash flows, the observable market price of the impaired loan or the fair value
of the underlying collateral. In most cases, the creditor can select the
measurement method on a loan by loan basis.
Management estimates the amount of the allowance for doubtful accounts
based on a comparison of amounts due to the estimated fair value of the
underlying franchise, which collateralizes the note. Impairment losses are
included in the allowance for doubtful accounts through a charge to bad debt
expense. The cumulative effect as of May 1, 1995 of implementing the Statements
was immaterial to the Company's financial position and results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company implemented Statement of Financial Accounting Standards 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF," (Statement 121) in the fourth quarter of fiscal 1996. In
implementing Statement 121, the Company changed its accounting method to
establish a threshold for determining impairment based on undiscounted cash
flows of the underlying store. The measurement of the amount of impairment for
assets which the threshold indicates recognition of an impairment is required,
is based upon the estimated value of the asset, computed based on a formula
applied to the tax preparation fees generated by the underlying store or stores
during the most recently completed tax season. The impact of adopting Statement
121 for the fiscal year ended April 30, 1996 included charges of $67,508
relating to long-lived assets associated with existing Company-owned stores and
a charge of $202,607 to write off long-lived assets associated with closed
locations. For the year ended April 30, 1997, the Company recognized an
impairment loss of $183,525 related to Company-owned stores. These charges have
been included in selling, general and administrative expenses in the
accompanying 1996 and 1997 consolidated statements of operations.
STOCK-BASED COMPENSATION
Prior to May 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On May
1, 1996, the Company adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
F-10
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are measured based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rate expected to be in effect when the
differences are expected to reverse. The effect of a change in tax rates is
recognized in income in the period that includes the enactment date.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
shares of common stock outstanding during the period, including the dilutive
effects of stock options and stock purchase warrants. Net income is adjusted for
dividends accrued on Series A Redeemable Convertible Preferred Stock and
accretion of preferred stock issuance costs to arrive at net income per common
share. The Company's convertible notes and redeemable convertible preferred
stock are excluded from the calculation of primary net income per common share
because they do not qualify as common stock equivalents.
ADVERTISING EXPENSES
Advertising costs, which are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations, are expensed as incurred. Advertising expenses for 1995, 1996 and
1997 were $4,347,730, $3,677,629 and $5,080,056, respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates. These
significant estimates include the adequacy of the allowance for doubtful
accounts and notes receivable, the recoverability of intangible assets, the fair
value of franchised stores and the liability under refund anticipation loan
programs.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation.
2. RELATED PARTY TRANSACTIONS
The following summarizes the Company's related party transactions:
PURCHASES AND SALES OF CUSTOMER LISTS AND OTHER ASSETS
During 1995, the Company purchased customer lists and other assets related
to three territories from a related party in exchange for 112,575 shares of the
Company's common stock. The customer lists and other assets were simultaneously
sold to three parties, two of which were related parties, for $1,463,470 in
notes receivable. The purchase of the customer lists and other assets was valued
at $11.80 per share, the average trading price of the Company's stock during the
period of negotiation relating to the purchase. The gain of $135,085 associated
with the subsequent sale was deferred due to the value of the underlying
collateral and the related party nature of the transaction.
In addition to the above, in 1995, customer lists and other assets were
sold to three other related parties for $60,876 in cash and $676,712 in notes
receivable. A gain of $89,847 was recognized on these sales.
NOTES AND ACCOUNTS RECEIVABLE
At April 30, 1996 and 1997, related parties owed the Company $635,815 and
$109,106, respectively, under notes receivable (note 4) and $224,203 and $936,
respectively, under accounts receivable. Repayments of notes receivable from
these parties during the years ended April 30, 1996 and 1997 were $340,606 and
$54,553, respectively.
F-11
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RELATED PARTY TRANSACTIONS -- (CONTINUED)
STOCK SUBSCRIPTION RECEIVABLE
The stock subscription receivable reflected in the accompanying
consolidated balance sheets is due from the Company's former Chairman of the
Board of Directors, John Hewitt. On September 9, 1996, Mr. Hewitt resigned from
the Company. On December 12, 1996, Mr. Hewitt executed a $1,276,057 promissory
note, which represents all amounts then due the Company, including accrued
interest, other than the $99,000 obligation referred to below. This recourse
note bears interest at 6.9% per year. Mr. Hewitt is required to make monthly
interest payments and to repay the principal amount in one lump sum on April 30,
1999. To secure this recourse note, Mr. Hewitt pledged 145,050 shares of Company
stock to the Company, and granted the Company a proxy to vote this stock until
his obligation is repaid in full. In return for a monthly payment by the Company
to Mr. Hewitt of approximately $23,000, Mr. Hewitt also executed a covenant not
to compete with the Company in the United States through April 30, 1999, and
agreed not to solicit Company employees, conduct a solicitation of proxies or
disparage the Company or its officers and directors during the same period. In
addition, the Company forgave a $99,000 (plus accrued interest) obligation of
Mr. Hewitt to the Company, which would have been due and payable on April 30,
1997. As a part of this transaction, the Company and Mr. Hewitt executed mutual
releases.
OTHER
The Company recognized $295,266, $325,530 and $52,361, respectively, in
royalty and advertising revenue from franchises owned by related parties for the
years ended April 30, 1995, 1996 and 1997.
3. ACQUISITION OF FRANCHISE ASSETS
During the year ended April 30, 1997, the Company acquired certain assets
from 31 Jackson Hewitt franchisees for a total purchase price of $2,418,287. The
Company gave the franchise owners cash of $340,507, canceled notes and accounts
receivable of $1,768,022, gave the previous owners notes totaling $273,195, and
assumed lease obligations totaling $36,563 to complete these transactions.
During the year ended April 30, 1996, the Company acquired certain assets
from 36 Jackson Hewitt franchisees for a total purchase price of $2,370,522. The
Company gave the franchise owners cash of $16,917, canceled notes receivable
from franchisees of $2,267,697, gave the previous franchise owners notes
totaling $80,462, reversed deferred revenue of $370,618, redeemed 3,433 shares
and issued 111,125 shares of Jackson Hewitt common stock for a net value of
$376,064 based on the average over the counter trading value of the shares
around the time of redemption and issuance.
During the year ended April 30, 1995, the Company acquired certain assets
from 33 Jackson Hewitt franchisees for a total purchase price of $3,608,702. The
Company gave the franchise owners cash of $523,963, canceled notes receivable
from franchisees of $1,155,261, gave the previous franchise owners notes
totaling $410,501, and issued 127,674 shares of Jackson Hewitt common stock
valued at $1,518,977 based on the average over the counter trading value of the
shares around the time issuance.
The purchase price is allocated among the assets acquired based on the
estimated relative fair value of the underlying assets. The portion allocated to
customer lists is generally based on a percentage of gross revenue generated by
the respective franchises. The purchase price was allocated among the assets
purchased as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C>
Customer lists................................. $3,296,097 $2,136,156 $2,240,152
Other intangible assets, primarily goodwill.... 95,972 162,699 141,135
Property and equipment......................... 54,918 71,667 22,000
Other.......................................... 161,715 -- 15,000
---------- ---------- ----------
Total.......................................... $3,608,702 $2,370,522 $2,418,287
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company purchased certain of the aforementioned franchise assets from
related parties as disclosed in note 2.
F-12
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION OF FRANCHISE ASSETS -- (CONTINUED)
A summary of franchise office activity follows (unaudited):
FRANCHISEE OFFICES
<TABLE>
<CAPTION>
BEGINNING CLOSED OR PURCHASED END
OF PERIOD OPENED BY THE COMPANY OF PERIOD
--------- ------ ------------------- ---------
<S> <C>
1995............................................. 742 381 (36) 1,087
1996............................................. 1,087 336 (177) 1,246
1997............................................. 1,246 318 (288) 1,296
</TABLE>
4. NOTES RECEIVABLE
Notes receivable are issued to business partners to finance the purchase of
franchises and/or for working capital and equipment needs. The notes generally
are due in two to five years and bear interest at rates between 10% and 12%.
Transactions for 1996 and 1997 follow:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C>
Balance at beginning of year............................................................. $14,864,696 $14,173,596
Notes issued:
Sales of customer lists................................................................ 2,509,590 2,536,500
Loans to business partners............................................................. 419,785 108,799
Refinancing of existing notes.......................................................... 387,787 314,551
Sales of franchise territories......................................................... 1,546,205 2,463,100
Notes canceled........................................................................... (2,556,042) (2,642,254)
Oden notes eliminated in consolidation................................................... -- (168,095)
Repayment of notes....................................................................... (2,998,425) (3,438,412)
----------- -----------
Balance at end of year................................................................... $14,173,596 $13,347,785
----------- -----------
----------- -----------
</TABLE>
Notes receivable, franchisees, reflected on the accompanying balance
sheets, include notes related to the sale of customer lists as well as loans to
franchisees for working capital and equipment. Most of the notes receivable
reflected on the accompanying balance sheets are due from the Company's
franchisees. The notes are collateralized by the underlying franchise, are
guaranteed by the franchisees and are generally five years in length at
inception.
The franchisees' ability to repay the notes is dependent upon the
performance of the tax preparation industry as a whole and the Company in
particular. As a result of certain IRS actions, fiscal 1995 was a difficult year
for the Company's franchisees, resulting in a number of the Company's
receivables being past due at April 30, 1995 and 1996. In fiscal 1996 and early
1997, the Company restructured a number of notes receivable and terminated a
number of franchisees with whom a satisfactory payment plan was not reached. In
many cases, the Company included the business partners' accounts receivable and
interest receivable balances in the restructured notes. At April 30, 1996 and
1997, notes receivable installments of approximately $1,800,000 and $570,000 are
past due, respectively. Management believes that the recorded allowance is
adequate based upon its consideration of the estimated value of the franchises
supporting the receivables. Any adverse change in the tax preparation industry
could affect the Company's estimate of the allowance.
At April 30, 1997, the Company had an investment in impaired notes and
related interest receivable of approximately $806,000 which had recorded values
that exceeded the fair value of the underlying collateral by approximately
$73,000. In addition, the Company had trade accounts receivable due from these
business partners of approximately $94,000 at April 30, 1997. The Company has
reflected an allowance of $167,000 for this impairment in the accompanying
consolidated balance sheet. Activity in the allowance for doubtful accounts for
the years ended April 30, 1996 and 1997 is summarized as follows:
1996 1997
----------- -----------
Beginning balance............................ $ 1,226,724 $ 1,366,250
Additions charged to expense................. 2,316,595 991,715
Write-offs................................... (2,177,069) (1,154,366)
----------- -----------
Ending balance............................... $ 1,366,250 $ 1,203,599
----------- -----------
----------- -----------
F-13
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES RECEIVABLE -- (CONTINUED)
The Company's average investment in impaired notes receivable during the
years ended April 30, 1996 and 1997 was approximately $3,900,000 and $1,750,000,
respectively. Interest income related to these notes of approximately $240,000
and $216,000 has been included in the accompanying consolidated statements of
operations for the years ended April 30, 1996 and 1997, respectively.
5. LINE OF CREDIT AND EXTRAORDINARY ITEM
Throughout fiscal 1997, the Company had a line of credit facility (the
Facility) with a commercial lender, under which the Company could borrow from
$2,000,000 to $7,900,000 throughout the year. Interest was payable monthly at
prime plus 0.5% on the first $5,500,000 of the borrowings and prime plus 1.25%
for amounts borrowed in excess of $5,500,000. The Facility contained certain
maintenance and restrictive covenants, including but not limited to a total
liabilities to tangible net worth and debt service coverage ratio. The Facility
was collateralized by accounts and notes receivable, inventory, furniture,
fixtures, equipment, contract rights and general intangibles as well as a deed
of trust on the Company's headquarters. Under the terms of the Facility, the
Company was required to repay all borrowings under the Facility and maintain a
zero balance for a period of 30 days prior to its expiration. No amounts were
outstanding on the line of credit facility as of April 30, 1997. As discussed in
note 16, the Company renewed the Facility in May 1997 through June 30, 1999.
During 1995 and 1996, the Company had two facilities available (the Old
Facilities) with the lender. The Old Facilities provided the Company with a
$4,500,000 line of credit facility and a $3,500,000 facility available to
finance franchise expansions and new franchise sales. The Old Facilities bore
interest at prime plus 0.5% through July 1995. From July 1995 to June 1996, the
interest rate on the Old Facilities was increased to prime plus 2.5%.
In addition, in August 1995, the lender provided an additional $3,000,000
short-term facility to provide additional working capital. This line expired on
April 30, 1996 and also bore interest at prime plus 2.5%. The Old Facilities
were replaced in fiscal 1997 with the Facility discussed above. There were no
amounts outstanding under the Old Facilities on April 30, 1996.
In conjunction with the Old Facilities, the Company's lender was also
granted warrants to obtain up to 999,327 shares, or 19.9% of the then fully
diluted common stock of the Company, exercisable at $0.01 per share. Based upon
independent appraisal, the Company valued the warrants at $0.74 per warrant at
the date of issuance. As a result, an original issue discount of $739,502,
representing the initial value of the warrants, was recorded against the
borrowings under the Old Facilities and was amortized over the terms of the Old
Facilities. The agreement governing the warrants provided the holder with
additional rights, such as a put option, piggyback registration and other
rights. As a result of the existence of the put option, the Company recorded
accretion to the estimated ultimate redemption amount as interest expense for
the period the warrants were outstanding. The agreement also included a clawback
provision under which the Company could earn back warrants based upon a formula
applied to its repayment of amounts outstanding under the Old Facilities. In
April 1996, the Company exercised the clawback rights under the agreement and
reduced the number of warrants to 582,549. As a result, the value of the
warrants, discount amortization and accretion to the put price were reduced
proportionately.
In June 1996, the Company agreed to purchase the put option on all warrants
and to purchase 572,549 of the outstanding warrants held by the lender for
$1,875,967. The Company financed the purchase using amounts available under the
Facility. A loss of $1,248,388 associated with the early extinguishment of the
put warrant liability is reflected as an extraordinary item in the accompanying
consolidated statement of operations for the year ended April 30, 1997. The
remaining outstanding warrants have been included in additional capital in the
accompanying April 30, 1997 consolidated balance sheet.
F-14
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt at April 30, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C>
Note payable to bank; monthly installments of $10,995 including interest at 10.87%; due February
2009; collateralized by land and building....................................................... $ 938,810 $ 908,912
Note payable to bank; interest paid monthly at prime plus 1%; repaid in full in 1997.............. 556,142 --
Note payable to former franchisee; annual installments of $41,040 on April 30, plus interest at
7.00%; due April 1998........................................................................... 82,080 41,040
Non-interest bearing note payable to former franchisee, monthly installments of $2,166; interest
imputed at 11.00%; due March 1999............................................................... 55,319 34,333
Note payable to financing company; interest at 9.75%; repaid in full in 1997...................... 15,320 --
Non-interest bearing note payable to former franchisee, annual installments of $27,500, interest
imputed at 11.00%; due March 2000............................................................... 76,862 54,542
Non-interest bearing note payable to former franchisee; interest imputed at 9%; due in full in
February 1998................................................................................... -- 182,860
Notes payable to former Oden stockholders; due in various installments between July 1997 and
February 1998; interest payable annually at 9%.................................................. -- 244,596
Other notes payable............................................................................... 218,506 168,288
---------- ----------
Total long-term debt....................................................................... 1,943,039 1,634,571
Less current installments......................................................................... 462,166 606,465
---------- ----------
Total long-term debt, less current installments............................................ $1,480,873 $1,028,106
---------- ----------
---------- ----------
</TABLE>
Aggregate maturities of long-term debt as of April 30, 1997 are as follows:
1998.............................................................. $ 606,465
1999.............................................................. 109,586
2000.............................................................. 84,737
2001.............................................................. 58,196
2002.............................................................. 62,482
Thereafter........................................................ 713,105
----------
Total............................................................. $1,634,571
----------
----------
7. CONVERTIBLE NOTES
The Company has $762,750 of convertible notes outstanding at April 30, 1997
which bear interest at 6% payable semiannually and are due in full March 1,
1998. Upon the occurrence of certain events of default, the holders of not less
than 25% of the convertible notes may demand repayment of the notes in their
entirety.
The convertible notes are convertible into one share of common stock per
$16 of principal (47,671 shares of common stock), anytime on or prior to
maturity. The conversion rate of the notes is subject to change upon the
occurrence of certain events. No conversions occurred in 1995, 1996 or 1997.
8. LEASE OBLIGATIONS
The Company leases office space and equipment for its operations under
leases expiring through 2002. Rent expense totaled $1,424,587, $1,328,334 and
$1,149,872 for the years ended April 30, 1995, 1996 and 1997, respectively.
Annual office rents for tax preparation offices are based on minimum rentals
plus a percentage of gross receipts in excess of minimum revenues. Rent expense
calculated as a percentage of gross receipts totaled $92,962, $184,472 and
$69,671 for the years ended April 30, 1995, 1996 and 1997, respectively.
F-15
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASE OBLIGATIONS -- (CONTINUED)
Included in property and equipment are the following amounts applicable to
capital leases at April 30, 1996 and 1997:
1996 1997
---------- -----------
Office furniture, fixtures and equipment......... $1,799,779 $ 2,133,299
Less accumulated amortization.................... (657,056) (1,294,869)
---------- -----------
$1,142,723 $ 838,430
---------- -----------
---------- -----------
Total amortization expense charged under capital leases was $167,002,
$476,228 and $637,812 for the years ended April 30, 1995, 1996 and 1997,
respectively.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of April 30, 1997 are
as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C>
1998......................................................................................... $ 712,320 $300,426
1999......................................................................................... 322,216 109,794
2000......................................................................................... 33,911 97,277
2001......................................................................................... -- 33,200
2002......................................................................................... -- 28,000
-------------- ----------------
Total minimum lease payments................................................................. 1,068,447 $568,697
----------------
----------------
Amount representing interest................................................................. 216,243
--------------
Present value of future minimum lease payments............................................. 852,204
Less current installments of obligations under capital leases................................ 618,385
--------------
Obligations under capital leases, excluding current installments........................... $ 233,819
--------------
--------------
</TABLE>
9. INCOME TAXES
The provision for income taxes for the years ended April 30, 1995, 1996 and
1997 is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---------- ----------
<S> <C>
Current:
Federal............................................................................. $193,552 $1,210,602 $3,693,000
State............................................................................... 62,596 141,000 679,000
-------- ---------- ----------
256,148 1,351,602 4,372,000
-------- ---------- ----------
Deferred:
Federal............................................................................. 239,322 146,398 (136,000)
State............................................................................... 44,000 27,000 (26,000)
-------- ---------- ----------
283,322 173,398 (162,000)
-------- ---------- ----------
$539,470 $1,525,000 $4,210,000
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
The Company's effective tax rate differs from the U.S. Federal statutory
tax rate for the years ended April 30, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C>
Statutory rate.......................................................................................... 34.0% 34.0% 34.0%
Increases in income taxes resulting from:
State income taxes, net of Federal income tax benefit................................................. 5.1 4.0 4.1
Accretion of stock purchase warrants.................................................................. -- 1.7 --
Disposal of Oden territories.......................................................................... -- -- 1.0
Other................................................................................................. -- (0.9) 1.2
---- ---- ----
Effective rate................................................................................... 39.1% 38.8% 40.3%
---- ---- ----
---- ---- ----
</TABLE>
F-16
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at April 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C>
Deferred tax assets:
Deferred revenue for financial statement purposes recognized currently for tax purposes........... $ 100,000 $ 122,000
Bad debt allowance, deductible when related receivables are written off........................... 518,000 457,000
Accrued vacation, deductible as paid for tax purposes............................................. 37,000 51,000
Property, equipment and intangible assets, due to differing depreciation
and amortization methods........................................................................ 58,000 --
Capital leases, deductible as paid for tax purposes............................................... 15,000 5,000
Other accounts payable, deductible as paid for tax purposes....................................... 84,000 --
Amortization of loan discount, due to different amortization methods.............................. 78,000 --
Inventory related costs capitalized for tax purposes.............................................. 11,000 14,000
----------- ---------
901,000 649,000
----------- ---------
Deferred tax liabilities:
Installment sales, recognized for tax purposes as cash is received................................ (1,132,000) (861,000)
Property, equipment and intangible assets, due to differing depreciation and
amortization methods............................................................................ -- (37,000)
----------- ---------
(1,132,000) (898,000)
----------- ---------
Net deferred tax liabilities............................................................... $ (231,000) $(249,000)
----------- ---------
----------- ---------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company guarantees to reimburse customers for penalties and interest in
the case of errors it makes in preparing tax returns in Company operated
offices. Experience has shown that actual penalties paid have been negligible.
The Company has guaranteed operating leases for office equipment of certain
franchises. The total obligations under these leases are $873,940 and have
remaining terms of up to 39 months.
The Company has guaranteed bank loans of certain franchisees. The guarantee
obligations total approximately $137,000 at April 30, 1997.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with its President and Chief
Executive Officer which expires in June 1999. The agreement provides for an
annual salary and a bonus if certain performance objectives are met. The Company
may terminate the employment agreement at any time without cause. Upon such
termination, the Company is required to pay the employee $250,000 over a
one-year period and vest all options granted to the employee in full.
LITIGATION
The Company is a defendant in certain lawsuits and is aware of other
threatened claims generally incidental to its business as a franchiser.
Management is of the opinion that the accompanying financial statements will not
be materially affected by the ultimate resolution of litigation pending or
threatened at April 30, 1997.
11. EMPLOYEE BENEFITS
401(K) PLAN
Jackson Hewitt Inc. 401(k) Plan (the Plan) is a defined contribution plan
sponsored by the Company. The Plan provides for employee salary deferral and
matching employer contributions. Employees of the Company are eligible to
participate in the Plan when they attain age 21 and have completed one year of
service.
F-17
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFITS -- (CONTINUED)
The Company began contributing to the Plan during 1997. Participants vest
in the Company's contributions based upon years of service. The Company's
contribution for the year ended April 30, 1997 was $26,519.
STOCK COMPENSATION PLANS
At April 30, 1997, the Company has two stock-based compensation plans.
Under the 1994 Long-Term Incentive Plan, the Company may grant options to its
employees for up to 698,000 shares of common stock. Under the 1996 Non-Employee
Director Stock Option Plan, the Company may grant options to its non-employee
directors for up to 150,000 shares of common stock. Under both plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant, and the option's maximum term is ten years. Options vest over
five years under the 1994 Plan and over four years under the 1996 Plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock options, which were granted with an exercise price at least
equal to the stock's fair market value at the date of grant. Had compensation
cost for the Company's two stock-based compensation plans been determined
consistent with FASB Statement No. 123, the Company's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C>
Net income As Reported $2,402,265 $4,983,768
Pro Forma 2,386,714 4,732,577
Primary net income As Reported $ 0.40 $ 0.95
per share Pro Forma 0.40 0.89
Fully diluted net income As Reported 0.40 0.91
per share Pro Forma 0.40 0.86
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma and net income per share amounts
presented above because compensation cost is reflected over the options vesting
periods and compensation cost for options granted prior to May 1, 1995 is not
considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997, respectively: dividend yield of 0
percent for both years; expected volatility of 73% for both years; risk-free
interest rates of 5.9% and 6.7% for the 1994 Plan options and 5.4% and 6.3% for
the 1996 Plan options; and expected lives of six and ten years for the 1994 Plan
options and ten years for the 1996 Plan options.
A summary of the status of the Company's two fixed stock option plans as of
April 30, 1996 and 1997 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C>
Outstanding at beginning of year....................................... 174,590 $ 6.65 235,590 $ 4.38
Granted................................................................ 126,700 3.35 388,765 5.01
Exercised.............................................................. -- -- 75,090 1.80
Expired................................................................ 37,000 10.00 54,000 10.00
Forfeited.............................................................. 28,700 6.40 49,180 3.96
--------- ---------
Outstanding at end of year............................................. 235,590 4.38 446,085 4.71
--------- ---------
--------- ---------
Options exercisable at year-end........................................ 70,790 1.73 28,660 3.45
Weighted-average fair value of options granted during the year......... 126,700 0.82 388,765 3.62
</TABLE>
At April 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.86-$5.75 and eight
years, respectively.
F-18
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In fiscal 1994, 504,950 shares of Series A Redeemable Convertible Preferred
Stock (Preferred Stock) were sold in a private placement to three private
investors. The Company received net proceeds (after payment of placement fees
and expenses) of $2,518,046. The excess of the redemption value over the
carrying value is being accreted by periodic charges to retained earnings over
the life of the issue. The holders of the Preferred Stock are entitled to 10%
cumulative annual dividends due in August of each year and a liquidation
preference upon the liquidation or dissolution of the Company. Additional
dividends accrue on unpaid dividends. The Company accrued dividends of $297,921,
$321,236 and $322,219 for the years ended April 30, 1995, 1996 and 1997,
respectively.
At any time, upon occurrence of certain events, the holders of the 504,950
shares of issued and outstanding shares of Preferred Stock may convert their
shares to 504,950 shares of common stock.
If any of the Preferred Stock has not been converted to common stock by
August 31, 1998, the Company must redeem from each holder of Preferred Stock
1/3, 1/2 and all of the remaining shares, respectively, of the Preferred Stock
held by such holder on August 31, 1998, August 31, 1999 and August 31, 2000,
respectively. The redemption price to be paid by the Company is equal to the
greater of (i) the liquidation preference payment for the Preferred Stock, which
is equal to $3,000,000 plus any accrued, but unpaid dividends or (ii) the fair
market value of the shares of Preferred Stock on such date. The fair market
value of the Preferred Stock will be determined in good faith by the Board of
Directors of the Company, subject to the right of the holders of the Preferred
Stock to select an independent appraiser that is agreeable to the Company to
determine such price. The Company is accreting the Preferred Stock to the
estimated redemption value over the period through which redemption is required.
