SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K/A
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/A or any
amendment to this Form 10-K/A [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of August 22, 1997: $165,663,601.
The number of shares outstanding of each of the issuer's classes of
common stock as of August 22, 1997: 6,611,810.
DOCUMENTS INCORPORATED BY REFERENCE
References in this Form 10-K/A 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/A refer to the Company's fiscal year ending on April
30. References to the term "tax season" throughout this Form 10-K/A 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.
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."
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.
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.
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.
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
=== === ===== ===== =====
The Company's experience indicates that mature Jackson Hewitt offices
generally outperform newer offices. The following chart identifies the average
number of tax returns prepared by Jackson Hewitt offices at varying maturity
levels.
Number of Tax Number of Jackson Hewitt Average Number of Tax
Seasons Open Offices Returns Prepared
------------- ------------------------ ----------------------
1 318 278
2 198 443
3 214 665
4 188 880
5 and above 454 862
Franchise Operations
Historical Growth. The Company's growth has been largely attributable
to the expansion of its franchise operations. The Company has expanded its
franchise network from 49 offices in 1988 to 1,296 in 1997. During the 1997 tax
season, 5.5% of Jackson Hewitt offices were owned by the Company and 94.5% were
owned by franchisees. In 1997, the Company sold 166 new franchise territories
and increased the net number of its franchised offices by 50.
The Company believes that franchise growth has resulted from its
ability to sell relatively inexpensive franchises to franchisees. The current
franchise fee for a new Jackson Hewitt franchise is $20,000, a portion of which
may be financed over a three-year period.
The Company attempts to sell franchise territories on a geographically
concentrated basis so that it can more effectively and efficiently target
customers through its mass media advertising campaigns. Through the expansion of
its franchise operations, the Company has established a national presence while
enhancing its position in the Mid-Atlantic region of the United States.
The Franchise Agreement. Under the terms of the Company's franchise
agreement ("Franchise Agreement"), each franchisee receives the right to operate
Jackson Hewitt offices within a specific geographic territory with a population
of approximately 50,000. Franchisees are permitted to operate as many offices
within a specified territory as they choose. Currently there are approximately
4,600 territories in the United States, approximately 1,000 of which are
currently served by Jackson Hewitt offices. Unlike many other franchise concepts
where the franchisee pays fees according to how many office locations the
franchisee operates, Jackson Hewitt franchisees pay one fee for each territory
they purchase. Historically, franchisees have been able to maximize their profit
potential by operating between one to four offices in a territory, with the
particular number depending largely on local economics and the population
dispersion of the region. In some instances, the opening of a second or third
office within a territory may decrease the revenues and profitability of
existing Jackson Hewitt offices, but may also increase the overall market share,
revenues, and profitability of the territory.
The initial term of the Franchise Agreement is five years, with
successive renewals exercisable at the option of the franchisee for additional
five-year periods as long as the terms of the Franchise Agreement have been met.
In addition, franchisees are required to keep at least one office location open
throughout the year in each territory in which the franchisee operates unless
the franchisee owns contiguous territories, in which case only one office must
be open during the off-season for at least one day per week within those
territories. This policy is designed to ensure that customers in each territory
have access to a Jackson Hewitt tax preparer for assistance in matters relating
to late filings or previously filed or future tax returns. Each franchisee is
also required to conduct tax seminars, which are offered to the general public
to attract prospective seasonal tax preparers in order to maintain a staff of
quality tax preparation professionals and to enhance name recognition.
Franchise Development. The Company has historically expanded its
franchise office operations through the selective recruitment of new franchisees
as well as the sale of new territories to existing franchisees with successful
operating histories. The Company intends to emphasize selling franchise
territories to existing Company franchisees and potential franchisees capable of
purchasing and operating multiple territories. Sales of franchises to new
franchisees originate through referrals from existing franchisees, direct mail
campaigns, newspaper advertisements, and numerous franchise trade shows in which
the Company participates.
Prior to entering into the Franchise Agreement with a potential
franchisee, a credit check is performed and an interview is conducted by a
Company regional director. The regional director, who oversees between 150 and
200 franchisees, focuses on the qualities generally found in a successful
Company franchisee: customer service values, ability to follow recommended
procedure, and a strong work ethic. Since the Company's proprietary interactive
tax software greatly facilitates the tax preparation process, tax or accounting
knowledge and experience are not prerequisites. If the applicant successfully
completes the interview process, the applicant is required to complete a
five-day training program during which the Company provides information on
staffing requirements, operating procedures, and other matters necessary to
properly manage a franchise.
