As Filed With the Securities and Exchange Commission on June 30, 1998
Registration No.______
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
JTH TAX, INC.
(Name of small business issuer in its charter)
Delaware 7291 54-1828391
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2610 Potters Road, Virginia Beach, Virginia 23452 (757) 340-7610
(Address and telephone number of principal executive office)
2610 Potters Road, Virginia Beach, Virginia
23452 (Address of principal place of business or intended
principal place of business)
John T. Hewitt, 2610 Potters Road, Virginia Beach, Virginia 23452 (757) 340-7610
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act check the following box and list the Securities Act
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit aggregate offering price registration fee
Class A Common Stock 310,000 $12.50 $3,875,000 $1,143.13
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED June 30, 1998
Prospectus
310,000 Shares
JTH TAX, INC.
Class A Common Stock
JTH Tax, Inc. (the "Company") is offering a maximum of 310,000 shares
and a minimum of 40,000 shares (the "Shares") of Class A common stock, par value
$1.00 per share (the "Class A Common Stock"), at a price of $12.50 per Share.
There is no public market for any of the Company's securities, and it is not
anticipated that a market will develop for the Shares following the completion
of this offering.
The Shares are being offered for sale in direct transactions to
selected persons. The offering will be made on a best-efforts basis by the
Company through its director and officer, John K. Seal. If at least 40,000
Shares are not sold at a price of at least $12.50 per Share within 30 days of
the date that the registration statement relating to these securities becomes
effective, the proceeds of any sale of Shares will be returned to investors
(with interest) and the offering will be terminated. If at least 40,000 Shares
are sold by that date, subscriber funds received through that date will be
released to the Company. Members of the Company's management may, but are not
obligated to purchase Shares. See "Plan of Distribution." Any Shares purchased
by the Company's management may be counted toward the determination of whether
the minimum offering amount has been met.
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds
Price to Public Discounts(1) to Company(2)
Per Share................. $12.50 -- $12.50
Total Maximum............. $3,875,000 -- $3,875,000
(1) The offering is being made by the Company through its officer and
director, who will not be separately compensated for doing so.
(2) Before deducting expenses of the offering, estimated to be $100,000.
The date of this Prospectus is July , 1998.
AVAILABLE INFORMATION............................................. 5
SUMMARY........................................................... 5
RISK FACTORS...................................................... 7
USE OF PROCEEDS................................................... 13
DILUTION ......................................................... 14
PLAN OF DISTRIBUTION.............................................. 14
LEGAL PROCEEDINGS................................................. 16
MANAGEMENT........................................................ 16
EXECUTIVE COMPENSATION............................................ 18
DESCRIPTION OF CAPITAL STOCK...................................... 20
INDEMNIFICATION OF DIRECTORS AND OFFICERS......................... 21
BUSINESS ......................................................... 22
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
.................................................................. 33
REPORTS TO STOCKHOLDERS........................................... 33
AVAILABLE INFORMATIONAVAILABLE INFORMATION
The Company is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (No. 333- ) (together with
any amendments thereto, the "Registration Statement"), under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and financial
statements, notes and schedules filed as part thereof, which may be inspected at
the public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, New York, New York
10048. Copies of such documents may also be obtained through the Commission's
Internet address at http://www.sec.gov. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not necessarily
complete, and in each instance are qualified in all respects by reference to the
copy of such document filed as an exhibit to the Registration Statement.
This Prospectus contains certain forward-looking statements which
involve substantial risks and uncertainties. These forward-looking statements
can generally be identified as such because the context of the statement
includes words such as the Company "believes," "anticipates," "expects,"
"estimates," "intends," or other words of similar intent. Similarly, statements
that describe the Company's future plans, objectives and goals are also
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed or implied in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
The Company
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services to taxpayers primarily in the
lower- to middle-income tax brackets. The Company operates in Canada through its
majority-owned subsidiary, Tax Depot Inc., a corporation organized under the
laws of the Province of Manitoba ("Tax Depot"). (Throughout this Prospectus,
references to the Company's Canadian operations and to Tax Depot's operations
are used interchangeably.) Tax Depot currently operates under the trade name
"U&R Tax Depot" but the Company intends to conduct business in both Canada and
the U.S. under the name "Liberty Tax Service" by the 1999 tax season. During the
1998 tax season, there were 207 U&R Tax Depot offices (13 of which were owned by
Tax Depot and the balance of which were owned by franchisees of Tax Depot)
extending from the Maritimes to British Columbia. In addition, the Company owned
and operated five tax preparation offices in Columbus, Ohio during the 1998 tax
season.
The Company seeks competitive advantage in its markets by (i) providing
prompt tax return preparation at a reasonable price, (ii) providing electronic
filing services, (iii) providing ancillary services, such as audit assistance,
tax return checking and taxation seminars, and (iv) offering a refund
anticipation loan program pursuant to which the Company will arrange, for a fee,
loans to customers based upon the size of the customers' tax refunds.
The Company intends to use the proceeds of this offering to expand its
operations in the United States. Until April 30, 1999, the Company's ability to
own or franchise tax preparation offices in the U.S. is limited by certain
restrictive covenants to which John T. Hewitt, the Company's Chairman, Chief
Executive Officer, President and founder, and John K. Seal, Vice President,
Treasurer and director of the Company, are subject. The Company will seek
further expansion of its operations in the United States after the termination
of those restrictive covenants. See "Risk Factors - Existence of Restrictive
Covenants."
The Company's principal executive offices are located at 2610
Potters Road, Virginia Beach, VA 23452 and its telephone number is (757)
340-7610.
The Offering
Securities offered....................................... 310,000 shares of Class A Common Stock
Securities to be outstanding after
the offering............................................. 710,000 shares of Class A Common Stock
......................................................... 90,000 shares of Class B Common
......................................................... Stock
Use of proceeds.......................................... The proceeds of the offering, after the payment of offering
expenses, are expected to be used by the Company to
purchase existing tax practices in the U.S., establish
up to 30 new tax return preparation offices in the U.S., and
develop software.
Risk factors............................................. An investment in the Shares involves a high degree of risk.
See "Risk Factors" beginning on page 7 hereof for
information that should be considered by prospective
investors.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Shares. The cautionary statements set forth below and elsewhere in this
Prospectus should be read as accompanying forward-looking statements included
under "Business" and elsewhere herein. The risks described in the statements set
forth below could cause the Company's results to differ materially from those
expressed in or indicated by such forward-looking statements.
Minimal Operating Revenues and History. The Company's operations
commenced in September 1997 with its purchase of a 60% interest in Tax Depot, an
established provider of tax preparation services in Canada. In addition, the
Company commenced tax preparation operations in Columbus, Ohio in 1998. As a
recently formed entity, the Company has minimal operating history upon which an
evaluation of its future prospects can be made. The Company's future viability,
profitability and growth will depend upon its ability to successfully operate
and expand its Canadian operations and its ability to commercialize its tax
services through establishment of Company-owned and franchised offices in the
United States. The Company's prospects in the U.S. must be considered in light
of the risks, expenses and difficulties frequently encountered in the
establishment and development of a new business, particularly in the tax return
preparation industry which is characterized by intense competition, two dominant
national tax return preparation firms and ease of market entry. There can be no
assurance that any of the Company's efforts will prove successful.
Lack of Public Market for Shares. No active market for the Shares will
exist following the closing of this offering, nor is such a market expected to
develop in the foreseeable future. Therefore, investors should be prepared to
hold their investment in the Shares indefinitely.
Minimum Offering. The consummation of this offering is conditioned upon
a minimum of 40,000 Shares at a price of $12.50 per share (the "Minimum Offering
Amount") being sold within 30 days after the date of effectiveness of the
registration statement for this offering (the "Minimum Offering Date") and
together the "Minimum Conditions"). In the event that the Minimum Conditions are
not met, the Company is required to return the proceeds of any Shares which were
sold in this offering up to the Minimum Offering Date, with interest, and this
offering will be terminated. See "Plan of Distribution - Repayment if Minimum
Conditions Not Met." If, however, the Minimum Conditions are satisfied and the
Company proceeds with this offering, there is a risk that the Company may
receive substantially less than the $3,875,000 sought in this offering. To the
extent that less than the maximum number of Shares is sold, the Company is
subject to increased risk that it will have insufficient funds to open all of
the offices and/or acquire all of the tax service practices that it anticipates
it will fund with the maximum proceeds of this offering, and to operate for the
3-year period that the Company anticipates it can operate if the maximum number
of Shares is sold. See "Risk Factors - Need for Additional Financing."
Need for Additional Financing. Although the Company expects that the
net proceeds of this offering will be sufficient to fund the Company's U.S.
operations for at least three years following its completion, this estimate is
based upon certain assumptions regarding the number of the Company's tax
preparation offices in both Canada and the United States operating during such
period, the cost of establishing and purchasing tax preparation offices,
operating expenses, revenues from tax return preparation in Canada and the
United States and similar matters, including the assumption that the maximum
number of Shares offered hereby is sold. There can be no assurance that such
assumptions will be realized or that unforeseen costs will not be incurred. In
addition, the Company will likely need additional capital in order to expand its
U.S. operations beyond the purchase of the existing practices and the
establishment of the 30 Company-owned offices that the Company plans to fund
through this offering. It is unlikely that cash flow from operations will be
sufficient to support material growth during the next several years of
operations. There can be no assurance that the Company will be able to obtain
capital as and when needed (either for operational purposes or to fund
expansion) upon terms acceptable to it.
Existence of Restrictive Covenants. Mr. Hewitt, the Company's Chairman,
Chief Executive Officer and President, and Mr. Seal, the Company's director,
Vice President of Operations and Treasurer, are subject to covenants not to
compete with their former employer, Jackson Hewitt Inc. ("Jackson Hewitt"), a
national tax return preparation service company, in any city, town or county
within the geographical limits of the United States, its territories and
possessions in which Jackson Hewitt or its franchises, "business partners" or
other business entities bearing its tradename were conducting business as of
December 9, 1996, or in which Jackson Hewitt had made plans or preparations, of
which Mr. Hewitt or Mr. Seal were aware, to locate a franchise or entity prior
to such date. The restrictive covenants expire on April 30, 1999. As of April
30, 1997, Jackson Hewitt had 1,296 franchised offices and 76 company-owned
offices in 41 states. The covenants pertaining to Messrs. Hewitt and Seal
effectively prohibit the Company from establishing offices in most large urban
or suburban areas, and thus from creating a national presence in the United
States, prior to the 2000 tax season. Accordingly, such covenants may adversely
affect the Company's growth, revenues and profitability at least until their
expiration.
