SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1997
Commission file number 0-22324
JACKSON HEWITT INC.
(Exact Name of Registrant as specified in its charter)
Virginia 54-1349705
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4575 Bonney Road, Virginia Beach, Virginia 23462
(Address of principal executive offices) (Zip Code)
(757) 473-3300
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the
Exchange Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of July 25, 1997: $91,657,277.
The number of shares outstanding of each of the issuer's classes of
common stock as of July 25, 1997: 5,255,193.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement (the "1997
Proxy Statement") to be used in connection with the 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
<PAGE>
References in this Form 10-K 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 Form 10-K refer to the Company's fiscal year ending on April 30.
References to the term "tax season" throughout this Form 10-K refer to the
period from January through April of each fiscal year. For a discussion of
certain risks associated with the Company's business operations, see "Item 1.
Business -- Risk Factors."
PART I
Item 1. 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 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 report 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.
<PAGE>
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 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.
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."
<PAGE>
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 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, all of which are further
described and defined in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation." 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.
<PAGE>
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 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. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- 1997 Compared to 1996 -- Minority
Interest Share of Earnings."
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.
<PAGE>
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 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.
<PAGE>
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
At April 30
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
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
=== === ===== ===== =====
<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.
<PAGE>
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 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.
<TABLE>
<CAPTION>
NUMBER OF FRANCHISEES
Previous Fiscal
Fiscal Year Year Total Left System(1) New Franchisees Total Franchisees
- ----------- ---------- -------------- --------------- -----------------
<S> <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 $17,900 to $24,730 for a total initial investment ranging
from approximately $49,350 to $61,780.
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.
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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 immediately prior to 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.
<PAGE>
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 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.
<PAGE>
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 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 ""Item 3. --
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.
<PAGE>
H&R Block, Inc. ("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.
Risk Factors
The specific factors set forth below, as well as the other information
included in this Form 10-K, should be considered carefully. 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 " -- 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 " -- 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, 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.
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 an.d 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.
<PAGE>
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 " -- 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.
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 " --
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 "Item
3 -- Legal Proceedings."
<PAGE>
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 "Item 7. 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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Quarterly
Results of Operations" and " -- Liquidity and Capital Resources."
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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
<PAGE>
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.
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 " -- 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 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 " -- Competition."
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 " -- Franchise Operations."
<PAGE>
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 " --
Proprietary Information and Computer Technology."
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 " -- 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 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.
Limited Public Market For The Common Stock; Possible Volatility Of
Stock Price. The average daily trading volume of the Company's Common Stock
("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. There can be no assurance that an
active trading market for the Common Stock will develop 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
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters."
<PAGE>
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.
Executive Officers of the Company
The following table sets forth certain information concerning the
Company's executive officers.
Name Age Position
---- --- --------
Keith E. Alessi 42 Director, Chairman,
President, and Chief
Executive Officer
Christopher Drake 48 Secretary, Treasurer, and
Chief Financial Officer
Martin B. Mazer 35 Franchise Development and
Corporate Offices
Kelly A. Wagner 31 Vice President of
Operations
Leslie A. Wood 32 Vice President of
Technology
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.
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 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.
<PAGE>
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.
Item 2. Properties.
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.
Item 3. 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information Regarding Market Price. 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
On July 28, 1997, there were 596 holders of record of the Common
Stock. The Company has never paid a dividend on its Common Stock, and the
Company's credit facility with its primary lender prohibits the payment of any
dividends without the lender's consent. See "Item 1. Business -- Risk Factors --
Absence of Payment of Cash Dividends."
Sales of Unregistered Securities.
1. Effective June 18, 1997, the Company exchanged 699,707 shares
of its Common Stock for all of the then outstanding shares of the Company's
Series A Convertible Preferred Stock in a tax free recapitalization. The
transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933 ("Securities Act") and Rule 506 of Regulation D promulgated pursuant
to the Securities Act ("Regulation D").
2. 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.
3. 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 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.
4. 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.