The following chart summarizes the number of new Company franchisees
for each fiscal year since 1993.
NUMBER OF FRANCHISEES
Previous Fiscal
Fiscal Year Year Total Left System(1) New Franchisees Total Franchisees
- ----------- ---------- -------------- --------------- -----------------
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
(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.
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.
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.
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.
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.
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.
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/A, 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 continued 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.
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."
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 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."
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."
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.
Recent Development
On August 5, 1997, the Company closed a public offering in which
1,322,500 shares of common stock were sold by the Company at a public Offering
price of $21.25 per share. The net proceeds to the Company in the offering
were approximately $25.8 million. In the offering, certain shareholders of the
Company also sold an aggregate of 178,945 shares of common stock at a price
of $21.25 per share.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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.
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.
Years Ended April 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(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
===== ===== ====== ====== ======
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
As Of April 30,
---------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
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
(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.
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:
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%.
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.
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.
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 $1.6
million or 186.0%.
Seasonality And Quarterly Results Of Operations
Given the seasonal nature of the tax preparation business, the Company
has generated and expects to continue to generate substantially all of its
revenues during January through April of each year. During 1997, the Company
generated approximately 89% of its revenues during this period. The Company
generally operates at a loss through the first three quarters of each fiscal
year, during which it incurs costs associated with preparing for the upcoming
tax season. During these quarters, the Company relies on revenues generated
during the prior tax season and its credit facility to finance its operations.
See " -- Liquidity and Capital Resources," "Item 1. Business -- Risk Factors --
Seasonality and Disaster Recovery Risks," and Note 15 of the Notes to the
Consolidated Financial Statements.
The following table presents certain unaudited quarterly consolidated
statements of operations data for each of the Company's last eight fiscal
quarters. In the opinion of the Company's management, this quarterly information
has been prepared on the same basis as the Consolidated Financial Statements
appearing elsewhere in this report and includes all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the unaudited
quarterly results set forth herein. The Company's quarterly results have in the
past been subject to fluctuations, and thus, the operating results for any
quarter are not necessarily indicative of results for a full year.
Fiscal 1996 Fiscal 1997
----------- -----------
Quarter Ended Quarter Ended
------------------------------------------ ----------------------------------------------
July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30,
1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data) (in thousands, except per share data)
Net revenues.............................$ 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
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.
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 that closed on August
5, 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. See "Item 1. Business--Recent
Development." Management estimates it will require approximately $8.0 million to
fund its off-season capital needs in 1998. To the extent the Company completes
any acquisitions, it may require additional debt or equity financing to meet its
capital needs.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(Statement 128). Statement 128 supersedes APB Opinion No. 15, Earnings Per
Share, and specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. Statement 128 was issued to simplify the computation of
EPS and to make the United States standard more compatible with the EPS
standards of other countries and that of the International Accounting Standards
Committee (IASC). It replaces primary EPS and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes all dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS, similar to fully
diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Statement 128 is effected for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be restated
to conform with Statement 128. See Note 17 of the Notes to the Consolidated
Financial Statements for further discussion of the impact of implementation of
this standard.
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.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information concerning the Company's
directors and executive officers.
DIRECTOR
NAME AGE POSITION SINCE
- ---------------------------------------------------------------- --- ---------------------------------------- --------
Keith E. Alessi................................................. 42 Director, Chairman, President, and Chief 1996
Executive Officer
Harry W. Buckley(1),(2)......................................... 52 Director 1997
Harry S. Gruner(1),(2).......................................... 38 Director 1995
Michael E. Julian, Jr.(1),(2)................................... 46 Director 1997
William P. Veillette(1),(2)..................................... 37 Director 1993
Christopher Drake............................................... 48 Secretary, Treasurer, and Chief
Financial Officer
Martin B. Mazer................................................. 35 Vice President of Franchise Development
and Corporate Offices
Kelly A. Wagner................................................. 31 Vice President of Operations
Leslie A. Wood.................................................. 32 Vice President of Technology
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
KEITH E. ALESSI is President and Chief Executive Officer of the Company, a
position he has held since June 1996. Mr. Alessi was elected to the Board of
Directors in January 1996 and was elected Chairman of the Board in September
1996. Prior to that time, Mr. Alessi, a certified public accountant, served Farm
Fresh, Inc. ("Farm Fresh"), a leading Virginia supermarket chain, as its Vice
Chairman, Secretary, Treasurer, and Chief Financial Officer from 1994 to 1996.