In addition, Mr. Hewitt (and, derivatively, the Company) is subject to
covenants prohibiting his use of "confidential and proprietary information"
about or relating to Jackson Hewitt or its customers. As used in the covenant,
the term "confidential and proprietary information" is broadly defined to cover
production processes, marketing techniques, financial information, the "Hewtax"
interactive software package (the tax preparation computer software developed by
Mr. Hewitt and used by Jackson Hewitt), "operating principles," promotional
plans or strategies, sales methods and similar matters. In particular, there can
be no assurance that any proprietary computer software developed by the Company
would not be challenged by Jackson Hewitt as being derivative of the "Hewtax"
software and thus violative of the covenant. Mr. Seal and Martha O'Gorman,
Director of Marketing, are similarly prohibited from using confidential
information or trade secrets of Jackson Hewitt related to its operations and tax
preparation business. The confidentiality covenants of Messrs. Hewitt and Seal
and Ms. O'Gorman are, by their terms, perpetual.
Messrs. Hewitt and Seal and Ms. O'Gorman are also subject to
"non-disparagement covenants" which prohibit them from doing or saying anything
which might reasonably be expected to materially harm the business interests of
Jackson Hewitt. The non-disparagement covenant of Ms. O'Gorman expires on
November 20, 1998 and those of Messrs. Hewitt and Seal expire on April 30, 1999.
Although the Company believes that its proposed operations and the
activities of its officers will not violate these covenants, in view of the
broad nature of the definitions of "confidential and proprietary information"
and "trade secrets" and the breadth of the non-disparagement covenants, there
can be no assurance that Jackson Hewitt will not seek to block one or more
aspects of the Company's operations (whether by seeking injunctive relief or
otherwise) as contravening these covenants. To date, Jackson Hewitt has
commenced one suit against Mr. Hewitt and Mr. Seal, as individuals, alleging
breach of their restrictive covenants and seeking injunctive relief suspending
Messrs. Hewitt's and Seal's activities in connection with the Company's
Columbus, Ohio operations. See "Legal Proceedings." Jackson Hewitt obtained a
voluntary dismissal of the suit shortly after its initial filing, but the
dismissal was without prejudice and therefore Jackson Hewitt may file another
suit asserting the same or similar claims. Although the Company was not a party
to this suit and did not participate in Messrs. Hewitt's and Seal's defense, if
the Company is named a party to any future legal actions brought by Jackson
Hewitt alleging breach, in connection with the Company's business, of the
restrictive covenants binding on Messrs. Hewitt and Seal and Ms. O'Gorman, the
Company will rigorously defend itself. It is likely to be very costly for the
Company to defend such future actions. There can be no assurance that even if
the Company were to mount such defense, it would prevail on the merits. The
granting of an injunction against the Company or any of Mr. Hewitt, Mr. Seal or
Ms. O'Gorman could materially adversely affect the Company's financial condition
and operations and, in certain instances, require the Company to seek
alternatives to its then-current business practices or terminate operations.
Jackson Hewitt could also seek and, if successful, be awarded damages which,
depending upon the nature of the claim, a court's view of the enforceability of
the covenants and the facts relating to such damages, may be substantial.
Accordingly, if Jackson Hewitt were to make a claim, succeed on the merits and
be awarded damages, it is possible that purchasers of the Class A Common Stock
could lose some portion or all of their investment in the Company.
Lack of Copyright Registration of Software Program. The Company does
not expect that it will file for copyright registration for any software
programs it may develop. The Company's competitors could conceivably recreate,
or "reverse engineer," its tax preparation software and begin offering similar
computerized and standardized services. If this were to occur, the Company may
not have any practical legal recourse and could find that, in effect, it would
be forced to compete with its own system. However, because the Company's tax
preparation software will require updating at least annually to reflect changes
in the tax law, the Company believes that it would be difficult for any
unauthorized party to misappropriate the proprietary aspects of its software
programs in a timely and profitable manner.
Importance of Refund Anticipation Loan Program. The Company believes
that its refund anticipation loan program will be an important source of revenue
in both the United States and Canada since members of its targeted market
typically desire tax refunds as quickly as possible. The success of the program
will depend, in part, on the continued availability of third party financing for
the loans. See "Business - Services Offered - Refund Anticipation Loan Program."
To the extent that the Company does not recover the full amount of a refund
anticipation loan from the proceeds of the refund, the Company's revenues may be
adversely affected. While efforts will be made to collect the shortfall from the
customer, there can be no assurance that any or all of the amount would be
recovered.
Dependence on Electronic Filing. An element critical to the Company's
operating strategy, and to the refund anticipation loan program in particular,
is the continuation of the IRS's and Revenue Canada's electronic filing
programs. Although the IRS has established a 98% electronic filing target for
the year 2000, the Company is aware of concerns expressed by the IRS and certain
members of Congress regarding the filing of fraudulent electronic returns. The
IRS has indicated that it has more difficulty catching fraudulent refund claims
from electronic returns than from traditional paper returns. Any decision by
either the IRS or Revenue Canada to suspend, terminate or substantially modify
its respective electronic return filing program could materially adversely
affect the Company's tax return preparation business, given the Company's
expectation that a large percentage of tax returns prepared by the Company will
be filed electronically.
Government Regulation. The Company's future results of operations will
depend in part on its ability to comply with Canadian, provincial, United States
and state regulations affecting tax return preparers. Currently, there are no
onerous Canadian, provincial, United States and state regulations affecting the
Company's operations. However, the Company is aware of at least three states
that have passed laws relating to the implementation of refund anticipation loan
programs, and that others may be considering similar legislation. In addition,
the Company expects that many of its tax return preparers will be hired after
they successfully complete a tax school offered by the Company to the general
public. Some states and provinces have implemented, or are considering
implementing, laws or regulations governing proprietary schools. The Company
does not believe that existing laws and government regulations will materially
affect the Company's operations; however, the Company cannot predict whether a
change will occur in such laws and regulations, and if so, the economic or
business effect of such change. To the extent that any legislation has the
effect of limiting the profitability of the Company's refund anticipation loan
program, or requires the Company to alter its proposed operations to comply with
proprietary school requirements, the Company's operations could be adversely
affected.
Franchise Operations. Although the Company will begin its United States
operations with Company-owned tax preparation offices, the Company anticipates
that it will seek future growth primarily through establishing franchise
operations in the United States and expanding Tax Depot's franchise operations
in Canada. There can be no assurance that the Company will be able to sell
United States franchises or additional Canadian franchises on terms acceptable
to it, or at all, or that franchisees will be able to run franchised offices
profitably. The Company will seek to establish extensive training programs and
quality-control procedures with respect to its franchisees; however, there can
be no assurance that the programs and procedures will be effective in enabling
franchisees to run successful tax preparation businesses. In addition, failure
by a franchisee to provide service at acceptable levels may result in adverse
publicity which can materially adversely affect the Company's ability to compete
in the particular market in which the franchisee is located.
Liability for Franchisee Actions and Obligations. Both the Company and
Tax Depot will grant their franchisees a limited license to use their registered
service marks and, accordingly, there is risk that one or more of the
franchisees may be identified as being controlled by the Company or Tax Depot.
In the event that a franchisee is not adequately identified as a franchisee, the
Company and/or Tax Depot could be held vicariously liable for the debts and
obligations of the franchisee so misidentified.
Regulation of Franchise Operations. During the 1997 fiscal year,
franchise royalties accounted for 90% of Tax Depot's gross revenues. The
profitability of the Company's future operations will depend in large part on
its ability to comply with federal and state franchise regulations and Tax
Depot's continued ability to comply with Canadian and provincial franchise
regulations. While management currently believes that the Company and Tax Depot
will be able to comply with all applicable franchise regulations, there can be
no assurance that such regulations will not change and, if so, that any changes
will not materially adversely affect the Company's business. See "Business
Franchise Operations -Regulation of Franchise Operations."
Need for a Large Pool of Low Cost Seasonal Labor. In conducting their
business operations, the Company, Tax Depot and their franchisees will depend,
in part, on the availability of employees willing to work for little more than
the minimum hourly wage, with minimal benefits, for periods of less than a year.
The Company's success in managing its business and any expansion of it will
depend upon the ability of it and its franchisees to hire, train and supervise
additional personnel, and to deal with turnover rates for lower paid employees,
which may be substantial. Moreover, if the supply of this labor pool is reduced
in the future for reasons within or outside of the Company's control or if the
Company is required to provide its employees more extensive and costly benefits,
either as a result of competition or governmental regulation, the expenses
associated with the Company's operations could be substantially increased
without the Company receiving offsetting increases in revenues.
Importance of Key Employees. The Company's future success will
depend in material part upon the continued services of the Company's senior
management, particularly Mr. Hewitt. The unexpected loss of the services
of any of these management personnel could have a material adverse effect
upon the Company. The Company currently maintains for its benefit a
$1,000,000 key man life insurance policy on the life of Mr. Hewitt but does not
have an employment contract with Mr. Hewitt or any other member of senior
management. See "Management."
Need for Management Personnel. The future growth and success of the
Company will depend upon its ability to attract and retain capable middle
management (such as regional and district directors for Company-owned offices
and consultants for franchised offices, as well as training directors, tax
advisors and computer personnel) with the specific executive skills necessary to
assist the Company and its franchisees. The Company currently employs one
district director in the United States and one district director in Canada. The
Company will face competition for such personnel from numerous other entities,
including competing tax return preparation firms, most of which have
significantly greater resources than the Company. There can be no assurance that
the Company will be able to attract and retain personnel, and the inability to
do so could have a material adverse effect on the Company.
Business is Highly Seasonal. The tax preparation business is highly
seasonal, with the vast bulk of revenues being earned in the January 1 through
April 15 "tax season" in the United States and the January 1 through April 30
"tax season" in Canada in each year. The Company anticipates that 80% or more of
its gross revenues for a fiscal year will be generated in the tax season for
that year. Both the Company and Tax Depot are is on a May 1 to April 30 fiscal
year and may operate at a loss during the first eight months of each fiscal
year. (Tax Depot switched from a calendar fiscal year on December 31, 1997.)
There can be no assurance that the Company's activities during the "off-season"
will not cause the cash resources of the Company to be strained on a regular
basis. If the Company were unable to obtain adequate sources of capital to fund
its operations during the "off-season," it would be forced to curtail any
existing expansions plans, cut back on its work force or take other steps to
address its cash flow needs. Moreover, in view of the very compressed time
period in which the Company's revenues arise in each year, it may have little or
no time to respond to unforeseen changes in competitive conditions, markets,
pricing, new product offerings by its competitors and similar matters which
could materially adversely affect the Company's competitive position during the
relevant tax season.