The holders of the Preferred Stock, voting as a separate series, may elect
one director of the Company until such time as all of the Preferred Stock is
converted to common stock. Holders of the Preferred Stock have the right to vote
on all matters properly before the shareholders of the Company. The number of
votes to which the holders of the Preferred Stock are entitled is the same
number of votes to which such holders would be entitled if the Preferred Stock
were converted to common stock. In addition to certain dividend, liquidation,
conversion, registration, and redemption rights, the holders of the Preferred
Stock have certain rights in the event of an offering of the Company's common
stock.
As discussed in note 16, in June 1997 the Company and the preferred
shareholders agreed to settle the mandatory redemption feature and convert the
preferred shares to common shares.
13. ACQUISITION
On July 31, 1996, the Company completed an exchange of 106,501 shares of
the Company's common stock, net of shares retired, for all of the outstanding
stock of Oden Inc., a franchisee. The total purchase price, based upon the
market value of the Company's stock at July 31, 1996, was $480,375. The
transaction was accounted for as a purchase and the resulting goodwill, which is
included in other intangible assets in the accompanying balance sheet, will be
amortized over five years. Assets acquired and liabilities assumed in the
purchase are as follows:
F-19
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. ACQUISITION -- (CONTINUED)
<TABLE>
<S> <C>
Assets acquired:
Cash.......................................................................................................... $ 5,195
Accounts receivable........................................................................................... 55,587
Notes and interest receivable................................................................................. 645,693
Prepaid expenses.............................................................................................. 1,480
Fixed assets.................................................................................................. 22,295
Customer lists................................................................................................ 837,911
Goodwill...................................................................................................... 575,785
Other assets.................................................................................................. 9,016
----------
Total assets............................................................................................... 2,152,962
----------
Liabilities assumed:
Accounts payable.............................................................................................. 483,556
Notes and interest payable.................................................................................... 1,009,031
Deferred income taxes......................................................................................... 180,000
----------
Total liabilities.......................................................................................... 1,672,587
----------
Purchase price........................................................................................... $ 480,375
----------
----------
</TABLE>
Included in accounts payable and notes and interest payable are amounts due
to the Company of $464,821 and $182,970, respectively, which were eliminated in
consolidation upon the closing of the acquisition. The remaining notes payable
are due to former Oden shareholders in varying installments through February
1998.
The following unaudited pro forma financial information for the years ended
April 30, 1996 and 1997 combines the results of operations of the Company and
Oden as if the acquisition occurred at the beginning of fiscal 1996, after
giving effect to certain adjustments, including the depreciation and
amortization of assets based on their fair values and intercompany eliminations.
The unaudited pro forma information does not purport to represent what the
results of operations of the Company would have been if such transaction had in
fact occurred on such date or to project the Company's results of operations for
any future period.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C>
Revenue........................................................................................ $25,723,168 $31,403,599
Income before extraordinary item............................................................... 2,308,500 6,365,749
Net income..................................................................................... 2,308,500 5,117,361
Net income per common share:
Income before extraordinary item............................................................... $ 0.38 $ 1.25
Net income..................................................................................... 0.38 0.98
</TABLE>
F-20
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes disclosure regarding the estimated fair value of
the Company's financial instruments at April 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996
-----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C>
Cash and cash equivalents..................................................................... $ 3,557,861 $3,557,861
Trade accounts receivable..................................................................... 3,171,035 3,171,035
Notes receivable.............................................................................. 14,173,596 14,173,596
Notes payable................................................................................. 1,943,039 2,042,866
Convertible notes............................................................................. 762,750 733,926
Accounts payable.............................................................................. 3,043,019 3,043,019
Accrued payroll and related liabilities....................................................... 1,001,709 1,001,709
Stock purchase warrants....................................................................... 609,492 1,875,967
Series A redeemable convertible preferred stock............................................... 3,277,792 3,277,792
Financial guarantees, for which it is not practicable to estimate fair value.................. -- --
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C>
Cash and cash equivalents..................................................................... $ 6,323,586 $6,323,586
Trade accounts receivable..................................................................... 2,861,567 2,861,567
Notes receivable.............................................................................. 13,347,785 13,347,785
Notes payable................................................................................. 1,634,571 1,731,433
Convertible notes............................................................................. 762,750 750,290
Accounts payable.............................................................................. 1,924,580 1,924,580
Accrued payroll and related liabilities....................................................... 879,996 879,996
Series A redeemable convertible preferred stock............................................... 3,236,443 7,084,534
Financial guarantees, for which it is not practicable to estimate fair value.................. -- --
</TABLE>
(A) CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE
AND ACCRUED PAYROLL AND RELATED LIABILITIES
The carrying amount approximates fair value because of the short maturity
of these instruments.
(B) NOTES RECEIVABLE
The carrying amount approximates fair value, because the rates of interest
on these notes approximate rates currently offered by lending institutions for
loans of similar terms to individuals or companies with comparable credit risk.
However, the Company has not sold any of these notes and thus actual rates have
not been established. There can be no assurance that the Company would obtain
these rates if the notes were sold.
(C) NOTES PAYABLE AND CONVERTIBLE NOTES
The fair value of the Company's notes payable and convertible notes is
estimated based on the present value of future cash flows discounted using the
Company's recently negotiated line of credit borrowing rate of LIBOR plus 2.5%
at April 30, 1997.
(D) SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 1996, the Company estimated that the fair value approximated the
carrying value since the carrying amount reflects accretion to the redemption
price based upon the fair value of the common stock, and the preferred stock
dividend rate approximates what the Company could expect to pay for funds
financed under similar terms. For 1997, the fair value has been estimated based
upon the trading value of the common stock at April 30, 1997 using the 699,707
shares to be issued upon conversion as described in note 16.
F-21
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
(E) STOCK PURCHASE WARRANTS
The fair value at April 30, 1996 represents the amount paid by the Company
in July 1996 (note 5) to repurchase substantially all of the stock purchase
warrants.
(F) FINANCIAL GUARANTEES
A reasonable estimate of the fair value of the Company's guarantees of
long-term debt and lease obligations of others, more fully described in note 10,
could not be made without incurring excessive costs.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
Company:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C>
Year Ended April 30, 1996:
Revenue.............................................................................. $ 823 $ 1,318 $5,219 $17,656
Net income (loss).................................................................... (1,326) (1,599) (475 ) 5,802
Net income (loss) per common share................................................... ($ 0.33) ($ 0.32) ($0.11 ) $ 1.16
Year Ended April 30, 1997:
Revenue.............................................................................. $ 980 $ 1,216 $7,805 $21,431
Income (loss) before extraordinary item.............................................. (1,322) (1,008) 1,184 7,378
Extraordinary item................................................................... (1,248) -- -- --
Net income (loss).................................................................... (2,570) (1,008) 1,184 7,378
Net income (loss) per common share:
Income (loss) before extraordinary item............................................ ($ 0.32) ($ 0.24) $ 0.24 $ 1.54
Net income (loss).................................................................. (0.59) (0.24) 0.24 1.54
</TABLE>
16. SUBSEQUENT EVENTS
In May 1997, the Company's lender renewed the Company's working capital
facility through June 30, 1999. Under the terms of the Amended and Restated
Credit Agreement, amounts which can be borrowed under the Facility vary from
$2.0 million to $8.0 million throughout the year, subject to certain borrowing
base limitations, and bear interest at the 30 day LIBOR rate plus 2.5%. The
facility is renewable annually for one additional year at a time.
In June 1997, the Company and the preferred shareholders entered into a
Recapitalization Agreement under which the preferred shareholders agreed to
exchange all of the Preferred Stock for 699,707 shares of common stock. The
closing of the transaction is expected to occur on July 3, 1997, with an
effective date of June 18, 1997, which was the date the parties reached
agreement as to the terms of the transaction. As a result of this transaction,
the Company will record a charge to retained earnings and net income to common
shareholders of approximately $1.9 million in the first quarter of fiscal 1998,
representing the fair value on June 18, 1997 of the incremental shares of common
stock issued to induce conversion.
17. EFFECT OF UNADOPTED ACCOUNTING STANDARD
In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER SHARE"
(Statement 128). Statement 128 supersedes APB Opinion No. 15, "EARNINGS PER
SHARE," and specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. Statement 128 was issued to simplify the computation of
EPS and to make the U.S. standard more compatible with the EPS standards of
other countries and that of the International Accounting Standards Committee
(IASC). It will replace primary EPS and fully diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the
F-22
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. EFFECT OF UNADOPTED ACCOUNTING STANDARD -- (CONTINUED)
numerator and denominator of the basic EPS computations to the numerator and
denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes all dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS, similar to fully
diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Statement 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform with Statement 128. The following table summarizes the pro forma EPS
data of the Company as if Statement 128 had been adopted for all periods
presented.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
------------------------
1995 1996 1997
----- ----- ------
<S> <C>
Basic EPS
Income before extraordinary item.................................................................. $0.11 $0.46 $ 1.24
Extraordinary item................................................................................ -- -- (0.28)
----- ----- ------
Net income........................................................................................ $0.11 $0.46 $ 0.96
----- ----- ------
----- ----- ------
Diluted EPS
Income before extraordinary item.................................................................. $0.11 $0.41 $ 1.19
Extraordinary item................................................................................ -- -- (0.26)
----- ----- ------
Net income........................................................................................ $0.11 $0.41 $ 0.93
----- ----- ------
----- ----- ------
</TABLE>
F-23
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SHARES OF COMMON STOCK IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 12
Use of Proceeds................................ 12
Price Range of Common Stock.................... 12
Dividend Policy................................ 13
Capitalization................................. 13
Recent Developments............................ 14
Selected Consolidated Financial Data........... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 22
Management..................................... 34
Certain Transactions........................... 39
Principal and Selling Shareholders............. 40
Description of Capital Stock................... 41
Shares Eligible for Future Sale................ 44
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Additional Information......................... 46
Index to Consolidated Financial Statements..... F-1
1,129,099 SHARES
[LOGO]
COMMON STOCK
------------------------------------
PROSPECTUS
------------------------------------
JANNEY MONTGOMERY SCOTT INC.
SCOTT & STRINGFELLOW, INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting fees and
commissions, in connection with the Offering are as
follows:
Expenses Amount
Registration Fee $4,601.20
NASD Fees 2,011.00
Nasdaq National Market Fees *
Printing Expenses *
Legal Fees and Expenses *
Transfer Agent and Registrar Fees *
Accounting Fees and Expenses *
Blue Sky Fees and Expenses *
Miscellaneous Expenses *
---------
TOTAL $ *
=========
* To be filed by amendment.
Item 14. Indemnification of Officers and Directors.
The Virginia Stock Corporation Act ("Virginia Act")
allows a corporation to include a provision in its articles of
incorporation or bylaws eliminating liability of directors and
officers in proceedings brought by or in the right of a corporation or
brought by or on behalf of shareholders, however, such liability may
not be eliminated if a director or officer engages in willful misconduct
or a knowing violation of the criminal law or of any federal or state
securities law. The Company's Articles of Incorporation provide
that the Company's officers and directors will not be liable with
respect to any proceeding brought by or in the right of the Company or
brought by or on behalf of the shareholders of the Company, provided
that the officer or director has not engaged in willful misconduct or a
knowing violation of the criminal law or of any federal or state
securities law. The Company's Articles of Incorporation also provide
that the Company will indemnify its directors, officers, employees and
agents in the manner provided by the Virginia Act.
The Virginia Act sets forth certain provisions
regarding the indemnification of directors and officers. Generally,
these provisions of the Virginia Act allow a corporation to indemnify
directors and officers if: (i) they conducted themselves in good
faith; (ii) they believed (a) in the case of conduct in their official
capacity, that their conduct was in the corporation's best interest,
and (b) in all other cases, that their conduct was at least not opposed
to its best interest; and (iii) in the case of any criminal proceeding,
that they had no reasonable cause to believe their conduct was
unlawful. Under the Virginia Act, a corporation may not indemnify
directors and officers (i) in connection with a proceeding by or in the
right of the corporation in which the directors or officers are
adjudged liable to the corporation; or (ii) in any other proceeding
charging improper personal benefit, in which they are adjudged liable on
the basis that personal benefit was improperly received.
Item 15. Recent Sales of Unregistered Securities.
The following information relates to securities of the
Company issued or sold within the past three years which were not
registered under the Securities Act of 1933, as amended (the
"Securities Act"):
Effective June 18, 1997, the Company exchanged 699,707 shares of its
Common Stock for all of the then outstanding shares of Series A Preferred Stock
in a tax free recapitalization. This privately-negotiated transaction did not
involve a public offering and was therefore exempt from registration under
Section 4(2) of the Securities Act, as well as Rule 506 of Regulation D
promulgated thereunder ("Regulation D"). See "Recent Developments."
On June 18, 1997, the Company's President, Chief Executive
Officer, and Chairman of the Board exercised an employee stock option
to purchase 46,226 shares of Common Stock in a transaction exempt
under Section 4(2) of the Securities Act.
On March 6, 1997, a former employee who held an option to
purchase 70,790 shares of Common Stock exercised the option to purchase
33,000 of these shares in a transaction exempt from registration
<PAGE>
under Section 4(2) of the Securities Act. The employee had previously
exercised the option with respect to 37,790 shares on August 19, 1996.
On July 31, 1996, the Company exchanged 106,501 shares of
Common Stock for all of the outstanding shares of common stock
of Oden, Inc. This privately-negotiated transaction did not involve
a public offering and was therefore exempt from registration under
Section 4(2) of the Securities Act, as well as Rules 504, 505, and
506 of Regulation D promulgated thereunder ("Regulation D").
On October 31, 1995, the Company repurchased a franchise in
exchange for 103,125 shares of Common Stock. This privately-negotiated
transaction did not involve a public offering and was therefore exempt
from registration under Section 4(2) of the Securities Act, as well as
Rule 504 of Regulation D.
On September 30, 1995, the Company repurchased two
franchises in exchange for 3,000 and 5,000 shares of Common Stock.
Neither of these privately negotiated transactions involved a public
offering and both were therefore exempt from registration under
Section 4(2) of the Securities Act, as well as Rule 504 of Regulation
D.
In July 1995, the Company issued a warrant to purchase up to
999,327 shares of Common Stock to its principal lender in a
transaction exempt under Section 4(2) of the Securities Act.
On October 20, 1994, the Company repurchased a franchise
for 1,900 shares of Common Stock. This privately-negotiated transaction
did not involve a public offering and was therefore exempt from
registration under Section 4(2) of the Securities Act, as well as Rule
504 of Regulation D.
On June 30, 1994, the Company repurchased two franchises in
exchange for 112,574 and 10,892 shares of Common Stock. Neither of
these privately negotiated transactions involved a public offering
and both were therefore exempt from registration under Section 4(2)
of the Securities Act. The transaction involving 10,892 shares of
Common Stock was also exempt under Rule 504 of Regulation D.
On May 31, 1994, the Company repurchased a franchise for
2,308 shares of Common Stock. This privately-negotiated transaction did
not involve a public offering and was therefore exempt from
registration under Section 4(2) of the Securities Act, as well as Rule
504 of Regulation D.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Sequential
Exhibit No. Page Number
Description
<S> <C>
***1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference *
to the Registrant's Form 10-SB, Commission File No. 0-22324, as amended,
previously filed with the Commission on August 31, 1993).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, Commission File
No. 333-30439, previously filed with the Commission on June 30, 1997.) *
**4.1 Form of Specimen Common Stock Certificate.
4.2 Terms of the 6% Convertible Notes. (Incorporated by reference to *
the Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
4.3 Series A Convertible Preferred Stock Purchase Agreement, dated *
August 19, 1993, between the Company, John T. Hewitt and
certain Investors. (Incorporated by reference to the
Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
<PAGE>
4.4 Registration Rights Agreement, dated August 19, 1993, between the Company and *
certain Investors. (Incorporated by reference to the Registrant's Form 10-SB,
Commission File No. 0-22324, as amended, previously filed with the Commission on
August 31, 1993).
4.5 Stockholders Agreement, dated August 19, 1993, between the *
Company, John T. Hewitt and certain Investors. (Incorporated
by reference to the Registrant's Form 10-SB, Commission File No.
0-22324, as amended, previously filed with the Commission on
August 31, 1993).
**5 Opinion and Consent of Kaufman & Canoles.
10.1 Master License Agreement, dated October 15, 1988, between the *
Company and Montgomery Ward & Co., Incorporated, and extension
letter agreement, dated June 8, 1993. (Incorporated by reference
to the Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
10.2 Second Amendment to Partnership Agreement of Refant Partners, dated June 30, 1994, *
between Republic Service, Inc. and Hewfant, Inc. (Incorporated by reference to
the Registrant's Form 10-QSB, Commission File No. 0-22324, previously filed with
the Commission on September 13, 1994).
10.3 Loan Agreement, dated November 4, 1994, between the Company and Republic Bank. *
(Incorporated by reference to the Registrant's Form SB-2, Commission File No.
0-22324, as amended, previously filed with the Commission on December 5, 1994.)
10.4 1994 Long Term Incentive Plan. (Incorporated by reference to the Registrant's *
Form SB-2, Commission File No. 33-94162, previously filed with the Commission on
June 30, 1995.)
10.5 Lease dated September 23, 1994, between the Company and Wal-Mart Stores, Inc. *
(Incorporated by reference to the Registrant's Form SB-2, Commission File
No. 33-94162, previously filed with the Commission on June 30, 1995.)
10.6 First Amendment, dated October 31, 1994, to the Stock Purchase *
Agreement, the Registration Rights Agreement and the
Stockholders Agreement, each dated August 19, 1993, between the
Company, John T. Hewitt, GeoCapital, II, L.P., GeoCapital III,
L.P., Stephen J. Bachmann and Charles Federman. (Incorporated by
reference to the Registrant's Form SB-2, Commission File No.
33-94162, previously filed with the Commission on June 30,
1995.)
10.7 Warrant Agreement, dated October 17, 1995, between the Company *
and NationsBank, N.A. (Incorporated by reference to the
Registrant's 10-KSB/A previously filed with the Commission on
December 18, 1995.)
10.8 Warrant Certificate, dated October 18, 1995, between the Company and NationsBank, *
N.C. (Incorporated by reference to the Registrant's 10-KSB/A previously filed
with the Commission on December 18, 1995.)
10.9 First Amendment to Master Shopping Center Lease Agreement, dated January 29, 1996, *
between Wal-Mart Stores, Inc. and Jackson Hewitt Inc. (Incorporated by reference
to the Registrant's 10-QSB previously filed with the Commission on March 18, 1996.)
10.10 Renewal of Master License Agreement, July 12, 1996, between *
Montgomery Ward & Co., Incorporated and Jackson Hewitt Inc.
(Incorporated by reference to the Registrant's 10-KSB previously
filed with the Commission on July 29, 1996.)
<PAGE>
10.11 Second Amendment to Master Shopping Center Lease Agreement, dated May 15, 1996, *
between Wal-Mart Stores, Inc. and Jackson Hewitt Inc. (Incorporated by reference
to the Registrant's 10-KSB previously filed with the Commission on July 29, 1996.)
10.12 First Amendment to Warrant Agreement, dated June 7, 1996, between Jackson Hewitt *
Inc. and NationsBank, N.A. (Incorporated by reference to the Registrant's 10-KSB
previously filed with the Commission on July 29, 1996.)
10.13 Agreement of Sale, dated June 10, 1996, between Jackson Hewitt Inc. and Refant *
Partners. (Incorporated by reference to the Registrant's 10-KSB previously filed
with the Commission on July 29, 1996.)
10.14 Business Loan Agreement, dated June 10, 1996, between Jackson Hewitt Inc. and *
Republic Bank. (Incorporated by reference to the Registrant's 10-KSB previously
filed with the Commission on July 29, 1996.)
10.15 Release and Settlement Agreement, dated December 9, 1996, by and between Jackson *
Hewitt Inc. and John T. Hewitt. (Incorporated by reference to the Registrant's
10-QSB previously filed with the Commission on January 31, 1997)
10.16 John T. Hewitt's Promissory Note for $1,276,057 dated December 1, 1996. *
(Incorporated by reference to the Registrant's 10-QSB previously filed with the
Commission on January 31, 1997.)
10.17 Stock Pledge Agreement, dated December 1, 1996, by and between Jackson Hewitt Inc. *
and John T. Hewitt. (Incorporated by reference to the Registrant's 10-QSB
previously filed with the Commission on January 31, 1997.)
10.18 Mutual Release Agreement, dated December 31, 1996, by and between Jackson Hewitt *
Inc. and Susan Ventresca. (Incorporated by reference to the Registrant's 10-QSB
previously filed with the Commission on January 31, 1997.)
10.19 Form Franchise Offering Circular, June 1997. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
10.20 Employment Agreement, dated May 29, 1997, between Jackson Hewitt Inc. and Keith E. *
Alessi. (Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Commission File No. 333-30439, previously filed with the Commission on
June 30, 1997.)
10.21 Amended and Restated Credit Agreement dated May 30, 1997, between Jackson Hewitt *
Inc. and NationsBank, N.A. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, Commission File No. 333-30439, previously filed
with the Commission on June 30, 1997.)
10.22 Recapitalization Agreement, dated as of June 18, 1997, between *
Jackson Hewitt Inc., Geocapital II, L.P., Geocapital III, L.P.,
JMI Equity Fund, L.P., Charles Federman, and Stephen Bachman. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1, Commission
File No. 333-30439, previously filed with the Commission on June 30, 1997.)
***10.23 Agreement of Purchase and Sale dated July 1, 1997, between Susan E. Ventreson *
and Jackson Hewitt Inc.
11 Computation of per share earnings. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
21 Subsidiaries of the Registrant. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
***23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants. *
**23.2 Consent of Kaufman & Canoles.
24 Power of Attorney relating to Jackson Hewitt Inc. (appears on the signature page *
hereto).
27 Financial Data Schedule. (Incorporated by reference to the Registrant's *
Registration Statement on Form S-1, Commission File No. 333-30439, previously
filed with the Commission on June 30, 1997.)
99.1 Financial Statement Schedule--Schedule 2, Valuation and *
Qualifying Accounts (Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Commission File No. 333-30439, previously filed with
the Commission on June 30, 1997.)
</TABLE>
- ------------------------------------------------
* In accordance with Rule 12(b)-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, the
exhibit is incorporated by reference.
<PAGE>
** To be filed by amendment.
*** Filed herewith.
(b) Financial Statement Schedules.- Schedule 2, Valuation
and Qualifying Accounts
Item 17. Undertakings.
Insofar as indemnification for liabilities arising out
of the Securities Act of 1933 (the "Act") may be permitted to
directors, officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant 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 registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense in any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
<PAGE>
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 for filing on Form S-1 and
authorizes this Registration Statement to be signed on its behalf by
the undersigned, in the City of Virginia Beach, Commonwealth of Virginia, on
July 11, 1997.
JACKSON HEWITT INC.
By: /s/ Keith E. Alessi
---------------------------------------
Keith E. Alessi, Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of
1933, this Registration Statement has been signed by the following
persons in the capacities and on the dates stated. Each person whose
signature appears below constitutes and appoints Keith E. Alessi and
Christopher Drake his true and lawful attorney-in-fact and agent,
each acting along with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement on Form S-1, and to any
registration statement filed under Securities and Exchange Commission
Rule 462, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Witness our hands and common seals on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Keith E. Alessi Director, Chairman of the Board, President and July 11, 1997
- --------------------------- Chief Executive Officer (Principal Executive
Keith E. Alessi Officer)
* Director July 11, 1997
- ---------------------------
Harry W. Buckley
* Director July 11, 1997
- ---------------------------
Harry S. Gruner
* Director July 11, 1997
- ---------------------------
Michael E. Julian, Jr.
* Director July 11, 1997
- ---------------------------
William P. Veillette
* Secretary, Treasurer and Chief Financial July 11, 1997
- --------------------------- Officer (Principal Financial Officer and
Christopher Drake Principal Accounting Officer)
</TABLE>
* Keith E. Alessi, by his name hereto, does sign this Registration Statement on
behalf of the persons indicated above for whom he is attorney-in-fact pursuant
to a power of attorney duly executed by such persons and filed with the
Securities and Exchange Commission.
By: /s/ Keith E. Alessi, attorney-in-fact
--------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Page Number
Description
<S> <C>
***1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference *
to the Registrant's Form 10-SB, Commission File No. 0-22324, as amended,
previously filed with the Commission on August 31, 1993).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, Commission File
No. 333-30439, previously filed with the Commission on June 30, 1997.) *
**4.1 Form of Specimen Common Stock Certificate.
4.2 Terms of the 6% Convertible Notes. (Incorporated by reference to *
the Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
4.3 Series A Convertible Preferred Stock Purchase Agreement, dated *
August 19, 1993, between the Company, John T. Hewitt and
certain Investors. (Incorporated by reference to the
Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
<PAGE>
4.4 Registration Rights Agreement, dated August 19, 1993, between the Company and *
certain Investors. (Incorporated by reference to the Registrant's Form 10-SB,
Commission File No. 0-22324, as amended, previously filed with the Commission on
August 31, 1993).
4.5 Stockholders Agreement, dated August 19, 1993, between the *
Company, John T. Hewitt and certain Investors. (Incorporated
by reference to the Registrant's Form 10-SB, Commission File No.
0-22324, as amended, previously filed with the Commission on
August 31, 1993).
**5 Opinion and Consent of Kaufman & Canoles.
10.1 Master License Agreement, dated October 15, 1988, between the *
Company and Montgomery Ward & Co., Incorporated, and extension
letter agreement, dated June 8, 1993. (Incorporated by reference
to the Registrant's Form 10-SB, Commission File No. 0-22324, as
amended, previously filed with the Commission on August 31,
1993).
10.2 Second Amendment to Partnership Agreement of Refant Partners, dated June 30, 1994, *
between Republic Service, Inc. and Hewfant, Inc. (Incorporated by reference to
the Registrant's Form 10-QSB, Commission File No. 0-22324, previously filed with
the Commission on September 13, 1994).
10.3 Loan Agreement, dated November 4, 1994, between the Company and Republic Bank. *
(Incorporated by reference to the Registrant's Form SB-2, Commission File No.
0-22324, as amended, previously filed with the Commission on December 5, 1994.)