<PAGE>
Item 6. 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 Form 10-K. The information below is qualified in its entirety
by the detailed information included elsewhere herein and should be read in
conjunction with "Item 1. Business," "Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended April 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C>
(in thousands, except per share, office and fee data)
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
===== ===== ====== ====== ======
<PAGE>
<S> <C>
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
Other Operating Data:
Tax returns prepared(1)................................................... 404 570 618 722 875
Refund anticipation loans (RALs) provided(1).............................. 246 331 108 102 142
Accelerated check requests (ACRs) provided(1)............................. 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(1)................................ $67 $69 $80 $92 $99
</TABLE>
<TABLE>
<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) Includes Company-owned and franchised offices.
Item 7. 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 Form 10-K. Yearly
references contained throughout this Form 10-K 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.
<PAGE>
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 "Item
1. Business -- The Tax Preparation Business -- Bank Products" and " -- Results
of Operations -- 1997 Compared to 1996" below.
Results Of Operations
The following table sets forth certain information regarding the
Company's consolidated statement of operations as a percentage of total
revenues:
<PAGE>
Years Ended April 30,
1995 1996 1997
---- ---- ----
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%
===== ===== =====
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%.
<PAGE>
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 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.
<PAGE>
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 "Item 1. Business -- Risk Factors -- Adverse
Impact of IRS Policies."
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
$0.5 million primarily due to reduced advertising expenses which were partially
offset by an increase in bad debt expense resulting from increased franchisee
terminations. These decreases were offset by an increase of $0.6 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.
<PAGE>
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 "Item 1. Business -- 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," "Item 1. Business -- 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 report 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.
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997
----------- -----------
Quarter Ended Quarter Ended
------------------------------------------ ----------------------------------------------
July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30,
1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C>
(in thousands, except per share data) (in thousands, except per share data)
Net revenues.............................$ 823 $1,318 $5,219 $17,656 $980 $1,216 $7,805 $21,431
Income (loss) before extraordinary item...(1,326) (1,599) (475) 5,802 (1,322) (1,008) 1,184 7,378
Net income (loss).........................(1,326) (1,599) (475) 5,802 (2,570) (1,008) 1,184 7,378
Earnings per common share:
Income (loss) before extraordinary item..$ (0.33) $(0.32) $(0.11) $1.16 $(0.32) $(0.24) $0.24 $1.54
Net income (loss)........................ (0.33) (0.32) (0.11) 1.16 (0.59) (0.24) 0.24 1.54
</TABLE>
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 "Item 1. Business -- 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.
<PAGE>
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.
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 Company's stock offering scheduled to close in
early August, 1997, 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.
<PAGE>
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The Company's Consolidated Financial Statements and the Notes thereto
are included in Exhibit 99.1. For quarterly financial information, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results of Operations."
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
The information required by Part III (Items 10, 11,12, and 13) has been
incorporated herein by reference to the Company's 1997 Proxy Statement, as set
forth below, in accordance with Instruction G(3) of Form 10-K.
Item 10. Directors and Executive Officers of the Registrant.
Information relating to directors of the Company and compliance with
Section 16(a) of the Securities Exchange Act of 1934 will be set forth in the
sections entitled "Election of Directors" and "Compliance with Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 1997 Proxy Statement
and is incorporated herein by reference. Certain information concerning the
executive officers of the Company is set forth under the caption entitled
"Executive Officers of the Company" in Part I, Item 1 of this Form 10-K.
Item 11. Executive Compensation.
Information regarding compensation of officers and directors of the
Company will be set forth in the section entitled "Executive Compensation" in
the Company's 1997 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding ownership of certain of the Company's securities
will be set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
with the Company will be set forth in the section entitled "Certain
Relationships and Related Transactions" in the Company's 1997 Proxy Statement
and is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report.
(1) Financial Statements and Schedules: Included in this
Form 10-K as Exhibits 99.1 and 99.2.
(2) Exhibits: The exhibits listed on the accompanying
Exhibit Index are filed or incorporated by reference as part of this Form 10-K
and the Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K: None.
<PAGE>
Signatures
In accordance with Section 13 of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, in the City of
Virginia Beach, Commonwealth of Virginia, on July 25, 1997.
JACKSON HEWITT INC.