Competition. The tax return preparation industry is characterized by
intense competition among numerous tax service providers, accounting firms and
others. Most of these competitors are more established than the Company, with
substantially greater marketing, financial, personnel and other resources than
are currently available to the Company. In the low to mid-income taxpayer market
targeted by the Company, competition is dominated in the United States by H&R
Block, Inc. ("H&R Block") and Jackson Hewitt, both of which are large, well
established national service providers. H&R Block also operates and is a major
competitor in Canada; Jackson Hewitt currently has no Canadian operations. The
Company will seek to compete by providing prompt service (generally, the Company
anticipates that a customer's return can be prepared in approximately one hour,
assuming the customer has assembled all appropriate records) at a reasonable
price that is competitive in each geographic market (the Company estimates that
its average charge per return for the 1998 tax season was $90 in the United
States and C$60 in Canada). There are few significant barriers to entry into the
industry, or to the adoption by competitors of some or all of the Company's
marketing or operational strategies.
Changes in Tax Laws. The tax laws of Canada and the United States have
undergone a period of rapid and substantial change, and the Company anticipates
that this will continue for the foreseeable future. Although the Company
believes that the complexity and rapidity of the changes will provide it with an
important marketing tool, it is anticipated that the Company will incur
significant yearly costs in maintaining the currency of its tax return
preparation software and tax preparer materials. In addition, there have been
numerous proposals for simplification of United States tax laws, including "flat
tax" and "modified flat tax" proposals. Adoption of any such proposals could
reduce demand for the Company's services in the United States; adoption of a
strict flat tax could reduce demand substantially.
Costs of Canadian Operations. The costs of opening additional Tax Depot
company offices and supporting franchises in Canada are not expected to be
materially less than the costs of opening or supporting comparable United States
offices. However, the Company anticipates that the average fee per return will
be approximately 33% less in Canada due to the less complex structure of
Canadian tax law. Accordingly, to achieve the same level of revenue per office
as a comparable United States office, a Canadian office will be required to
process more returns than a U.S. office. In addition, because the fees Tax Depot
will charge in Canada will be denominated in Canadian dollars there is risk that
fluctuations in the value of the Canadian dollar relative to the United States
dollar will result in losses from foreign currency exchanges. Canadian sales and
operations may also be affected by factors beyond the Company's control,
including imposition of governmental licensing or other controls or
restrictions, and changes in Canadian tax law.
Control by Principal Stockholder. The Company's common stock is divided
into two classes. Purchasers in this offering will own Class A Common Stock; all
the outstanding Class B Common Stock is owned by Mr. Hewitt. The Company's
certificate of incorporation provides that the Class B stockholders have the
right to elect one more director than may be elected by the Class A
stockholders. As a consequence, Mr. Hewitt will have effective control of the
Board of Directors irrespective of how many shares of Class A Common Stock are
outstanding.
Cash Dividend Policy. Since its inception, the Company has not paid any
cash dividends on the Class A Common Stock or Class B Common Stock. The Company
intends to retain future earnings, if any, to provide funds for the operation of
its business and, accordingly, does not anticipate paying any cash dividends in
the reasonably foreseeable future. The payment of future dividends is within the
discretion of the Board of Directors and will depend upon the Company's future
earnings, if any, its capital requirements, financial condition and other
relevant factors.
Arbitrary Determination of Offering Price. The offering price of the
Shares has been determined arbitrarily by the Company based upon the Company's
capital needs and does not necessarily bear any relationship to the Company's
assets, book value or financial condition, or to any other recognized criterion
of value.
Loss of Goodwill. Tax Depot has been operating under the "U&R Tax
Depot" name since May 1994. In the second half of 1998, the Company expects to
change the name of the Tax Depot owned and franchised offices to "Liberty Tax
Service." Tax Depot may suffer a loss of goodwill associated with the name if
former and potential new customers are not aware of the name change.
USE OF PROCEEDS
Assuming this offering is fully sold, the net proceeds, after deducting
estimated offering expenses of $100,000, will be approximately $3,775,000. The
Company expects to use the net proceeds as follows:
Establishment of new tax preparation
offices (30 offices at $50,000 each): $1,500,000
Purchase of existing tax practices: 1,800,000
Software development: 475,000
$3,775,000
In the event that only the Minimum Offering Amount is sold, the net
proceeds, after deducting estimated offering expenses of $100,000, will be
approximately $400,000. The Company expects to use the net proceeds to purchase
up to eight existing tax practices at $50,000 each. The proceeds of the sale of
additional Shares will be applied to purchasing additional tax practices, then
to software development and finally to the establishment of new tax preparation
offices.
While the foregoing represents the Company's best estimate of its
expected use of net proceeds, the amounts actually expended for the purposes set
forth above may vary significantly depending upon numerous factors, including
the actual costs incurred in purchasing existing tax practices, leasing and
furnishing office space, and personnel costs. The Company reserves the right to
reallocate proceeds among the foregoing uses and for general corporate purposes.
DILUTION
The offering price per Share is more than the price paid per share of
the Company's securities in the past by certain promoters and affiliates of the
Company. However, there will not be a dilution of the equity interest of
purchasers in this offering. In connection with the incorporation of the
Company, Mr. Hewitt purchased 1,000 shares of Class B Common Stock for $.10 per
share. In December 1996, Mr. Hewitt capitalized the Company by contributing to
it certain securities with an aggregate market price at the time of contribution
of $176,000. In return therefor, Mr. Hewitt was issued 44,000 shares of Class B
Common Stock resulting in a price per share of $4.00. In July 1997, the Company
sold 200,000 shares of Class A Common Stock to a select group of investors for a
price of $10.00 per share. On January 10, 1997, the Company declared a stock
dividend of one share of Class A Common Stock or Class B Common Stock for each
such share outstanding, resulting in an aggregate of 400,000 shares of Class A
Common Stock and 90,000 shares of Class B Common Stock being outstanding as of
the date of this Prospectus.
PLAN OF DISTRIBUTION
The Shares are being offered by the Company, on a best efforts basis,
through John K. Seal, a director, Vice President and Treasurer of the Company.
Mr. Seal will not receive any separate compensation for his efforts to sell the
Shares. The Shares are offered subject to prior sale, withdrawal or cancellation
of the offering without notice.
Minimum Offering Amount; Escrow Arrangements. The Minimum Offering
Amount is 40,000 Shares at $12.50 per Share and the Minimum Offering Date is 30
days after the date of effectiveness of the registration statement for this
offering. The Company has entered into an agreement with First Union National
Bank (the "Escrow Agent"), a national bank which is not affiliated with the
Company, Tax Depot, or any of the officers or directors of the Company or Tax
Depot. The Escrow Agent will set up an escrow account (the "Escrow Account")
which will bear interest at an annual rate of 5.2%. The proceeds of any Shares
sold through the Minimum Offering Date will be placed in the Escrow Account.
Officers and directors of the Company may purchase Shares as part of this
offering but are not obligated to do so. Any such purchases will be on terms
identical to those applicable to other investors. The Company has been advised
that officers and directors currently intend to purchase an aggregate of 44,900
Shares in this offering. The purchases of Shares by officers and directors may
be used to meet the Minimum Offering Amount.
Repayment if Minimum Conditions Not Met. In the event that the Minimum
Conditions are not met, either by receipt of proceeds from the sale of the
Minimum Offering Amount or by subscription commitments therefor, the Escrow
Agent will repay the proceeds of the sale of the Shares to the investors with
interest at the rate set forth above. Thereafter, no more Shares will be offered
for sale and any outstanding subscriptions will become null and void.
Satisfaction of Minimum Conditions. The Escrow Agent will determine
that the Minimum Conditions are met if on the Minimum Offering Date, the funds
in the Escrow Account are equal to the Minimum Offering Amount or the Escrow
Agent has firm subscriptions for Shares equal to the Minimum Offering Amount or
a combination thereof. Once the Minimum Conditions have been met, the Escrow
Agent will release the funds in the Escrow Account to the Company and close the
account. Proceeds from subsequent sales of Shares will not be escrowed.
LEGAL PROCEEDINGS
To date, officers of the Company have been involved in one legal
proceeding which was voluntarily dismissed by the plaintiff without prejudice.
Tax Depot is a party to two actions which arose in the ordinary course of its
business, and management does not believe that such proceedings will,
individually or in the aggregate, have a material adverse effect on the
financial condition or operations of the Company.
In January 1998, Jackson Hewitt filed a complaint in Virginia Beach
Circuit Court against Messrs. Hewitt and Seal in their individual capacities.
The complaint alleged breach of their respective covenants not to compete (see
"Risk Factors - Existence of Restrictive Covenants") in connection with the
operation of the Company's tax preparation offices in Columbus, Ohio. The
complaint also alleged that each of Mr. Hewitt and Mr. Seal had tortiously
interfered with Jackson Hewitt's contract with the other man. Jackson Hewitt
sought a declaratory judgment and a preliminary injunction requiring Messrs.
Hewitt and Seal to suspend their Columbus, Ohio operations. Jackson Hewitt
voluntarily dismissed both suits, without prejudice, in early February 1998.
Although the Company was not a party to the suit and did not participate in
Messrs. Hewitt's and Seal's defense, the Company intends to vigorously defend
itself if named as a party in any future legal actions Jackson Hewitt may bring
alleging breach, in connection with the Company's business, of the restrictive
covenants binding Mr. Hewitt, Mr. Seal and Ms. O'Gorman.
In February 1995, a predecessor to Tax Depot filed a trade mark
application with the Registrar of Trade Marks in Ottawa, Canada for the "Tax
Depot" mark. The registration is opposed by Ms. Heidi Gordash, who alleges prior
use. It is anticipated that Ms. Gordash's opposition will be withdrawn when Tax
Depot begins using "Liberty Tax Service" as its mark. Ms. Gordash also filed a
"passing off" action in June 1996, seeking an injunction and $1.0 million in
damages. Management does not believe that Ms. Gordash has a superior right to
the Tax Depot name and intends to vigorously defend this action.
Finally, a tax rebate discounting agent for Tax Depot, who acted solely
as an agent for Tax Depot in financing tax rebate discounts and not as an
employee or franchisee, has been sued by a group of clients for whom she is
alleged to have prepared inaccurate and/or fraudulent returns in order to
increase their rebates. Both H&R Block and Tax Depot were also named as parties
to this suit. Tax Depot believes it has no liability for the agent's actions and
intends to vigorously defend this suit.
MANAGEMENT
The following sets forth certain information regarding the Company's
directors and executive officers.
Name Age Position with the Company
- ---- --- -------------------------
John T. Hewitt 49 Chairman of the Board of Directors, Chief Executive Officer and President
John K. Seal 47 Director, Vice President of Operations and Treasurer
Martha O'Gorman 40 Director and Vice President of Marketing
Donna Halligan 46 Director, Vice President of Franchise Operations and Secretary
Kathleen Curry 35 Director, Vice President of Technology and Legal Counsel
Karen Robinson 34 Vice President and Regional Director in the United States
John T. Hewitt has been Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since its formation in 1996.