10.4 1994 Long Term Incentive Plan. (Incorporated by reference to the Registrant's *
Form SB-2, Commission File No. 33-94162, previously filed with the Commission on
June 30, 1995.)
10.5 Lease dated September 23, 1994, between the Company and Wal-Mart Stores, Inc. *
(Incorporated by reference to the Registrant's Form SB-2, Commission File
No. 33-94162, previously filed with the Commission on June 30, 1995.)
10.6 First Amendment, dated October 31, 1994, to the Stock Purchase *
Agreement, the Registration Rights Agreement and the
Stockholders Agreement, each dated August 19, 1993, between the
Company, John T. Hewitt, GeoCapital, II, L.P., GeoCapital III,
L.P., Stephen J. Bachmann and Charles Federman. (Incorporated by
reference to the Registrant's Form SB-2, Commission File No.
33-94162, previously filed with the Commission on June 30,
1995.)
10.7 Warrant Agreement, dated October 17, 1995, between the Company *
and NationsBank, N.A. (Incorporated by reference to the
Registrant's 10-KSB/A previously filed with the Commission on
December 18, 1995.)
10.8 Warrant Certificate, dated October 18, 1995, between the Company and NationsBank, *
N.C. (Incorporated by reference to the Registrant's 10-KSB/A previously filed
with the Commission on December 18, 1995.)
10.9 First Amendment to Master Shopping Center Lease Agreement, dated January 29, 1996, *
between Wal-Mart Stores, Inc. and Jackson Hewitt Inc. (Incorporated by reference
to the Registrant's 10-QSB previously filed with the Commission on March 18, 1996.)
10.10 Renewal of Master License Agreement, July 12, 1996, between *
Montgomery Ward & Co., Incorporated and Jackson Hewitt Inc.
(Incorporated by reference to the Registrant's 10-KSB previously
filed with the Commission on July 29, 1996.)
<PAGE>
10.11 Second Amendment to Master Shopping Center Lease Agreement, dated May 15, 1996, *
between Wal-Mart Stores, Inc. and Jackson Hewitt Inc. (Incorporated by reference
to the Registrant's 10-KSB previously filed with the Commission on July 29, 1996.)
10.12 First Amendment to Warrant Agreement, dated June 7, 1996, between Jackson Hewitt *
Inc. and NationsBank, N.A. (Incorporated by reference to the Registrant's 10-KSB
previously filed with the Commission on July 29, 1996.)
10.13 Agreement of Sale, dated June 10, 1996, between Jackson Hewitt Inc. and Refant *
Partners. (Incorporated by reference to the Registrant's 10-KSB previously filed
with the Commission on July 29, 1996.)
10.14 Business Loan Agreement, dated June 10, 1996, between Jackson Hewitt Inc. and *
Republic Bank. (Incorporated by reference to the Registrant's 10-KSB previously
filed with the Commission on July 29, 1996.)
10.15 Release and Settlement Agreement, dated December 9, 1996, by and between Jackson *
Hewitt Inc. and John T. Hewitt. (Incorporated by reference to the Registrant's
10-QSB previously filed with the Commission on January 31, 1997)
10.16 John T. Hewitt's Promissory Note for $1,276,057 dated December 1, 1996. *
(Incorporated by reference to the Registrant's 10-QSB previously filed with the
Commission on January 31, 1997.)
10.17 Stock Pledge Agreement, dated December 1, 1996, by and between Jackson Hewitt Inc. *
and John T. Hewitt. (Incorporated by reference to the Registrant's 10-QSB
previously filed with the Commission on January 31, 1997.)
10.18 Mutual Release Agreement, dated December 31, 1996, by and between Jackson Hewitt *
Inc. and Susan Ventresca. (Incorporated by reference to the Registrant's 10-QSB
previously filed with the Commission on January 31, 1997.)
10.19 Form Franchise Offering Circular, June 1997. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
10.20 Employment Agreement, dated May 29, 1997, between Jackson Hewitt Inc. and Keith E. *
Alessi. (Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Commission File No. 333-30439, previously filed with the Commission on
June 30, 1997.)
10.21 Amended and Restated Credit Agreement dated May 30, 1997, between Jackson Hewitt *
Inc. and NationsBank, N.A. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, Commission File No. 333-30439, previously filed
with the Commission on June 30, 1997.)
10.22 Recapitalization Agreement, dated as of June 18, 1997, between *
Jackson Hewitt Inc., Geocapital II, L.P., Geocapital III, L.P.,
JMI Equity Fund, L.P., Charles Federman, and Stephen Bachman. (Incorporated
by reference to the Registrant's Registration Statement on Form S-1, Commission
File No. 333-30439, previously filed with the Commission on June 30, 1997.)
***10.23 Agreement of Purchase and Sale dated July 1, 1997, between Susan E. Ventreson *
and Jackson Hewitt Inc.
11 Computation of per share earnings. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
21 Subsidiaries of the Registrant. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 333-30439,
previously filed with the Commission on June 30, 1997.)
***23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants. *
**23.2 Consent of Kaufman & Canoles.
24 Power of Attorney relating to Jackson Hewitt Inc. (appears on the signature page *
hereto).
27 Financial Data Schedule. (Incorporated by reference to the Registrant's *
Registration Statement on Form S-1, Commission File No. 333-30439, previously
filed with the Commission on June 30, 1997.)
99.1 Financial Statement Schedule--Schedule 2, Valuation and *
Qualifying Accounts (Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Commission File No. 333-30439, previously filed with
the Commission on June 30, 1997.)
</TABLE>
- ------------------------------------------------
* In accordance with Rule 12(b)-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, the
exhibit is incorporated by reference.
** To be filed by amendment.
*** Filed herewith.
EXHIBIT A
JACKSON HEWITT INC.
1,129,099 Common Shares*
UNDERWRITING AGREEMENT
Philadelphia, Pennsylvania
______________, 1997
JANNEY MONTGOMERY SCOTT INC.
SCOTT & STRINGFELLOW, INC.
As Representatives of the Several
Underwriters Named in Schedule I
Hereto
c/o Janney Montgomery Scott Inc.
1801 Market Street
Philadelphia, PA 19103
Ladies and Gentlemen:
Jackson Hewitt Inc., a Virginia corporation (the "Company"), proposes
to sell to Janney Montgomery Scott Inc. and Scott & Stringfellow, Inc. (the
"Representatives") and the several other underwriters named in Schedule I hereto
(collectively, with the Representatives, the "Underwriters") 1,000,000 shares of
the Company's $0.02 par value common stock ("Common Shares"); and the selling
shareholders of the Company named in Table 1 of Schedule II hereto
(collectively, the "Selling Shareholders") propose to sell severally to the
Underwriters an aggregate of 129,099 Common Shares. Such Common Shares to be
sold to the Underwriters by the Company and the Selling Shareholders are
referred to collectively herein as the "Firm Shares." The respective amounts of
the Firm Shares to be purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The respective amounts of the Firm
Shares to be sold by Selling Shareholders are set forth opposite their names in
Table 1 of Schedule II hereto. The Firm Shares shall be offered to the public at
a public offering price of $______ per Firm Share (the "Offering Price").
In addition, in order to cover over-allotments in the sale of the Firm
Shares, the Underwriters may purchase for the Underwriters' own accounts,
ratably in proportion to the amounts set forth opposite their respective names
in Schedule I hereto, up to 19,364 additional Common Shares from the Selling
Shareholders and up to 150,000 additional Common Shares from the Company. Such
169,364 additional Common Shares are referred to collectively herein as the
"Optional Shares." If any Optional Shares are purchased: (i) all the Optional
Shares of the Selling Shareholders shall be
- --------
* Plus an over-allotment option to purchase up to 169,364 additional
shares.
-1-
<PAGE>
purchased before any Optional Shares of the Company may be purchased; (ii) all
Optional Shares of the Selling Shareholders listed in Table 2 of Schedule II
hereto shall be purchased on a pro rata basis in proportion to the amount set
forth opposite to their names; and (iii) the Optional Shares shall be purchased
for offering to the public at the Offering Price and in accordance with the
terms and conditions set forth herein. The Firm Shares and the Optional Shares
are referred to collectively herein as the "Shares."
The Company and the Selling Shareholders, intending to be legally
bound, hereby confirm their agreement with the Underwriters as follows:
1. Representations and Warranties.
(a) Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that (all
references to the Company herein shall be deemed to include reference to the
Company and each of the Company's subsidiaries set forth on Schedule III hereto
(the "Subsidiaries") collectively or taken as a whole, unless the context
clearly indicates otherwise):
(i) the Company has prepared, in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Regulations") of the Securities and Exchange
Commission (the "SEC") under the Act in effect at all applicable times, and has
filed with the SEC a registration statement on Form S-1 (File No. 333-30439) and
one or more amendments thereto for the purpose of registering the Shares (or a
portion of the Shares if a "Rule 462(b) Registration Statement," as defined
below, has been or is to be filed) under the Act. The Company similarly may have
prepared or may prepare an additional registration statement on Form S-1 with
respect to a portion of the Shares pursuant to Rule 462(b) of the Regulations,
and if so prepared or if to be so prepared, such additional registration
statement has been or will be filed pursuant to Rule 462(b) of the Regulations.
The term "Rule 462(b) Registration Statement" means such additional registration
statement, if any, filed pursuant to Rule 462(b) of the Regulations, including,
without limitation, all exhibits thereto, the contents of the earlier
registration statement incorporated therein by reference, and any price-related
information included therein, but omitted from the earlier registration
statement in reliance on Rule 430A of the Regulations. Copies of all such
registration statements (or the form thereof in the case of a Rule 462(b)
Registration Statement that has not yet been filed) and any amendments thereto,
and all forms of the related prospectus contained therein, have been delivered
to the Representatives. Each prospectus included in any such registration
statement before it became effective under the Act and any prospectus filed with
the SEC pursuant to Rule 424(a) of the Regulations is hereinafter called a
"Preliminary Prospectus." The various parts of the first registration statement
referenced in this Section 1(a)(i), including all exhibits thereto and the
information contained in the form of final prospectus filed with the SEC
pursuant to Rule 424(b) of the Regulations in accordance with Section 5(a)(ii)
of this Agreement and deemed by virtue of Rule 430A(b) of the Regulations to be
part of the registration statement at the time it was declared effective, each
as amended at the time the registration statement became effective, as well as
the information contained in the Rule 462(b) Registration Statement, if any,
deemed to be a part of the registration statement pursuant to General
Instruction V of Form S-1, are hereinafter collectively called the "Primary
Registration Statement." The term "Registration
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<PAGE>
Statements" means both the Primary Registration Statement and the Rule 462(b)
Registration Statement collectively. The term "Term Sheet" means the term sheet,
if any, containing the information required Pursuant to Rule 434(b) or (c), as
applicable, of the Regulations, and filed Pursuant to Rule 424(b)(7) of the
Regulations. The term "Prospectus" means the Prospectus relating to the Shares
included in the Registration Statement at the time it became effective
(including, if the Company omitted information from the Primary Registration
Statement pursuant to Rule 430A(a) of the Regulations, the information deemed to
be a part of the Primary Registration Statement at the time it became effective
pursuant to Rule 430A(b) of the Regulations); provided, however, that, if with
the consent of the Representatives, the Company provides a Term Sheet prior to
the time any confirmation is sent or given for purposes of Section 2(10)(a) of
the Act, the term "Prospectus" shall mean the "prospectus subject to completion"
(as defined in Rule 434(g) of the Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares, plus and including the information contained in the Term Sheet.
Notwithstanding the foregoing, if any revised Prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the Prospectus referred to in the immediately preceding
sentence (whether or not such revised Prospectus is required to be filed with
the SEC pursuant to Rule 424(b) of the Regulations), the term "Prospectus" shall
refer to such revised Prospectus from and after the time it is first provided to
the Underwriters for such use. If, with the consent of the Representatives, the
Company shall have provided to the Underwriters a Term Sheet prior to the time
any confirmation is sent or given for purposes of Section 2(10)(a) of the Act,
the Prospectus and the Term Sheet together will not be materially different from
the prospectus in the Registration Statements;
(ii) the Primary Registration Statement has
become effective under the Act and the SEC has not issued any stop order
suspending the effectiveness of the Registration Statements or preventing or
suspending the use of any Preliminary Prospectus, nor has the SEC instituted or
threatened to institute proceedings with respect to such an order. No stop order
suspending the sale of the Shares in any jurisdiction designated by the
Representatives as provided for in Section 5(a)(x) hereof has been issued, and
no proceedings for that purpose have been instituted or threatened. The Company
has complied in all material respects with all requests of the SEC, or requests
of which the Company has been advised of any state or foreign securities
commission in a state designated by the Representatives as provided for in
Section 5(a)(x) hereof, for additional information to be included in the
Registration Statements, any Preliminary Prospectus or the Prospectus. Each
Preliminary Prospectus conformed to all the requirements of the Act and the
Regulations as of its date in all material respects and did not as of its date
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
the foregoing shall not apply to statements in, or omissions from, any
Preliminary Prospectus in reliance upon and in conformity with information
regarding the Underwriters supplied to the Company in writing by or on behalf of
any Underwriter through the Representatives expressly for use therein. The
Primary Registration Statement, on the date on which it was declared effective
by the SEC (the "Effective Date") and when any post-effective amendment thereof
shall become effective, the Rule 462(b) Registration Statement when filed with
the SEC, and the Prospectus, at the time it is filed with the SEC and on the
Closing Date (as defined in Section 3 hereof) and any 0ption Closing Date (as
defined in Section 4(b) hereof), conformed and will conform in all material
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<PAGE>
respects to all the requirements of the Act and the Regulations, and did not and
will not, on any of such dates, include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the Primary
Registration Statement (including the information contained in the Rule 462(b)
Registration Statement after it is filed with the SEC) or the Prospectus made in
reliance upon and in conformity with information regarding the Underwriters
furnished to the Company in writing by or on behalf of any Underwriter through
the Representatives expressly for use therein;
(iii) the Company is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Virginia, with all necessary corporate power and authority, and all required
licenses, permits, clearances, certifications, registrations, approvals,
consents and franchises, to own or lease and operate its properties and to
conduct its business as described in the Prospectus, and to execute, deliver and
perform this Agreement. Each of the Subsidiaries has been duly organized and is
validly existing as a corporation or partnership, as applicable, in good
standing under the laws of the jurisdiction of its organization (which
jurisdiction is set forth in Schedule III hereto), with all necessary corporate
power and authority, and all required licenses, permits, clearances,
certifications, registrations, approvals, consents and franchises, to own or
lease and operate its properties and to conduct its business as described in the
Prospectus. The Company and each of the Subsidiaries is duly qualified to do
business as a foreign corporation or partnership, as applicable, and is in good
standing, in all jurisdictions in which such qualification is required, except
where the failure to so qualify would not have a material adverse effect on the
general affairs, properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the Company and the
Subsidiaries taken as a whole (a "Material Adverse Effect"). No proceeding has
been instituted in any jurisdiction revoking, limiting or curtailing, or seeking
to revoke, limit or curtail the Company's or any Subsidiary's corporate power
and authority or qualification or ability to own or lease and operate its
properties and to conduct its business as described in the Prospectus;
(iv) the outstanding shares of capital stock or
other evidence of ownership of the respective Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and, except for
the securities owned by third parties as described specifically below in this
Section 1(a)(iv), are owned by the Company free and clear of all liens,
encumbrances and security interests. Except for the common stock of or other
ownership interests in the Subsidiaries owned by the Company, as of the Closing
Date there will be no shares of capital stock of or other ownership interests in
any Subsidiary outstanding, and no options, warrants or other rights to
purchase, agreements or other obligations to issue, or other rights to convert
any obligations into, shares of capital stock or ownership interests in any
Subsidiary or securities convertible into or exchangeable for capital stock of,
or other ownership interests in, any Subsidiary are, or as of the Closing Date
will be, outstanding. The Company owns no stock or other interest whatsoever,
whether equity or debt, in any corporation, partnership or other entity other
than the Subsidiaries;
(v) this Agreement has been duly authorized,
executed and delivered by the Company and constitutes its legal, valid and
binding obligation, enforceable against the Company in accordance with its
terms, except as enforcement may be limited by bankruptcy,
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<PAGE>
insolvency or other similar laws affecting the enforcement of creditors, rights
generally and subject to applicability of general principles of equity and
except, as to this Agreement, as rights to indemnity and contribution may be
limited by federal and state securities laws or principles of public policy;
(vi) the execution, delivery and performance of
this Agreement and the transactions contemplated herein do not and will not,
with or without the giving of notice or the lapse of time, or both, (A) conflict
with any term or provision of the Company's Articles of Incorporation or Bylaws;
(B) result in a breach of, constitute a default under, result in the termination
or modification of, result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the assets of the Company or its
Subsidiaries under, or require any payment by the Company or its Subsidiaries or
impose any liability on the Company or its Subsidiaries pursuant to, any
contract, indenture, mortgage, deed of trust, commitment or other agreement or
instrument to which the Company or its Subsidiaries is a party or by which any
of their assets are bound or affected; (C) assuming compliance with Blue Sky
laws and regulations applicable to the offer and sale of the Shares, violate any
applicable law, rule, regulation, judgment, order or decree of any government or
governmental agency, instrumentality or court, domestic or foreign, having
jurisdiction over the Company or its Subsidiaries or any of their respective
properties or businesses; or (D) result in a breach, termination or lapse of the
Company or its Subsidiaries' corporate power and authority to own or lease and
operate their respective assets and properties and conduct their respective
businesses as described in the Prospectus;
(vii) at the date or dates indicated in the
Prospectus, the Company had the duly authorized and outstanding capitalization
set forth in the Prospectus under the caption "Capitalization" and will have, as
of the issuance of the Firm Shares on the Closing Date, the pro forma adjusted
capitalization set forth therein. The description of the Company's
capitalization in the Prospectus conforms in all material respects with the
instruments defining the same. On the Effective Date, the Closing Date and any
Option Closing Date (as defined in Section 4(b) hereto), there will be no
options or warrants for the purchase of, other outstanding rights to purchase,
agreements or obligations to issue or agreements or other rights to convert or
exchange any obligation or security into, capital stock of the Company or
securities convertible into or exchangeable for capital stock of the Company,
except as expressly described in the Prospectus. The information in the
Prospectus insofar as it relates to all outstanding options and other rights to
acquire securities of the Company as of the Effective Date and immediately prior
to the Closing Date and any Option Closing Date is true and correct in all
material respects;
(viii) the currently outstanding shares of the
Company's capital stock, including the Shares to be purchased by the
Underwriters from the Selling Shareholders, have been duly authorized and are
validly issued, fully paid and non-assessable, and none of such outstanding
shares of the Company's capital stock has been issued in violation of any
preemptive rights of any security holder of the Company. No preemptive rights or
other rights to subscribe for or purchase exist with respect to the sale of the
Shares by the Company. The holders of the outstanding shares of the Company's
capital stock are not subject to personal liability solely by reason of being
such holders. All previous offers and sales of the outstanding shares of the
Company's capital stock, whether described in the Registration Statement or
otherwise, were made in conformity with
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<PAGE>
applicable federal and state securities laws. The authorized capital stock of
the Company, including, without limitation, the outstanding Common Shares, the
Shares being issued, and the outstanding options to purchase shares of Common
Shares conform in all material respects with the descriptions thereof in the
Prospectus, and such descriptions conform in all material respects with the
instruments defining the same.
(ix) when the Shares have been duly delivered
against payment therefor as contemplated by this Agreement, the Shares will be
validly issued, fully paid and non-assessable. The certificates representing the
Shares are in proper legal form under, and conform in all respects to the
requirements of, the Virginia Stock Corporation Act, as amended (the "VSCA").
Neither the filing of the Registration Statement nor the offering or sale of
Shares as contemplated by this Agreement gives any security holder of the
Company any rights for or relating to the registration of any Common Shares or
any other capital stock of the Company or any rights to convert or have redeemed
or otherwise receive anything of value with respect to any other security of the
Company;
(x) no consent, approval, authorization, order,
registration, license, permit of, or filing or registration with, any court,
government, governmental agency, instrumentality or other regulatory body or
official is required for the valid and legal execution, delivery and performance
by the Company of this Agreement and the consummation of the transactions
contemplated hereby and described in the Prospectus, except such as may be
required for the registration of the Shares under the Act, the Regulations and
for compliance with the applicable state securities or Blue Sky laws or the
Bylaws, rules and other pronouncements of the National Association of Securities
Dealers, Inc. (the "NASD");
(xi) the Common Shares are registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Common Shares (including the Shares) are included for quotation
on the Nasdaq Stock Market's National Market System and neither the Company, any
Selling Shareholder nor, to the knowledge of the Company, any other person has
taken any action designed to cause, or likely to result in, the termination of
the registration of the Common Shares under the Exchange Act or the termination
of the inclusion thereof in the Nasdaq Stock Market's National Market System.
Neither the Company nor any Selling Shareholder has received any notification
that the SEC or the Nasdaq Stock Market's National Market System is
contemplating terminating such registration or inclusion. On the Effective Date,
the Closing Date and any Option Closing Date, the Shares shall be included for
quotation on the Nasdaq Stock Market's National Market System. The Company has
complied in all material respects with the applicable provisions of the Exchange
Act during the period it was subject to such requirements;
(xii) the statements in the Registration
Statements and Prospectus, insofar as they are descriptions or summaries of or
references to contracts, agreements or other documents, are accurate in all
material respects and present or summarize fairly, in all material respects, the
information required to be disclosed under the Act and/or the Regulations, and
there are no contracts, agreements or other documents, instruments or
transactions of any character required to be described or referred to in the
Registration Statements or Prospectus or to be filed as exhibits to the
Registration Statements that have not been so described, referred to or filed,
as required;
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<PAGE>
(xiii) the consolidated financial statements of the
Company (including the notes thereto) filed as part of any Preliminary
Prospectus, the Prospectus and the Registration Statements present fairly, in
all material respects, the financial position of the Company and the
Subsidiaries as of the respective dates thereof, and the results of operations
and cash flows of the Company and the Subsidiaries for the periods indicated
therein, all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved. The supporting notes and
schedules included in the Registration Statements fairly state in all material
respects the information required to be stated therein in relation to the
financial statements taken as a whole. The selected and summary financial and
statistical information in the Prospectus including, but not limited to, that
under the captions "Summary Consolidated Financial Information," "Selected
Consolidated Financial Data," "Recent Developments," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presents fairly the information shown therein and has been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statements. The unaudited financial statements included in the
Registration Statements comply as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act and the pro
forma adjustments, if any, have been properly applied to the historical amounts
in the compilation of those statements. No financial statements or schedules or
other information other than that which appears in the Prospectus is required to
be included in the Registration Statement;
(xiv) since the respective dates as of which
information is given in the Registration Statements and the Prospectus, except
as otherwise stated therein, there has not been (A) any material adverse change
(including, whether or not insured against, any material loss or damage to any
material assets), or development involving a prospective material adverse
change, in the general affairs, properties, assets, management, condition
(financial or otherwise), results of operations, stockholders' equity, business
or prospects of the Company and the Subsidiaries taken as a whole; (B) any
material adverse change, loss, reduction, termination or non-renewal of any
contract to which the Company or any Subsidiary is a party; (C) any transaction
entered into by the Company or any Subsidiary not in the ordinary course of its
business that is material to the Company or any Subsidiary, (D) any dividend or
distribution of any kind declared, paid or made by the Company on its capital
stock, (E) any liabilities or obligations, direct or indirect, incurred by the
Company or any Subsidiary that are material to the Company on a consolidated
basis; (F) any change in the capitalization or stock ownership of the Company or
any Subsidiary; or (G) any change in the indebtedness of the Company or any
subsidiary that is material to the Company on a consolidated basis. Neither the
Company nor any Subsidiary has any contingent liabilities or obligations that
are material to the Company that are not expressly disclosed in the Prospectus;
(xv) the Company has not distributed, and will
not distribute, any offering material in connection with the offering and sale
of the Shares other than the Registration Statements, a Preliminary Prospectus,
the Prospectus and other material, if any, permitted by the Act and the
Regulations. Neither the Company nor any of its officers, directors or
affiliates has taken, nor shall the Company or such persons take, any action
designed to, or that might be reasonably expected to, cause or result in
stabilization or manipulation of the price of the Shares;
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<PAGE>
(xvi) the Company and each Subsidiary has filed
with the appropriate federal, state and local governmental agencies, and all
foreign countries and political subdivisions thereof, all tax returns that are
required to be filed or has duly obtained extensions of time for the filing
thereof and has paid all taxes shown on such returns or otherwise due and all
material assessments received by them to the extent that the same have become
due. Neither the Company nor any Subsidiary has executed or filed with any
taxing authority, foreign or domestic, any agreement extending the period for
assessment or collection of any income or other tax and neither is a party to
any pending action or proceeding by any foreign or domestic governmental agency
for the assessment or collection of taxes, and no claims for assessment or
collection of taxes have been asserted against the Company or any Subsidiary
that might have a Material Adverse Effect;
(xvii) KPMG Peat Marwick, which has given its
reports on certain financial statements included as part of the Registration
Statements, is a firm of independent certified public accountants as required by
the Act and the Regulations with respect to the Company;
(xviii) neither the Company nor any Subsidiary is in
violation of, or in default under, any of the terms or provisions of (A) its
Articles or Certificate of Incorporation or Bylaws or similar governing
instruments, or (B) any indenture, mortgage, deed of trust, contract, commitment
or other agreement or instrument to which it is a party or by which it or any of
its properties is bound or affected, (C) any law, rule, regulation, judgment,
order or decree of any government or governmental agency, instrumentality or
court, domestic or foreign, having jurisdiction over it or any of its properties
or business, or (D) any license, permit, certification, registration, approval,
consent or franchise referred to in Section l(a)(iii) hereof, except with
respect to clause (B), (C) or (D) above, where any such violation or default
would not have a Material Adverse Effect.