By:/s/ Keith E. Alessi
-------------------------
President, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Keith E. Alessi Chairman of the Board, Chief Executive July 25, 1997
- --------------------------------- Officer, President, Director
Keith E. Alessi
/s/ Harry W. Buckley Director July 25, 1997
- ---------------------------------
Harry W. Buckley
/s/ Harry S. Gruner Director July 25, 1997
- ---------------------------------
Harry S. Gruner
/s/ Michael E. Julian Jr. Director July 25,1997
- ---------------------------------
Michael E. Julian
/s/ William P. Veillette Director July 25, 1997
- ---------------------------------
William P. Veillette
/s/ Christopher Drake Secretary, Treasurer, Chief Financial July 25, 1997
- --------------------------------- Officer (Principal Financial Officer and
Christopher Drake Principal Accounting Officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
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. (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.)
4.2 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).
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).
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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
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.)
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.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
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. (Incorporated by reference to the Registrant's Registration Statement on Form S-1, Commission
File No. 333-30439, previously filed with the Commission on July 11, 1997.)
**10.24 Asset Purchase and Service Agreement, dated July 15, 1997, between the Company and Resource Bank.
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. *
**27 Financial Data Schedule.
**99.1 Financial Statements. *
**99.2 Financial Statement Schedule -- Schedule II, Valuation and Qualifying Accounts *
</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.
** Filed herewith.
ASSET PURCHASE AND SERVICE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of July 15, 1997 by and between
JACKSON HEWITT INC. (hereinafter "Seller"), a Virginia corporation, with its
principal office at 4705 Bonney Road, Virginia Beach, Virginia and RESOURCE
BANK, (hereinafter "Purchaser"), a Virginia banking corporation, with its
principal office located at 3720 Virginia Beach Boulevard, Virginia Beach,
Virginia.
WHEREAS, Seller owns and is the payee under certain promissory notes
that are more particularly described on Schedule 1 attached hereto (the
"Notes"); and
WHEREAS, Seller desires to sell and Purchaser desires to purchase said
Notes upon the terms, provisions and conditions hereinafter stated:
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Price. The Seller agrees to sell, assign, convey, transfer, and
deliver and the Purchaser agrees to buy the Notes for the purchase price (the
"Purchase Price") of 100 percent (100%) of the outstanding balance, including
interest due under all Notes; subject, however, to the terms and conditions of
this Agreement or any other writing executed between the parties at any time
hereafter.
It is the expressed intent of the parties that this transaction is an
absolute sale of the Notes and is not the creation of a creditor-debtor
relationship between the Purchaser and the Seller. Seller shall have no right to
repurchase the Notes except as provided in paragraph 5 below. The Seller and the
Purchaser each shall mark their respective books and records to evidence this
transaction as an absolute sale of the Notes.
The above purchase price shall also include and be payment for all
franchise rights, account cards, records, forms, papers, chattel mortgages,
security agreements, finance statements, certificates of title, claims,
judgments, liens, and other forms of security held by Seller in connection with
the Notes sold hereunder.
2. Delivery.
2.1 Seller's Deliveries at Closing. Seller shall
deliver to Purchaser on or before the date hereof (the "Closing Date") the
following:
(a) each of the Notes duly endorsed to the
order of the Purchaser in the manner set forth on Exhibit A attached hereto;
<PAGE>
(b) a fully executed Assigned of Notes in the
form of Exhibit B attached hereto; and
(c) written notifications addressed to each
obligor under any Note informing such obligor of the sale of the Note to the
Purchaser and directing each obligor to make payment on each Note in accordance
with the terms of this Agreement;
2.2 Purchaser's Deliveries at Closing.Purchaser shall
deliver to Seller on or before the Closing Date the Purchase Price.
3. Indemnification. Seller agrees to protect, defend, and indemnify
Purchaser and to hold it harmless from, against and with respect of any
liability, loss, deficiency, expense, including reasonable attorneys' fees,
other costs of litigation and collection, and those arising from the enforcement
of indemnification (of all of which are referred to hereafter collectively as
"Damages"), and agrees to pay or reimburse Purchaser on demand for all Damages
resulting, by reason of, caused by or incident to: (a) any and all claims
against and liabilities of Seller of every kind and nature, absolute, and
contingent arising from or in connection with the actions of Seller prior to the
Closing Date; (b) any untrue representation or breach of any representation or
warranty of Seller contained herein or in any exhibit, certificate or other
writing delivered to Purchaser pursuant to this Agreement and/or (c) any
nonfulfillment of any agreement or covenant of Seller contained herein. This
indemnification shall include, but not be limited to, Damages resulting from any
claim or legal proceeding which is commenced by or on behalf of one or more of
the real persons and/or corporations or other entities shown to be indebted
pursuant to any Note on the records of the Seller (such debtors shall be
referred to herein as "Obligors") for causes of action arising prior to the
Closing Date, and any governmental investigation or administrative proceeding
predicated upon acts or omissions committed prior to the Closing Date for which
the Seller or its predecessor in interest may be responsible. In any such event,
Seller shall be entitled to assume the defense of such action using an attorney
reasonable acceptable to Purchaser.