From 1992 until 1994, Mr. Alessi was Chairman and Chief Executive Officer of
Virginia Supermarkets, Inc. From 1988 through 1992, Mr. Alessi was employed by
Farm Fresh and served as President and Chief Operating Officer at the time he
left the company. Mr. Alessi is also a director of Cort Business Services, Inc.,
Town Sports International, Inc., and Shoppers Food Warehouse Corp.
HARRY W. BUCKLEY was President and Chief Executive Officer of H&R Block Tax
Service, Inc., a subsidiary of H&R Block, from 1988 until 1995, at which time he
resigned. Mr. Buckley served H&R Block in various capacities for 28 years.
HARRY S. GRUNER is a General Partner of JMI Equity Fund, a private equity
investment partnership, a position he has held since November 1992. From August
1986 to October 1992, Mr. Gruner was employed by Alex. Brown & Sons Incorporated
and was a principal at the time of his departure. Mr. Gruner is also a director
of Brock International, Inc., a developer, marketer, and supporter of software
systems, The META Group, Inc., a syndicated information technology research
company, Hyperion Software, Inc., a financial software company, V-One
Corporation, a security software company, Optika Imaging, Inc., an imaging
software company, and numerous privately held companies. See " -- Special
Contractual Right to Nominate Director."
MICHAEL E. JULIAN, JR. is the President and Chief Executive Officer of
Jitney-Jungle Stores of America, Inc. ("Jitney Jungle"), a regional supermarket
chain in Mississippi, a position he has held since March 1997. Prior to that
time, Mr. Julian was employed by Farm Fresh and FF Holdings, serving as
Executive Vice President and Chief Operating Officer in 1987, as Chief Executive
Officer from 1988 until 1997, and as President from 1992 until 1997. Mr. Julian
has served as a director of Jitney Jungle since March 1996.
WILLIAM P. VEILLETTE is a District Manager for Otis Elevator Company, a
position he has held since 1992. From 1990 until 1992, he was an Account Manager
for Otis Elevator Company and from 1988 until 1990 he was a Development
Associate for the Trammell Crow Company.
CHRISTOPHER DRAKE is Secretary, Treasurer, and Chief Financial Officer of
the Company, a position he has held since May 1997. From July 1994 to May 1997,
he was Controller and Chief Financial Officer. Mr. Drake joined the Company in
January 1992 as Controller. Mr. Drake is also a franchisee of the Company.
During 1991, Mr. Drake was Senior Vice-President and Chief Financial officer of
Mulberry Phosphates, Inc. of Norfolk, Virginia f/k/a Royster Company, when that
company filed for protection under Chapter 11 of the United States Bankruptcy
Code. The case was filed on April 8, 1991 in
the Southern District of New York, Case No. 91-07012-Pi. The reorganization was
completed, and the company emerged from bankruptcy on January 5, 1993.
MARTIN B. MAZER is Vice President of Franchise Development and Corporate
Offices, a position he has held since May 1997. From May 1996 to May 1997, Mr.
Mazer was Director of Franchise Development. From May 1995 until May 1996, Mr.
Mazer served as Divisional Director in charge of Company-owned offices and from
December 1993 to April 1995, Mr. Mazer served as Regional Director of the
Company's Southeast Region. Mr. Mazer joined the Company in August 1993 as a
franchise sales representative. Before joining the Company, Mr. Mazer was an
area supervisor with Bally's Health and Tennis, where he had worked since 1981.
KELLY A. WAGNER is Vice President of Operations, a position she has held
since June 1997. From August 1991 until June 1997, Ms. Wagner was a Regional
Director of the Company. From May 1989 until August 1991, she was Assistant
Director of Training for the Company. Ms. Wagner joined the Company in January
1989.
LESLIE A. WOOD is Vice President of Technology, a position she has held
since March 1997. From April 1995 until March 1997, she served as Director of
Technology. From September 1994 to March 1995, she was Director of Field
Automation, and from July 1992 until August 1994, she served as Director of
Office Systems. From September 1990 to July 1992, she was a Systems Analyst for
Computer Data Systems, Inc.