(xix) except as expressly disclosed in the
Prospectus, there are no claims, actions, suits, protests, proceedings,
arbitrations, investigations or inquiries pending before, or to the Company's
knowledge threatened or contemplated by, any governmental agency,
instrumentality, court or tribunal, domestic or foreign, or before any private
arbitration tribunal to which the Company, any Subsidiary or any franchisee is
or may be made a party or otherwise affecting the Company that could reasonably
be expected to affect the validity of any of the outstanding Common Shares, or
that, if determined adversely to the Company or any Subsidiary, would, in any
case or in the aggregate, result in any Material Adverse Effect, nor is the
Company aware of any reasonable basis for any such claim, action, suit, protest,
proceeding, arbitration, investigation or inquiry. Except as expressly disclosed
in the Prospectus, there are no outstanding orders, judgments or decrees of any
court, governmental agency, instrumentality or other tribunal enjoining the
Company from, or requiring the Company to take or refrain from taking, any
action, or to which the Company or any Subsidiary, their properties, assets or
businesses are bound or subject;
(xx) the Company and each Subsidiary owns, or
possesses adequate rights to use, all patents, patent applications, trademarks,
trademark registrations, applications for trademark registration, trade names,
service marks, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
technology, information, systems, design methodologies and devices or procedures
developed or derived from or for the businesses of the Company or the
Subsidiary), trade secrets, confidential
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<PAGE>
information, processes and formulations and other proprietary information
necessary for, used in, or proposed to be used in, the conduct of its business
as described in the Prospectus (collectively, the "Intellectual Property").
Neither Company nor any Subsidiary owns any rights in or to any patents. Neither
the Company nor any Subsidiary has infringed, is infringing and, except as
expressly and specifically disclosed in the Prospectus, has received any notice
of conflict with, the asserted rights of others with respect to the Intellectual
Property that, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect,
and the Company knows of no reasonable basis therefor. To the knowledge of the
Company, no other parties, including but not limited to current or former
franchisees or directors or officers of the Company have infringed upon or are
in conflict with the Intellectual Property. Neither the Company nor any
Subsidiary is a party to, or bound by, any agreement pursuant to which
royalties, honorariums or fees are payable by the Company or such Subsidiary to
any person by reason of the ownership or use of any Intellectual Property that
is material to the business of the Company on a consolidated basis;
(xxi) the Company and each Subsidiary has good and
marketable title to all property described in the Prospectus as being owned by
it, free and clear of all liens, security interests, charges or encumbrances and
the like, except such as are expressly described or referred to in the
Prospectus or such as would not have a Material Adverse Effect. The Company,
each Subsidiary, and to the knowledge of the Company, each franchisee has
adequately insured its property against loss or damage by fire or other casualty
and maintains, in amounts reasonably believed by it to be adequate, and
insurance against such other risks as management of the Company deems
appropriate. All real and personal property leased by the Company, any
Subsidiary, or to the knowledge of the Company, any franchisee, as described or
referred to in the Prospectus, is held by the Company or the Subsidiary under
valid leases. The executive offices and the other facilities of the Company, the
Subsidiaries and to the knowledge of the Company, the franchisees (the
"Premises"), and all operations presently or formerly conducted thereon by the
Company, the Subsidiaries and the franchisees, are now and, since the Company,
the Subsidiaries or the franchisees began to use such Premises, always have been
and, to the knowledge of the Company, prior to when the Company, the
Subsidiaries and the franchisees began to use such Premises, always had been, in
compliance with all federal, state and local statutes, ordinances, regulations,
rules, standards and requirements of common law concerning or relating to
industrial hygiene and the protection of health and the environment
(collectively, "the Environmental Laws"), except to the extent that any failure
to be in such compliance would not have a Material Adverse Effect. There are no
conditions on, about, beneath or arising from the Premises or at any other
location that might give rise to liability, the imposition of a statutory lien
or require a "Response," "Removal" or "Remedial Action," as defined herein,
under any of the Environmental Laws, and that would have a Material Adverse
Effect. Except as expressly disclosed in the Prospectus, or where such items
will not result in any Material Adverse Effect, (A) neither the Company, any
Subsidiary, or to the knowledge of the Company, any franchisee has received
notice or has knowledge of any claim, demand, investigation, regulatory action,
suit or other action instituted or threatened against the Company or any
Subsidiary or any portion of the Premises relating to any of the Environmental
Laws and (B) neither the Company, any Subsidiary, or to the knowledge of the
Company, any franchisee has received any notice of material violation, citation,
complaint, order, directive, request for information or response thereto, notice
letter, demand letter or compliance schedule to or from any governmental or
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regulatory agency arising out of or in connection with "hazardous substances"
(as defined by applicable Environmental Laws) on, about, beneath, arising from
or generated at the Premises or at any other location. As used in this
subsection, the terms "Response," "Removal" and "Remedial Action " shall have
the respective meanings assigned to such terms under Sections 101(23) - 101(25)
of the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C.
9601(23)-9601(25);
(xxii) the Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that: (A)
transactions are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary in order to permit
preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (C) access to
assets is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences;
(xxiii) no unregistered securities of the Company
have been sold by the Company or on behalf of the Company by any person or
persons controlling, controlled by, or under common control with the Company
within the three years prior to the date hereof, except as expressly disclosed
in the Registration Statements and any such sales of unregistered securities by
the Company were completed in compliance with the applicable provisions of the
state and federal securities or bluesky laws;
(xxiv) neither the Company nor any Subsidiary had
or currently has any employee benefit plan, profit sharing plan, employee
pension benefit plan or employee welfare benefit plan or deferred compensation
arrangements ("Plans") that are subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the rules and regulations
thereunder ("ERISA") and that are not in compliance with ERISA in all material
respects, and, to the extent required by the Internal Revenue Code of 1986, as
amended (the "Code"), in compliance with the Code in all material respects. The
Company has not had any employee pension benefit plan that is subject to Part 3
of Subtitle 8 of Title I of ERISA or any defined benefit plan or multi-employer
plan. Neither the Company nor any Subsidiary has maintained retired life and
retired health insurance plans that are employee welfare benefit plans providing
for continuing benefit or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment, except as required by
Section 4980B of the Code. No fiduciary or other party in interest with respect
to any of the Plans has caused any of such Plans to engage in a prohibited
transaction as defined in Section 406 of ERISA. As used in this subsection, the
terms "defined benefit plan," "employee benefit plan," "employee pension benefit
plan," "employee welfare benefit plan," "fiduciary" and "multiemployer plan"
shall have the respective meanings assigned to such terms in Section 3 of ERISA;
(xxv) no labor dispute exists with any employees
of the Company or any Subsidiary, and to the Company's knowledge, no such labor
dispute is threatened. The Company has no knowledge of any existing or
threatened labor disturbance by the employees of any of its principal suppliers,
contractors or customers that would have a Material Adverse Effect. None of
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the employees of the Company or any Subsidiary is covered by a collective
bargaining agreement and no union organizing activity exists with respect to any
of such employees;
(xxvi) the Company has not incurred any liability
for any finder's fees or similar payments in connection with the transactions
contemplated herein other than as disclosed in the Prospectus;
(xxvii) the Company is familiar with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and the Company intends to conduct,
its affairs in such a manner as to ensure that it will not be an "investment
company" within the meaning of the 1940 Act and the rules and regulations
thereunder;
(xxviii) no statement, representation, warranty or
covenant made by the Company in this Agreement or in any certificate or document
required by this Agreement to be delivered to the Representatives is, was when
made, or as of the Closing Date or any Option Closing Date will be, inaccurate,
untrue or incorrect in any material respect. No transaction has occurred or is
proposed between or among the Company (or any Subsidiary) and any of its (or any
of its Subsidiaries) officers, directors or stockholders or any affiliate of any
such officer, director or stockholder that is required to be described in and is
not described in the Registration Statements and the Prospectus;
(xxix) neither the Company or any Subsidiary nor
any officer, director, employee, agent or other person acting on behalf of the
Company or any Subsidiary has, directly or indirectly, given or agreed to give
any money, property or similar benefit or consideration to any customer or
supplier (including any employee or agent of any customer or supplier) or
official or employee of any agency or instrumentality of any government (foreign
or domestic) or political party or candidate for office (foreign or domestic) or
any other person who was, is or in the future may be in a position to affect the
general affairs, properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or prospects of the Company or any
actual or proposed business transaction of the Company that (A) could subject
the Company to any liability (including, but not limited to, the payment of
monetary damages) or penalty in any civil, criminal or governmental action or
proceeding that would have a Material Adverse Effect, or (B) violates any law,
rule or regulation to which the Company or any Subsidiary is subject, which
violation if proven would have a Material Adverse Effect;
(xxx) each person listed on Schedule IV hereto
has executed an agreement in a form reasonably satisfactory to the
Representatives that such person will not, for the period specified in such
agreement (the "Lock-up Period"), offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any Common Shares, any options or warrants to
purchase any Common Shares or any securities convertible into or exchangeable
for Common Shares (collectively, "Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise then as specified in such agreement
or with the prior written consent of the Representatives; provided, however,
that the forgoing language shall not
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prohibit the purchase of Common Stock from the Company pursuant to the exercise
of stock options. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and shareholders have
agreed to such or similar restrictions (the "Lock-Up Agreements");
(xxxi) each contract or other instrument (however
characterized or described) to which the Company or any Subsidiary is a party or
by which any of their respective properties or businesses is bound or affected
and which is material to the conduct of the respective businesses of the Company
and the Subsidiary has been duly and validly executed by the Company or its
Subsidiary, as applicable, and, to the knowledge of the Company, by the other
parties thereto. Each such contract or other instrument is in full force and
effect and is enforceable against the parties thereto in accordance with its
terms and neither the Company nor any Subsidiary is, and to the knowledge of the
Company, no other party is, in default thereunder, and no event has occurred
that, with the lapse of time or the giving of notice, or both, would constitute
a default under any such contract or other instrument. All necessary consents
under such contracts or other instruments to the disclosure in the Prospectus
with respect thereto have been obtained; and
(xxxii) the Company is in compliance with the
applicable requirements of the Federal Trade Commission rules governing
franchising, including 16 C.F.R. ss.436, and the applicable provisions of
federal and state laws or regulations governing the activities of a franchiser
and the tax preparation business. The Company's Franchise Offering Circular
complies with the applicable requirements of state law governing the activities
of franchisers and complies as to form with the requirements of the North
American Securities Administrators Association's Uniform Franchise Offering
Circular.
Any certificate signed by any officer of the Company in such capacity
and delivered to the Representatives or to counsel for the Underwriters pursuant
to this Agreement shall be deemed a representation and warranty by the Company
to the several Underwriters as to the matters covered thereby.
(b) Representations and Warranties of the Selling
Shareholders. Each of the Selling Shareholders represents and warrants to, and
agrees with, the several Underwriters that:
(i) such Selling Shareholder has duly executed
and delivered a Custody Agreement and Power of Attorney (the "Custody
Agreement"), in the form heretofore delivered to the Representatives, appointing
either Keith Alessi or Christopher Drake as such Selling Shareholder's
attorneys-in-fact (the "Attorneys-in-Fact"), and appointing Keith Alessi as
custodian (the "Custodian"). The Attorneys-in-Fact are authorized to execute,
deliver and perform the Custody Agreement and this Agreement on behalf of such
Selling Shareholder, including, without limitation, the authority to determine
the purchase price to be paid to each Selling Shareholder by the Underwriters as
set forth in Section 2 of this Agreement. Certificates in negotiable form
representing the Shares to be sold by each Selling Shareholder hereunder have
been deposited with the Custody Agreement with the Custodian. Certificates in
negotiable form representing the Shares
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to be sold by each Selling Shareholder hereunder have been deposited with the
Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant
to this Agreement. Such Selling Shareholder agrees that the Shares represented
by the certificates on deposit with the Custodian are subject to the interests
of the Underwriters hereunder, that the arrangements made for such custody and
the appointment of the Attorneys-in-Fact are to that extent irrevocable, and
that the obligations of such Selling Shareholder hereunder shall not be
terminated, except as provided in this Agreement, by any act of such Selling
Shareholder, by operation of law or otherwise, whether by the dissolution,
reorganization, death or incapacity of such Selling Shareholder or the
occurrence of any other event. If any such dissolution, reorganization, death,
incapacity or other such event should occur before the delivery of the Shares to
be sold by the affected Selling Shareholder hereunder, and certificates for such
Shares shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement, as if such dissolution, reorganization, death,
incapacity, or other event had not occurred, regardless of whether or not the
Custodian or Attorneys-in-Fact shall have received notice thereof;
(ii) such Selling Shareholder has all requisite
right, power and authority to enter into this Agreement, the Power of Attorney
and the Custody Agreement, and to sell, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder, and this Agreement, the Power of
Attorney and the Custody Agreement have been duly authorized, executed and
delivered by such Selling Shareholder and constitute the legal, valid and
binding obligations of such Selling Shareholder enforceable in accordance with
their respective terms;
(iii) the execution, delivery and performance, and
the consummation of the transactions contemplated hereby and by the Prospectus,
the Power of Attorney and the Custody Agreement do not and shall not, with or
without the giving of notice or lapse of time or both, (A) conflict with any
term or provision of such Selling Shareholder's charter, bylaws or other organic
or governing documents, if applicable, (B) conflict with or result in a breach
or a violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage or other agreement or instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or any of
his, her or its Shares is bound, or (C) violate any existing, applicable law,
rule, regulation, judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over such
Selling Shareholder or any of his, her or its Shares;
(iv) all authorizations, approvals and consents
necessary for the valid execution and delivery by such Selling Shareholder of
this Agreement, the Power of Attorney and the Custody Agreement have been
obtained and are in full force and effect, and the sale and delivery of the
Shares to be sold by such Selling Shareholder hereunder (other than, at the time
of the execution hereof, the issuance of the order of the Commission declaring
the Registration Statement effective and such authorizations, approvals or
consents as may be necessary under the state or foreign securities or Blue Sky
laws and the Bylaws, rules and pronouncements of the NASD), have been obtained
and are in full force and effect;
(v) such Selling Shareholder now is, and on the
Closing Date and any Option Closing Date will be, the lawful owner of the Shares
to be sold by such Selling Shareholder pursuant to this Agreement. On the
Closing Date and any Option Closing Date, such Selling
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Shareholder will have good and marketable title to such Shares, free and clear
of all liens, encumbrances, security interests or other restrictions (other than
those created under the Custody Agreement). Upon proper delivery of, and payment
for, such Shares as provided herein, the Underwriters will acquire good and
marketable title thereto, free and clear of all liens, encumbrances, security
interests and other restrictions and defects whatsoever;
(vi) such Selling Shareholder has examined the
Primary Registration Statement and the Prospectus and the information relating
to such Selling Shareholder set forth therein and, as to such information,
neither the Primary Registration Statement nor the Prospectus contains any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(vii) such Selling Shareholder has not incurred
any liability for any finder's fee or similar payment in connection with the
sale of such Selling Shareholder's Shares hereunder; and
(viii) such Selling Shareholder has not distributed
and will not distribute any offering material in connection with the offering
and sale of the Shares other than the Registration Statements, a Preliminary
Prospectus, the Prospectus and other material, if any, permitted by the Act and
the Regulations. Neither such Selling Shareholder nor any affiliate of such
Selling Shareholder has taken or shall take any action designed, or that might
be reasonably expected, to cause or result in stabilization or manipulation of
the price of the Shares.
2. Purchase and Sale of Firm Shares. On the basis of the
representations, warranties, covenants and agreements contained herein, and
subject to the terms and conditions set forth herein, the Company shall sell
1,000,000 of the Firm Shares, and each Selling Shareholder, severally and not
jointly, shall sell the number of Firm Shares set forth opposite his name in
Table 1 of Schedule II hereto, to the several Underwriters, and each of the
Underwriters, severally and not jointly, shall purchase the number of Firm
Shares set forth opposite its name in Schedule I hereto, The purchase price of
the Firm Shares hereunder shall be the Offering Price less the Underwriting
Discounts and Commissions shown on the cover page of the Prospectus. Each
Underwriter shall be obligated to purchase from the Company, and from each
Selling Shareholder, that number of Firm Shares that represents the same
proportion of the number of Firm Shares to be sold by the Company, and by each
Selling Shareholder, as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule I hereto represents of the total number of Firm
Shares to be purchased by all of the Underwriters pursuant to this Agreement.
The respective purchase obligations of the Underwriters with respect to the Firm
Shares shall be rounded among the Underwriters to avoid fractional shares, as
the Representatives may determine. In making this Agreement, each Underwriter is
contracting severally and not jointly, and except as provided in Sections 4 and
11 hereof, the agreement of each Underwriter is to purchase only that number of
shares specified with respect to that Underwriter in Schedule I hereto. The
several Underwriters intend to offer the Shares to the public as set forth in
the Prospectus; provided, however, that no Shares registered pursuant to the
Rule 462(b) Registration Statement, if any, will be offered prior to the filing
of such registration
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<PAGE>
statement with the SEC. After the public offering, the several Underwriters may,
in their discretion, vary the public offering price.
3. Payment and Delivery.
(a) Delivery of and payment for the Firm Shares shall be made
at the offices of Janney Montgomery Scott Inc., 1801 Market Street,
Philadelphia, Pennsylvania at 10:00 a.m., Philadelphia, Pennsylvania time (i) on
the third full business day following the first day that the Firm are traded, or
(ii) at such other time and date not later than seven full business days
following the first day the Firm Shares are traded as the Representatives and
the Company may determine (or at such time and date to which delivery and
payment shall have been postponed pursuant to Section 11 hereof). Such date and
time of delivery and payment are referred to collectively herein as the "Closing
Date." Notwithstanding the foregoing, if the Company has not made available to
the Representatives copies of the Prospectus in the quantities and within the
time provided for in Section 5(a)(vii) hereof, the Representatives may, in their
sole discretion, postpone the Closing Date until no later than two full business
days following delivery of such copies of the Prospectus to the Representatives.
(b) On the Closing Date, the Company and the Selling
Shareholders shall deliver or cause to be delivered certificates representing
the Firm Shares to the Representatives for the account of each Underwriter
against payment to or upon the order of the Company (with respect to the Firm
Shares sold by it) and the Custodian (with respect to the Firm Shares sold by
the Selling Shareholders) of the purchase price (i) by certified or official
bank check or checks payable in New York Clearing House (next-day) funds, or
(ii) in immediately available funds wired to such accounts as the Company and/or
the Custodian may specify (with all costs and expenses incurred by the
Underwriters in connection with such settlement in immediately available funds,
including, but not limited to, interest or cost of funds expense, to be borne by
the Company and/or the Selling Shareholders, as the case may be). Time is of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of each Underwriter's obligation hereunder.
(c) The certificates representing the Firm Shares to be sold
and delivered will be in such denominations and registered in such names as the
Representatives request not less than two full business days prior to the
Closing Date, and will be made available to the Representatives for inspection,
checking and packaging at the offices of Janney Montgomery Scott Inc., 26
Broadway, New York, New York, not less than one full business day prior to the
Closing Date. If the Representatives so elect, delivery of the Firm Shares may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
(d) The Company and the Selling Shareholders shall not be
obligated to deliver any Firm Shares to be delivered on the Closing Date, except
upon payment for all the Firm Shares to be purchased on such date.
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<PAGE>
4. Option to Purchase Optional Shares.
(a) For the purposes of covering any over-allotments in
connection with the distribution and sale of the Firm Shares as contemplated by
the Prospectus, subject to the terms and conditions herein set forth, the
several Underwriters are hereby granted an option by the Company and the Selling
Shareholders to purchase all or any part of the Optional Shares (the
"Over-allotment Option"). The purchase price to be paid for the Optional Shares
shall be the Offering Price less the Underwriting Discounts and Commissions
shown on the cover page of the Prospectus. The Over-allotment Option granted
hereby may be exercised by the Representatives on behalf of the several
Underwriters as to all or any part of the Optional Shares at any time and from
time to time within 30 days after the date of the Prospectus. No Underwriter
shall be under any obligation to purchase any Optional Shares prior to an
exercise of the Over-allotment Option.
(b) The Over-allotment Option granted hereby may be exercised
by the Representatives on behalf of the several Underwriters by giving notice to
the Company and the Selling Shareholders by a letter delivered by hand or sent
by registered or certified mail, postage prepaid, or by courier, telegram or
facsimile (such notice to be effective when received), addressed as provided in
Section 13 hereof, setting forth the number of Optional Shares to be purchased,
the date and time for delivery of, and payment for, such Optional Shares and
stating that the Optional Shares referred to therein are to be used for the
purpose of covering over-allotments in connection with the distribution and sale
of the Firm Shares. If such notice is given at least two full business days
prior to the Closing Date, the date set forth therein for such delivery and
payment shall be the Closing Date. If such notice is given less than two full
business days prior to the Closing Date, the date set forth therein for such
delivery and payment shall be a date selected by the Representatives that is not
more than three full business days after the date the notice is effective. The
date and time set forth in such a notice is referred to herein as an "Option
Closing Date," and a closing held pursuant to such a notice is referred to
herein as an "Option Closing." Upon each exercise of the Over-allotment Option,
and on the basis of the representations, warranties, covenants and agreements
herein contained, and subject to the terms and conditions herein set forth, the
several Underwriters shall become severally, but not jointly, obligated to
purchase from the Selling Shareholders and the Company the number of Optional
Shares specified in each notice of exercise of the Over-allotment Option
(allocated among the several Underwriters in accordance with Section 4(c)
hereof).
(c) To the extent any Optional Shares are purchased, then the
Underwriters shall purchase all the Optional Shares of the Selling Shareholders,
as reflected in Table 2 of Schedule II hereto, before they purchase any Optional
Shares of the Company. To the extent the number of Optional Shares to be
purchased by the Underwriters at any Option Closing accounts for some but not
all of the Optional Shares of the Selling Shareholders listed in Table 2 of
Schedule II hereto, then the Underwriters shall purchase Optional Shares from
the Selling Shareholders pro rata in proportion to the amounts set forth
opposite their names in Table 2 of Schedule II hereto. At each Option Closing,
the Selling Shareholders will be obligated, severally and not jointly, to sell
their Optional Shares to the Underwriters in accordance with the foregoing
sentences. Subject to the foregoing, at each Option Closing, each Underwriter
shall be obligated, severally and not jointly, to purchase from each Selling
Shareholder, and from the Company, that number of Optional Shares that
represents the same proportion of the number of Optional Shares to be sold by
each Selling Shareholder, and
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<PAGE>
by the Company, as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto represents of the total number of Firm Shares
to be purchased by all of the Underwriters pursuant to this Agreement.
Notwithstanding the foregoing, the number of Optional Shares purchased and sold
pursuant to each exercise of the Over-allotment Option shall be subject to such
adjustment as the Representatives may approve to eliminate fractional shares and
shall be subject to the provisions for the allocation of Optional Shares
purchased for the purpose of covering over-allotments set forth in the agreement
entered into by and among the Underwriters in connection herewith (the
"Agreement Among Underwriters").
(d) Delivery of and payment for the Optional Shares to be
purchased by the several Underwriters pursuant to any exercise of the
Over-allotment Option shall be made at the offices of Janney Montgomery Scott
Inc., 1801 Market Street, Philadelphia, Pennsylvania, or such other place as
shall be agreed upon by the Company and the Representatives at 10:00 a.m.,
Philadelphia, Pennsylvania time on the Option Closing Date set forth in the
notice of such exercise. On such Option Closing Date, the Selling Shareholders
(who are obligated to sell Optional Shares pursuant to Section 4(c) hereof) and
the Company, if applicable, shall deliver or cause to be delivered certificates
representing the Optional Shares to the Representatives for the account of each
Underwriter against payment to or upon the order of the Custodian (with respect
to Optional Shares sold by Selling Shareholders) and the Company (with respect
to Optional Shares sold by it, if any), (i) by certified or official bank check
or checks payable in New York Clearing House (next-day) funds, or (ii) in
immediately available funds wired to such accounts as the Custodian and the
Company may specify (with all costs and expenses incurred by the Underwriters in
connection with such settlement in immediately available funds, including, but
not limited to, interest or cost of funds expense, to be borne by the Selling
Shareholders and the Company). Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each Underwriter hereunder.
(e) The certificates representing the Optional Shares to be
issued and delivered will be in such denominations and registered in such names
as the Representatives request not less than two full business days prior to the
Option Closing Date, and will be made available to the Representatives for
inspection, checking and packaging at the Philadelphia correspondent office of
the Company's transfer agent not less than one full business day prior to the
Option Closing Date. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
5. Certain Covenants and Agreements.
(a) Certain Covenants and Agreements of the Company. The
Company covenants and agrees with the several Underwriters as follows:
(i) if the Rule 462(b) Registration Statement
has not been filed at the time this Agreement is executed and delivered by the
parties hereto and such Rule 462(b) Registration Statement is required to be
filed, the Company will use its best efforts to cause such registration
statement to be filed and become effective as promptly as possible;
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<PAGE>
(ii) if the Company omitted information from
the Primary Registration Statement at the time it was declared effective in
reliance upon Rule 430A of the Regulations, the Company will timely file the
Prospectus pursuant to and in compliance with Rule 424(b)(1) or (4) and Rule
430A(a)(3) of the Regulations and will advise the Representatives of the time
and manner of such filing; provided, however, that if the Representatives shall
agree to the utilization of Rule 434 of the Regulations, the Company will timely
file pursuant to and in compliance with Rule 424(b)(7) and Rule 430A(a)(3) of
the Regulations the information required to be included in the Term Sheet, and
will advise the Representatives of the time and manner of such filing;
(iii) if for any reason the filing of a form of
Prospectus is required under Rule 424(b)(3) of the Regulations, the Company will
timely file such Prospectus pursuant to and in compliance with such Rule and
will advise the Representatives of the time and manner of such filing;
(iv) the Company will not file or publish any
Rule 462(b) Registration Statement or any amendment or supplement to the
Registration Statement(s), Preliminary Prospectus or Prospectus at any time
before the completion (in the opinion of the Underwriters' counsel) of the
distribution of the Shares by the Underwriters that is not (A) in compliance
with the Regulations; and (B) approved by the Representatives (such approval not
to be unreasonably withheld or delayed);
(v) the Company will advise the Representatives
immediately, and confirm such advice in writing, (A) when any Rule 462(b)
Registration Statement or post-effective amendment to the Registration
Statements is filed with the SEC, (B) of the receipt of any comments from the
SEC concerning the Registration Statements, (C) when any post-effective
amendment to the Registration Statements becomes effective, or when any
supplement to the Prospectus or any amended Prospectus has been filed, (D) of
any request of the SEC for amendment or supplementation of the Registration
Statements or Prospectus or for additional information, (E) during the period
when the Prospectus is required to be delivered under the Act and Regulations,
of the happening of any event as a result of which the Registration Statements
would include an untrue statement of a material fact or omit to state a material
fact required therein or necessary to make the statements therein not
misleading, or as a result of which the Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, (F)
during the period noted in clause (E) above, of the need to amend the
Registration Statements or supplement the Prospectus to comply with the Act, (G)
of the issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statements or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, and (H) of the suspension of the
qualification of any the Shares for offering or sale in any jurisdiction in
which the Underwriters intend to make such offers or sales, or of the initiation
or threatening of any proceedings for any of such purposes known to the Company.