4. Payment of Certain Taxes. Seller shall be solely responsible for any
and all taxes, fees and other charges which shall become due (a) on account of
the operation and conduct of the business of Seller or (b) on account of the
acquisition, holding or administering of any of the Notes prior to the Closing
Date.
5. Recourse. It is understood and agreed that all Notes are assigned,
transferred and conveyed to Purchaser pursuant hereto with limited recourse as
provided in this paragraph. The Seller hereby guarantees to the Purchaser that
the Obligor of each and every Note shall promptly and fully pay and satisfy all
payments owing under the Note when and as the same become due and payable. In
addition to the foregoing, upon written request of Purchaser, Seller shall
within thirty (30) days of the receipt of such notice repurchase any Note at a
price of equal to the purchase price of such Note minus any amounts paid by the
Obligor on such Note after the Closing Date, in the event that than any of the
following (subject in all instances to any cure rights of the Obligor) shall be
accurate:
<PAGE>
(a) the Purchaser is unable, after reasonable effort to do so,
but in no event greater than ten (10) days after the Closing Date, to verify the
Obligor's existence or residence at the place furnished by the Seller,
(b) any Obligor files bankruptcy, or
(c) the Obligor fails to make any payment due under
his Note within 30 days of the due date for such payment.
Except as provided in this paragraph 5, the Seller has no obligation to
repurchase the Notes. In no event does the Seller have the right to repurchase
the Notes, or any of the Notes.
6. Nonassumption of Seller's Liabilities. It is understood and hereby
covenanted by Seller that Purchaser will not assume, and shall not in any manner
become liable for, any debt, obligation, or liability of Seller by reason of
this transaction, the provisions hereof or the operation of law.
7. Survival of Representations and Warranties Remedies Cumulative. All
representations and warranties herein contained shall survive this Agreement.
All remedies of Purchaser herein shall be deemed to be cumulative and not
exclusive, and the exercise or enforcement of any one or more remedies shall not
preclude the exercise or enforcement of any other remedy or remedies.
8. Servicing Agreement.
8.1. Administration and Servicing of Notes. The Seller is
hereby authorized to act as agent for the Purchaser and in such capacity shall
manage, service, administer and make collections on the Notes and perform the
other actions required by the Seller under this Agreement. The Seller agrees
that its servicing of the Notes shall be carried out in accordance with Seller's
customary and usual collection procedures. The Seller's duties shall include,
without limitation, collection and posting of all payments, responding to
inquiries of Obligors on the Notes, investigating delinquencies, reporting any
required tax information to Obligors, monitoring the collateral, if any,
accounting for collections and furnishing monthly and annual statements to the
Purchaser. To the extent generally consistent with the standards, policies and
procedures otherwise required hereby, the Seller shall follow its customary
standards, policies, and procedures and shall have full power and authority,
acting alone, to do any and all things in connection with such managing,
servicing, administration and collection that it may deem necessary or
desirable. Without limiting the generality of the foregoing, the Seller is
hereby authorized and empowered by the Purchaser to execute and deliver, on
behalf of the Purchaser, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge, and all other
comparable instruments, with respect to the Notes; provided, however, that
notwithstanding the foregoing, the Seller shall not, except pursuant to an order
from a court of competent jurisdiction, release an Obligor from payment of any
unpaid amount under any Note or waive the right to collect the unpaid balance of
any Note from the Obligor. The Seller is hereby authorized to commence, in its
own name or in the name of the Purchaser (provided the Seller has obtained the
Purchaser's consent, which consent shall not be unreasonably withheld), a legal
proceeding to enforce a Note or to commence or participate in any other legal
proceeding (including, without limitation, a bankruptcy proceeding) relating to
or involving a Note or an Obligor. If the Seller commences or participates in
such a legal proceeding in its own name, the Purchaser shall thereupon be deemed
to have automatically assigned such Note to the Seller solely for purposes of
commencing or participating in any such proceeding as a party or claimant, and
the Seller is authorized and empowered by the Purchaser to execute and deliver
in the Seller's name any notices, demands, claims, complaints, responses,
affidavits or other documents or instruments in connection with any such
proceeding. The Purchaser shall furnish the Seller with any powers of attorney
and other documents which the Seller may reasonably request and which the Seller
deems necessary or appropriate and take any other steps which the Seller may
deem necessary or appropriate to enable the Seller to carry out its servicing
and administrative duties under this Agreement.