TERMINATED CONTRACTUAL RIGHT TO NOMINATE DIRECTOR
Pursuant to the Recapitalization Agreement, the Company continued to be
obligated to use its best efforts to fix the number of directors of the Company
at between five and seven and to cause at least one nominee of the former
holders of Company preferred stock to be recommended to the shareholders
eligible to vote thereon for election as a director at all meetings of
shareholders, or consents in lieu thereof, for such purpose. The obligation of
the Company to recommend a nominee of the former holders of Company preferred
stock to serve as a director of the Company has now terminated, however, as the
Company recently completed a "qualified public offering." A qualified public
offering was defined in contractual agreements between the Company and the
former preferred stockholders as an underwritten public offering of shares of
the Company's Common Stock in which the Company's net proceeds, after deducting
underwriters' discounts and commissions and offering expenses, equal or exceed
$15.0 million and in which the public offering price per share equals or exceeds
$17.82. The Company's recently closed public offering exceeded each of these
standards; accordingly the Company is no longer required to recommend a nominee
of the former holders of the Company's preferred stock for election as a
director. See "Item 1. Business--Recent Development."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established Audit and Compensation Committees.
The Audit Committee is empowered by the Board of Directors to, among other
things, recommend the firm to be employed by the Company as its independent
auditor and to consult with such auditor regarding audits and the adequacy of
internal accounting controls. The Compensation Committee makes recommendations
to the Board of Directors as to, among other things, the compensation of the
Chief Executive Officer and designated other members of senior management, as
well as new compensation and awards under the Company's 1994 Long-Term Incentive
Plan.
DIRECTORS' COMPENSATION
The Company pays outside directors $6,000 per year and reimburses all of
the directors' expenses relating to their activities as directors. Outside
directors also receive initial grants and automatic annual option grants under
the Company's Non-Employee Director Stock Option Plan pursuant to a
pre-determined formula. Employee directors do not receive additional
compensation for service on the Board of Directors or its committees. See "Stock
Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. Buckley, Mr. Gruner, Mr. Julian,
and Mr. Veillette, none of whom are current or former officers or employees of
the Company or any of its subsidiaries. There are no compensation committee
interlocks.
Item 11. Executive Compensation.
The following table sets forth certain information with respect to the
compensation paid by the Company for services rendered during the years ended
April 30, 1997, 1996, and 1995, to its current Chairman, President, and Chief
Executive Officer, its former President and Chief Executive Officer, and other
current and former executive officers of the Company whose combined salary and
bonus exceeded $100,000 in 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
NUMBER OF
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
------------------------ OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)(2) COMPENSATION ($)
- --------------------------------------------- ---- ---------- --------- ------------ ----------------
Keith E. Alessi.............................. 1997 $ 153,461 $ 130,000 268,065(4) $ --
Chairman, President, and Chief 1996 -- -- 10,000(5) 3,500(6)
Executive Officer(3)
Martin B. Mazer.............................. 1997 73,425 41,250 4,000 650(7)
Vice President of Franchise 1996 71,134 3,912 2,000 --
Development and Corporate 1995 67,191 -- 1,000 --
Offices
John T. Hewitt............................... 1997 75,932 -- -- 227,514(9)
Former President and 1996 107,858 115,000 20,000 --
Chief Executive Officer(8) 1995 200,299 -- 13,000 --
Thomas P. Czaplicki.......................... 1997 66,501 41,250 6,500 1,565(7)
Former Vice President 1996 39,316 15,000 -- --
of Corporate Development(10)
- ---------------
(1) Does not include perquisites and other personal benefits that do not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus reported
for the Named Executive Officers.
(2) Granted pursuant to the Company's 1994 Long-Term Incentive Plan unless
otherwise indicated.
(3) Mr. Alessi became President and Chief Executive Officer in June 1996. He was
appointed to the Board of Directors in January 1996.
(4) Mr. Alessi exercised 46,226 of these options in June 1997 at an exercise
price of $4.81 per share. See " -- Employment Agreement."
(5) Granted pursuant to the Non-Employee Director Stock Option Plan when Mr.
Alessi was a non-employee director.
(6) Represents director fees paid prior to Mr. Alessi's employment with the
Company.
(7) Represents matching contributions made by the Company pursuant to its 401(k)
Plan.
(8) Mr. Hewitt resigned as President and Chief Executive Officer of the Company
in September 1996.
(9) Represents cancellation of indebtedness to the Company in the amount of
$115,827 and non-competition payments in the amount of $111,687 in
connection with Mr. Hewitt's resignation from the Company. See "Certain
Transactions."
(10) Mr. Czaplicki joined the Company in June 1995 and resigned in March 1997.