The Company will use its best efforts to prevent the issuance of any such stop
order or of any order preventing or suspending such use, and if any such order
is issued, to obtain as soon as possible the lifting thereof;
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<PAGE>
(vi) in case of any event (occurring at any time
within the period during which, in the opinion of Blank Rome Comisky & McCauley,
counsel for the Underwriters ("Underwriters' Counsel"), a prospectus is required
to be delivered under the Act and Regulations), as a result of which any
Preliminary Prospectus or the Prospectus, as then amended or supplemented, would
contain, in the opinion of Underwriters' Counsel, an untrue statement of a
material fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or, if it is necessary at any time to amend any Preliminary
Prospectus or the Prospectus to comply with the Act and Regulations or any
applicable securities or Blue Sky laws, the Company promptly will prepare and
file with the SEC, and any applicable state or foreign securities commission, an
amendment, supplement or document that will correct such statement or omission
or effect such compliance and will furnish to the several Underwriters such
number of copies of such amendments, supplements or documents (in form and
substance satisfactory to the Representatives and counsel for the Underwriters)
as the Representatives may reasonably request. For purposes of this Section 5(a)
(vi), the Company will provide such information to the Representatives, the
Underwriters' Counsel and counsel to the Company as shall be necessary to enable
such persons to consult with the Company as shall be necessary to enable such
persons to consult with the Company with respect to the need to amend or
supplement the Registration Statements, Preliminary Prospectus or Prospectus or
file any document, and shall furnish to the Representatives and the
Underwriters' Counsel such further information as each may from time to time
reasonably request;
(vii) the Company has delivered to the
Representatives, without charge, as many copies of each Preliminary Prospectus
as the Representatives have reasonably requested. The Company will deliver to
the Representatives, without charge, from time to time during the period when
delivery of the Prospectus is required under the Act, such number of copies of
the Prospectus (as supplemented or amended) as the Representatives may
reasonably request. The Company hereby consents to the use of such copies of the
Preliminary Prospectus and the Prospectus for purposes permitted by the Act, the
Regulations and the securities or Blue Sky laws of the states or foreign
jurisdictions in which the Common Shares are offered by the several Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
Prospectus is required by the Act to be delivered in connection with sales by
any Underwriter or dealer. The Company has furnished or will furnish to the
Representatives at least three original signed copies of the Registration
Statements as originally filed and of all amendments and supplements thereto,
whether filed before or after the Effective Date, at least three copies of all
exhibits filed therewith and of all consents and certificates of experts, and
will deliver to the Representatives such number of conformed copies of the
Registration Statements, including financial statements and exhibits, and all
amendments thereto, as the Representatives may reasonably request;
(viii) the Company will comply with the Act, the
Regulations, the Exchange Act and the rules and regulations thereunder so as to
permit the continuance of sales of, and dealings in, the Shares for as long as
may be necessary to complete the distribution of the Shares as contemplated
hereby;
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<PAGE>
(ix) the Company will furnish such information
and pay such filing fees and other expenses as may be required, and otherwise
cooperate in the registration or qualification of the Shares, or exemption
therefrom, for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions in which the
Representatives determine to offer the Shares, after consultation with the
Company, and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or qualification;
provided, however, that no such qualification shall be required in any
jurisdiction where, solely as a result thereof, the Company would be subject to
taxation or qualification as a foreign corporation doing business in such
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such statements
and reports as are or may be required to continue such qualification in effect
for so long a period as is required under the laws of such jurisdictions for
such offering and sale;
(x) the Company will make generally available to
its security holders, as soon as practicable, but not later than 45 days after
the end of the period covered thereby, an earnings statement of the Company
(which need not be audited unless required by the Act or the Regulations) that
shall comply with Section 11 (a) of the Act and the Regulations (including, at
the option of the Company, Rule 158) and cover a period of at least 12
consecutive months beginning not later than the first day of the Company's
fiscal quarter next following the Effective Date;
(xi) for a period of three years from the
Effective Date, the Company will deliver to the Representatives: (A) a copy of
each report or document, including, without limitation, reports on Forms 8-K,
10-K and 10-Q (or such similar forms as may be designated by the SEC),
registration statements and any exhibits thereto, filed with or furnished to the
SEC or any securities exchange or the Nasdaq Stock Market's National Market
System or the NASD, on the date each such report or document is so filed or
furnished; (B) as soon as practicable, copies of any reports or communications
(financial or other) of the Company mailed to its security holders; and (C)
every press release in respect of the Company or its affairs that is released or
prepared by the Company;
(xii) during the course of the distribution of the
Shares, the Company will not take, directly or indirectly, any action designed
to, or that could reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Shares;
(xiii) the Company will not engage in any
transactions with affiliates (as defined in the Regulations) without the prior
approval of a majority of the disinterested members of its Board of Directors;
(xiv) the Company will use all reasonable efforts
to maintain the inclusion of the Common Shares (including, without limitation,
the Shares) for quotation on the Nasdaq Stock Market's National Market System;
(xv) the Company shall, at its sole cost and
expense, supply and deliver to the Representatives and the Underwriters'
Counsel, within a reasonable period from the Closing
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Date, closing binders, in such number as the Representatives shall reasonably
request, each of which shall include the Registration Statements, as amended or
supplemented, all exhibits to the Registration Statements, the Prospectus, as
amended or supplemented, the Preliminary Blue Sky Memorandum and any supplement
thereto, all underwriting and closing documents and all other correspondence,
filings and applications with the SEC, the NASD and the Nasdaq Stock Market's
National Market System;
(xvi) the Company will use the net proceeds from
the sale of the Shares to be sold by it hereunder substantially in accordance
with the description set forth under the caption "Use of Proceeds" in the
Prospectus and shall file such reports with the SEC with respect to the sale of
such Shares and the application of the proceeds therefrom as may be required
under the Regulations, including, but not limited to, Rule 463;
(xvii) the Company will maintain a transfer agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its Common
Shares;
(xviii) the Company will take such steps as shall be
necessary to insure that neither it nor any Subsidiary shall become an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended, and the rules and regulations of the SEC
thereunder;
(xix) during the Lock-Up Period, the Company will
not, without the prior written consent of the Representatives, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Optional Shares hereunder and the Company's issuance of
Common Stock upon the exercise of options, presently outstanding, under the
Company's stock option plans (the "Stock Plans") and expressly described in the
Prospectus plan; and
(xx) for a period of three years from the
Effective Date, the Company will deliver to the Representatives, subject to
execution of an appropriate confidentiality agreement, such additional
information concerning the business and financial condition of the Company as
the Representatives may from time to time reasonably request, and which can be
prepared or obtained by the Company without unreasonable effort or expense.
(b) Certain Covenants and Agreements of the Selling
Shareholders. Each Selling Shareholder covenants and agrees with the several
Underwriters as follows:
(i) during the course of the distribution of the
Shares, such Selling Shareholder shall not take, directly or indirectly, any
action designed to, or that could reasonably be expected to, cause or result in
stabilization or manipulation of the market price of the Shares;
(ii) during the Lock-Up Period, such Selling
Shareholder will not, without the prior written consent of the Representatives,
effect the Disposition of, directly or indirectly, any Securities other than
such Selling Shareholder's Firm Shares and Optional Shares hereunder; and
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(iii) such Selling Shareholder will deliver to the
Representatives prior to the Closing Date a properly completed and executed
United States Treasury Department Form W-8 (if the Selling Shareholder is a
non-United States person) or Form W-9 (if the Selling Shareholder is a United
States person).
6. Payment of Fees.
(a) Whether or not the transactions contemplated by this
Agreement are consummated and regardless of the reason this Agreement is
terminated, the Company will pay or cause to be paid, and bear or cause to be
borne, all costs and expenses incident to the performance of the obligations of
the Company under this Agreement, including:
(i) the fees and expenses of the accountants and
counsel for the Company incurred in the preparation of the Registration
Statements and any post-effective amendments thereto (including financial
statements and exhibits), Preliminary Prospectuses and the Prospectus and any
amendments or supplements thereto;
(ii) printing and mailing expenses associated
with the Registration Statements and any post-effective amendments thereto,
Preliminary Prospectus, the Prospectus, this Agreement, the Agreement Among
Underwriters, the Underwriters' Questionnaire submitted to each of the
Underwriters by the Representatives in connection herewith, the Power of
Attorney executed by each of the Underwriters in favor of the Representatives in
connection herewith, the Selected Dealer Agreement and related documents and the
preliminary Blue Sky memorandum (collectively with any supplement thereto, the
"Blue Sky Memorandum");
(iii) the costs (other than fees and expenses of
the Underwriters' Counsel, except such fees incurred in connection with Blue Sky
and NASD filings or exemptions as provided herein) incident to the
authentication, insurance, sale and delivery of the Shares to the Underwriters;
(iv) the fees, expenses and all other costs of
qualifying the Shares for sale under the securities or Blue Sky laws of those
states in which the Shares are to be offered or sold, including, without
limitation, the reasonable fees (not to exceed $10,000) and expenses of
Underwriters' Counsel and such local counsel as may have been reasonably
required and retained for such purpose;
(v) the fees, expenses and other costs of, or
incident to, securing any review or approvals by or from the NASD, including the
reasonable fees and expenses of the Underwriters' Counsel;
(vi) the filing fees of the SEC;
(vii) the cost of furnishing to the Underwriters
copies of the Registration Statements, Preliminary Prospectuses and Prospectuses
as herein provided;
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(viii) the Company's travel expenses in connection
with meetings with the brokerage community and institutional investors;
(ix) the costs and expenses associated with
settlement in same day funds (including, but not limited to, interest or cost of
funds expenses), if desired by the Company;
(x) any fees or costs payable to the Nasdaq
Stock Market's National Market System as a result of the offering;
(xi) the cost of printing certificates for the
Shares;
(xii) the cost and charges of any transfer agent;
(xiii) all taxes, if any, on the issuance, delivery
and transfer of the Shares sold by the Company; and
(xiv) all other costs and expenses reasonably
incident to the performance of the Company's and the Selling Shareholders'
obligations hereunder that are not otherwise specifically provided for in this
Section 6(a); provided, however, that, except as specifically set forth in
Section 6(c) hereof, (A) the Company shall pay to the Representatives a
non-accountable expense allowance of $150,000 to cover expenses incurred by the
Representatives in connection with the Offering (including price stabilization
transactions), and (B) the Selling Shareholders shall be responsible for any
transfer or income taxes assessed with respect to the Shares sold by the Selling
Shareholders and any fees and expenses of the Selling Shareholders' counsel and
such other expenses as are agreed to by the Company and the Selling Shareholders
or as may be required by law or regulation.
(b) The Company shall pay as due any state or foreign
registration, qualification and filing fees and any accountable out-of-pocket
disbursements in connection with such registration, qualification or filing in
the states and foreign jurisdictions in which the Representatives determine to
offer or sell the Shares.
(c) If the Underwriters are willing to proceed with the
offering, and the transactions contemplated by this Agreement are not
consummated because the Company or the Selling Shareholders elect not to proceed
with the offering for any reason or if the Representatives terminate this
Agreement pursuant to Section 10(b) hereof, then the Company will reimburse the
Representatives for their actual and accountable out-of-pocket expenses,
including, without limitation, fees and disbursements of Underwriters' Counsel,
incurred in the performance of or in contemplation of performing their
obligations hereunder, in an amount not to exceed $100,000.
7. Conditions of Underwriters' Obligations.
The obligation of each Underwriter to purchase and pay for the
Firm Shares that it has agreed to purchase hereunder on the Closing Date, and to
purchase and pay for any Optional Shares as to which it exercises its right to
purchase under Section 4 on an Option Closing Date, is
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subject at the date hereof, the Closing Date and any option Closing Date, to the
continuing accuracy and fulfillment of the representations and warranties of the
Company and the Selling Shareholders, to the performance by the Company and the
Selling Shareholders of their covenants and obligations hereunder, and to the
following additional conditions:
(a) if required by the Regulations, the Prospectus shall have
been filed with the SEC pursuant to Rule 424(b) of the Regulations within the
applicable time period prescribed for such filing by the Regulations. On or
prior to the Closing Date or any Option Closing Date, as the case may be, no
stop order or other order preventing or suspending the effectiveness of the
Primary Registration Statement or the Rule 462(b) Registration Statement, if
any, or the sale of any of the Shares shall have been issued under the Act or
any state securities law, and no proceedings for that purpose shall have been
initiated or shall be pending or, to the Representatives' knowledge or the
knowledge of the Company, shall be contemplated by the SEC or by any authority
in any jurisdiction designated by the Representatives pursuant to Section
5(a)(x) hereof. Any request on the part of the SEC for additional information
shall have been complied with to the reasonable satisfaction of Underwriters'
Counsel;
(b) all corporate proceedings and other matters incident to
the authorization, for and validity of this Agreement, the Shares and the form
of the Registration Statements and the Prospectus, as amended and supplemented,
and all other legal matters relating to this Agreement and the transactions
contemplated hereby shall be satisfactory in all material respects to
Underwriters' Counsel. The Company and the Selling Shareholders shall have
furnished to such counsel all documents and information that they may have
reasonably requested to enable them to pass upon such matters;
(c) the NASD shall have indicated it has no objection to the
underwriting arrangements pertaining to the sale of any Shares;
(d) the Representatives shall have received a copy of an
executed Lock-up Agreement from each person described on Schedule IV hereto;
(e) the Representatives shall have received at or prior to the
Closing Date from the Underwriters' counsel a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the securities or
Blue Sky laws of such jurisdictions designated by the Representatives pursuant
to Section 5(a)(x) hereof;
(f) on the Closing Date and any Option Closing Date, there
shall have been delivered to the Representatives a signed opinion of Kaufman &
Canoles, a professional corporation, counsel for the Company in the form
attached hereto as Exhibit 1, dated as of each such date and addressed to the
Representatives individually and as representatives of the several Underwriters
to such effect as is reasonably satisfactory to the Representatives;
(g) on the Closing Date and any Option Closing Date, there
shall have been delivered to the Representatives signed opinions of one or more
counsel for the Selling Shareholders
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<PAGE>
in the form attached hereto as Exhibit 2, dated as of each such date and
addressed to the Representatives individually and as representatives of the
several Underwriters to such effect as is reasonably satisfactory to the
Representatives;
(h) at the Closing Date and any Option Closing Date: (i) the
Registration Statements and any post-effective amendment thereto and the
Prospectus and any amendments or supplements thereto shall contain all
statements that are required to be stated therein in accordance with the Act and
the Regulations and in all material respects shall conform to the requirements
of the Act and the Regulations, and the Registration Statements and any
Post-effective amendment thereto shall not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and the Prospectus,
as amended or supplemented, shall not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; (ii) since the respective dates as of which information is
given in the Registration Statements and any post-effective amendment thereto
and the Prospectus and any amendments or supplements thereto, except as
otherwise expressly stated therein, there shall have been no material adverse
change in the properties, condition (financial or otherwise), results of
operations, stockholders' equity, business or management of the Company and the
Subsidiary taken as a whole, from that set forth therein, whether or not arising
in the ordinary course of business; (iii) since the respective dates as of which
information is given in the Registration Statements and any post-effective
amendment thereto and the Prospectus or any amendment or supplement thereto,
there shall have been no event or transaction, contract or agreement entered
into by the Company or any Subsidiary, other than in the ordinary course of
business and as set forth in the Registration Statements or Prospectus, that has
not been, but would be required to be, set forth in the Registration Statements
or Prospectus; and (iv) no action, suit or proceeding at law or in equity shall
be pending or threatened against the Company or any Subsidiary that would be
required to be set forth in the Prospectus, other than as set forth therein, and
no proceedings shall be pending or threatened against or directly affecting the
Company or any Subsidiary before or by any federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding would have a Material Adverse Effect other than as set forth in the
Prospectus;
(i) the Representatives shall have received at the Closing
Date and any Option Closing Date certificates of the Company signed by the Chief
Executive Officer and the Chief Financial Officer of the Company dated as of the
date of the Closing Date or Option Closing Date, as the case may be, and
addressed to the Representatives, individually and as representatives of the
several Underwriters, to the effect that (i) the signers of the certificate have
read this Agreement, and the representations and warranties of the Company in
this Agreement are true and correct in all material respects, as if made at and
as of the Closing Date or the Option Closing Date, as the case may be, and the
Company has complied in all material respects with all the agreements, fulfilled
in all material respects all the covenants and satisfied in all material
respects all the conditions on its part to be performed, fulfilled or satisfied
at or prior to the Closing Date or the Option Closing Date, as the case may be,
and (ii) the signers of the certificate have carefully examined the Registration
Statement and the Prospectus and any amendments or supplements thereto, and the
conditions set forth in Section 7(h) hereof have been satisfied;
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<PAGE>
(j) the Representatives shall have received at the Closing
Date and any Option Closing Date certificates of or on behalf of the Selling
Shareholders dated as of the date of the Closing Date or Option Closing Date, as
the case may be, and addressed to the Representatives, individually and as
representatives of the several Underwriters, to the effect that (i) the Selling
Shareholders have read this Agreement, and the representations and warranties of
the Selling Shareholders in this Agreement are true and correct in all material
respects, as if made at and as of the Closing Date or the Option Closing Date,
as the case may be, and (ii) the Selling Shareholders have examined the
Registration Statement and the Prospectus and any amendments or supplements
thereto, and the conditions set forth in Section 7(h) hereof have been satisfied
with respect to the Selling Shareholders;
(k) at the time this Agreement is executed and at the Closing
Date and any Option Closing Date, the Representatives shall have received a
letter addressed to the Representatives, individually and as representatives of
the several Underwriters, in form and substance satisfactory to the
Representatives in all respects (including, without limitation, the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
from KPMG Peat Marwick dated as of the date of this Agreement, the Closing Date
or the Option Closing Date, as the case may be:
(i) confirming they are independent certified
public accountants within the meaning of the Act and the Regulations, and
stating that the section of the Primary Registration Statement under the caption
"Experts" is correct insofar as it relates to them;
(ii) stating that, in their opinion, the
consolidated financial statements, schedules and notes of the Company and the
Subsidiaries audited by them and included in the Registration Statements comply
in form in all material respects with the applicable accounting requirements of
the Act and the Regulations;
(iii) stating that, on the basis of specified
procedures, which included the applicable procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information, as described in SAS No. 71, Interim Financial Information, a
reading of the latest available unaudited interim consolidated financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the minutes of
the meetings of the stockholders and the Boards of Directors of the Company and
the Subsidiaries, and audit and compensation committees of such Boards, if any,
and inquiries to certain officers and other employees of the Company and the
Subsidiaries responsible for operational, financial and accounting matters and
other specified procedures and inquiries, nothing has come to their attention
that would cause them to believe that (A) the unaudited consolidated financial
statements of the Company and the Subsidiaries included in the Registration
Statements and related schedules if any, (1) do not comply in form and in all
material respects with the applicable accounting requirements of the Act and the
Regulations, or (2) should be materially modified in order for such unaudited
financial statements to be in conformity with generally accepted accounting
principles; (B) at a specified date not more than five business days prior to
the date of such letter, there was any change in the capital stock or debt of
the Company or any decrease in net current assets, total assets or stockholders'
equity of the Company as compared with the amounts shown in the April 30, 1997
consolidated balance sheet of the Company included the
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Registration Statements, or that for the period from May 1, 1997 to a specified
date not more than five days prior to the date of the letter, there were any
decreases, in revenues, operating income or total or per share amounts of net
income, except in all instances for changes, decreases or increases that the
Registration Statements disclose have occurred or may occur and except for such
other changes, decreases or increases which the Representatives shall in their
sole discretion accept; or (C) the unaudited pro forma financial statements
included in the Registration Statements, if any, do not comply as to form in all
material respects with the applicable accounting requirements of Regulation S-X
under the Act and that the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of those statements; and
(iv) stating that they have compared specific
dollar amounts, numbers of shares and other numerical data and financial
information set forth in the Registration Statement that have been specified by
the Representatives prior to the date of this Agreement (to the extent that such
information is derived from the accounting records subject to the internal
control structure, policies and procedures of the Company's or the Subsidiaries'
accounting system, or has been derived directly from such accounting records by
analysis or comparison or has been derived from other records and analyses
maintained or prepared by the Company or any Subsidiary thereof) with the
results obtained from the application of readings, inquiries and other
appropriate procedures (which procedures do not constitute an audit in
accordance with generally accepted auditing standards) set forth in the letter,
and found them to be in agreement;
(l) the Representatives shall have received from KPMG Peat
Marwick a letter addressed to the Company and made available to the
Representatives for the use of the Underwriters stating that their review of the
Company's system of internal accounting controls, to the extent they deem
necessary in establishing the scope of their audit of the Company's consolidated
financial statements as of April 30, 1997 did not disclose any weaknesses in
internal controls that they considered to be material weaknesses;
(m) there shall have been duly tendered to the Representatives
for the respective accounts of the Underwriters certificates representing all of
the Shares to be purchased by the Underwriters on the Closing Date or any Option
Closing Date, as the case may be;
(n) at the Closing Date and any Option Closing Date, the
Representatives shall have been furnished such additional documents, information
and certificates as they shall have reasonably requested;
(o) the issuance and sale of the Shares shall be legally
permitted under applicable Blue Sky or state securities laws so long as such
sales are made in accordance with the Blue Sky Memorandum;
(p) the Representatives shall have received copies of the
executed Custody Agreement provided for in Section 1(b)(i) hereof for each
Selling Shareholder, and such documents shall have been approved in form and
substance by the Underwriters' Counsel, such approval not to be withheld
unreasonably; and
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(q) all corporate and other proceedings and other matters
incident to the authorization, form and validity of this Agreement and the form
of the Registration Statements and Prospectus and all other legal matters
related to this Agreement and the transactions contemplated hereby (including
but not limited to all opinions, certificates, letters and documents required or
permitted hereunder) shall be reasonably satisfactory in all respects to
Underwriters' Counsel. The Company and the Selling Shareholders shall have
furnished to such counsel all documents and information that they shall have
reasonably requested to enable them to pass upon such matters.
The Company and the Selling Shareholders shall furnish the
Representatives with such conformed copies of such opinions, certificates,
letters and other documents as they shall reasonably request. All such opinions,
certificates, letters and documents shall be in compliance with the provisions
hereof only if they are reasonably satisfactory in form and substance to the
Representatives and the Underwriters' counsel. If any condition to the
Underwriters' obligations hereunder to be fulfilled prior to or at the Closing
Date or any Option Closing Date, as the case may be, is not fulfilled, the
Representatives may on behalf of the several Underwriters, terminate this
Agreement with respect to the Closing Date or such Option Closing Date, as
applicable, or, if they so elect, waive any such conditions that have not been
fulfilled or extend the time for their fulfillment. Any such termination shall
be without liability of the Underwriters to the Company or the Selling
Shareholders.
8. Indemnification and Contribution
(a) The Company and each Selling Shareholder, severally and
not jointly, shall indemnify and hold harmless each Underwriter, and each
person, if any, who controls each Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever, including, but not limited to,
any and all reasonable expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever or in connection with any investigation or inquiry of, or action or
proceeding that may be brought against, the respective indemnified parties,
arising out of or based upon (x) in the case of each Selling Shareholder, any
breach of such Selling Shareholder's representation and warranties made in this
Agreement, and (y) in the case of the Company, (i) any breach of representations
and warranties made in this Agreement; (ii) any untrue statements or alleged
untrue statements of material fact contained in any Preliminary Prospectus, the
Registration Statements or the Prospectus, or any amendment or supplement
thereto, any application or other document (in this Section 8 collectively
called "application") executed by the Company and based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify all or any part of the Shares under the securities laws thereof or filed
with the SEC or the NASD, (iii) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (iv) any untrue statement or alleged untrue statement of
material fact contained in any audio or visual materials used in connection with
the marketing of the Shares, including without limitation, slides, videos, films
and tape recordings, or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referenced in any claim or action arising out of or based upon
matters covered by (i) or (ii) above; provided, however, that the foregoing
indemnity:
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(i) shall not apply in respect of any statement
or omission made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
expressly for use in any Preliminary Prospectus, the Registration Statements or
Prospectus, or any amendment or supplement thereto, as the case may be; and
(ii) with respect to any Preliminary Prospectus,
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages, liabilities or expenses purchased the Shares
if, at or prior to the written confirmation of the sale of such Shares, a copy
of an amended Preliminary Prospectus or the Prospectus (or the Prospectus as
amended or supplemented) was delivered to such Underwriter, but was not sent, or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the amended
Preliminary Prospectus or Prospectus (or the Prospectus as amended or
supplemented), unless such failure on the part of such Underwriter is the result
of noncompliance by the Company with Section 5(a)(vi) hereof.
The obligations of the Company and the Selling Shareholders under this
Section 8(a) will be in addition to any liability the Company and the Selling
Shareholders may otherwise have.