<PAGE>
8.2. Collection of Note Payments: Modifications of Notes.
(a) Consistent with the standards, policies
and procedures required by this Agreement, the Seller shall make reasonable
efforts to collect all payments called for under the terms and provisions of the
Notes as and when the same shall become due, and shall follow such collection
procedures as it follows with respect to all comparable Notes that it services
for itself and otherwise act with respect to the Notes, in such manner as will,
in the reasonable judgment of the Seller, maximize the amount to be received by
the Purchaser with respect thereto.
(b) The Seller may not at any time agree to a
modification or amendment of any Note without having first obtained the
express written consent of the Purchaser which consent may be withheld in its
sole discretion.
(c) The Seller shall remit all payments by or
on behalf of the Obligors received by the Seller to the account maintained by
the Purchaser for deposit of such payments (the "Collection Account") without
deposit into any intervening account and as soon as practicable, but in no event
later than the Business Day after receipt thereof.
(d) If the Seller elects to commence a legal
proceeding to enforce the holders rights under any Note, the act of
commencement shall be deemed to be an automatic assignment from the Purchaser to
the Seller of the rights under such Note on the grounds that it is not a real
party in interest or a Person entitled to enforce the Note, the Purchaser, at
the Purchaser expense, shall take such steps as the Seller deems necessary to
enforce the Note.
8.3. Servicing Fee: Payment of Certain Expenses by Seller.
On April 15, of each year (each "Payment Date"), the Seller shall be entitled to
receive out of the Collection Account a service fee equal to two percent 2% of
all amounts collected on all Notes since the prior year's Payment Date. The
Seller shall be required to pay all expenses incurred by it in connection with
its activities under this Agreement (including taxes imposed on the Seller,
expenses incurred in connection with distributions and reports made by the
Seller to Purchaser and all other fees and expenses of the Purchaser, except
taxes levied or assessed against the Purchaser, and claims against the Purchaser
in respect of indemnification, which taxes and claims in respect of
indemnification against the Purchaser are expressly stated to be for the account
of Seller).
<PAGE>
8.4. Retention and Termination of Seller. The Seller
hereby covenants and agrees to act as such under this Agreement until Seller's
receipt of written notification from the Purchaser that Seller's obligations
pursuant to this paragraph 8 have been terminated.