Before that, he was the founder of Jackson Hewitt, where he served as Chairman
of the Board of Directors and Chief Executive Officer from 1982 (and President
from 1986) to 1996. During Mr. Hewitt's tenure, Jackson Hewitt grew from six
offices to over 1,300 offices. From 1970 through 1981, Mr. Hewitt was employed
by H&R Block, becoming a Regional Director in charge of over 200 offices in
Pennsylvania, New Jersey and Delaware. Together with his father, Daniel J.
Hewitt, Mr. Hewitt created "Hewtax," the basic tax return preparation software
used by Jackson Hewitt.
John K. Seal has been Vice President of Operations, Treasurer and a
director of the Company since shortly after its formation. From 1993 through
1996, Mr. Seal served as Director of Field Operations for Jackson Hewitt. From
1990 through 1993, Mr. Seal owned and operated seven Jackson Hewitt franchise
offices in the Rochester, New York territory and until 1997, he owned and
operated four franchised Jackson Hewitt offices in Las Vegas, Nevada. Prior to
joining Jackson Hewitt, Mr. Seal served as a financial manager at General Foods
for eight years and also owned and operated a successful mini-storage business.
Martha O'Gorman has been Vice President of Marketing and a director of
the Company since its formation in 1996. From 1989 through 1996, Ms. O'Gorman
served as Director of Communications for Jackson Hewitt. Before that, Ms.
O'Gorman was a partner in an advertising firm in Virginia Beach, Virginia.
Donna Halligan has been Vice President of Franchise Operations,
Secretary and a director of the Company since its formation in 1996. From 1994
to 1996 she was employed by Jackson Hewitt as Director of Training, Director of
Franchisee Operations and, most recently, Divisional Director in charge of
company stores. Prior to joining Jackson Hewitt's headquarters operation, Ms.
Halligan owned and operated six Jackson Hewitt franchise offices in the
Syracuse, New York territory from 1987 to 1994. Before that, Ms. Halligan
operated an independent tax preparation firm and worked for H&R Block for five
years as a tax preparer.
Kathleen Curry has been the Vice President of Technology, Legal Counsel
and a director of the Company since July 1997. From 1992 through 1995, Ms. Curry
served variously as Corporate Attorney, Director of Tax and Software and
Regional Director for Jackson Hewitt. For a brief period during the latter part
of 1995 and early part of 1996, Ms. Curry served as a Product Manager for Best
Programs, Inc.
Karen Robinson has been the United States Regional Director of the
Company since September 1997. From 1992 to 1997, Ms. Robinson held various
positions, including Director of Training, Franchise Operations, Liaison and
Troubleshooter for Jackson Hewitt. In 1997, Ms. Robinson obtained her master's
degree from Old Dominion University, where she served as an Adjunct Professor of
Education from 1995 through 1997.
All directors (except directors appointed to fill vacancies) are elected at
each annual meeting of stockholders for a term of one year, and will hold office
until their successors are elected. See "Description of Capital Stock - General"
for a description of the rights of holders of each class of Common Stock with
respect to the election of directors. Directors receive no compensation for
serving as directors. All officers serve at the discretion of the Board of
Directors.
EXECUTIVE COMPENSATION
No executive officer or director received any compensation during 1996. In
1997, Mr. Hewitt received a salary of $30,000. In 1998, Mr. Hewitt will receive
$30,000 in addition to the stock options to purchase 5,000 shares of Class A
Common Stock at $11 per share that he received earlier in 1998. No executive
officer of the Company has received an aggregate annual compensation in excess
of $100,000 since the Company's formation.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of shares of both
Class A Common Stock and Class B Common Stock owned, as of the date of this
Prospectus, by (a) each person who, to the knowledge of the Company, is the
beneficial owner of 5% or more of the outstanding shares of Class A or Class B
Common Stock, (b) each of the Company's directors, (c) each of the Company's
executive officers, and (d) all of the Company's executive officers and
directors as a group.
Common Stock
Amount Owned Percent of Class
Beneficial Owner Class A Class B Class A Class B
- ---------------- ------- ------- ------- -------
Directors and Executive
Officers: (1)
John T. Hewitt 141,150(2) 90,000 35% 100%
John K. Seal 13,162(3) 0 4% 0
Martha O'Gorman 4,000(4) 0 1% 0
Donna Halligan 7,000(5) 0 2% 0
Kathleen Curry 4,000(6) 0 1% 0
Karen Robinson 4,000(7) 0 1% 0
All Directors and Executive
Officers as a group
(six persons) 173,312(8) 90,000 41% 100%
Other owners of 5% or
more of outstanding Shares:
Scott Lake Holdings Ltd.(9) 100,000 0 25% 0
- --------------
(1) The address for each director and executive officer is 2610 Potters Road,
Virginia Beach, Virginia 23452.
(2) includes 5,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(3) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(4) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(5) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(6) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(7) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(8) includes 25,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(9) The address for Scott Lake Holdings, Ltd. is 280-6815 8th St. N.E.,
Calgary Alberta T2P7B7.
DESCRIPTION OF CAPITAL STOCK
General. The Company is authorized to issue 1,000,000 shares of capital
stock, consisting of 800,000 shares of Class A Common Stock, 100,000 shares of
Class B Common Stock and 100,000 shares of Preferred Stock, all par value $1.00
per share. As of the date of this Prospectus, there were 400,000 shares of Class
A Common Stock, 90,000 shares of Class B Common Stock and no shares of Preferred
Stock outstanding.
Holders of both Class A and Class B Common Stock are entitled to
dividends when, as and if declared by the Board of Directors and in such amounts
as the Board of Directors may deem advisable. See "Risk Factors - Cash Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of Common Stock are entitled,
after payment or provision for payment of the debts or other liabilities of the
Company, and subject to the prior rights of holders of any Preferred Stock which
may then be outstanding (none is currently designated under the Company's
certificate of incorporation), to share ratably in the remaining assets of the
Company. Neither class of Common Stock possesses preemptive rights.
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote at a meeting of stockholders. However,
with respect to the election of directors, holders of each class of Common
Stock, voting as a class, are entitled to elect directors on a pro rata basis in
proportion to the number of shares outstanding in each class, except that
holders of the Class A Common Stock are entitled to elect one less director than
the number of directors elected by holders of the Class B Common Stock. Voting
in each class is on a non-cumulative basis.
A holder of the Class B Common Stock may, at the holder's option, elect
to convert the Class B into an equal number of fully paid and non-assessable
shares of Class A Common Stock. The right may be exercised with respect to any
portion or all of a holder's shares and at any time. There is no public market
for the Company's securities and it is not anticipated that a market will
develop for the Shares following this offering.
Anti-Takeover Provisions of Delaware Law. As a Delaware corporation,
the Company is subject to certain anti-takeover provisions of the Delaware
General Corporation Law (the "Delaware Law"). Under the business combination
provisions of Section 203 of the Delaware Law ("Section 203"), a Delaware
corporation may not engage in any business combination with any interested
stockholder for a period of three years following the date such stockholder
became an interested stockholder, unless (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, or (ii) upon completion of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding, for purposes of determining the number of
shares outstanding, (a) shares owned by persons who are directors and also
officers and (b) employee stock plans, in certain instances), or (iii) on or
after such date the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders by at least 66%
of the outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines an interested stockholder to be any person who (i) owns,
directly or indirectly, 15% or more of the outstanding voting stock of the
corporation or (ii) is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately before the date on which it is
sought to be determined whether such person (and the affiliates and the
associates of such person) is an interested stockholder. Section 203 defines
business combinations to include certain mergers, consolidations, asset sales,
transfers and other transactions resulting in a financial benefit to the
interested stockholder.
The restrictions imposed by Section 203 do not apply to a corporation
if (i) the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or (ii) the
corporation, by the action of stockholders holding a majority of outstanding
stock, adopts an amendment to its certificate of incorporation or by-laws
expressly electing not to be governed by Section 203 (such amendment will not be
effective until 12 months after adoption and does not apply to any business
combination between the corporation and any person who became an interested
stockholder of the corporation on or before such adoption). The Company has not
elected out of Section 203. Section 203 could make it more difficult for a third
party to gain control of the Company, and have a depressive effect on the price
obtainable for the Class A Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the Delaware Law, the Company's
certificate of incorporation provides that directors of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware Law, relating
to prohibited dividends or distributions or the repurchase or redemption of
stock, or (iv) for any transaction in which the director derives an improper
personal benefit. In addition, the Company's bylaws provide for indemnification
of the Company's officers and directors to the fullest extent permitted under
Delaware law. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions or otherwise, the Company has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company maintains directors' and officers' liability insurance
against any actual or alleged error, misstatement, misleading statement, act,
omission, neglect or breach of duty by any director or officer, excluding
certain matters including fraudulent, dishonest or criminal acts or
self-dealing.
BUSINESS
General
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services for taxpayers primarily in the
lower- to middle-income tax brackets. The Company intends to provide its
services through both Company-owned and franchised offices in selected
locations. The Company seeks competitive advantage in its markets by (i)
providing prompt tax return preparation at a reasonable price, (ii) providing
electronic filing services, (iii) providing ancillary services, such as audit
assistance, tax return checking and taxation seminars, and (iv) offering a
refund anticipation loan program under which the Company will arrange, for a
fee, loans to customers based upon the size of the customers' expected tax
refunds.
The Company owns a majority interest in Tax Depot, which has been
providing tax preparation services in Canada since 1972. During the 1998 tax
season, there were 207 Tax Depot offices, 13 of which were owned by Tax Depot
and the remainder of which were owned by Tax Depot franchisees. In addition, the
Company operated five tax preparation offices in Columbus, Ohio. All Tax Depot
offices currently operate under the "U&R Tax Depot" name, while the Company's
Columbus, Ohio offices operate under the "Liberty Tax Service" name. The Company
expects that, pursuant to a license agreement that Tax Depot will enter into
with the Company, Tax Depot and its franchisees will also operate their tax
return preparation offices under this service mark beginning in the third or
fourth quarter of 1998.
As of April 30, 1998, the Company had 32 employees and Tax Depot had
52 employees. Due to the conclusion of the tax season, as of May 15, 1998, the
Company had 21 employees and Tax Depot had 15 employees.
Tax Depot. Tax Depot is a closely-held corporation incorporated under
the law of the Province of Manitoba in Winnipeg. Tax Depot was formed in May
1994 as a wholly-owned subsidiary of Datatax Business Services, Ltd. ("Datatax")
which was also the franchisor for U&R Tax Services, Ltd. Datatax assigned and
licensed those franchises to Tax Depot which then changed the name of the
franchises to U&R Tax Depot. The Company purchased its 60% interest in Tax Depot
from Datatax in September 1997. Datatax still owns the remaining 40% interest in
Tax Depot. Pursuant to a Shareholders Agreement entered into at the time of the
Company's investment in Tax Depot, the Company has the right to nominate two of
Tax Depot's three directors, while the other shareholder has the right to
nominate one director. During the 1998 tax season, Tax Depot prepared 93,224 tax
returns and had net revenues of C$2,143,624.