(b) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statements, each Selling Shareholder, and each other person, if any, who
controls the Company or a Selling Shareholder within the meaning of the Act to
the same extent as the foregoing indemnities from the Company and the Selling
Shareholders to the several Underwriters, but only with respect to any loss,
liability, claim, damage or expense resulting from statements or omissions, or
alleged statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statements or Prospectus or any amendment or supplement thereto,
and in conformity with written information furnished to the Company by any
Underwriter through the Representatives expressly for use in any Preliminary
Prospectus, the Registration Statements or Prospectus, or any amendment or
supplement thereto, or any application, as the case may be. The obligations of
each Underwriter under this Section 8(a) will be in addition to any liability
such Underwriter may otherwise have.
(c) If any action, inquiry, investigation or proceeding is
brought against any person in respect of which indemnification may be sought
pursuant to Section 8(a) or (b) hereof, such person (hereinafter called the
"indemnified party") shall, promptly after notification of, or receipt of
service of process for, such action, inquiry, investigation or proceeding,
notify in writing the party or parties against whom indemnification is to be
sought (hereinafter called the "indemnifying party") of the institution of such
action, inquiry, investigation or proceeding. The indemnifying party, upon the
request of the indemnified party, shall assume the defense of such action,
inquiry, investigation or proceeding, including, without limitation, the
employment of counsel (reasonably satisfactory to such indemnified party) and
payment of expenses. No indemnification provided for in this Section 8 shall be
available to any indemnified party who shall fail to give such notice if the
indemnifying party does not have knowledge of such action, inquiry,
investigation or proceeding, to the extent that such indemnifying party has been
materially
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prejudiced by the failure to give such notice, but the omission to so notify the
indemnifying party shall not relieve the indemnifying party otherwise than under
this Section 8. Such indemnified party or controlling person thereof shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless the employment of such counsel shall have been authorized in writing by
the indemnifying party in connection with the defense of such action. If such
indemnified party or parties shall have been advised by counsel that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties or that there may be legal defenses available
to such indemnified party or parties different from or in addition to those
available to the indemnifying party or parties, the indemnified party or parties
shall be entitled to select counsel to conduct the defense to the extent
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties, and the reasonable fees and expenses of such
counsel shall be borne by the indemnifying party. Expenses covered by the
indemnification in this Section 8 shall be paid by the indemnifying party as
they are incurred by the indemnified party. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action. Anything in this Section 8 to the contrary
notwithstanding, the indemnifying party shall not be liable for any settlement
of any such claim effected without its written consent.
(d) Each Selling Shareholder's aggregate liability under this
Section 8 shall be limited to an amount equal to the net proceeds (before
deducting expenses) received by such Selling Shareholder from the sale of such
Selling Shareholder's Shares pursuant to this Agreement.
(e) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under Section
8(a) or (b) hereof in respect of any losses, liabilities, claims, damages or
expenses (or actions, inquiries, investigations or proceedings in respect
thereof) referred to herein, except by reason of the provisos set forth in
Section 8(a) hereof or the failure to give notice as required in Section 8(c)
hereof (provided that the indemnifying party does not have knowledge of the
action, inquiry, investigation or proceeding and to the extent such party has
been materially prejudiced by the failure to give such notice), then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, liabilities, claims, damages or
expenses (or actions, inquiries, investigations or proceedings in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company or the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company or each Selling Shareholder on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, liabilities, claims or reasonable expenses (or actions, inquiries,
investigations or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company or each
Selling Shareholder an the one hand and the
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<PAGE>
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company or each Selling Shareholder bears to the total underwriting discount and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or a Selling Shareholder on the
one hand or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this Section
8(e) were determined by pro rata allocation (even if the Selling Shareholders or
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to above in this Section 8(e). The amount paid or payable by an
indemnified party as a result of the losses, liabilities, claims, damages or
reasonable expenses (or actions, inquiries, investigations or proceedings in
respect thereof) referred to above in this Section 8(e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(e), (i) the provisions of the
Agreement Among Underwriters shall govern contribution among Underwriters, (ii)
no Underwriter (except as provided in the Agreement Among Underwriters) shall be
required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and (iii) no
person guilty of fraudulent misrepresentation (within the meaning of Section 11
(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' and the Selling
Shareholders' obligations in this Section 8(e) to contribute are several in
proportion to their individual underwriting obligations and number of Shares
sold, respectively, and not joint.
9. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements made as of the Closing Date and any Option Closing Date. All such
representations, warranties and agreements of the Underwriters, the Company and
the Selling Shareholders, including, without limitation, the indemnity and
contribution agreements contained in Section 8 hereof and the agreements
contained in Sections 6, 9, 10 and 13 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any controlling person, and shall survive delivery of the Shares
and termination of this Agreement, whether before or after the Closing Date or
any Option Closing Date.
10. Effective Date of this Agreement and Termination Hereof.
(a) This Agreement shall become effective at the earlier of
(i) 10:00 a.m., Philadelphia, Pennsylvania time, on the first business day
following the Effective Date or (ii) at the time of the public offering by the
Underwriters of the Shares, whichever is earlier, except that the
-31-
<PAGE>
provisions of Sections 6, 8, 10 and 13 hereof shall be effective upon execution
hereof. The time of the public offering, for the purpose of this Section 10,
shall mean the time when any of the Shares are first released by the
Underwriters for offering by dealers. The Representatives may prevent the
provisions of this Agreement (other than those contained in Sections 6, 8, 10
and 13) hereof from becoming effective without liability of any party to any
other party, except as provided in Sections 6 and 8 hereof, by giving the notice
indicated in Section 10(c) hereof before the time the other provisions of this
Agreement become effective.
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date as provided in Sections 7 and 11
hereof or if any of the following have occurred:
(i) since the respective dates as of which
information is given in the Registration Statements and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company, or the earnings, business affairs, management or business prospects of
the Company, whether or not arising in the ordinary course of business, that
would, in the Representatives' reasonable judgment, make the offering or
delivery of the Shares impracticable;
(ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic, political or
financial market conditions if the effect on the financial markets of the United
States of such outbreak, calamity, crisis or change would, in the
Representatives' reasonable judgment, make the offering or delivery of the
Shares impracticable;
(iii) suspension of trading generally in
securities on the New York Stock Exchange, the American Stock Exchange, or the
over-the-counter market (including, without limitation, the Nasdaq Stock
Market's National Market System) or limitation on prices (other than limitations
on hours or numbers of days of trading) for securities or the promulgation of
any federal or state statute, regulation, rule or order of any court or other
governmental authority that in the Representatives' reasonable opinion
materially and adversely affects trading of the Shares on such exchange or
over-the-counter market;
(iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority that in the Representatives' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company;
(v) the taking of any action by any federal,
state or local government or agency in respect of monetary or fiscal affairs
that in the Representatives' reasonable opinion has a material adverse effect on
the securities markets in the United States; or
(vi) trading in any securities of the Company
shall have been suspended or halted by the Nasdaq Stock Market's National Market
System or the SEC.
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<PAGE>
(c) If the Representatives elect to prevent this Agreement
from becoming effective or to terminate this Agreement as provided in this
Section 10, the Representatives shall notify the Company and the Selling
Shareholders thereof promptly by telephone, telegram or facsimile, confirmed by
letter.
11. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Optional Shares hereunder, and if
the Firm Shares or Optional Shares with respect to which such default relates do
not exceed in the aggregate 10% of the number of Firm Shares or Optional
Shares, as the case may be, that all Underwriters have agreed to purchase
hereunder, then such Firm Shares or Optional Shares to which the default relates
shall be purchased severally by the non-defaulting Underwriters in proportion to
their respective commitments hereunder.
(b) If such default relates to more than 10% of the Firm
Shares or Optional Shares, as the case may be, the Representatives may in their
discretion arrange for another party or parties (including a non-defaulting
Underwriter) to purchase such Firm Shares or Optional Shares to which such
default relates, on the terms contained herein. In the event that the
Representatives do not arrange for the purchase of the Firm Shares or Optional
Shares to which a default relates as provided in this Section 11(b), this
Agreement may be terminated by the Representatives or by the Company without
liability on the part of the several Underwriters (except as provided in Section
8 hereof) or the Company (except as provided in Sections 6 and 8 hereof);
provided that if such default occurs with respect to Optional Shares after the
Closing Date, this Agreement will not terminate as to the Firm Shares or any
Optional Shares purchased prior to such termination. Nothing herein shall
relieve a defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default hereunder.
(c) If the Firm Shares or Optional Shares to which the default
relates are to be purchased by the nondefaulting Underwriters, or are to be
purchased by another party or parties, the Representatives or the Company shall
have the right to postpone the Closing Date or any Option Closing Date, as the
case may be, for a reasonable period, but not in any event exceeding seven days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statements or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment to the
Registration Statements or supplement to the Prospectus that in the opinion of
Underwriters' Counsel may thereby be made necessary. The terms "Underwriters"
and "Underwriter" as used in this Agreement shall include any party substituted
under this Section 11 with like effect as if it had originally been a party to
this Agreement with respect to the Firm Shares and/or Optional Shares purchased
by it.
(d) It is understood that the Representatives (or either of
them), individually and not as the representatives of the several Underwriters,
may (but shall not be obligated to) make payment of the purchase price on behalf
of any Underwriter or Underwriters whose check or checks shall not have been
received by them prior to the Closing Date or the Option Closing Date for the
Firm Shares or Optional Shares, as the case may be, to be purchased by such
Underwriter or
-33-
<PAGE>
Underwriters. Any such payment by the Representatives shall not relieve any
such Underwriter or Underwriters of any of its or their obligations hereunder.
12. Information Furnished by Underwriters. The statement set forth on
the inside cover page regarding stabilization and in the second and eighth
paragraph under the caption "Underwriting" in any Preliminary Prospectus and the
Prospectus constitute the only written information furnished by or on behalf of
any Underwriter referred to in Sections l(a)(ii) and 8 hereof.
13. Notice. All communications hereunder, except as otherwise
specifically provided herein, shall be in writing and, if sent to the
Underwriters, shall be mailed, delivered, telegrammed or faxed and confirmed to
such Underwriters, c/o Janney Montgomery Scott Inc., 1801 Market Street,
Philadelphia, PA 19103, Attention: Mr. Edward J. Losty, with a copy to Blank
Rome Comisky & McCauley, Four Penn Center Plaza, Philadelphia, PA 19103,
Attention: Barry H. Genkin, Esquire; if sent to the Company, shall be mailed,
delivered, telegrammed or faxed and confirmed to Jackson Hewitt Inc., 4575
Bonney Road, Virginia Beach, VA 23462, Attention: Keith E. Alessi, Chairman,
President and Chief Executive Officer, with a copy to Kaufman & Canoles, One
Commercial Place, Suite 2000, Norfolk, VA 23514-3037, Attention: John M. Paris,
Jr., Esquire and if sent to the Selling Shareholders shall be mailed, delivered,
telegrammed or faxed and confirmed to ________________________________, with a
copy to _________________________________.
14. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Company, the Selling
Shareholders and the controlling persons, directors and officers thereof, and
their respective successors, assigns, heirs, legatees and legal representatives,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Agreement or
any provision herein contained. The terms "successors" and "assigns" shall not
include any purchaser of the Shares merely because of such purchase.
15. Definition of Business Day. For purposes of this Agreement,
"business day" means any day on which the Nasdaq Stock Market's National Market
System is opened for trading.
16. Counterparts. This Agreement may be executed in one or more
counterparts, and all such counterparts will constitute one and the same
instrument.
17. Construction. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and performed entirely within the Commonwealth.
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<PAGE>
If the foregoing correctly sets forth your understanding of our
agreement, please sign and return to the Company the enclosed duplicate hereof,
whereupon it will become a binding agreement in accordance with its terms.
Very truly yours,
JACKSON HEWITT, INC.
By:_________________________________________
Keith E. Alessi, Chairman, President and
Chief Executive Officer
THE SELLING SHAREHOLDERS
By:______________________________________
Attorney-in-Fact, acting on behalf of
each of the Selling Shareholders
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
JANNEY MONTGOMERY SCOTT INC.
SCOTT & STRINGFELLOW, INC.
As Representatives of the Several Underwriters
named in Schedule I hereto
BY: JANNEY MONTGOMERY SCOTT INC.
By:_________________________________________
Authorized Representative
BY: SCOTT & STRINGFELLOW, INC.
By:_________________________________________
Authorized Representative
-35-
<PAGE>
SCHEDULE I
Underwriters
Number of Firm Shares
Underwriter to be Purchased
- -------------------------------------------- ---------------------
Janney Montgomery Scott Inc.................
Scott & Stringfellow, Inc...................
---------------------
TOTAL.............................. 1,129,099
=====================
I-1
<PAGE>
SCHEDULE II
Table 1. Selling Shareholders
Number of Firm Shares
Selling Shareholders to be Sold
- ------------------------------------- ---------------------
Jackson Hewitt Inc. 401(k) Plan Trust 20,917
Linda L. Hewitt 70,790
Paul Grunberg 20,000
Arline C. Littman 4,348
Paul W. Littman 13,044
-------
TOTAL 129,099
=======
II-1
<PAGE>
TABLE 2. OPTIONAL SHARES
Number of
Optional
Selling Shareholders Shares
To Be Sold
- ---------------------------------------------------------------- ----------
A. All shares of these persons to be sold pro rata before any of
those listed in Section B below:
Jackson Hewitt Inc. 401(k) Plan Trust 3,137
Linda L. Hewitt 10,619
Paul Grunberg 3,000
Arline C. Littman 652
Paul W. Littman 1,956
19,364
======
<TABLE>
<CAPTION>
<S> <C>
B. All Shares of the following persons to be sold after
all shares in Section A above are sold:
Jackson Hewitt Inc....................... 150,000
-------
TOTAL 169,364 Shares
=======
</TABLE>
II-2
<PAGE>
SCHEDULE III
The Company's Subsidiaries
Name Jurisdiction in Which Incorporated/Organized
---- --------------------------------------------
Oden, Inc. Virginia
Refant Partners Pennsylvania
Hewfant, Inc. Virginia
Jackson Hewitt of Memphis, LLC Virginia
III-1
<PAGE>
SCHEDULE IV
Persons Who Are to Deliver Lock-Up Agreements
Jackson Hewitt Inc.
Lock-up obligations included in Underwriting Agreement.
The Selling Shareholders
Jackson Hewitt Inc. 401(k) Plan Trust
Linda L. Hewitt
Paul Grunberg
Arline C. Littman
Paul W. Littman
Officers and Directors
Keith E. Alessi
Harry W. Buckley
Harry S. Gruner
Michael E. Julian, Jr
William P. Veillette
Christopher Drake
Martin B. Mazer
Kelly Wagner
Leslie A. Wood
IV-1
<PAGE>
EXHIBIT B
JACKSON HEWITT INC.
1,129,099 Common Shares*
----------------------------------
SELECTED DEALER AGREEMENT
----------------------------------
Philadelphia, Pennsylvania
__________, 1997
Ladies and Gentlemen:
We have delivered to you a prospectus (the "Prospectus") relating to
the offering by Jackson Hewitt Inc., a Virginia corporation (the "Company"), and
certain selling shareholders thereof of the number of shares of common stock of
the Company stated therein ("Shares"). The undersigned and the other
underwriters (the "Underwriters") listed in Schedule I to the Underwriting
Agreement referred to in the Prospectus (the "Underwriting Agreement") have
agreed to purchase the Shares, subject to the conditions specified in the
Underwriting Agreement.
Subject to the terms and conditions hereof and to the modification,
withdrawal or cancellation of the offering without notice, and subject to the
terms and conditions of the Underwriting Agreement, one or more of the
Underwriters, acting through us, are severally offering to certain dealers
("Dealers") (included among whom may be any or all of the Underwriters and their
respective subsidiaries) who are members of the National Association of
Securities Dealers, Inc. (the "NASD") or foreign dealers registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), who shall
agree, in making sales of the Shares in the United States, to conform to the
NASD Conduct Rules, or if not so registered, shall agree not to reoffer, resell
or deliver the Shares in the United States, its territories or possessions or to
persons who they have reason to believe are citizens thereof or residents
therein, unless they comply with the NASD's Interpretation with Respect to
Free-Riding and Withholding and comply, as though they were members of the NASD,
with the provisions of Rules 2730, 2740 and 2750 of the NASD Conduct Rules and
with Rule 2420 of the NASD Conduct Rules as that rule applies to a nonmember
foreign dealer, the opportunity to purchase Shares at $_______ per Share (the
"public offering price") less a concession to Dealers of $______ per Share. This
offer is extended to you only on behalf of such of the Underwriters as may
lawfully sell Shares to Dealers in your state.
We shall advise you by telegram, facsimile or letter of the method and
terms of the offering. Acceptance of any reserved Shares, which must be sent by
telegraph or in writing to us, received by the time specified therefor in the
offering telegram, facsimile or letter to us by the time specified therefore in
the offering communication, and any application for additional Shares, will be
subject
- --------
* Plus an over-allotment option to purchase up to 169,364 additional shares.
IV-2
<PAGE>
to rejection in whole or in part. The subscription books for the offering to
Dealers may be closed by us at any time without notice and we reserve the right
to reject any subscription in whole or in part. All subscriptions will be
received subject to prior sale.
Immediately upon receipt of the aforementioned telegram, facsimile or
letter, you may reoffer the Shares purchased by you hereunder, subject to the
Underwriters receipt and acceptance of the Shares, and upon the other terms and
conditions set forth herein and in the Prospectus. Shares purchased hereunder or
pursuant to the following sentence are to be offered to the public at the public
offering price, except that an amount not exceeding $_____ per Share may be
allowed to any member of the NASD (or to foreign dealers who are not eligible
for such membership but who agree to conform to the NASD Conduct Rules in making
sales to purchasers in the United States) acting as principal or as buyer's
agent, if such allowance is to be retained and not reallowed in whole or in
part. With our consent or after the books in respect of the offering to Dealers
have been closed, Dealers who are parties to the Selected Dealer Agreement and
Underwriters may deal in Shares with each other at the public offering price
less an amount not exceeding the concession to Dealers. After the Shares are
released for sale to the public, we are authorized to vary the public offering
price and other selling terms.
The Shares confirmed to you are to be paid for at the public offering
price less the concession to Dealers at the offices of Janney Montgomery Scott
Inc., 1801 Market Street, Philadelphia,
IV-3
<PAGE>
Pennsylvania, prior to 9:00 a.m., Philadelphia, Pennsylvania time, on the
Closing Date and, if applicable, the Option Closing Date, as defined in the
Underwriting Agreement, by certified or official bank check payable in next day
funds to our order against delivery of such Shares. Dealers not located in
Philadelphia should arrange to have a Philadelphia bank or correspondent accept
delivery of, and pay for, the Shares that they agree to purchase and should
advise us immediately of the name of such bank or correspondent.
In order to facilitate distribution of the Shares, we, for the
respective accounts of the several Underwriters, during the term of the
agreement among the Underwriters (the "Agreement Among Underwriters") may,
within the limits specified in such agreement, make purchases and sales of
Shares (but are without obligation to do so) in the open market or otherwise,
for long or short account, at such prices, in such amounts and in such manner as
we may determine, and, in arranging for the sale of Shares to Dealers, may
over-allot for the accounts of the Underwriters, and may make purchases for the
purposes of covering such over-allotments. There can be no assurance that the
price of Shares will be stabilized or that stabilization, if commenced, will not
be discontinued at any time.
Your acceptance hereof shall constitute an obligation on your part to
purchase, upon the terms and conditions hereof, the Shares confirmed to you in
respect hereof and to observe all of the terms and conditions hereof. You agree
that in reoffering the Shares you will comply with all applicable requirements
of the Securities Act of 1933, as amended, the Exchange Act, and of all
applicable rules and regulations under the federal securities laws. If you fail
to pay for the Shares confirmed to you or fail to perform any of your other
obligations hereunder, we may, in our discretion and without demand, notice or
legal proceedings, and in addition to any and all remedies otherwise available
to us and to the other several Underwriters (a) terminate any right or interest
on your part hereunder, and (b) at any time and from time to time sell, without
notice to you, any Shares then held for your account at public or private sale
at such price or prices and upon such terms and conditions as we may deem fair,
and apply the net proceeds so realized, as determined by us, toward payment of
any obligations in respect of which you are in default, and, notwithstanding any
action
IV-4
<PAGE>
taken under (a) or (b) above, or both, you shall remain liable to the
Underwriters for all loss and expense resulting from your default. At any such
sale or sales, any of the Underwriters may purchase any portion of the Shares so
sold, free from any right or interest on your part in such Shares. A default by
one or more Dealers shall not release you from any obligation hereunder.
You agree that until termination of this Agreement you will advise us,
from time to time upon request, as to the number of Shares confirmed to you
hereunder which then remain unsold; and you further agree that, until
termination of this Agreement, you will upon our request sell to us for the
account of one or more of the Underwriters such number of such unsold Shares as
we may specify at the public offering price or, if agreeable to you, at the
public offering price less an amount not in excess of the concession to Dealers.
As representatives of the Underwriters, we shall have full authority to
take such action as we may deem advisable in respect to all matters pertaining
to the offering or arising hereunder. You are not authorized (a) by the Company
or by any of the Underwriters to give any information or to make any
representations in connection with the offering or sale of the Shares other than
those contained in the Prospectus or (b) to act as agent for the Company or for
any of the Underwriters when offering the Shares to the public or otherwise.
Nothing contained herein shall constitute the Dealers as an association or
partnership with us or with each other, or an unincorporated business or other
separate entity.
We will advise you on request of the jurisdictions under the Blue Sky
or securities laws of which counsel for the Underwriters have advised us that
the Shares have been qualified for public offering and sale, or are exempt from
qualification. We shall, however, be under no responsibility whatsoever to any
Dealer with respect to the right of such Dealer to sell the Shares in any
jurisdiction.
We have undertaken and undertake to mail copies of the Prospectus upon
receipt of written requests to the addresses stated in such requests. You
confirm that you have undertaken and undertake to do the same with regard to the
delivery of such copies to your associated persons and to other persons.
Neither we nor any Underwriters shall be under any liability (except
for our own want of good faith) for or in respect of the validity or value of,
or title to, any of the Shares, the form of, or the statements contained in, or
the validity of, the Prospectus or any amendment or supplement thereto, or any
other instruments executed by or on behalf of the Company or others, the form or
validity of the Underwriting Agreement, the Agreement Among Underwriters or this
Agreement, the delivery of the Shares, the performance by the Company or others
of any agreement on its or their part or any matter in connection with any of
the foregoing; provided, however, that nothing in this paragraph shall be deemed
to relieve us or any Underwriters from any liability imposed by federal
securities laws.
You confirm that you are familiar with the Interpretation of the Board
of Governors of the NASD with respect to Free-Riding and Withholding, and you
agree that you will comply with such Interpretation in offering and selling
Shares to the public.
You further represent that neither you nor any of your directors,
officers, partners or "persons associated with" you (as defined in the By-Laws
of the NASD), nor, to your knowledge any "related
IV-5
<PAGE>
person" (as defined by the Rule 2710 of the NASD Conduct Rules) have
participated or intend to participate in any transaction or dealing as to which
documents or information are required to be filed with the NASD pursuant to such
Rule 2710.
All communications from you should be addressed to Janney Montgomery
Scott Inc., 1801 Market Street, Philadelphia, Pennsylvania 19103, Attention:
Syndicate Department. Any notice from us to you shall be deemed to have been
duly authorized by the Underwriters and to have been duly given if mailed or
telegraphed to you at the address to which this letter is addressed.
This Agreement shall terminate simultaneously with termination of the
Agreement Among Underwriters, but it may be terminated by us at any time
theretofore without notice. Upon termination of this Agreement, all
authorizations, rights and obligations hereunder shall cease, except rights and
obligations accrued or unsatisfied at the date of termination. Notwithstanding
termination of this Agreement, you shall be liable for your proper proportion of
any transfer tax or other liability which may be asserted against us or any of
the Underwriters or Dealers purchasing Shares hereunder, based upon the claim
that the Dealers, or any of them, constitute a partnership, an association, an
unincorporated business or other separate entity.
If before the termination of this Agreement, we shall purchase, or
contract to purchase, for the accounts of the Underwriters, in the open market
or otherwise, any Shares delivered to you pursuant hereto, you shall repay to
us, for the account of the Underwriters, the concession to Dealers with respect
to such Shares, and all brokerage commissions and transfer taxes paid in
connection with such purchase or contract to purchase.
Please confirm your agreement to abide by and conform to all the terms
and conditions of this Agreement by signing and returning at once the duplicate
copy enclosed herewith.
Yours very truly,
JANNEY MONTGOMERY SCOTT INC.
SCOTT & STRINGFELLOW, INC.
By: JANNEY MONTGOMERY SCOTT INC.
By: _______________________________
(Authorized Signature)
Please execute the Confirmation on next page.
IV-6
<PAGE>
CONFIRMATION
JANNEY MONTGOMERY SCOTT INC.
Scott & Stringfellow, Inc.
c/o Janney Montgomery Scott Inc.
1801 Market Street
Philadelphia, PA 19103
Ladies and Gentlemen:
We hereby confirm our agreement to purchase the Shares to which the
foregoing Selected Dealer Agreement relates, subject to your acceptance or
rejection in whole or in part in case of a subscription or application in excess
of any reservation, and acknowledge that such purchase and the purchase of
additional Shares, if any, prior to the termination of the Selected Dealer
Agreement, are subject to all the applicable terms and conditions thereof. We
agree to abide by and conform to the Selected Dealer Agreement and to your
offering telegram, facsimile or letter referred to therein, and to take up and
pay for such Shares as therein provided. We acknowledge receipt of the
Prospectus relating to the Shares and we hereby confirm that in entering into
the Selected Dealer Agreement and in offering the Shares we have relied and will
rely upon the Prospectus and on no other statements whatsoever, written or oral.