9. Representations and Warranties of Seller. The Seller
represents, warrants and covenants as of the Closing Date as to itself:
(a) Organization and Good Standing. The Seller has been duly
organized and is validly existing and in good standing under the laws of its
jurisdiction of organization, with power, authority and legal right to own its
properties and to conduct its business as such properties are currently owned
and such business is currently conducted, and had at all relevant times, and now
has, power, authority and legal right to enter into and perform its obligations
under this Agreement;
(b) Due Qualification. The Seller is duly qualified to do
business as a foreign corporation in good standing and has obtained all
necessary licenses and approvals, in all jurisdictions in which the ownership or
lease of property or the conduct of its business (including the servicing of the
Notes as required by this Agreement) requires or shall require such
qualification;
(c) Power and Authority. The Seller has the power and
authority to execute and deliver this Agreement and to carry out its terms and
the execution, delivery and performance of this Agreement have been duly
authorized by the Seller by all necessary corporate action;
(d) Binding Obligation. The provisions of this Agreement
shall constitute legal, valid and binding obligations of the Seller enforceable
in accordance with their respective terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, or other similar laws
affecting the enforcement of creditors' rights generally and by equitable
limitations on the availability of specific remedies, regardless of whether such
enforceability is considered in a proceeding in equity or at law;
(e) No Violation. The consummation of the transactions
contemplated by this Agreement and the fulfillment of the terms of this
Agreement shall not conflict with, result in any breach of any of the terms and
provisions of, or constitute (with or without notice or lapse of time) a default
under, the articles of incorporation or bylaws of the Seller, or any indenture,
agreement, mortgage, deed of trust or other instrument to which the Seller is a
party or by which it or its properties are bound, or result in the creation or
imposition of any lien upon any of its properties pursuant to the terms of any
such indenture, agreement, mortgage, deed of trust or other instrument, other
than this Agreement, or, to the best of Seller's knowledge, violate any law,
order, rule or regulation applicable to the Seller of any court or of any
federal or state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or any of its properties;
<PAGE>
(f) No Proceedings. There are no proceedings or
investigations pending or, to the best of the Seller's knowledge, threatened
against the Seller, before any court, regulatory body, administrative agency or
other tribunal or governmental instrumentality having jurisdiction over the
Seller or its properties (A) asserting the invalidity of this Agreement, (B)
seeking to prevent the sale of the Notes or the consummation of any of the
transactions contemplated by this Agreement, or (C) seeking any determination or
ruling that might materially and adversely affect the performance by the Seller
of its obligations under, or the validity or enforceability of, this Agreement
or (D) seeking to adversely affect the federal income tax or other federal,
state or local tax attributes of the Notes; and
(g) No Consents. The Seller is not required to obtain the
consent of any other party or any consent, license, approval or authorization,
or registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity or
enforceability of this Agreement which has not already been obtained.
(h) Ownership of Notes. Seller owns outright and has full
and complete title to all of the Notes, free and clear of all claims, liens,
pledges and other encumbrances of any kind whatsoever.
(i) No Bankruptcies. There are no bankruptcies, filed or
pending, in connection with the Notes of which Purchaser has been advised in
writing.
(j) Validity of Notes. All of the Notes, together with any
security instruments securing the same, were made for full and valuable
consideration and also all Notes, now constitute valid and enforceable
obligations and indebtedness of the respective real persons and/or corporations
or other entities shown to be indebted in respect thereof on the records of the
Seller. The amounts shown on Schedule 1 to be owing and unpaid on the respective
Notes represent the true and correct gross amounts owing and unpaid thereon at
the close of business on July 14, 1997.
(k) No Known Defenses. There are no known defenses with
respect to the Notes such as set-offs, usury, unrecorded credits, counterclaims,
lack of consideration, fraud, violations of Truth-in-Lending or other Federal or
State laws pertaining to the Notes, forgery, alterations, or undisclosed
agreements with Obligors or with third-parties. All payments credited upon said
Notes were paid by the Obligors.
(l) Accuracy of Book and Records. The ledger cards and
other books, records and documents relating to the Notes fairly, accurately, and
completely set forth the names and last known addresses of all the respective
Obligor, the terms of the Notes, the amounts initially outstanding thereon.
<PAGE>
10. Miscellaneous.
10.1 Authority to Execute and Deliver. The person or
persons executing this instrument hereby represent(s) and warrant(s) that he,
she or they are the duly authorized officer(s), representative(s) or agent(s) of
the Seller, and that he, she or they have the power and authority to execute and
deliver this instrument on behalf of Seller.
10.2 Brokers. The parties respectively represent and
warrant that they have not employed or utilized the services of any brokers in
connection with this Agreement or the transactions contemplated hereby. Each
party agrees to indemnify and save the other harmless from and against the
claims of any broker claiming to have acted on behalf of such party.
10.3 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been received on the
earlier of its receipt in fact or five (5) days after its being mailed, regular
mail or Certified Mail, Return Receipt Requested, postage paid, to the parties
at the following addresses (or at such other address as may be specified by
notice given pursuant hereto):
(a) If to Purchaser:
Resource Bank
3720 Virginia Beach Boulevard
Virginia Beach, Virginia 23452
Attn: President
(b) If to Seller:
Jackson Hewitt Inc.