Tax Depot recently entered into a management agreement with Save-Smart
Insurance and Financial Services, Inc. ("Save Smart") to share office space with
it in selected Wal-Mart stores in Canada under the name "Save Smart Tax Depot."
Tax Depot provides tax return preparation services (either directly from Tax
Depot or from one of its franchisees) while Save Smart provides insurance
products. Tax Depot pays Save Smart a monthly fee equal to the greater of
C$2,500 or 10% of its net revenues for each Save Smart Tax Depot location plus
an additional 5% of such net revenues. Most of the locations will be leased by
Tax Depot on behalf of its franchisees who will reimburse Tax Depot for the
monthly fee paid to Save Smart. The term of the management agreement is until
January 2000, subject to renewal for an additional two-year period, unless
earlier terminated because of a termination of Save Smart's agreement with
Wal-Mart. During the 1998 tax season, there were 33 Save Smart Tax Depot
offices, 28 of which were franchises. The Company expects to expand to between
60 and 80 Save Smart Tax Depot locations within the next two years, most of
which will be franchise locations. Once Tax Depot begins using the name "Liberty
Tax Service," these locations will operate under the name "Save Smart Liberty
Tax Service."
Liberty Tax Service. In December 1997, the Company purchased one
existing tax preparation office in Columbus, Ohio. During the 1998 tax season,
the Company opened four more offices in that area which operated under the
"Devore Tax Service" name. In May 1998, the Company changed the name of the
offices to "Liberty Tax Service." Liberty Tax Service provides tax return
preparation services, electronic filing services, audit assistance, tax return
checking, refund loans and tax seminars to its customers.
Services Offered
Tax Preparation. There are approximately 120,000,000 and 20,000,000
individual tax returns filed annually in the United States and Canada,
respectively. The Company will offer tax return preparation services to the
public, focussing its efforts on marketing to persons with incomes of less than
$35,000/C$35,000 per year. Based upon management's prior experience in the
industry, the Company anticipates that over 60% of its customers will have
incomes below $35,000/C$35,000, and that over 30% will have incomes below
$20,000/C$20,000 per year. The Company believes that there is a significant
market of people in these income brackets that do not wish to prepare their own
returns, or who may face relatively complex situations (such as divorce,
multiple jurisdiction filings, multiple deductions or other considerations) but
who are unwilling or unable to pay the level of fees charged by accountants or
tax attorneys.
The Company's tax preparers use personal computer based software to
conduct comprehensive client interviews and to prepare tax returns. Tax Depot
offices prepare tax returns using Tax Depot proprietary software. The average
amount of time required to prepare tax returns in Canada is approximately
one-half hour, assuming the customer has all relevant records and is able to
answer all questions asked. Tax Depot is currently in the process of rewriting
and updating that software in order to keep pace with recent technological
developments. The Company used off-the-shelf software to prepare U.S. tax
returns during the 1998 tax season and plans to use similar software during the
1999 season, with appropriate updates and modifications. The Company prepares
U.S. tax returns on average in approximately one hour. The Company is in the
process of determining how to meet its software needs for the 2000 tax season:
it may develop software on its own or with a joint venture partner or it may
continue to use off-the-shelf software.
In assessing its software needs, the Company focuses on meeting four
requirements: (i) enabling the Company to provide consistent, high quality tax
preparation services, (ii) enabling the Company to utilize persons as tax return
preparers who are not as dependent upon technical tax skills as may be required
in other operations, (iii) allowing tax return preparers to concentrate more
closely upon providing quick and friendly service to customers, and (iv)
enabling the Company to electronically file a customer's tax return more rapidly
and efficiently in order to allow the customer to obtain a tax refund more
quickly.
Electronic Filing. The Company offers electronic filing services to its
customers in Canada and in the U.S. at no extra cost. Because an electronically
filed return is handled on a priority basis by both the IRS and Revenue Canada,
a client receives a tax refund much more quickly than if the return is manually
filed. The Company anticipates that speedy refunds will be a major marketing
tool for the Company both in the United States and Canada. The customer will
also receive speedy IRS or Revenue Canada acknowledgement that the return is
mathematically correct. In management's experience, over 80% of returns which
are filed electronically receive refund checks within 21 days in Canada and
within 14 days in the United States. The Company anticipates that over 80% of
the returns it prepares will be filed electronically. The Company will also, for
a fee, electronically file returns prepared by non-client taxpayers or other tax
preparers.
Refund Anticipation Loan Program. Because the Company believes that the
speed of obtaining a refund, or cash in anticipation of a refund, will be
important to the Company's targeted market, and in order to compete with other
tax return preparation firms, the Company will offer a refund anticipation loan
service. A refund anticipation loan is a loan made to a taxpayer, secured by the
anticipated tax refund payment, and with full recourse to the taxpayer. Refund
loans will either be provided directly by the Company using line of credit
financing or will be provided by a third party lender through the Company's
assistance. These loans will enable the Company's customers to receive their
refunds in as little as 24 hours from the time the return is filed with the IRS
or Revenue Canada. The Company anticipates that as many as 25% of the Company's
customers will utilize this service.
The procedure with respect to third party refund loans will generally
be as follows:
o The customer's return is prepared;
o The customer completes a refund anticipation loan application
(in which the taxpayer/borrower assigns the rights to the
refund to the lending institution);
o The tax preparer or other office worker electronically
transmits the customer's tax return to Company headquarters
which files the tax returns electronically with the IRS or
Revenue Canada;
o Revenue Canada or the IRS acknowledge that the return is
mathematically correct and Revenue Canada acknowledges that no
government liens exist against the customer;
o Once approved by the IRS or Revenue Canada, the tax
return is electronically messengered to the participating
bank for final approval;
o Upon confirmation from the bank of a loan approval, the
Company electronically advises the originating office of the
approval; and
o The originating office prints out a check for the amount of
the approved loan (the refund amount less bank charges and the
Company's return preparation fee which includes a loan
application fee), which can then be distributed to the
customer.
Substantially the same procedures will be followed when the Company
provides the loan directly, except that no third party approval of the loan will
be required and no bank fee will be charged.
Typically within two to three weeks from the electronic filing, the IRS
or Revenue Canada wires the refund amount directly to the lender. Fees for the
loan and the preparation of the return are deducted from the check amount,
thereby requiring no cash outlay by the taxpayer and assuring payment to the
Company. The costs of writing off bad debt that may be incurred in the program
are factored into the fees charged for the loans. See "Risk Factors - Importance
of Refund Anticipation Program."
During the 1998 tax season, the Company had arrangements with the Bank
of Montreal (for Canadian loans) and Bank One (for U.S. loans). The Bank of
Montreal provided Tax Depot with a $9.25 million line of credit to fund refund
loans. The facility bore interest at the prime rate as reported in The Wall
Street Journal plus 1%, and was personally guaranteed by Mr. Hewitt and Gary
Ibbotson, one of Tax Depot's directors. The facility expired in May 1998, but
the Company expects to renew it in January 1999 for the 1999 tax season. The
line of credit allowed Tax Depot to make refund anticipation loans which
generated revenues of 15% of the first C$300 loaned and 5% of the balance. (If
the loan was made by a franchisee using Tax Depot's line of credit, Tax Depot
received 48% of this revenue.) The Company's arrangement with Bank One was
established through Drake Software, a third party provider of tax preparation
software. Under the arrangement, Bank One funded the loans for a fee of $70-80
per refund; Drake Software received a fee of $2 per refund for its IRS
transmittal services and the Company received a de minimis referral fee from
Bank One plus the $25 loan application fee from each customer.
Training Programs and Other Ancillary Services. The Company provides
extensive training for tax preparers at Company-owned offices. These employee
training sessions cover substantive tax law, policies and procedures for office
conduct, use of computer software and client interaction. Additionally, the
Company provides training to franchisees. These sessions are devoted to
operational aspects of the business. Training of franchisee employees with
respect to tax law, policies and procedures and software use is provided by the
franchisee after he or she has completed the Company's training. The Company
does not train franchisee employees.
The Company will also offer certain ancillary services which will be
covered by the initial fee paid by the customer, including audit assistance, tax
return checking, taxation seminars and schools.
Growth Strategy
The Company intends to follow a growth strategy involving the
establishment of both Company- and franchisee-owned offices as well as the
acquisition of independent tax practices. Initially, the Company intends to open
up to 30 Company-owned offices in the United States for operation during the
1999 tax season. See "Use of Proceeds." Thereafter the Company will seek to
implement a franchise program which it anticipates will be the primary source of
its growth. See "Business - Franchise Operations" and "Risk Factors - Franchise
Operations." The Company will also seek to grow through the acquisition of
existing tax return preparation practices. The Company anticipates that, for the
immediate future, any such acquisitions will be for cash (see "Use of
Proceeds"); however, the Company is not restricted from using securities of the
Company for such acquisitions and may do so if the opportunity arises. The
Company anticipates that growth of Tax Depot's operations will be through
franchising; Tax Depot expects to grant up to 120 new franchises for the 1999
tax season.
The Company's ability to open additional Company-owned offices and to
acquire additional tax practices will depend upon the Company's ability to
generate funds through operations, to obtain financing or to attract additional
capital, while the Company's ability to establish a franchise program will
depend upon the Company's ability to develop a franchising structure and to
attract desirable franchisees. There can be no assurance that the Company will
be successful in any such endeavors. See "Risk Factors - Minimal Operating
Revenues and History," " - Need for Additional Financing," " - Competition" and
" - Franchise Operations."
As a result of certain restrictive covenants binding upon John T.
Hewitt, the Company's Chairman, Chief Executive Officer and President, and John
K. Seal, the Company's Director of Operations and Treasurer, the Company will
only seek to expand, through the 1999 tax season, in selected regional markets
in the United States, although such markets have not been determined as of the
date hereof. See "Risk Factors - Existence of Restrictive Covenants" for a
description of the restrictive covenants pertaining to Messrs. Hewitt and Seal.
The Company will, however, be able to focus its business activities more broadly
in the Canadian market.
A second aspect of the Company's growth strategy involves achieving
"critical mass" in any market it enters, defined by the Company as having at
least one office for every 200,000 residents in the market area. The Company
believes that it is necessary to achieve this critical mass in order to provide
efficient marketing and advertising programs, and to effectively develop market
share. The Company intends to enter a particular market only when it believes it
can attain critical mass within one year. As a consequence of the foregoing, the
Company anticipates that it will seek to expand regionally rather than
attempting to establish a national presence.