We further confirm that we are a member of the National Association of
Securities Dealers, Inc. ("NASD"), or if we are not such a member, that (i) we
are a foreign dealer registered under the Securities Exchange Act of 1934, as
amended, and hereby agree that in making sales of Shares in the United States we
will conform to the NASD Conduct Rules, or (ii) if not so registered, we hereby
agree not to reoffer, resell or deliver Shares in the United States, its
territories or possessions or to any person who we have reason to believe is a
citizen thereof or resident therein, unless we comply with the NASD's
Interpretation with Respect to Free-Riding and Withholding and comply, as though
we were a member of the NASD, with the provisions of Rules 2730, 2740 and 2750
of the NASD Conduct Rules and with Rule 2420 of such rules as that Rule applies
to a non-member foreign dealer.
________________________________________
(Name of Firm)
By: ____________________________________
(Authorized Signature)
________________________________________
(Address)
________________________________________
(City and State)
Dated:________________, 1997
IV-7
<PAGE>
Exhibit 1
Opinion of Kaufman & Canoles
Counsel for Jackson Hewitt
1. Each of the Company and the Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia, with all necessary corporate power and authority to
own or lease and operate its properties and to conduct its business as described
in the Prospectus. To the knowledge of such counsel, each of the Company and the
Subsidiaries has all licenses, permits, clearances, certifications,
registrations, approvals, consents and franchises required to own or lease and
operate its properties and to conduct their respective businesses as described
in the Prospectus. Each of the Company and the Subsidiaries is duly qualified to
do business as a foreign corporation and is in good standing in all
jurisdictions in which such qualification is required, except where the failure
to so qualify would not have a Material Adverse Effect.
2. The Company has all requisite power and authority to enter into the
Underwriting Agreement and the Underwriting Agreement has been duly authorized,
executed and delivered by the Company and constitutes a legal, valid and
binding, obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting creditors rights generally or
by general equitable principles, and except that the enforceability of the
indemnification and contribution provisions set forth in Section 8 of the
Underwriting Agreement may be limited by the federal and state securities laws
or principles of public policy.
3. The execution, delivery and performance of the Underwriting
Agreement by the Company and the consummation of the transactions contemplated
herein, do not and will not, with or without the giving of notice or the lapse
of time, or both, (a) conflict with any terms or provisions of the Certificate
of Incorporation or Bylaws of the Company or any Subsidiary, (b) result in a
breach of, or constitute a default under, result in the termination or
modification of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the assets of the Company or any
Subsidiary pursuant to, any contract, indenture, mortgage, deed of trust,
commitment or other agreement or instrument to which the Company or any
Subsidiary is a party or by which any of their respective assets is bound or
affected; (c) violate any applicable law, rule or regulation, or to such
counsel's knowledge, any judgment, order or decree, of any government or
governmental agency, instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or any of their respective
properties or businesses; or (d) result in a breach, termination or lapse of the
Company's or any Subsidiary's corporate power and authority to own or lease and
operate their respective assets and to conduct its respective businesses as
described in the Prospectus.
4. At the date or dates indicated in the Prospectus, the Company had
the duly authorized and outstanding shares of capital stock as set forth under
the caption "Capitalization" and "Description of Capital Stock" in the
Prospectus and following the issuance of the Shares on the Closing Date, will
have the capitalization set forth under capitalization as adjusted in the
Prospectus. The description of the Company's capitalization in the Prospectus
conforms in all material respects to the instruments defining the same. There
are no options or warrants for the purchase of, other
1
<PAGE>
outstanding rights to purchase, agreements or obligations to issue, or
agreements or other rights to convert or exchange any obligation or security
into, capital stock of the Company or securities convertible into or
exchangeable for capital stock of the Company, except as and to the extent
expressly described in the Prospectus. All of the outstanding stock or other
ownership interests in the Subsidiaries is owned by the Company free and clear
of all liens, encumbrances and security interests. The Company owns no other
stock or other interest, whether debt or equity, in any corporation, partnership
or other entity other than the Subsidiaries.
5. The authorized capital stock of the Company, including, without
limitation, the outstanding Common Shares, the Shares being issued, and the
authorized but unissued Preferred Stock, conforms in all material respects with
the descriptions thereof in the Prospectus, and such descriptions conform in all
material respects with the instruments defining the same. The information in the
Prospectus insofar as it relates to options, warrants and any other derivative
or convertible security with respect to the Common Shares and the preferred
stock is true and correct in all material respects.
6. The Common Shares outstanding immediately prior to the Closing Date
(including the shares to be purchased from the Selling Shareholders) have been
duly authorized and are validly issued, fully paid and non-assessable. The
Common Shares issuable upon exercise of outstanding options and warrants when
issued in accordance with the respective terms thereof, will be duly authorized,
validly issued, fully-paid and non-assessable; and none of such outstanding
Common Shares, were, and none of such issuable Shares will be, issued in
violation of any statutory preemptive rights, preemptive rights in the Company's
Certificate of Incorporation or Bylaws or, to such counsel's knowledge, any
other preemptive right of any securityholder of the Company.
7. The issuance and sale of the Shares by the Company have been duly
authorized and, when duly delivered against payment therefor as contemplated by
the Underwriting Agreement, the Shares will be validly issued, fully paid and
nonassessable, the holders thereof will not be subject to personal liability
solely by reason of being such holders, and good and valid title to the Shares,
free and clear of all liens, claims, encumbrances, security interests,
restrictions, and defects of title whatsoever, will pass to each of the
Underwriters who have purchased such Shares. None of the Shares will be issued
in violation of any statutory preemptive rights, preemptive rights in the
Company's Certificate of Incorporation or Bylaws or, to such counsel's
knowledge, any other preemptive right of any securityholder of the Company. The
certificates representing the Common Shares (including the shares to be issued
by the Company) are in proper legal form under, and conform in all respects to
the requirements of, the VSCA. To the knowledge of such counsel, neither the
filing of the Registration Statements nor the offering or sale of the Shares as
contemplated by the Underwriting Agreement gives any securityholder of the
Company any rights, other than those which have been waived, for or relating to
the registration of any Common Shares or any other securities of the Company.
8. The Common Shares (including the Shares) have been included for
quotation on the Nasdaq National Market. All previous offers and sales by or on
behalf of the Company in its own securities complied in all material respects
with the provisions of all applicable federal, state and foreign securities and
corporate laws.
9. No consent, approval, authorization, order, registration, license or
permit of any court, government, governmental agency, instrumentality or other
regulatory body or official is required
2
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for (a) the valid authorization, issuance, sale and delivery by the Company of
any of the Shares, (b) the valid and legal execution, delivery or performance by
the Company of the Underwriting Agreement or (c) the taking of any action
contemplated therein or in the Registration Statements or the Prospectus except
such as may be required for the registration of the Shares under the Act, the
Regulations or the Exchange Act (all of which have been obtained), or for
compliance with the applicable state or foreign securities or Blue Sky laws.
10. The statements in the Registration Statements and Prospectus,
insofar as they are descriptions or summaries of, or references to, statutes,
regulations, governmental or other proceedings, contracts, agreements, or other
documents, are accurate in all material respects and present or summarize fairly
the information required to be disclosed under the Act or the Regulations. There
are no contracts, agreements or other documents required to be described or
referred to in the Registration Statements or Prospectus or to be filed as
exhibits to the Registration Statements under the Act or the Regulations that
have not been so described, referred to or filed as required. Such counsel has
read all contracts referred to in the Registration Statements or the Prospectus,
and such contracts are fairly summarized or described therein and conform in all
material respects to the descriptions thereof contained therein.
11. Neither the Company nor any Subsidiary is in violation of, or in
default under, any of the terms or provisions of (a) its Certificate or Articles
of Incorporation, as amended, or Bylaws, as amended, or similar governing
instruments, or (b) except to the extent such action would not have a Material
Adverse Effect, (i) any indenture, mortgage, deed of trust, contract, commitment
or other agreement or instrument to which it is a party or by which it or any of
its properties is bound or affected; (ii) any law, rule, regulation, judgment,
order or decree of any government or governmental agency, instrumentality or
court, domestic or foreign, having jurisdiction over it or any of its properties
or business; or (iii) any license, permit, certification, registration,
approval, consent or franchise referred to in Paragraph 1 hereof.
12. There are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries pending before, or to such counsel's knowledge,
threatened or contemplated by, any governmental agency, instrumentality, court
or tribunal, domestic or foreign, or before any private arbitration tribunal, to
which the Company or any Subsidiary is a party or is threatened to be made a
party that, if determined adversely to the Company or any Subsidiary, would, in
any case or in the aggregate, result have a Material Adverse Effect. Except as
disclosed in the Prospectus, there are no outstanding orders, judgments or
decrees of any court, governmental agency, instrumentality or tribunal enjoining
the Company or any Subsidiary from or requiring the Company or any Subsidiary to
take or refrain from taking, any action, or pursuant to which the properties or
assets of the Company or any Subsidiary are bound.
13. The Primary Registration Statement has become effective under the
Act, as of the Effective Date and, if applicable, any Rule 462 Registration
Statement became effective under the Act upon its filing. The SEC has not issued
any stop order suspending the effectiveness of the Registration Statement, nor
to such counsel's knowledge, has the SEC instituted or threatened to institute
proceedings with respect to any such order. Any and all filings required to be
made by Rules 424, 430A and 462 under the Act have been made.
14. The Primary Registration Statement and the Prospectus, as of the
Effective Date (and any Rule 462 Registration Statement upon its filing), and
each amendment or supplement thereto
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as of its effective or issue date (except for the financial statements,
schedules and the notes thereto, as to which counsel expresses no opinion)
comply as to form in all material respects with, and appear on their face to be
appropriately responsive in all material respects to the applicable requirements
of the Act and Regulations.
15. The Company is not, and will not be immediately after receiving the
proceeds from the sale of any of the Shares, an "investment company" within the
meaning of the 1940 Act.
16. The Company is in compliance with the requirements of the Federal
Trade Commission rules governing franchising, including 16 C.F.R. ss.436, and
the applicable provisions of federal and state laws or regulations governing the
activities of a franchiser and the tax preparation business. The Company's
Franchise Offering Circular complies with the applicable requirements of state
law governing the activities of franchisers and complies as to form with the
requirements of the North American Securities Administrators Association's
Uniform Franchise Offering Circular.
Such counsel shall also state that they have participated in the
preparation of the Registration Statements and the Prospectus, including reviews
and discussions of the contents thereof, and while such counsel (for the
purposes of this paragraph) is not passing upon the accuracy or completeness of
the statements contained in the Registration Statements or the Prospectus, in
the course of such reviews and discussions, no facts came to its attention that
would cause them to have reason to believe that (a) the Registration Statements
or any post-effective amendment thereto, on the date it became effective,
contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that such counsel
need not express any opinion with respect to the financial statements, schedules
and the notes thereto or the financial tables included in the Prospectus and the
Registration Statements, or that (b) the Prospectus on the Effective Date, on
the date it was filed pursuant to Rule 424(b) and on the Closing Date or Option
Closing Date, as the case may be, contains any untrue statement of material fact
or omits to state any material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, except that
such counsel need not express any opinion with respect to the financial
statements, schedules and the notes thereto or the financial tables included in
the Prospectus or the Registration Statements.
The foregoing opinion may be limited to the laws of the United States
and the laws of the Commonwealth of Virginia and such counsel may rely as to
matters of fact upon the representations of the Company set forth in the
Underwriting Agreement and upon certificates of officers of the Company and of
government officials, all of which certificates must be satisfactory in form and
scope to counsel for the Underwriters. Counsel shall state in such opinion that
its opinion may be relied upon by counsel to the Underwriters.
4
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Exhibit 2
OPINION OF COUNSEL FOR SELLING SHAREHOLDERS
(i) With respect to Selling Shareholders that are corporations, each
Selling Shareholder is a corporation duly organized and validly existing under
the laws of its jurisdiction of incorporation;
(ii) Each Selling Shareholder has the power to enter into the
Underwriting Agreement, the Custody Agreement and the Power-of-Attorney and to
sell, transfer and deliver the shares being sold by such Selling Shareholder
hereunder in the manner provided in the Underwriting Agreement and to perform
its obligations under the Custody Agreement;
(iii) the execution and delivery of the Underwriting Agreement, the
Custody Agreement and the Power-of-Attorney have been duly authorized by all
necessary action on the part of each Selling Shareholder;
(iv) the Underwriting Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by each Selling
Shareholder; and assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney are the legal, valid,
binding and enforceable instruments of each Selling Shareholder, subject to
applicable bankruptcy, insolvency, reorganization and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law) and the availability of equitable remedies or
the enforceability of provisions concerning contribution and indemnification
contained in Section 8 of the Underwriting Agreement.
(v) the delivery by each Selling Shareholder to the several
Underwriters of certificates for the shares being sold hereunder by each Selling
Shareholder against payment therefor as provided herein, will convey good and
marketable title to such shares to the several Underwriters (assuming that they
are bona fide purchasers within the meaning of Section 8-302 of the Uniform
Commercial Code), free and clear of any adverse claim (within the meaning of the
Uniform Commercial Code);
(vi) the sale of shares to the Underwriters by each Selling Shareholder
pursuant to the Underwriting Agreement, the compliance by each Selling
Shareholder with the other provisions of the Underwriting Agreement, the Custody
Agreement and the Power-of-Attorney and the consummation of the other
transactions herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required under
state securities or blue sky laws, or (B) to such counsel's knowledge, conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which any Selling Shareholder is a party or by
which any Selling Shareholder or the property of any Selling Shareholders are
bound, or, in the case of a Selling Shareholder that is a corporation, the
charter
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<PAGE>
documents or by-laws of the Selling Shareholder or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Selling Shareholder.
In rendering such opinion, counsel may rely as to matters of fact, to
the extent such counsel deems proper, on certificates of the Selling
Shareholders and public officials, to the extent satisfactory in form and scope
to counsel for the Underwriters.
2
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (the "Agreement") is made as of this 1st day
of July, 1997 by and between Susan E. Ventresca, ("Seller") and Jackson
Hewitt Inc., a Virginia corporation (the "Purchaser").
WHEREAS, the Seller owns and operates certain Jackson Hewitt Tax Service
("Jackson Hewitt") franchises in the State of New York, as set forth in Exhibit
A (the "Franchise Territories"); and
WHEREAS, the Seller desires to sell, and Purchaser desires to purchase, all of
the tangible and intangible assets associated with Seller's operation of the
Franchise Territories.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto mutually agree as follows:
1. Sale of Assets; Nonassumption of Liabilities. Upon the terms and
subject to the conditions contained in this Agreement, at the Closing (as
defined in Section 3), the Seller shall sell, assign, transfer and deliver to
the Purchaser, and the Purchaser shall purchase and accept from the Seller, all
of the assets and rights of every nature, kind and description, tangible and
intangible, wherever located, that are owned, used or held for use by the Seller
in or for the Franchise Territories, as the same shall exist on the Closing Date
(as defined in Section 3) (the "Assets"), free and clear of any and all liens
and encumbrances including without limitation the following:
a. All furniture, fixtures, equipment, supplies and other
tangible property of a similar nature, including without limitation the items
set forth in Exhibit B;
b. Electronically provided customer information;
c. any accounts receivable, notes receivable, drafts or other
similar instruments;
d. all inventory;
e. all of Seller's right, title and interest under (i) any
equipment leases relating to equipment commonly utilized by Purchaser's business
partners as identified in Exhibit B, (ii) Seller's Amherst office lease (number
10063), and (iii) those other contracts of Seller specifically identified on
Exhibit B.
f. all customer and supplier lists, mailing lists,
catalogs, brochures and handbooks relating to the Franchise Territories;
<PAGE>
g. all business licenses and permits, and manufacturer
warranties, to the extent transferable;
h. all trademarks, service marks, trade names and other
goodwill or intellectual property associated with the Franchise Territories; and
i. originals, or if not available, copies, of all other
books, records, files, contracts, plans, notebooks, production and sales
data and other data of Seller relating to the Franchise Territories.
Notwithstanding anything in the foregoing to the contrary, all Jackson Hewitt
rebates payable to Seller will be paid in the same manner as are paid other
business partners of the Purchaser. Except as expressly set forth in this
Agreement to the contrary, Purchaser shall not assume or otherwise become
obligated for any of Seller's liabilities, whether known or unknown, absolute or
contingent, of any nature whatsoever, whether related to the Franchise
Territories or otherwise.
2. Purchase Price.
a. The purchase price for the Assets ("Purchase Price") shall
equal (a) the lesser of (x) six times the cash flow (defined as earnings before
interest, taxes, depreciation and amortization as determined in accordance with
generally accepted accounting principles ("GAAP"))of the Franchise Territories
for the one year period ending April 30, 1997 or (y) 120% of the gross revenues
(as determined in accordance with GAAP, provided that such term shall be deemed
to include off season and tax season income tax preparation revenues, bank fees,
tax school income, accrued rebates, and other sources of income commonly
accruing to business partners of the Purchaser) of the Franchise Territories for
the one year period ending April 30, 1997, plus (b) $40,000, representing
$20,000 for each of the unopened territories that Seller currently possesses the
right to, minus (c) $88,253.00, representing all of the outstanding liabilities
and debts of Seller owed to the Purchaser as of the date of this Agreement, with
such amount to be adjusted through the Closing Date. Purchaser shall have the
right, at its own cost and expense, to conduct an audit of Seller's books and
records for the one year period ended April 30, 1997 for the purpose of
determining the Purchase Price (the "Audit").
For purposes of this Agreement, the formula identified in a
(a)(x) above was the lesser amount. The purchase price is computed as follows:
Cash Flow of $48,254.00 x 6 = $289,542.00 + $40,000.00 (representing the 2
unopened territories) = $329,542.00 (the "Purchase Price") less amounts due and
owing of: $88,253.00 to equal a cash payment to Seller of $241,289.00.
b. Seller will be entitled to defer until the Closing all
principal and interest payments owed by them to the Purchaser that were due and
payable on February 28, 1997, together with accrued interest on such debt
through the Closing, with such amounts to be subtracted from the Purchase Price
payable to Seller at Closing pursuant to Section 2.a.(c) above.
<PAGE>
c. At the Closing, Seller and Purchaser shall agree to an
allocation of the Purchase Price among the Assets. Each of the parties hereto
agrees to report the sale and purchase of the Assets for state and federal
income tax purposes in accordance with such allocation of the Purchase Price.
3. Closing Date.
a. The closing ("Closing") of the transactions contemplated by
this Agreement shall take place at such location as is mutually agreeable to
Seller and Purchaser. The Closing shall occur ("Closing Date") within 15 days
after the completion of the Audit by Purchaser for the purpose of making the
Purchase Price calculation as contemplated by Section 2.a. above, or, if the
parties agree on the Purchase Price and the Audit is not undertaken by
Purchaser, then within 15 days after the date on which the Purchase Price is
agreed upon; provided, however, that in no event may the Closing occur later
than July 15, 1997 without the mutual written agreement of both Seller and
Purchaser.
b. At the Closing, Seller shall deliver to Purchaser (w) a
Bill of Sale with respect to the Assets, (x) Assignment and Assumption
Agreements with respect to the leases and contracts contemplated by Section 1.e,
(y) such agreements and certificates as are contemplated by Section 6, and (z)
such other instruments of sale, transfer and conveyance as are reasonably
requested by Purchaser and its counsel, all in such forms as are acceptable to
Purchaser and its counsel. At the Closing, Purchaser shall pay to Seller in cash
an amount, if any, equal to the Purchase Price as determined pursuant to Section
2.a. above. In addition, at the Closing, Purchaser, Seller shall enter into the
Release Agreement in the form attached hereto as Exhibit C ("Release
Agreement").
4. Representations and Warranties of Seller. Seller jointly and
severally, represent and warrant to Purchaser that the statements contained in
this Section 4 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 4).
a. Seller has good and marketable title to the Assets and the
absolute and unqualified right to sell, assign, and transfer the Assets to the
Purchaser, free and clear of all liens, pledges, and encumbrances of any kind,
including without limitation pledges or liens on the Jackson Hewitt name or
other intellectual property of Seller.
b. The Seller is a sole proprietorship duly organized, validly
existing and in good standing under the laws of the State of New York. The
Seller is qualified to do business in the State of New York.
c. All of the Assets that constitute furniture, fixtures,
equipment and other tangible personal property of Seller are in good working
order and are fit for the purposes for which they are intended to be used.
<PAGE>
d. The Seller is not a party to any contract, written or oral,
unless specifically identified in this Agreement or attached as a Schedule
hereto, that is not terminable by its terms on thirty (30) days or less notice,
including without limitation employment agreements, labor contracts, or
distributor or dealer sales or purchase contracts pertaining to the Seller's
operation of the Franchise Territories. The Seller has performed all obligations
required to be performed by it to date under any contracts, agreements, leases,
or other documents to which it is a party, and is not in default with respect
thereto, including without limitation the Franchise Agreements between the
parties for the Franchise Territories ("Franchise Agreements").
e. There are no actions, suits or proceedings of law or in
equity pending or threatened against, or filed by, the Seller before or by any
federal, state, municipal, or other governmental department, commission, board,
agency or instrumentality, that involve any claim which would adversely affect
the business, affairs or prospects of the Franchise Territories or the Assets
being transferred hereunder. The Seller is not in default with respect to any
order, writ, injunction, or decree of any court or any federal, state,
municipal, or other governmental department, commission, board, agency or
instrumentality which would adversely affect the business, affairs or prospects
of the Franchise Territories or the Assets being transferred hereunder.
f. The Seller has filed in correct form all income tax returns
required by law for all years and/or periods and all amounts due thereunder have
been paid, and Seller has made provision for filing such returns for the 1996
tax year. All franchise, social security, withholding, real and personal
property tax, sales and use tax and all other returns that are currently due
have been filed, and the amounts due thereunder have been paid. All income,
franchise, social security, withholding, real and personal property tax, sales
and use tax and all other returns that are not currently due will be filed
timely, and the amounts owed thereunder will be paid when due by the Seller.
There are no audits or other investigations threatened or pending with respect
to any tax returns of the Seller or the operation of the Franchise Territories.
Seller has complied with all applicable laws relating to the reporting, payment,
collection and withholding of taxes. There are no tax liens on the Assets.
Seller has provided Purchaser a true and correct copy of Seller's profit and
loss statement as of April 30, 1997, and the related income statement
("Financial Statements"). The Financial Statements are consistent with the books
and records of the Seller and fairly present the financial position and the
results of operations of the Seller as of the dates thereof and for the periods
covered thereby in accordance with GAAP consistently applied. The books and
financial records of the Seller made available to the Purchaser constitute a
complete record of its financial affairs and accurately set forth all revenues,
expenses, assets and liabilities.
g. All financial information, including the Financial
Statements and Gross Volume Reports, presented to the Purchaser fully disclose,
present, and accurately and fairly represent the financial condition of the
Seller as of the date thereof and the results of operations for the periods
covered thereby and are not misleading, and all the aforementioned documents
have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved.
<PAGE>
h. Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, will conflict with or
result in a breach (i) of any of the terms, conditions or provisions of any
regulation, order, writ, injunction or decree of any court or government
instrumentality to which Seller is subject or (ii) of any agreement or other
instrument to which the Seller is a party or by which they are bound or
constitute (with the giving of notice or the passage of time or both) a default
thereunder, or result in any lien or encumbrance on any of the Assets.
i. The execution of this Agreement and all documents
contemplated hereby have been duly and validly authorized by all requisite
action, and no other proceedings on the part of Seller are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement constitutes the duly binding and legal obligations of the Seller
enforceable against them in accordance with its terms.
j. The Seller hereby relinquish all rights granted pursuant to
the Franchise Agreements and acknowledge that all post-term covenants of such
Franchise Agreements will be adhered to upon execution of this Agreement and
thereafter.
k. The Seller shall use their best efforts to insure the
Purchaser's success in the Franchise Territories and shall take no actions to
hinder or compromise the Purchaser's success.
l. Seller does not have any subsidiaries.
m. Seller has provided Purchaser with correct and complete
copies of all equipment and real property leases to which Seller is a party and
relating to the operation of the Franchise Territories ("Leases"). Each Lease is
valid and enforceable in accordance with its terms, is in full force and effect
and has not been canceled, terminated or modified in any way. To the best of
Seller's knowledge, upon reasonable investigation and inquiry, no lessor is in
default under any of the Leases.
n. The Seller has, and on the Closing Date will have, complied
with all applicable laws, regulations and orders, including without limitation
laws related to the protection of the environment, and laws related to employees
and employee benefits. The Seller has not received any notice of any violation
of any law, regulation or order. No license from or consent of any governmental
authority is required by any applicable law, statute, rule, regulation or
ordinance for the Seller to conduct its business as presently conducted.
o. No representation, warranty or statement by the Seller
contained in this Agreement, or in any other document or agreement furnished or
to be furnished to the Purchaser in connection herewith, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any fact necessary in order to make the statements contained or to be contained
therein not misleading.
<PAGE>
5. Survival of Representations and Warranties. The representations and
warranties set forth in Section 4 shall survive the Closing and remain in effect
forever thereafter (subject only to applicable statutes of limitations), and
shall not be affected by any investigation, verification, or approval by any
party hereto or by anyone on behalf of any of such parties.
6. Conditions to Obligations of Purchaser. The obligation of the
Purchaser to consummate the transactions contemplated hereby is subject to the
condition that at or prior to the Closing (or within such shorter time as may be
specifically provided) all of the following shall have occurred:
a. The Seller shall have delivered to the Purchaser
evidence of approval of this transaction by all necessary corporate action.
b. All of the terms, covenants and conditions of this
Agreement to be complied with or performed by the Seller at or before the
Closing shall have been duly complied with and performed. Seller shall certify
the foregoing in writing to the Purchaser at Closing.
c. The representations and warranties of the Seller set forth
in Section 4 shall be true and correct on the date hereof and on and as of the
Closing with the same force and effect as if such representations and warranties
had been made on and as of the Closing, and the Seller will at Closing certify
in writing that all such representations and warranties are true on and as of
the Closing.
d. From the date hereof until the Closing, there shall not
have been any material adverse change in the Seller's financial condition,
assets, liabilities, business or prospects. The Assets being transferred to the
Purchaser shall not have been materially and adversely affected as a result of
any fire, accident, or other casualty or any act of God or the public enemy, and
shall be in substantially the same condition as represented in this Agreement.