4705 Bonney Road
Virginia Beach, Virginia 23462
Attn: President
10.4 Headings. The headings in this Agreement and the
Schedules hereto are intended solely for convenience of reference and shall be
given no effect in the construction or interpretation of this Agreement.
10.5 Waivers. No waiver of any provision hereof, in part
or in whole, shall be effective unless particularly stated in a writing
addressed and delivered to the other party and duly signed on behalf of the
party against whom the waiver is sought to be enforced. Any waiver so granted
shall apply solely to the event occasioning the necessity for a waiver and with
respect only to the provision or provisions hereof applicable thereto, but shall
not apply to any other events or to reoccurrence of the same or similar event
nor to any other provisions hereof.
<PAGE>
10.6 Applicable Law. This Agreement shall be controlled,
construed and enforced in accordance with the laws of the Commonwealth of
Virginia, it being agreed that the courts of that state shall have jurisdiction
over the parties hereto and this Agreement in addition to such other courts as
may have such jurisdiction.
10.7 Entire Agreement. This Agreement represents the
entire agreement and understanding of the parties, superseding any and all
representations, understandings or agreements with respect to the transaction
herein contemplated if not set forth herein, and no modification hereof or
additions hereto have been agreed to, or will be binding upon any party or its
successors or assigns, unless specifically set forth in writing in a document
executed by the party against whom the modification of addition is sought to be
enforced.
10.8 Binding Agreement; Assignment. This Agreement shall
be binding upon the parties hereto and their successors and assigns; provided,
however, no assignment hereof shall excuse, release or constitute a waiver of
any duty or obligation the assignor may have to the other party hereunder unless
excused, released or a waiver is granted in writing by the other party upon the
assignee's written assumption of all of the assignor's duties and obligations
hereunder.
10.9 Attorney Fees. In the event of the institution of
legal proceedings based upon breach of any of the terms or conditions of this
Agreement by either party hereto, the prevailing party shall be entitled to
reimbursement for reasonable attorney fees, court costs and other expenses
incurred in connection therewith.
10.10 Offset. Seller further agrees that any future monies
owed to Seller by Purchaser can be used to offset any monies owed by Seller to
Purchaser under this agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered on
behalf of the parties hereto by their duly authorized officers or authorized
representatives, all as of the date first above written.
RESOURCE BANK (Purchaser)
By: /s/ RESOURCE BANK
------------------------------------
Title:
---------------------------------
JACKSON HEWITT INC. (Seller)
By: /s/ JACKSON HEWITT
------------------------------------
Title:
---------------------------------
<PAGE>
EXHIBIT A
Each Note shall be stamped and executed as follows:
PAY TO THE ORDER OF RESOURCE BANK WITH LIMITED RECOURSE PURSUANT TO PARAGRAGH
FIVE OF THAT CERTAIN ASSET PURCHASE AGREEMENT DATED JULY 15, 1997, BY AND AMONG
RESOURCE BANK AND JACKSON HEWITT INC.
JACKSON HEWITT INC.,
a Virginia corporation
By:
--------------------------------
Its:
-------------------------------
<PAGE>
EXHIBIT B
ASSIGNMENT OF NOTES
THIS ASSIGNMENT OF NOTES ("Assignment") is made as of July 15, 1997 by
and between JACKSON-HEWITT, INC., a Virginia corporation and RESOURCE BANK, a
Virginia banking corporation ("Assignee").
Recitals:
A. The Assignor and the Assignee simultaneously have entered into
an Asset Purchase and Sale Agreement dated July 15, 1997 ("Purchase Agreement").
B. The Purchase Agreement provides for the sale and transfer by
the Assignor to the Assignee of the Notes (this term and all other capitalized
terms used, and not otherwise defined, in this Assignment have the definitions
ascribed to them in the Purchase Agreement). The Notes are more particularly
listed and described on Schedule 1 which is attached.
Agreement:
For and in consideration of the promises and agreements contained in
this Assignment and in the Purchase Agreement and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
Assignor irrevocably sells, transfers, assigns, grants and conveys to the
Assignee all of the Assignor's right, title and interest in, to and under the
Notes, with limited recourse, pursuant to paragraph five of the Purchase
Agreement.
Dated: July 15, 1997
JACKSON HEWITT INC.