The following table provides a summary of compensation related stock
options granted to the Named Executive Officers during 1997.
STOCK OPTION GRANTS IN THE LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE GRANT DATE
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE VALUE(1)
- ---------------------------------------------------- ---------- ------------- ----------- ---------------- ----------
Keith E. Alessi..................................... 268,065 69.0% $4.81 June 17, 2006(2) $1,065,140
Martin B. Mazer..................................... 4,000 1.0 5.75 May 1, 2006(3) 15,217
Thomas P. Czaplicki................................. 6,500 1.7 5.75 May 1, 2006(3) 24,728
- ---------------
(1) Value determined using the Black Scholes Option-Pricing Model with the
following weighted average assumptions: no dividend yield, expected
volatility of 73%, risk free interest rate of 6.69%, and expected life of 10
years in the case of Mr. Alessi's options and six years in the case of
Messrs. Mazer's and Czaplicki's options. The actual value, if any, that may
be realized on the options will depend on the excess of the stock price over
the exercise price on the date the option is exercised. Accordingly, there
can be no assurance that the value realized on the options will be at or
near the value estimated by the Black-Scholes Model.
(2) The options vest in four equal, annual increments commencing June 18, 1997
and ending June 18, 2000. Each increment expires June 17, 2006.
(3) The options vest in five equal, annual increments commencing May 1, 1997 and
ending May 1, 2001. Each increment expires five years after vesting.
The following table sets forth information for the Named Executive Officers
concerning stock option exercises during 1997 and unexercised options held as of
April 30, 1997.
OPTION EXERCISES AND FISCAL YEAR-END OPTION
VALUE OF
UNEXERCISED
IN THE
MONEY
OPTIONS AT
NUMBER OF SECURITIES FISCAL
UNDERLYING UNEXERCISED OPTIONS YEAR- END
AT FISCAL YEAR-END (#) ($)(1)
SHARES ACQUIRED ------------------------------ -----------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- -------------------------------------------- -------------- ----------- ------------- -----------
Keith E. Alessi.............. 4,000 $ 5,560(2) 0 274,065 $ 0
Martin B. Mazer.............. -- -- 400 5,600 2,650(4)
Thomas P. Czaplicki.......... -- -- 0 6,500(6) 0
NAME UNEXERCISABLE
- ----------------------------- -------------
Keith E. Alessi.............. $ 1,468,355(3)
Martin B. Mazer.............. 28,100(5)
Thomas P. Czaplicki.......... 28,438(7)
- ---------------
(1) The closing sale price of the Company's Common Stock on the Nasdaq National
Market on April 30, 1997 was $10.125 per share.
(2) Represents difference between exercise price of $2.86 per share and closing
sale price of Company's Common Stock on the Nasdaq National Market on date
of exercise.
(3) Represents 6,000 options exercisable at $2.86 per share and 268,065 options
exercisable at $4.81 per share.
(4) Exercisable at $3.50 per share.
(5) Represents 1,600 options exercisable at $3.50 per share and 4,000 options
exercisable at $5.75 per share.
(6) Pursuant to Mr. Czaplicki's severance arrangement with the Company, all
stock options previously granted to Mr. Czaplicki will continue to vest in
annual increments after the termination of his employment.
(7) All 6,500 options are exercisable at $5.75 per share.
EMPLOYMENT AGREEMENT
Mr. Alessi is employed as the Company's President and Chief Executive
Officer under an employment agreement dated May 29, 1997 ("Alessi Employment
Agreement"). The Alessi Employment Agreement expires on June 18, 1999. Mr.
Alessi is paid an annual salary of $250,000 and is eligible to receive a bonus
of up to $137,500 per year if certain performance objectives established by the
Board of Directors are met. The Alessi Employment Agreement includes a covenant
not to compete with the Company throughout the United States or solicit
customers, franchisees, and employees of the Company for a period of two years
following termination of such agreement, and imposes certain non-disclosure
obligations on Mr. Alessi with respect to the Company's confidential and
proprietary information. The Company may terminate the Alessi Employment
Agreement at any time, without cause, upon 30 days notice to Mr. Alessi. Upon
such termination, the Company
is required to pay Mr. Alessi $250,000 over a one-year period. In addition, in
the event of Mr. Alessi's termination without cause, any unvested increment of
Mr. Alessi's option shares that would have vested on the succeeding June 18 will
be deemed to have vested and be available for exercise, along with all other
then vested options in accordance with the post-termination provisions of the
Company's 1994 Long Term Incentive Plan described below.