Management Structure
Both Tax Depot's and the Company's managerial control system is based
upon a central office-regional management format. The central office is
responsible for overall policy, advertising, marketing, training, software
updating and franchising. Tax Depot currently has two management offices in
Canada and the Company has its management office at the Virginia Beach
headquarters. As the Company's U.S. operations expand, the Company intends to
implement its policies through regional and district managers (who will
supervise groups of Company-owned offices) and franchise consultants (who will
supervise groups of franchised offices). Each Company-owned office will be
overseen by an office manager. Thereafter, the management structure will be
implemented as the growth in the number of Company-owned and franchised offices
requires.
Fees
The Company anticipates that revenues will be derived from (i) fees for
tax preparation services, (ii) fees for electronically filing tax forms for
non-customers, (iii) fees from customers for initiating tax refund loans (and
possibly referral fees from lenders), (iv) fees and royalties from franchisees,
and (v) proceeds from selling purchased practices to franchisees.
The Company's fees for specific tax services will differ by region and
by franchisee. The Company will provide franchisees with a listing of suggested
prices for all tax preparation services provided by its offices. Franchisees,
however, will have complete pricing autonomy. Company-owned stores will adhere
to the price schedules which management recommends for their markets. The
Company estimates that the average fee per tax return will be approximately $90
in the United States and C$60 in Canada. For individuals who prepare their own
returns or have them prepared elsewhere, the Company will charge a fee,
currently C$30 in Canada and estimated to be $35 in the United States, for the
electronic filing of the return. The Company does not charge customers in
Canada, and will not charge customers in the United States, an additional fee
for filing electronically if the Company prepares the return.
The Company anticipates that it will charge customers a fee of
approximately $70 to $80 for arranging refund anticipation loans, which the
Company will pay to the bank providing the funding. If the Company provides the
loan directly through line of credit financing, it will not charge this bank
fee. In either case, however, the Company will keep the $25 loan application fee
which will be included in the tax return preparation fee paid by the customer.
The actual amount of such fees will depend upon local competitive conditions,
the level of bank fees actually charged and customer acceptance. In Canada, the
Tax Rebate Accounting Act limits the amount that a tax service provider or
lender may charge for these loans: the taxpayer must receive not less than 85%
of the first C$300 of the anticipated refund and 95% of the balance. Most of
these loans are made by Tax Depot franchisees under an arrangement where Tax
Depot funds the loan and keeps 48% of the fee while the other 52% is kept by the
franchisees (franchisees may instead fund the loans themselves and pay royalties
to Tax Depot although it is expected that less than 10% will request this
arrangement).
Property
The Company leases its Virginia Beach headquarters, consisting of 3,000
square feet of office space, at a monthly rental of $2,700 (including heat,
utilities and janitorial services). The lease expires in April 2000. Tax Depot
leases two management offices in Canada: the main office in Winnipeg, Manitoba,
consisting of approximately 2,800 square feet, at a rent of C$1,875 per month,
and a regional office in Calgary, Alberta, consisting of 600 square feet, at a
rent of C$400 per month. In addition, the Company currently leases 4 local tax
preparation offices (one in Canada and three in Columbus, Ohio). These offices
range between 400 and 600 square feet in size at rentals of between C$400 and
$1,755 per month. The Company believes that these offices are adequate for its
current needs. However, depending upon the expansion of the Company's
operations, the Company may require additional office space for its headquarters
and/or small amounts of space for its regional offices.
The Company has established certain criteria for local tax preparation
offices in the United States and Canada as follows: offices will typically have
from 400 to 600 square feet of office space, and will be able to accommodate
anywhere from three to ten desks. As with any retail operation, the location of
an office will be important to its ultimate financial success. For this reason,
the Company will maintain control over the site selection process for all
offices (including franchisee operated offices) and will require that each
office have good visibility from a major intersection or busy street, high foot
traffic volume and proximity to shopping malls or other major food or clothing
retailers (preferably discounters). For all locations, the Company will seek
leases with terms that coincide with the tax season in order to reduce fixed
costs.
The Company will also seek to place smaller offices in shopping malls
through arrangements with large discount retail stores, similar to Tax Depot's
current arrangement with Save Smart. See "Business - General - Tax Depot."
Franchise Operations
The Company expects to expand Tax Depot's franchise program (except
that the Company does not anticipate selling franchises in Quebec) and to
develop a franchise program in the United States. In addition, the Company
intends to offer some or all of the existing tax practices it acquires to
franchisees. The following discussion is a summary of the key features of the
Company's program. The program may change as it is rolled out.
General. The Company will offer franchisees the right to operate in a
specified geographic area. The initial term of the Company's standard franchise
agreement will be for five years, with successive renewals exercisable at the
option of the franchisee for additional five-year periods as long as the terms
of the franchise agreement continue to be met. The Company does not expect it
will limit the number of offices a franchisee may open in the franchisee's
territory; however, franchisees will be required to obtain the Company's prior
approval for each location and to keep at least one office location open
throughout the year in each territory to ensure that customers in each territory
have access to a tax preparer for matters relating to late filings or any
questions they have regarding the prior or forthcoming tax year. Each franchisee
will also be required to hold tax seminars which will be offered to the general
public to attract prospective seasonal tax preparers and to enhance name
recognition in the market. (Canadian franchisees who executed franchise
agreements before July 1997 are not required to maintain off-season hours or to
provide tax seminars.)
The Company has been and intends to continue to be selective in its
choice of franchisees. In addition to customary personal and financial
background checks of a franchise candidate and interviews by management
personnel, each franchise candidate will be required to successfully complete a
week-long training course. At the conclusion of the course, management will make
a final evaluation of the candidate and determine whether to accept the
candidate as a franchisee.
Franchise Fees, Royalties and Other Charges. The Company currently does
not charge Canadian franchisees an initial franchise fee. Effective January 1,
1999, it expects to charge Canadian franchisees a C$10,000 initial franchise
fee. The fee will be assessed based on each geographic area licensed by the
franchisee, rather than based on the number of office locations the franchisee
operates. In addition, the Company will require (i) a C$2,000 franchise security
deposit, which will be refundable upon the expiration of the franchise agreement
provided that the franchisee is current with all amounts due to the Company and
has been open for business by February 1 of each year, (ii) an ongoing
advertising fee of 3% of gross receipts per month (defined as gross revenues
less customer discounts and G.S.T.) and an additional advertising fee of C$3,000
if the franchisee does not prepare at least 500 tax returns per territory during
its first tax season and at least 750 tax returns during its second tax season
(the Company also recommends that franchisees spend an additional
C$3,000-C$5,000 each year on advertising), and (iii) a fee for participating in
the income tax rebate program. Franchisees currently pay a royalty to the
Company of 14% of gross receipts, reduced to 12% for gross receipts over
C$50,000, or a minimum of C$3,000 per tax season, except that franchisees who
executed franchise agreements before March 1998 pay a 10% royalty or a minimum
of C$1,500 per tax season.
The Company is currently in the process of determining the fee
structure for its United States franchise program. The Company does not
anticipate it will have any franchisees in the United States until the 2000 tax
season.
In return for the fees paid, the Company may provide some or all of the
following products and services to its franchisees: (i) a minimum of four days
of initial training in business operations, (ii) the use of the Company's tax
return preparation software and regular updates to the software, (iii) a joint
advertising program which will be funded through the advertising fees paid by
both franchisee and Company operated offices, (iv) annual tax training programs
which assist franchisees in training seasonal tax preparation employees, (v)
standardized operating manuals, (vi) field support in the areas of management,
systems, software and questions regarding tax law interpretation, and (vii)
access to the Company's refund anticipation loan program. Franchisees will be
subject to a quality control system to be developed by the Company, which will
include statistical measurements, office visits and customer interviews by
Company personnel.
Regulation of Franchise Operations. The Company's United States
franchising activities will be subject both to federal and state laws and
regulations. Federal law and rules require a franchisor to give all prospective
franchisees disclosure about the nature of the franchise investment in the form
of an offering circular on the earlier of (i) the first personal meeting, (ii)
10 business days before any binding agreement is signed, or (iii) 10 business
days before any consideration is paid. The offering circular may be prepared in
accordance with the format designated by the North American Securities
Administrators Association called the Uniform Franchise Offering Circular
("UFOC"). In addition, at least five business days before signing any binding
agreement, the franchisor must provide the prospective franchisee with a
franchise agreement that reflects the specific terms on which the franchisee
will be licensed to do business. There is no private right of action available
to franchisees and prospective franchisees under the federal rules. Franchisees
who claim violations must bring their complaints to the Federal Trade
Commission. Violators are subject to civil penalties of up to $10,000 per
violation.
Federal law and rules govern franchisor conduct in all states. In
addition, California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota,
New York, North Dakota, South Dakota, Virginia, Washington and Wisconsin have
enacted state franchise laws. Federal law and rules permit state laws to govern
franchising if they provide protection that is greater than or equal to that
provided by federal law and rules. Most of these state laws require franchisors
to provide specific disclosure to franchisees, generally in the UFOC format
document.
Most state laws provide franchisees with a private right of action, in
addition to administrative penalties, if a franchisor fails to comply with a
state's franchising laws. Moreover, some states, like California, have laws that
govern the relationship between franchisor and franchisee after the franchise
agreement is signed, such as laws that (i) mandate "notice" and "right to cure"
periods before termination, (ii) restrict the grounds for termination without
the opportunity to "cure" a default, and (iii) restrict the franchisor's ability
to enforce agreements not to compete with the franchisor following termination.
Both the federal rules and the UFOC format require a franchisor to
update its offering circular to include new financial statements and in the
event of material changes, such as significant changes in financial condition,
changes to major fee structures, or a change in the business opportunity being
offered.
There are no federal franchise laws in Canada. Alberta has provincial
laws requiring use of a disclosure document similar to the UFOC format document.
The Company provides every potential Canadian franchisee with a disclosure
document.
Tax Return Preparers
The Company and its franchisees will utilize the services of part-time
tax preparers. The bulk of these preparers will be hired for the January through
April tax season with the number of preparers at any given time being adjusted
to the demands of that office. Peak employment is expected to occur in February.
The Company anticipates that a typical office will increase the number of tax
preparers from as few as one during the off-season to as many as ten during the
peak of tax season. See "Risk Factors - Business Is Highly Seasonal" and - "Need
for a Large Pool of Low Cost Seasonal Labor."
The Company anticipates that its tax preparers will be individuals
seeking to supplement their incomes and who have flexible schedules, such as
retirees, undergraduate and graduate students and part-time employees of other
firms. The Company anticipates that many of its seasonal employees will have had
prior experience with other tax return service companies, and further
anticipates recruiting persons taking the Company's tax preparation training
programs. See "Business - Training Programs."
Although wages will vary depending on an office's regional location,
the Company expects that the average wage for seasonal tax preparers will be
approximately $6 per hour (C$6), increasing by 5% a year for each year of
service. Tax preparers will also receive 5% of the gross dollar volume they
generate as a bonus paid on April 30, effectively giving most preparers the
ability to earn from $8 to $15 (C$8 to C$15 in Canada) an hour.