By:
---------------------------------
Its:
--------------------------------
STATE OF
---------------------
CITY/COUNTY OF , to-wit:
--------------------------------------
The foregoing instrument as acknowledged before me in the City/County
of State of
-----------------------------------------, --------------
this day of , 1997, by
-------- ------------------ ---------------------------
of JACKSON-HEWITT, INC., on its behalf.
-----------------------------
Notary Public
(SEAL)
My commission expires:
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Jackson Hewitt Inc.:
We consent to incorporation by reference in the registration statements on
Form S-8 (No. 33-77948 and No. 333- ) of Jackson Hewitt Inc. of our report
dated June 9, 1997, except as to note 16, which is as of June 27, 1997,
relating to 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, which report
appears in the April 30, 1997 annual report on Form 10-K of Jackson
Hewitt Inc.
Our report 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.
/s/ KPMG PEAT MARWICK LLP
Norfolk, Virginia
July 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 6,324
<SECURITIES> 0
<RECEIVABLES> 6,658
<ALLOWANCES> (1,204)
<INVENTORY> 0
<CURRENT-ASSETS> 13,873
<PP&E> 5,248
<DEPRECIATION> (2,572)
<TOTAL-ASSETS> 28,160
<CURRENT-LIABILITIES> 7,891
<BONDS> 0
3,236
0
<COMMON> 92
<OTHER-SE> 14,648
<TOTAL-LIABILITY-AND-EQUITY> 28,160
<SALES> 0
<TOTAL-REVENUES> 31,432
<CGS> 0
<TOTAL-COSTS> 19,664
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> (998)
<INCOME-PRETAX> 10,442
<INCOME-TAX> 6,232
<INCOME-CONTINUING> 6,232
<DISCONTINUED> 0
<EXTRAORDINARY> (1,248)
<CHANGES> 0
<NET-INCOME> 4,984
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.91
</TABLE>
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>
F-7
<PAGE>
JACKSON HEWITT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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).
See accompanying Notes to Consolidated Financial Statements.
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:
<TABLE>
<S> <C>
Building and building improvements....................................................... 40 years
Office furniture, fixtures and equipment................................................. 7-10 years
Computer software........................................................................ 5-7 years
Leasehold improvements................................................................... 7-10 years
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C>
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
----------- -----------
----------- -----------
</TABLE>
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:
<TABLE>
<S> <C>
1998.................................................................................... $ 606,465
1999.................................................................................... 109,586
2000.................................................................................... 84,737
2001.................................................................................... 58,196
2002.................................................................................... 62,482
Thereafter.............................................................................. 713,105
----------
Total................................................................................... $1,634,571
----------
----------
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C>
Office furniture, fixtures and equipment......................................................... $1,799,779 $ 2,133,299
Less accumulated amortization.................................................................... (657,056) (1,294,869)
---------- -----------
$1,142,723 $ 838,430
---------- -----------
---------- -----------
</TABLE>
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. In addition, any invested increment of option shares that would
have vested on the succeeding vesting date will be deemed vested and available
for exercise.
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.
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.
F-17
<PAGE>
JACKSON HEWITT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFITS -- (CONTINUED)
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
------- ------- ------- -------
<S> <C>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
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
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
Jackson Hewitt Inc.:
Under date of June 9, 1997, except as to note 16 which is as of June 27, 1997,
we reported on the consolidated balance sheets of Jackson Hewitt Inc. and
subsidiaries as of April 30, 1996 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended April 30, 1997 which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule, Schedule II - Valuation and Qualifying Accounts. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
June 9, 1997
<PAGE>
SCHEDULE II
JACKSON HEWITT INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE, AMOUNTS
BEGINNING CHARGED TO BALANCE,
OF YEAR EXPENSE DEDUCTIONS END OF YEAR
--------- ---------- ---------- -----------
<S> <C>
Year Ended April 30, 1995
Allowance for doubtful accounts $ 186,493 $ 1,466,663 $ (426,432) $ 1,226,724
Year Ended April 30, 1996
Allowance for doubtful accounts $ 1,226,724 $ 2,316,595 $ (2,177,069) $ 1,366,250
Year Ended April 30, 1997
Allowance for doubtful accounts $ 1,366,250 $ 991,715 $ (1,154,366) $ 1,203,599
</TABLE>