In addition, upon being named President and Chief Executive Officer, Mr.
Alessi received an option to purchase 268,065 shares of Common Stock, which on
the grant date represented 5% of the fully diluted Common Stock of the Company
("Alessi Option"). The exercise price for the Alessi Option is $4.81, which was
the average closing sale price of the Company's Common Stock over the 20 trading
days preceding the grant date. The Alessi Option consists of 83,160 incentive
stock options and 184,905 non-qualified stock options, which become exercisable
in four equal, annual increments commencing June 18, 1997.
STOCK OPTION PLANS
In 1994, the Board of Directors of the Company adopted, and shareholders
approved, the 1994 Long-Term Incentive Plan (the "Incentive Plan") pursuant to
which officers and other key employees of the Company are eligible to receive
options to purchase Common Stock and other awards as described below. The
maximum number of shares of Common Stock that may be issued pursuant to awards
under the Incentive Plan is 698,000 (subject to anti-dilution adjustments).
The Incentive Plan is administered by the Compensation Committee. The
Compensation Committee has the discretion to select the individuals to receive
awards and to grant such awards and has a wide degree of flexibility in
determining the terms and conditions of awards. Subject to limitations imposed
by applicable law, the Board of Directors of the Company may amend or terminate
the Incentive Plan at any time and in any manner. However, no such amendment or
termination may affect a participant's rights under an award previously granted
under the Incentive Plan without his or her consent.
Awards under the Incentive Plan may be in the form of stock options (both
nonqualified stock options and incentive stock options), stock appreciation
rights, performance shares, and restricted stock, either separately or in such
combination as the Compensation Committee may in its discretion deem
appropriate. Under the terms of the Incentive Plan, subject to certain
conditions, all outstanding awards vest and become exercisable immediately prior
to a "change of control" of the Company. A change of control is defined to
encompass different types of significant corporate transactions, including
reorganizations and mergers, acquisitions of 20% of the Company's Common Stock,
or a change in the composition of at least two-thirds of the membership of the
Company's Board of Directors over a two year period, other than by reason of
death, or the acquisition of at least 5% of the Company's Common Stock if such
acquisition is not approved by the Board of Directors. The Incentive Plan
remains in effect until all awards under the Incentive Plan have been satisfied
by the issuance of shares of Common Stock or the payment of cash. As of July 29,
1997, options to purchase up to 418,869 shares of Common Stock were outstanding
under the Incentive Plan.
In 1996, the Board of Directors of the Company adopted, and shareholders
approved, the Non-Employee Director Stock Option Plan ("Director Plan") pursuant
to which non-employee directors of the Company are eligible to receive
non-qualified stock options pursuant to a formula that grants any new directors
options to purchase 10,000 shares and existing directors 2,000 shares upon their
re-election each year. Each of these awards vests in increments over five years.
Option awards granted pursuant to the Director Plan vest automatically in the
event of death, permanent and total disability, or retirement (as defined in the
Director Plan) of the director or a change in control or potential change in
control of the Company, as defined in such plan. The terms change in control and
potential change in control have the meaning similar to those discussed above
with respect to the Incentive Plan. As of July 29, 1997, options to purchase up
to 42,400 shares of Common Stock were outstanding under the Director Plan.
Pursuant to Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), directors, executive officers, and 10% shareholders of the
Company are generally liable to the Company for repayment of any profits
realized from any non-exempt purchase and sale of Common Stock occurring within
a six-month period. Rule 16b-3 promulgated under the Exchange Act provides an
exemption from Section 16(b) liability for certain transactions by officers or
directors that comply with such rule.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 22, 1997, by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each Named
Executive Officer, and (iv) all directors and executive officers as a group. The
number of shares beneficially owned by each person shown in the table below is
determined under the rules of the Securities and Exchange Commission (the
"Commission"), and such information is not necessarily indicative of beneficial
ownership for any other purpose.
BENEFICIAL OWNERSHIP(1)
NAME OF ------------------------
BENEFICIAL OWNER(2) NUMBER PERCENT
- --------------------------------------------- ------- -------
Keith E. Alessi.............................. 96,016 1.5%
Harry W. Buckley............................. 2,000(3) *
Harry S. Gruner(4)........................... 243,735(5) 3.8
Michael E. Julian, Jr........................ 12,000(3) *
William P. Veillette......................... 138,562(6) 2.2
Paul Grunberg(7)............................. 355,882(8) 5.6
Geocapital Partners(9)....................... 455,370(10) 7.1
Martin B. Mazer.............................. 2,050(11) *
John T. Hewitt(12)........................... 174,434 2.7
Thomas P. Czaplicki(13)...................... 31,118(14) *
All directors and executive officers as a
group (9 persons).......................... 505,463 7.8
- ---------------
* Indicates ownership of less than one percent.