Regulation
Both United States law and Canadian law require income tax return
preparers, among other things, to identify themselves as paid preparers on all
tax returns which they prepare, to provide customers with copies of their tax
returns and to retain copies of the returns they prepare for three years.
Failure to comply with these requirements may result in the imposition of
penalties. The laws also provide for assessment of penalties against a preparer
who (i) negligently or intentionally disregards federal tax rules or
regulations, (ii) takes a position on a tax return which does not have a
realistic possibility of being sustained on its merits, (iii) willfully attempts
to understate a taxpayer's tax liability or (iv) aids or abets in the
understatement of such tax liability. In addition, several states of the United
States have enacted or are considering enactment of legislation which would
regulate tax return preparers.
The Company will be subject to regulation in connection with its
franchise operations in the United States and in the Province of Alberta, Canada
(see "Business - Franchise Operations: Regulation of Franchise Operations" and
"Risk Factors - Regulation of Franchise Operations"). In addition, refund
anticipation loan programs and proprietary schools (such as the Company's
proposed tax training programs) are regulated in some states. See "Risk Factors
- - Government Regulation."
Competition
The tax return preparation and electronic filing business is highly
competitive. The Company believes that its competition will come primarily from
three sources: (i) large return preparation services such as H&R Block and
Jackson Hewitt, (ii) numerous small or seasonal tax preparation services,
including accounting and law firms, and (iii) individuals who prepare their own
returns. Many of the firms offering tax preparation services, and many firms not
otherwise in the tax preparation business, provide electronic filing and refund
loan services to the public. In particular, both H&R Block and Jackson Hewitt
have programs, including refund anticipation loan programs, that are
substantially similar to those the Company proposes to provide. Commercial tax
return preparers and electronic filers are highly competitive with regard to
price, service and reputation for quality. This competitiveness may restrict
growth opportunities for the Company and the prices the Company can charge for
its services.
H&R Block dominates the industry. As of April 30, 1997, the date of its
most current annual report on Form 10-K, H&R Block had 9,937 offices in
operation in the United States, Canada, Australia and Europe, of which 4,722
were owned by franchisees. In the United States alone, H&R Block operated 8,554
offices. H&R Block also estimated that during its fiscal year ended April 30,
1997, it served approximately 18,190,000 taxpayers world-wide, of which
approximately 15,600,000 were in the United States, and prepared approximately
14,302,000 individual United States income tax returns (of which approximately
7,279,000 were filed electronically), constituting about 13% of the IRS's
estimate of total United States individual income tax returns filed during 1997.
In addition, as of that date H&R Block operated 1,021 offices in Canada, and
filed approximately 2,156,000 Canadian returns with Revenue Canada during the
fiscal year ended April 30, 1997. Because of its size, wide-spread name
recognition and the availability of capital to it, the Company believes that H&R
Block will offer formidable competition to the Company's efforts to establish
and expand its tax return preparation business.
Jackson Hewitt is the second largest provider of retail income tax
preparation services in the United States. According to its Annual Report on
Form 10-KSB for the fiscal year ended April 30, 1997, Jackson Hewitt had 1,296
franchised offices and 76 company-owned offices in 41 states as of that date.
Jackson Hewitt filed 875,000 tax returns in its fiscal year ended April 30,
1997, 735,000 of which were filed electronically. Although Jackson Hewitt has no
operations in Canada, the Company believes that once the Company is able to
establish a broader base of offices in the United States (upon the expiration of
the restrictive covenants pertaining to Mr. Hewitt; see "Risk Factors Existence
of Restrictive Covenants"), Jackson Hewitt will offer strong competition in many
of the markets which the Company will seek to enter.
Computer Systems and Year 2000 Issue
The "year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date field.
Any computer programs using such a system, and which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities.
Based upon a recent assessment by the Company, the Company has in place
year 2000 capable systems. Any software purchased or developed by the Company in
the future will be year 2000 capable.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for any of the Company's securities, and,
following this offering, it is not anticipated that a market will develop for
the Class A Common Stock offered hereby. As of the date of this Prospectus,
there were 34 holders of record of the Class A Common Stock and one holder of
record of the Class B Common Stock. All of the shares of Class A Common Stock
and Class B Common Stock outstanding as of the date of this Prospectus are
"restricted securities" as defined under Rule 144 of the Securities Act, and
none of such securities may be resold pursuant to Rule 144. As of the date of
this Prospectus, there were 31,900 shares issuable pursuant to outstanding
options.
REPORTS TO STOCKHOLDERS
The Company provides annual reports with audited financial statements
to its stockholders.
JTH TAX INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1998
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ............................................. 3
FINANCIAL STATEMENTS
Balance Sheet ............................................. 4-5
Statement of Changes in Stockholder's Equity............... 6
Statement of operations.................................... 7
Schedule of Operating Expenses............................. 8
Statement of Cash Flows ................................... 9
Notes to Financial Statements ............................. 10-13
Hamilton Dwyer
& Company, P.C.
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JTH Tax Inc.
We have audited the accompanying consolidated balance sheet of JTH Tax
Inc. (a Corporation) as of April 30, 1998, and the related statement of
income, retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Tax Depot Inc., a subsidiary, which statements reflect
total assets and revenues constituting 37 percent and 81 percent,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for Tax
Depot Inc., is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit and
the report of the other auditors provides a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JTH
Tax Inc. as of April 30, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with generally
accepted accounting principles.
June 10, 1998
Member American Institute Certified Public Accountants, Tax Division
Member of Virginia Society Certified Public Accountants
-----------------------------------------------------------------
3800 Poplar Hill Rd, Chesapeake, VA 23321 P. O. Box 6189, Ports VA 23703
(757) 483-3555 Fax (757) 484-7493
JTH TAX INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
---------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 686,871
Accounts receivable 1,009,788
Trading securities (Note 3) 504,507
Employee advances 94,697
Prepaid expenses 27,538
Prepaid income taxes (Note 1) 280,727
-------------
Total current assets 2,604,128
FIXED ASSETS: (Note 1)
Furniture and fixtures 179,893
Leasehold improvements 9,895
Accumulated depreciation 36,222
--------------
Net fixed assets 153,566
OTHER ASSETS:
Available for sale securities (Note 3) 230,391
Utility deposit 850
Intangibles, net of accumulated
amortization of $8,125 394,770
Stock offering cost 57,921
---------------
Total other assets 683,932
TOTAL ASSETS $ 3,441,626
------------
See accompanying notes and accountant's report.
- 4 -
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 336,943
Franchise deposits 85,609
Capital lease 10,112
Total current liabilities 432,664
LONG-TERM LIABILITIES:
Deferred income taxes 47,186
STOCKHOLDER'S EQUITY (Note 4)
Common stock, class A 200,000
Common stock, class B 45,000
Additional paid in capital 1,931,100
Unrealized gain (Note 3) 2,541
Minority interest in subsidiary 180,285
Equity adjustment from foreign
currency translation (Note 1) (45,201)
Retained earnings 648,051
----------
Total stockholder's equity 2,961,776
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 3,441,626
===========
- 5 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED APRIL 30, 1998
A B Additional
Common Common Paid In Retained
Stock Stock Capital Earnings
----- ----- ------- --------
Stock issued for
cash through
April 30, 1997 $ - $ 45,000 $ 131,100 $ -
Prior years
Net income - - - (5,999)
-------- ------- --------- -------
Balance at
April 30, 1997 - 45,000 131,100 (5,999)
Stock issued
for cash in
current year 198,500 - 1,786,500 -
Stock issued for
services in
current year 1,500 - 13,500 -
Net income for the
current year - - - 654,050
-------- ------- --------- --------
BALANCE AT
APRIL 30, 1998 $ 200,000 $ 45,000 $ 1,931,100 $ 648,051
========== ========= =========== =========
See accompanying notes and accountant's report.
- 6 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1998
REVENUE:
Tax preparation $1,438,217
Franchise royalties 278,342
Tuition 57,923
Franchise sales 20,065
Commission income 29,135
Miscellaneous income 16,032
------------
Total revenue 1,839,714
------------
OPERATING EXPENSES (see schedule) 2,643,863
------------
NET LOSS FROM OPERATIONS (804,149)
------------
OTHER INCOME AND (EXPENSES):
Interest income 19,417
Dividends 41,924
Gain on investment 1,665,494
Interest expense (8,787)
------------
Total other income and expenses 1,718,048
------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 913,899
Provision for Income Taxes (Note 6) 371,459
-----------
INCOME BEFORE MINORITY INTEREST 542,440
Minority interest in subsidiaries' loss 111,610
------------
NET INCOME $ 654,050
===========
See accompanying notes and accountant's report.
- 7 -
JTH TAX INC.
CONSOLIDATED SCHULEDULE OF OPERATING EXPENSES
YEAR ENDED APRIL 30, 1998
OPERATING EXPENSES:
Advertising $ 312,700
Amortization 24,466
Bad debts 35,882
Bank Charges 33,847
Depreciation 15,227
Discounts 691,439
Equipment rental 14,641
Insurance 65,990
License and taxes 36,014
Miscellaneous 14,797
Office supplies 23,545
Operating lease 2,017
Payroll 734,768
Postage 58,621
Practice development 8,513
Printing 8,359
Professional development 9,617
Professional fees 79,349
Repairs and maintenance 8,340
Rent 66,500
Supplies 119,645
Telephone 96,870
Temporary service 37,987
Travel 134,330
Utilities 10,399
--------------
Total operating expense $ 2,643,863
==============
See accompanying notes and accountant's report.
- 8 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 654,050
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 43,815
Foreign currency translation (45,201)
Net realized gains on securities (261,459)
Minority interest in subsidiaries loss (111,610)
Changes in operation assets and liabilities:
Accounts receivable (1,009,788)
Prepaid expenses (27,538)
Prepaid income taxes (280,727)
Employee advances (94,697)
Franchise deposits 85,608
Acounts payable 286,676
Income taxes payable 47,186
-------------
NET CASH USED BY OPERATING ACTIVITIES (713,685)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (178,282)
Cost of stock offering (57,117)
Purchase of tax service (106,000)
Sales of trading securities 4,343,722
Purchases of trading securities (4,400,364)
Purchases of available-for-sale securities (230,391)
--------------
NET CASH USED IN INVESTING ACTIVITIES (628,432)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 2,000,000
Proceeds from short-term debt 10,112
--------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,010,112
------------
NET INCREASE IN CASH 667,995
CASH AT BEGINNING OF YEAR 18,876
------------
CASH AT END OF YEAR $ 686,871
============
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest paid (net of amount capitalized) $ 13,912
============
Income taxes paid $ 605,000
============
See accompanying notes and accountant's report.