Seller shall certify the foregoing in writing to Purchaser at Closing.
e. The Purchaser shall have received written evidence, in
form and substance satisfactory to the Purchaser and its counsel, to the effect
that:
i. The Seller is authorized to do business in each
jurisdiction where the Seller has been doing business.
ii. The Seller has good and marketable title to
the Assets being sold hereunder and has full power and authority to sell and
transfer them to the Purchaser, and upon transfer, the Purchaser will have good,
marketable and indefeasible title to such Assets, free and clear of all liens,
charges and encumbrances of any kind.
f. Purchaser shall be satisfied that the books and records
of Seller support the representations and warranties made by Seller hereunder.
<PAGE>
g. At the Purchaser's request, the Seller shall seek the
lessor's or landlord's consent to the assignment of any or all leases used in
Seller's operations and the obtainment of any or all of such consents shall, at
the sole and absolute discretion of Purchaser, be a condition to Purchaser's
obligations hereunder. Purchaser and the Seller will comply with any normal and
customary condition placed on any assignment by any lessor or landlord. The
Seller's obligations hereunder will survive Closing.
h. No action, suit or proceeding shall be pending or
threatened that would prevent consummation of the transactions contemplated by
this Agreement or affect adversely the rights of Purchaser to own the Assets or
conduct business operations in the Franchise Territories as currently conducted
by Seller.
i. This Agreement and the transactions contemplated hereby
shall have been ratified and approved by the Board of Directors of the
Purchaser.
7. Pre-Closing Covenants.
a. The Seller will conduct its business only in the ordinary
course from the date hereof to the Closing, will use its best efforts to
maintain a good relationship and its goodwill with its customers and suppliers
and will make no payment or distribution of any of the Assets to any person or
entity.
b. If requested by Purchaser, Seller will sign a joint letter
notifying the Seller's employees of the change in ownership of the Franchise
Territories and advising such employees that the Purchaser may, but is not
obligated to, offer them employment, and that employment by the Purchaser will
be separate and distinct from their employment by the Seller, with no carry over
of benefits or obligations.
c. Seller will afford to the officers, attorneys, accountants
and other representatives authorized by the Purchaser free and full access to
the offices, properties, books and records of the Seller in order that the
Purchaser may have full opportunity to make whatever investigation it shall
desire of the affairs, business and prospects of the Seller, provided that such
investigation shall not unreasonably interfere with the operations of Seller.
d. Seller shall give prompt written notice to Purchaser prior
to Closing of any development causing a breach of any statement, representation
or warranty made by Seller in this Agreement; provided however that no such
notice shall be deemed to amend, supplement, modify or cure any misstatement or
breach of a representation or warranty by Seller.
8. Covenant Not to Compete. Seller acknowledges that in the course
of her ownership of Jackson Hewitt franchises, she acquired and compiled
confidential information regarding the franchises. Accordingly:
a. Seller agrees as of the closing date, she will not, directly or
indirectly, compete with Purchaser within a ten mile radius of the franchise
territories set forth on Exhibit A within which Seller performed services or met
with customers during the past year, for a period of five (5) years following
the Closing.
<PAGE>
b. It is the specific intent of the parties that Seller shall be
restricted from competing directly or indirectly with any segment of Purchaser's
acquired business in which Seller engaged prior to the sale of her franchises to
Purchaser, and from any segment of the Purchaser's business about which Seller
acquired proprietary or confidential information during the time she owned and
operated the franchises. This business shall include, but not be limited to,
advertising and marketing directed to those individuals, corporations or other
entities required to file tax returns with the Internal Revenue Service or other
relevant state tax collection agencies; providing advice and counselling to
entities regarding tax planning, completing and filing tax returns for
customers, representing or providing testimony or evidentiary support in the
event of customer tax filings and/or challenges to customer's tax filings. These
operations include a mechanism for providing customers, upon the electronic
filing of their tax returns, with refund anticipation loans, in anticipation of
their actual tax refunds and accelerated refunds.
c. Seller agrees that competition shall include, but not be limited to,
engaging in competitive activity, either as an individual, as a partner, as a
joint venturer with any other person or entity, or otherwise associated in a
competitive activity with any business entity which directly or indirectly
competes with Purchaser.
d. Seller and Purchaser have examined in detail this covenant not to
compete and agree that the restraint imposed upon Seller is reasonable in light
of the legitimate interests of Purchaser, and it is not unduly harsh upon
Seller's ability to earn a livelihood.
9. Nondisclosure of Confidential Information.
a. Seller agrees to uphold and safeguard any information about
Purchaser or the franchises sold to Purchaser gained by Seller during the course
of their ownership and operation of the franchises. Seller shall not, without
prior written consent of Purchaser, misappropriate, disclose, or make available
to anyone for use outside the Purchaser's organization at any time, any
information about the Purchaser, or Purchaser's customer's, whether or not
developed by Seller.
b. Seller understands and agrees that any information about
the Purchaser or the Purchaser's customers is the property of the Purchaser and
is essential to the Purchaser's goodwill and to the maintenance of the
Purchaser's competitive position and accordingly should be kept secret. Such
information shall include, but is not limited to, the Purchaser's confidential
information, data, technical data, customer lists, personnel information,
products, special hardware, software, software under development, manuals,
formulae, processes, methods, advertising techniques, or other confidential or
proprietary information belonging to the Purchaser or related to Purchaser's
business affairs.
<PAGE>
10. Injunctive Relief.
a. Seller acknowledges that the remedies at law for any breach
of the restrictive covenants contained herein will be inadequate, and that the
Purchaser shall be entitled to injunctive relief against the Seller in addition
to any other remedy and damages available. The Seller acknowledges that the
restrictions contained herein are reasonable, but agrees that if any court of
competent jurisdiction shall hold such restrictions unreasonable as to time,
geographic area, activities or otherwise, such restrictions shall be deemed to
the reduced to the extent necessary in the opinion of such court to make them
reasonable.
b. The Seller agrees that the non-competitive obligation
contained herein shall be extended for the length of time which Seller shall
have been in breach of that provision. Seller recognizes that the time periods
included in this restrictive covenant shall begin on the date a court of
competent jurisdiction enters an order enjoining her from violating such
provisions unless good cause can be shown as to why the periods should not begin
at that time.
11. Non-solicitation. Seller shall not, and they shall cause its and
their shareholders, immediate family members, officers, directors, successors
and assigns (the "Affiliates") to not, directly or indirectly engage in, nor
have an interest in any business, firm, person, partnership, or corporation that
engages in the operation of a business under any name which performs services
similar to those performed by a Jackson Hewitt franchisee within a ten (10) mile
radius of the Franchise Territories set forth in Exhibit A within which the
Seller performed services or met with customers during the past year, for a
period of five (5) years following the Closing. The Seller and its Affiliates
shall not solicit the Seller's former customers, nor shall they divulge,
communicate, use to the detriment of the Purchaser, or for the benefit of any
other business, firm, person, partnership or corporation, or otherwise misuse
any of the Seller's confidential information, data, technical data, customer
lists, or personnel information. In the event of breach of this covenant by the
Seller and/or Affiliates, the Purchaser shall be entitled to injunctive relief
as well as to damages sustained and the recovery of court costs and reasonable
attorney's fees.
12. Indemnification.
a. Seller shall jointly and severally indemnify and defend the
Purchaser and each of Purchaser's officers, directors, employees, stockholders,
agents, advisors or representatives (collectively the "Indemnified Party")
against, and hold each of them harmless from, any loss, liability, obligation,
damage or expense, including without limitation attorneys' fees and
disbursements (collectively "Damages") that the Indemnified Party may suffer or
incur incidental to any claim or any proceeding against the Indemnified Party
based on or resulting from: (i) the failure of any representation or warranty
made by the Seller to be true and correct on the date hereof and on the Closing
Date; (ii) Seller's failure to perform or to comply with any covenant or
condition required to be performed or complied with by the Seller hereunder;
(iii) any liability of the Seller related to the Assets or the Franchise
Territories, except to the extent that Purchaser specifically assumes any
liability of Seller under any leases pursuant to the terms of this Agreement and
any Assignment and Assumption Agreements delivered at Closing; or (iv) the
ownership or operation of the Franchise Territories or Assets prior to the
Closing Date.
<PAGE>
b. If any third party shall notify any Indemnified Party with
respect to any matter (a "Third Party Claim") which may give rise to a claim for
indemnification against Seller (the "Indemnifying Party") under this Section 12,
then the Indemnified Party shall promptly notify the Indemnifying Party thereof;
provided, however, that no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying Party from any
obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is materially prejudiced. Any Indemnifying Party will have the
right to defend the Indemnified Party against the Third Party Claim with counsel
of its choice satisfactory to the Indemnified Party so long as (A) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Damages the Indemnified Party may suffer resulting from, arising
out of, or relating to the Third Party Claim, (B) the Indemnifying Party
provides the Indemnified Party with evidence acceptable to the Indemnified Party
that the Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its obligations hereunder, (C) the Third Party
Claim involves only money damages and does not seek an injunction or other
equitable relief, (D) settlement of, or an adverse judgment with respect to, the
Third Party Claim is not, in the judgment of the Indemnified Party, likely to
establish a precedential custom or practice adverse to the continuing business
interests of the Indemnified Party, and (E) the Indemnifying Party conducts the
defense of the Third Party Claim actively and diligently.
c. So long as the Indemnifying Party is conducting the defense
of the Third Party Claim in accordance with Section 9.b. above, (A) the
Indemnified Party may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim, (B) the Indemnified
Party will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Indemnifying Party not to be withheld unreasonably, and (C) the Indemnifying
Party will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Indemnified Party not to be withheld unreasonably.
d. In the event any of the conditions in Section 9.b. above is
or becomes unsatisfied, however, (A) the Indemnified Party may defend against,
and consent to the entry of any judgment or enter into any settlement with
respect to, the Third Party Claim in any manner it may deem appropriate and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith, (B) the Indemnifying Party will
reimburse the Indemnified Party promptly and periodically for the cost of
defending against the Third Party Claim, and (C) the Indemnifying Party will
remain responsible for any Damages the Indemnified Party may suffer resulting
from, arising out of, or relating to the Third Party Claim to the fullest extent
provided in this Section 9.
13. Termination.
a. This Agreement may be terminated at any time prior to the
Closing (i) by the mutual agreement of the Purchaser and the Seller; (ii) by the
Purchaser or the Seller (if such party is not in breach of or default under this
Agreement) giving written notice to such affect to the other party if the
Closing shall not have occurred on or before July 15, 1997, or such later date
as the parties shall have agreed upon in writing prior to the giving of such
notice; or (iii) by the Purchaser in the event of a material breach by or
default of Seller of any provision of this Agreement.
<PAGE>
b. Upon termination of this Agreement pursuant to Section
10.a., all obligations of the parties shall terminate except those under Section
12 related to indemnification, provided, however, that no such termination shall
relieve the Seller of any liability to the Purchaser by reason of any breach of
or default under this Agreement.
14. Further Offers. Until Closing, the Seller will (i) not provide any
information about the Franchise Territories, with the intent to sell or solicit
an offer to purchase the Assets of the Seller or the Franchise Territories, or a
material interest therein to anyone other than the Purchaser, (ii) not negotiate
or discuss with any other potential buyer other than the Purchaser the sale or
possible sale of Assets of the Seller or the Franchise Territories, or any
material interest therein, (iii) not sell or agree to sell the Assets of the
Seller or the Franchise Territories, or any interest therein and not solicit any
offer or indication of interest concerning the possible sale of the Assets of
the Seller or the Franchise Territories, or any interest therein, and (iv)
advise the Purchaser immediately of the receipt of any written offer or written
proposal for any material interest in the Assets of the Seller or the Franchise
Territories, including the terms of such an offer. The Seller agree that the
Purchaser has and will expend considerable time and money in negotiating the
purchase of the Assets and the preparation of this Agreement. The Seller
therefore agrees to pay the sum of $7,000.00_ to the Purchaser as liquidated
damages if the Seller breach the provisions of this Section 14.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but such counterparts together shall constitute one and the same
instrument.
16. Miscellaneous Provisions.
a. This Agreement and the Release Agreement constitute the
entire understanding of the parties and supersede all prior negotiations,
commitments, representations and undertakings of the parties with respect to the
subject matter hereto, except that this Agreement and the Release Agreement do
not extinguish any covenants in the Franchise Agreements, which by their terms
are applicable after the termination of the Franchise Agreements or the sale of
the Franchise Territories, and provided further that the Mutual Release
Agreement to which Purchaser are parties dated December 31, 1996, shall remain
in full force and effect in accordance with its terms.
b. The failure of any party to exercise any right, power or
option given it in this Agreement or any subsequently executed agreements, or to
insist upon strict compliance with the terms of any of them by the other shall
not constitute a waiver of the terms and conditions of any of such agreements
with respect to any other or subsequent breach thereof, nor a waiver of its
rights at any time thereafter to require exact and strict compliance with all of
the terms of such agreements. The rights or remedies hereunder, including
without limitation the rights of Purchaser under Section 10, 12, 14 are
cumulative to, and not in lieu of, any other rights or remedies which may be
granted by law.
<PAGE>
c. This Agreement shall be governed and construed under and in
accordance with the laws of the Commonwealth of Virginia without reference to
the conflict of laws principles thereof.
d. All of the parties hereto submit to the jurisdiction of any
state or federal court sitting in Norfolk, Virginia in any action or proceeding
arising out of or relating to this Agreement and each of them agrees that all
claims in respect of any such action or proceeding may be heard and determined
in any such court. The parties also agree not to bring any action or proceeding
arising out of or relating to this Agreement in any other court. Each of the
parties waives any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety, or other security
that might be required of the other party with respect thereto. Each party may
make service on the other party by sending or delivering a copy of the process
to the party to be served at the address and in the manner provided for the
giving of notices in Section 16.e. below; provided, however, that nothing herein
shall affect the right of the parties to serve legal process in any other manner
permitted by law or in equity. Each of the parties agrees that a final judgment
in any action or proceeding so brought shall be conclusive and may be enforced
by suit on the judgment or in any manner provided by law or in equity.
e. All notices, requests, demands, claims and other
communications hereunder will be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly given if (and five
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Purchaser: Jackson Hewitt, Inc.
Attn: Keith E. Alessi
4575 Bonney Road
Virginia Beach, VA 23462
With a copy to: John M. Paris, Jr., Esq.
Kaufman & Canoles
NationsBank Center
One Commercial Place, 20th Floor
Norfolk, VA 23510
If to the Seller:
Susan E. Ventresca
7008 Dawn Drive
Niagara Falls, NY 14304
<PAGE>
With a copy to: James Roscetti
730 Main Street
Niagara Falls, NY 14301
Each party may send any notice, request,
demand, claim or other communication hereunder to the intended recipient at the
address set forth above using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail) but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the intended recipient. Each of parties may change the
address to which notices and other communications hereunder are to be delivered
by giving the other party written notice in the manner herein set forth.
f. The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring one of the parties by virtue of the authorship of any of
the provisions of this Agreement.
g. This Agreement shall not confer any rights or remedies upon
any person other than the parties hereto and their respective successors and
permitted assigns. This Agreement shall be binding upon and inure to the benefit
of the parties named herein and their respective successors and permitted
assigns. No party may assign this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the other party.
h. Each of the parties acknowledges and agrees that the other
parties hereto would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the parties agrees that the other
party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the parties in the
matter, subject to the provisions set forth in Section 13.d. above, in addition
to any other remedy to which it may be entitled at law or in equity.
i. Should any part of this Agreement, for any reason, be
declared invalid by a court of competent jurisdiction, such decision or
determination shall not affect the validity of any remaining portion and such
remaining portion shall remain in force and effect as if this Agreement had been
executed with the invalid portion eliminated; provided, however, that in the
event of a declaration of invalidity, the provision declared invalid shall not
be invalidated in its entirety, but shall be observed and performed by the
parties to the extent such provision is valid and enforceable. The parties
hereby agree that any such provision shall be deemed to be altered and amended
to the extent necessary to effect such validity and enforceability.
<PAGE>
j. The parties waive compliance with the provisions of any
bulk sales law that may be applicable to the transactions contemplated hereby.
IN WITNESS THEREOF, the parties have hereunto set their hands and seals on the
date first above written.
SELLER:
/S/ SUSAN E. VENTRESCA
----------------------------
Susan E. Ventresca
----------------------------
Seller's Address
----------------------------
City and State and Zip
----------------------------
Telephone Number
----------------------------
Seller's TIN/EIN/SS #
PURCHASER:
JACKSON HEWITT INC.
By: /S/ KEITH E. ALESSI
---------------------------------
Keith E. Alessi, President/CEO
<PAGE>
EXHIBIT A
Franchisee's Jackson Hewitt Inc. granted franchise territories consist of the
following:
NY021 with zips: 14301, 14092, 14305, 14174
NY019 with zips: 14132, 14120, 14131
NY201 with zips: 14150, 14217 West of excluding Elmwood Avenue and N of
including Sheridan Drive
NY015 with zips: 14226, 14223
NY550 with zips: 14304, 14303, 14072
NY202 with zips: 14216, 14217 E of including Elmwood Ave. and S. of excluding
Sheridan Drive, 14207
<PAGE>
EXHIBIT B
ASSETS
Client Files, all copies on hard disk drive or floppy disk drive, all paper
copies and all related databases, Bank Products documents or applications, 8453s
All rights to telephone numbers: 871-9685, 832-7628, 284-0002, 297-0007, Seller
to retain all deposits.
Goodwill
Any and all rights to the lease dated June 14, 1995 for the premises known as:
3071 Sheriden Drive, Store 10 in Amherst, NY with lessor Northtown, Inc.
The following equipment:
16 Bevis Desks (with extra center pieces)
4 O'Sullivan desks (one of which owned by Jackson Hewitt)
83 Black Customer Chairs
5 Grey Tax Prep Chairs
18 Red Tax Prep Chairs
3 Filing Cabinets
3 6 foot folding tables
1 4x10 overhead sign
1 channel letter sign (TAX SERVICE)
1 3x14 foot sign (with 2 3x3 logo faces and 1 2x8 Tax Service Face)
6 Illuminated interior window signs with interchangeable faces
4 coffee stands
3 coffee tables
1 Konica copier (1015) and stand
10 386 computers, with keyboards (1 of which owned by Jackson Hewitt)
14 Dividers (some belong to Jackson Hewitt)
3 overhead projectors
8 2-line phones
1 HP 4+ printer
1 486 Computer, color monitor and keyboard
Front office printing devices
The attached leased equipment to the extent not included above, which are on an
Aloha Lease.
<PAGE>
All offices have:
Miscellaneous Supplies
Trash Cans
Wall signs
Crates
Radios
Employee boxes
Banners
<PAGE>
Bill of Sale
Seller, Susan E. Ventresca, conveyed the following assets to Purchaser, Jackson
Hewitt Inc. on , 1997
Electronically provided customer information
Goodwill
The following items of equipment:
16 Bevis Desks (with extra center pieces)
4 O'Sullivan desks (one of which owned by Jackson Hewitt)
83 Black Customer Chairs
5 Grey Tax Prep Chairs
18 Red Tax Prep Chairs
3 Filing Cabinets
3 6 foot folding tables
1 4x10 overhead sign
1 channel letter sign (TAX SERVICE)
1 3x14 foot sign (with 2 3x3 logo faces and 1 2x8 Tax Service Face)
6 Illuminated interior window signs with interchangeable faces
4 coffee stands
3 coffee tables
1 Konica copier (1015) and stand
10 386 computers, with keyboards (1 of which owned by Jackson Hewitt)
14 Dividers (come belong to Jackson Hewitt)
3 overhead projectors
8 2-line phones
1 HP 4+ printer
1 486 Computer, color monitor and keyboard
Front office printing devices
The attached leased equipment to the extent not included above, which are on an
Aloha Lease.
All offices have:
Miscellaneous Supplies
Trash Cans
Wall signs
Crates
Radios
Employee boxes
Banners
All rights to any the leased for the premises and dated June 14, 1995 for the
premises known as: 3071 Sheriden Drive, Store 10 in Amherst, NY with lessor
Northtown, Inc.
All rights to telephone numbers: 871-9685, 832-7628, 284-0002, 297-0007, Seller
to retain all deposits.
All rights contained in any Aloha Lease for equipment leased to Seller and used
in the franchised business.
Total Purchase Price: $329,542.00
/s/ SUSAN VENTRESCA
- ------------------------------
Susan Ventresca, Seller
<PAGE>
RELEASE AGREEMENT - Exhibit C
This Release Agreement (the "Agreement") is made and entered into as of
this ____ day of ____________, 1997, by and between Jackson Hewitt Inc., a
Virginia corporation ("Franchiser"), and Susan Ventresca the ("Franchisee").
WHEREAS, Franchiser and Franchisee have entered into an agreement for
Franchiser to purchase the territories listed on Exhibit A attached hereto and
made a part hereof by reference, for the operation of Jackson Hewitt Tax Service
offices in the State of New York ("Agreement of Purchase and Sale"); and
WHEREAS, Franchiser and Franchisee are parties to certain Franchise
Agreements related to such territories ("Franchise Agreements").
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
1. Franchisee and each of its agents, servants, successors, officers,
directors, guarantors, heirs and assigns, fully and finally release, acquit, and
forever discharge Franchiser, its present and former agents, servants,
successors, officers, directors, shareholders, employees, assigns and
affiliates, and all other persons, firms, corporations, associations, or
partnerships of and from any and all claims, actions, causes of action, demands,
damages, costs, loss of services, expenses, and compensation which Franchisee
now has, known or unknown, foreseen and unforeseen, arising under or relating to
any Franchise Agreement, any laws affecting the sale of a franchise including
without limitation to any state and/or federal franchise registration and/or
disclosure laws or regulations, up to and including the date hereof, and any and
all manner of other claims, accounts, debts, demands, damages, losses, causes of
action, actions, liabilities, or suits, whether at law or in equity, whether
known or hereafter discovered, which Franchisee or its agents, servants,
successors, officers, directors, guarantors, and assigns individually or
collectively has against Franchiser or its agents, servants, successors, heirs,
assigns, or affiliates. Franchisee hereby acknowledges that Franchiser is in
good standing pursuant to the terms of the Franchise Agreements, and that
Franchiser has performed all of its obligations thereunder.
2. Franchisee shall be responsible for any claims made by any third
party relating to or arising out of Franchisee's performance under the Franchise
Agreements including, without limitation, any tort claims brought by any third
party. Franchisee shall indemnify and hold Franchiser harmless against any and
all such claims. Nothing contained herein shall be construed to release,
satisfy, discharge or in any way hinder, delay or affect a recovery by
Franchiser against Franchisee with respect to any cost, damage, expense, claim,
or other liability imposed upon or suffered by Franchiser as a result of any
claim or claims which are brought by any third party against franchiser because
of any act or omission of Franchisee.
3. Notwithstanding anything contained herein to the contrary, any
rights or obligations which may arise between or among any of the parties hereto
as a result of the execution of this Agreement, any future business dealings, or
transactions between or among any of the parties hereto shall survive the
execution of this Agreement.
<PAGE>
4. Should any part of this Agreement for any reason be declared invalid
by a court of competent jurisdiction, such decision or determination shall not
affect the validity of any remaining portion, and such remaining portion shall
remain in force and effect as if this Agreement had been executed with the
invalid portion eliminated; provided, that in the event of a declaration of
invalidity the provision declared invalid shall not be invalidated in its
entirety, but shall be observed and performed by the parties to the extent such
provision is valid and enforceable.
5. This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original, but such
counterparts together shall constitute one and the same instrument.
6. This Agreement and the Agreement of Purchase and Sale shall
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments, and writings except that this Agreement shall not apply to any
post-term covenants contained in the Franchise Agreements, and provided further
that the Mutual Release Agreement to which Purchaser and Ventresca are parties
dated December 31, 1996, shall remain in full force and effect in accordance
with its terms. This Agreement may not be released, discharged, abandoned,
changed, or modified in any manner except by an instrument in writing signed on
behalf of each of the parties hereto.
7. This Agreement shall be governed and construed under and in
accordance with the laws of the Commonwealth of Virginia without reference to
the conflict of laws principles thereof.
8. The provisions of Section 16.d. and e. of the Agreement and
Purchase of Sale, related to submission to jurisdiction and notices,
respectively, are incorporated into this Agreement by reference and made a
part hereof.
IN WITNESS WHEREOF, the parties have executed, sealed, and delivered
this Agreement the day and year set forth above.
FRANCHISER:
JACKSON HEWITT INC.
---------------------------
Keith E. Alessi
Chairman, President and CEO
FRANCHISEE:
---------------------------
Susan Ventresca
<PAGE>
EXHIBIT A
Franchisee's Jackson Hewitt Inc. granted franchise territories consist of the
following:
NY021 with zips: 14301, 14092, 14305, 14174
NY019 with zips: 14132, 14120, 14131
NY201 with zips: 14150, 14217 West of excluding Elmwood Avenue and N of
including Sheridan Drive
0
NY202 with zips: 14216, 14217 E of including Elmwood Ave. and S. of excluding
Sheridan Drive, 14207
<PAGE>
ALLOCATION OF PURCHASE PRICE
Purchaser, Jackson Hewitt Inc. and Seller, Susan E. Ventresca, having entered
into an Agreement of Purchase and Sale dated July 1, 1997 hereby agree to
allocate the purchase price of: $329,542.00, as follows:
Electronically provided customer information: $290,000.00.
Furniture and Equipment: $10,000.00.
Goodwill: $9,542.00
Seller has purchased a Covenant Not to Compete from Seller for $20,000.00.
PURHCASER: SELLER
JACKSON HEWITT INC.
By: /s/ KEITH E. ALESSI /s/ SUSAN E. VENTRESCA
----------------------------------------- ----------------------------
Keith E. Alessi, Chairman, President, CEO Susan E. Ventresca
Exhibit 23.1
The Board of Directors
Jackson Hewitt Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Our report covering the financial statements refers to the adoption of Statement
of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
and SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended
by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME
RECOGNITION AND DISCLOSURE, in 1996.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
July 11, 1997