(1) Unless otherwise noted, sole voting and dispositive power is possessed with
respect to all shares of Common Stock shown.
(2) Unless otherwise noted, the address of each of the foregoing is c/o the
Company at 4575 Bonney Road, Virginia Beach, Virginia 23462.
(3) Represents options to purchase 2,000 shares of Common Stock that were
granted pursuant to the Company's Director Plan.
(4) Mr. Gruner's address is 1119 St. Paul's Street, Baltimore, Maryland 21202.
(5) Includes 233,235 shares owned by JMI Equity Fund, L.P. ("JMI Equity"). Mr.
Gruner is a general partner of JMI Equity, and he has shared voting and
investment power with respect to such shares.
(6) Includes (i) 29,300 shares owned jointly by Mr. William Veillette and his
wife, Tracy Veillette; (ii) 12,310 shares owned jointly by Mr. William
Veillette and his sister, Sally Veillette; (iii) 12,310 shares owned jointly
by Mr. William Veillette and his sister, Jeanne Bowerman; (iv) 50,000 shares
owned by the Veillette Family Trust, of which Mr. William Veillette shares
voting and investment powers; and (v) 265 shares owned jointly by Mr.
William Veillette and his son, Peter J. Veillette. Also includes options to
purchase 4,400 shares of Common Stock granted pursuant to the Director Plan.
Does not include (i) 3,487 shares owned individually by Mr. Veillette's
wife, Tracy Veillette, or (ii) 5,000 shares owned jointly by Tracy Veillette
and Susan Veillette.
40
(7) Mr. Grunberg's address is Route #2, Box 171, Valatie, New York 12184.
(8) Does not include 105,273 shares owned individually by Mr. Grunberg's wife.
Mr. Grunberg disclaims beneficial ownership of these shares.
(9) Geocapital Partners' address is 2115 Linwood Street, Fort Lee, New Jersey
07024.
(10) Consists of 222,134 shares held of record by Geocapital II, L.P. and
233,236 shares held of record by Geocapital III, L.P. The sole general
partner of Geocapital II, L.P., Softven Management, L.P., of which Stephen
J. Clearman, Irwin Lieber, James Harrison, and BVA Associates are general
partners, exercises voting and investment power with respect to the shares
held by Geocapital II, L.P. The sole general partner of Geocapital III,
L.P., Geocapital Management, L.P., of which Stephen J. Clearman, Lawrence
W. Lepard, Richard A. Vines, and BVA Associates III are general partners,
exercises voting and investment power with respect to the shares held by
Geocapital III, L.P.
(11) Includes options to purchase 1,600 shares of Common Stock that were granted
pursuant to the Incentive Plan.
(12) Mr. Hewitt's address is 2532 San Marco Court, Virginia Beach, Virginia
23456.
(13) Mr. Czaplicki's address is 4907 Rambling Rose Place, Tampa, Florida 33624.
(14) Includes options to purchase 1,300 shares of Common Stock granted pursuant
to the Incentive Plan.
Item 13. Certain Relationships and Related Transactions.
CERTAIN TRANSACTIONS
On July 11, 1994, the Company sold certain assets related to its operation
of a Company-owned office in Chesapeake, Virginia to Chestax Company, 50% of
which is owned by Christopher Drake, the Company's Secretary, Treasurer, and
Chief Financial Officer. The purchase price of $272,764 was equal to
approximately 120% of the gross revenues of the Jackson Hewitt office as of
April 30, 1994, was paid for by Mr. Drake's delivery of an 11%, five-year
promissory recourse note to the Company, and was calculated on terms comparable
to those of similar transactions with non-affiliates. The Company's gain on the
sale of these assets was $89,490. As of April 30, 1997, the unpaid balance of
the promissory note was $109,106. The Company believes that the foregoing
transaction was consummated on terms consistent with those that would apply to
transactions with non-affiliates in similar circumstances.