- 9 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JTH Tax, Inc. a Delaware corporation and it's subsidiary Tax Depot, Inc. is
incorporated under the Companies Act of Manitoba, Canada. Both companies are
engaged in providing services including personal income tax return preparation
and personal income tax refund discounting as well as sales of franchise to
provide these services in Canada and the United States. These services are
provided through company-owned operations and franchised agents.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
parent company JTH Tax, Inc. and its subsidiary Tax Depot, Inc. (60% ownership)
after elimination of significant intercompany accounts and transactions. These
financial statements have been prepared using the purchase method of
consolidation. All significant intercompany transactions and balances have been
eliminated on consolidation.
ACCOUNTING METHOD
The financial statements have been prepared on the accrual method of accounting
which means revenue is recognized when earned, rather than when received and
expenses are recognized when incurred rather than when paid.
TRANSLATION OF FOREIGN CURRENCIES
The financial statement is stated in United States currency. The Tax Depot,
Inc. was translated to United States dollars as of April 30, 1998 at the rate of
0.696 per dollar. A foreign currency translation adjustment of ($45,201.) is
reflected in the equity section of the Balance Sheet to recognize the changes
for the current year.
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities, as measured by the current enacted tax rates. Deferred tax
expense is the result of changes in the deferred tax asset and liability. - 10 -
- 10 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
JTH Tax, Inc. had previously elected S Corporation status that was effective
with the first fiscal year ending April 30, 1997. An S Corporation pays no
federal or state income taxes. Its separately stated items of income, loss,
deduction or credit pass through to the stockholders' and is reported on their
personal federal and state income tax returns. However, as of July 30, 1997 a
second class of stock was issued and automatically revoked the Subchapter S
election. Accordingly, the C Corporation pays federal and state income taxes on
it's profits using the cash basis of accounting. A provision for income taxes
has been established on the accompanying statements for the tax related to the
income from the last nine months of the year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations, renewals and betterments that materially
extend the life of the assets are capitalized. Gains or losses on dispositions
of property and equipment are included in operations in the year of disposal.
Depreciation is computed using the straight line method..
Note 2 - RELATED PARTY TRANSACTIONS
The Tax Depot, Inc. has a liability of $376,634, Canadian currency, ($262,135
United States currency) that has arisen from the sale and purchase of services
from JTH Tax Inc. There is also an outstanding loan of $400,000, Canadian
currency ($280,800 United States currency) at year end. These items have been
eliminated on consolidation.
Note 3 - MARKETABLE SECURITIES
The Companies' marketable securities consist of debt and equity securities that
have a readily determinable fair market value. Management determines the
appropriate classification of its investments at the time of purchase and
re-evaluates such determinations at each balance sheet date.
Securities have been classified in the balance sheet according to management's
intent as either available for sale, held to maturity or trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale and held to
maturity securities are reported as a component of stockholders' equity.
- 11 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 3 - MARKETABLE SECURITIES (continued)
Since the Company does not intend to sell certain securities in the near term,
they have been classified as "available for sale" and accordingly, are carried
at fair value, with unrealized gains and losses, net of tax, reported as a
separate component within the stockholders' equity section of the balance sheet.
Realized gains and losses on all marketable securities are determined by
specific identification and are charged or credited to current earnings.
Cost and fair value of marketable securities available for sale at April 30,
1998 are as follows:
Unrealized Unrealized Fair
Cost Gains Loss Value
Securities $ 227,849 $ 2,541 $ - $ 230,391
Note 4 - CAPITAL STOCK
JTH Tax, Inc. is authorized to issue 1,000,000 shares of capital stock,
consisting of 800,000 shares of Class A Common Stock, par value $0.50 per share,
100,000 shares of Class B Common Stock, par value $1.00 per share and 100,000
shares of Preferred Stock, par value $1.00 per share. As of the date of this
report, there are 400,000 shares of Class A Common Stock, 45,000 shares of Class
B Common Stock and no shares of Preferred Stock outstanding.
In the second quarter of the fiscal year the Company issued 200,000 shares of
Class A Common Stock at $10.00 per share totaling $2,000,000.
In 1998 the Board of Directors authorized a one-for-one stock split of the A
Shares to be distributed on January 10, 1998, to shareholders of record. The par
value of the A shares was reduced accordingly from $1.00 per share to $0.50 per
share.
Note 5 - PURCHASE OF SUBSIDIARY
On September 1, 1997 the Company acquired a 60% interest in the Tax Depot, Inc.,
a Canadian corporation, at the cost of $728,463. The subsidiary's financial
information is accounted for in the accompanying statements using the purchase
method. The acquisition resulted in goodwill of $290,621 which is being
amortized over forty years.
- 12 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Note 6 - INCOME TAXES
The provision for income taxes for JTH Tax Inc. consists of the following:
Current tax expense:
Federal $ 272,827
State 51,446
------------
Total current 324,273
------------
Deferred tax expense:
Federal 40,281
State 6,905
------------
Total deferred 47,186
------------
Total provision for income taxes $ 371,459
============
Tax Depot Inc. (a subsidiary) had a loss from it's current operations in Canada
and that loss is available for income tax purposes as a loss carry-forward until
April 30, 2005.
- 13 -
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- 14 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
BALANCE SHEET
APRIL 30, 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 18,876
Prepaid expenses 850
Investment Securities:
Trading Securities 7,864
Available-for-sale securities 440,000
----------
Total Current Assets 467,590
----------
FIXED ASSETS:
Furniture and fixtures 16,506
Accumulated Depreciation 532
----------
Net fixed assets 15,974
----------
OTHER ASSETS 804
----------
TOTAL ASSETS $ 484,368
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable
$ 267
Loans from related parties 50,000
----------
Total current liabilities 50,267
----------
STOCKHOLDER'S EQUITY:
Common Stock 4,500
Paid in Capital 171,600
Unrealized gain on securities
available-for-sale 264,000
Retained earnings (deficit) (5,999)
----------
Total stockholder's equity 434,101
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 484,368
==========
- 15 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF OPERATIONS
SEVEN MONTHS ENDED APRIL 30, 1997
- --------------------------------------------------------------------------------
REVENUE $ -
----------
OPERATION EXPENSES:
Payroll 1,513
Advertising 200
Business taxes & license 372
Cleaning and janitoral 240
Depreciation 532
Equipment Rental 599
Insurance 488
Miscellaneous 100
Occupancy 3,160
Printing 570
Postage 640
Professional fees 1,290
Supplies 473
Telephone 907
Travel 6,048
Utilities 368
----------
Total Expenses 17,500
----------
OTHER INCOME
Gain on security sales 11,501
----------
Total Net Income (5,999)
----------
RETAINED EARNINGS - BEGINNING OF THE PERIOD -
----------
RETAINED EARNINGS - END OF PERIOD $ (5,999)
----------
- 16 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED APRIL 30, 1997
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (5,999)
Adjustments to reconcile total net income to
Net cash provided by operating activities:
Depreciation and amortization 532
Net realized gains on securities 264,000
(Increase) in prepaid expenses (1,654)
Increase in accounts payable 267
----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 257,146
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (16,506)
Purchases of trading securities (7,864)
Purchases of available-for-sale securities (440,000)
----------
NET CASH (USED) IN
INVESTING ACTIVITIES (464,370)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 50,000
Proceeds from sale of stock 176,100
----------
NET CASH PROVIDED BY
FINANCING ACTIVITES 226,100
----------
NET INCREASE IN CASH AND EQUIVALENTS 18,876
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD -
----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,876
==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid (not of amount capitalized) $ -
==========
Income taxes paid $ -
==========
- 17 -
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
See "Indemnification of Directors and Officers" in Prospectus
Item 25. Other Expenses of Issuance and Distribution
Registration and filing fees:
Securities and Exchange Commission: $ 1,143
Blue Sky: * 11,170
Printing: * 6,500
Accounting: * 10,000
Total other expenses: * 71,187
-------
Total expenses: *$100,000
*____________________
*estimated
Item 26. Recent Sales of Unregistered Securities
In connection with incorporation of the Company in October 1996,
John Hewitt purchased 1,000 shares of Class B Common Stock for $.10 per share.
In December 1996, Mr. Hewitt contributed securities having an aggregate market
value of $176,000 in exchange for 44,000 shares of Class B Common Stock. In July
1997, the Company sold 200,000 shares of Class A Common Stock, at $10.00 per
share, to accredited investors in a private offering pursuant to Rule 506
promulgated under the Securities Act.
Item 27. Exhibits
3.1 Certificate of Incorporation of JTH Tax, Inc.
3.2 Bylaws of JTH Tax, Inc.
4 See Section 6 of
5 Opinion of Ledgewood Law Firm, P.C.
10.1 Subscription Agreement by and among Tax Depot Inc., JTH
Tax, Inc. and Datatax .Business Services Limited
10.2 Shareholders Agreement by and among Datatax Business
Services Limited, JTH Tax, Inc. and Tax Depot Inc.
10.3 Letter Agreement by and between Save-Smart Insurance and
Financial Services Inc. and U&R Tax Depot, Inc.
21 Registrants only subsidiary is Tax Depot Inc., a corporation
incorporated under the laws of the Province of Manitoba,
Canada, which currently does business under the name "U&R Tax
Depot."
23.1 Consent of Hamilton Dwyer & Company, P.C.
23.3 Consent of Ledgewood Law Firm, P.C. (included in Exhibit 5)
24 Power of Attorney (included as part of signature pages of this
Registration Statement)
27 Financial data schedule
99.1 Form of Subscription Agreement
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Virginia Beach, Commonwealth of Virginia, on
6/22, 1998.
JTH TAX, INC.
By: /s/ John T. Hewitt
___________________________
JOHN T. HEWITT, Chairman,
Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints John T. Hewitt and Kathleen Curry, and each of them
acting alone, his or her true and lawful attorney-in-fact, with full power of
substitution, for him or her in any and all capacities to execute and cause to
be filed with the Securities and Exchange Commission any and all amendments and
post-effective amendments to this registration statement with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or said attorney-in-fact's substitute or
substitutes may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ John T. Hewitt
_____________________________________ Date: 6/22, 1998
JOHN T. HEWITT, Chairman, Chief
Executive Officer and President
/s/ John K. Seal
_____________________________________ Date: 6/22, 1998
JOHN K. SEAL, Vice President of
Operations, Treasurer (Chief
Financial Officer and Chief
Accounting Officer) and Director
/s/ Martha O'Gorman
______________________________________ Date: June 22, 1998
MARTHA O'GORMAN, Vice President of
Marketing, and Director
/s/ Donna Halligan
______________________________________ Date: June 22, 1998
DONNA HALLIGAN, Vice President of
Franchise Support, Secretary
and Director
/s/ Kathleen Curry
_____________________________________ Date: 6/22/98, 1998
KATHLEEN CURRY, Vice President of
Technology, Legal Counsel and Director