The Company's Consolidated Financial Statements reflect a $1.3 million
stock subscription receivable which was due from the Company's former Chairman
of the Board of Directors, John T. Hewitt. On September 9, 1996, Mr. Hewitt
resigned his position with the Company effective immediately. Mr. Hewitt
resigned from the Company's Board of Directors in December 1996. On December 12,
1996, Mr. Hewitt executed a $1.3 million promissory note, which represented all
amounts then due the Company, including accrued interest, other than the $99,000
obligation referred to below. This recourse note bore interest at 6.9% per year
and required Mr. Hewitt to make monthly interest payments and to repay the
principal amount in one lump sum on April 30, 1999. To secure this note, Mr.
Hewitt pledged 145,050 shares of the Company's Common Stock to the Company, and
granted the Company a proxy to vote this stock until his obligation is repaid in
full. On July 14, 1997, Mr. Hewitt prepaid this obligation in full by delivering
82,327 of the pledged shares to the Company. The closing sale price of the
Company's Common Stock on July 14, 1997, was $15.50 per share. The Company has
agreed to release the remaining 62,723 pledged shares to Mr. Hewitt and
cancelled the 82,327 shares. In return for 29 monthly payments of $22,337 each
by the Company to Mr. Hewitt, Mr. Hewitt also executed a covenant not to compete
with the Company in the United States through April 30, 1999, and agreed not to
solicit Company employees, conduct a solicitation of proxies, or disparage the
Company or its officers and directors during the same period. In addition, the
Company forgave a $99,000 (plus accrued interest) obligation of Mr. Hewitt to
the Company, which would have been due and payable on April 30, 1997. See
"Recent Developments."
In December 1996, the Company entered into a binding letter of intent with
Susan Ventresca, a former franchisee and director of the Company, to purchase
her franchised territories and all related assets (the "Territories") at the end
of the 1997 tax season. Ms. Ventresca resigned from the Board of Directors in
December 1996 and the transaction closed in June 1997. The terms of the
agreement allowed the Company to audit Ms. Ventresca's franchise operations for
the one-year period ended April 30, 1997, to determine the purchase price of the
Territories. The purchase price was determined based on a formula equal to the
lesser of (i) six times the cash flow (defined as earnings before interest,
taxes, depreciation and amortization) of the Territories or (ii) 120% of the
gross revenues of the Territories, plus $40,000 (which represents the value of
two additional territories held by Ms. Ventresca) minus all outstanding debt to
the Company. All payments on Ms. Ventresca's outstanding notes receivable due to
the Company on February 28, 1997 were deferred until the closing of the
transaction. This formula resulted in a net payment to Ms. Ventresca of
$241,289. The Company believes that the foregoing transactions with Ms.
Ventresca were consummated on terms consistent with those that would apply to
transactions with non-affiliates in similar circumstances.
On July 3, 1997, the Company completed a tax-free recapitalization
transaction with the Preferred Shareholders pursuant to which the Company
exchanged 699,707 shares of Common Stock for the 504,950 outstanding Shares of
Series A Stock. The Preferred Shareholders include Geocapital II, L.P. and
Geocapital III, L.P., two affiliated partnerships which collectively own in
excess of 5% of the Company's issued and outstanding stock, and JMI Equity Fund,
L.P., of which Harry Gruner, a director of the Company, is a general partner.
See "Recent Developments" and "Principal and Selling Shareholders."
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/A 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/A
and the Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K: None.
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 August 28, 1997.
JACKSON HEWITT INC.
By:/s/ Keith E. Alessi
-------------------------
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.
Signature Title Date
--------- ----- ----
/s/ Keith E. Alessi Chairman of the Board, Chief Executive August 28, 1997
- --------------------------------- Officer, President, Director
Keith E. Alessi
/s/ Harry W. Buckley Director August 28, 1997
- ---------------------------------
Harry W. Buckley
/s/ Harry S. Gruner Director August 28, 1997
- ---------------------------------
Harry S. Gruner
/s/ Michael E. Julian Jr. Director August 28, 1997
- ---------------------------------
Michael E. Julian, Jr.
/s/ William P. Veillette Director August 28, 1997
- ---------------------------------
William P. Veillette
/s/ Christopher Drake Secretary, Treasurer, Chief Financial August 28, 1997
- --------------------------------- Officer (Principal Financial Officer and
Christopher Drake Principal Accounting Officer)
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
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).
II-2
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
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.)
II-3
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- --------------------------------------------------------------------------------------------------- ------------
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
(Incorporated by reference to the Registrant's 10-K previously filed with the Commission on
July 29, 1997).
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 *
- ---------------
* 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.