Registration No. No.333-58085
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
JTH TAX, INC.
(Name of small business issuer in its charter)
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. [ ]
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission and with the securities commissions for the
states in which the Issuer intends to offer the securities for sale. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED ____________ September, 1998
Prospectus
310,000 Shares
JTH TAX, INC.
Class A Common Stock
JTH Tax, Inc. (the "Company") is offering a maximum of 310,000 shares and
a minimum of 40,000 shares (the "Shares") of Class A common stock, par value
$1.00 per share (the "Class A Common Stock"), at a price of $12.50 per Share.
There is no public market for any of the Company's securities, and it is not
anticipated that a market will develop for the Shares following the completion
of this offering.
The offering will be made on a best-efforts basis by the Company through
its director and officer, John K. Seal. If at least 40,000 Shares are not sold
at a price of at least $12.50 per Share within 30 days of the date that the
registration statement relating to these securities becomes effective, the
proceeds of any sale of Shares will be returned to investors (with interest) and
the offering will be terminated. If at least 40,000 Shares are sold by that
date, subscriber funds received through that date will be released to the
Company. Members of the Company's management may, but are not obligated to
purchase Shares. See "Plan of Distribution." Any Shares purchased by the
Company's management may be counted toward the determination of whether the
minimum offering amount has been met.
The Shares entitle holders to elect one less director than the
shareholders of the Class B Common Stock are entitled to elect.
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INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PURCHASERS MAY EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION OF THEIR INVESTMENT AND A PROSPECTIVE PURCHASER SHOULD NOT INVEST
IN THE OFFERING UNLESS THE PURCHASER CAN AFFORD THE LOSS OF THE ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 9.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE AUTHORITIES NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
===============================================================================
Underwriting Proceeds
Price to Public Discounts(1) to Company(2)
- -------------------------------------------------------------------------------
Per Share......... $12.50 -- $12.50
===============================================================================
Total Maximum..... $3,875,000 -- $3,875,000
===============================================================================
(1) The offering is being made by the Company through its officer and
director, who will not be separately compensated for doing so.
(2) Before deducting expenses of the offering, estimated to be $100,000.
The date of this Prospectus is September __, 1998.
AVAILABLE INFORMATION....................................................... 5
SUMMARY..................................................................... 5
RISK FACTORS................................................................ 8
USE OF PROCEEDS............................................................. 16
DILUTION.................................................................... 17
PLAN OF DISTRIBUTION........................................................ 18
LEGAL PROCEEDINGS........................................................... 19
MANAGEMENT.................................................................. 18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 22
DESCRIPTION OF CAPITAL STOCK................................................ 23
EXPERTS..................................................................... 25
INDEMNIFICATION OF DIRECTORS AND OFFICERS................................... 25
BUSINESS.................................................................... 25
MANAGEMENT DISCUSSION AND ANALYSIS.......................................... 37
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 37
EXECUTIVE COMPENSATION...................................................... 35
REPORTS TO STOCKHOLDERS..................................................... 38
AVAILABLE INFORMATION
The Company is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (No. 333-) 58085) (together
with any amendments thereto, the "Registration Statement"), under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and financial
statements, notes and schedules filed as part thereof, which may be inspected at
the public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, New York, New York
10048. Copies of such documents may also be obtained through the Commission's
Internet address at http://www.sec.gov. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not necessarily
complete, and in each instance are qualified in all respects by reference to the
copy of such document filed as an exhibit to the Registration Statement.
This Prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified as such because the context of the statement includes
words such as the Company "believes," "anticipates," "expects," "estimates,"
"intends," or other words of similar intent. Similarly, statements that describe
the Company's future plans, objectives and goals are also forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from those expressed or implied in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
The Company
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services to taxpayers primarily in the
lower- to middle-income tax brackets. The Company operates in Canada through its
majority-owned subsidiary, Tax Depot Inc., a corporation organized under the
laws of the Province of Manitoba ("Tax Depot"). (Throughout this Prospectus,
references to the Company's Canadian operations and to Tax Depot's operations
are used interchangeably.) Tax Depot currently operates under the trade name
"U&R Tax Depot" but the Company intends to conduct business in both Canada and
the U.S. under the name "Liberty Tax Service" by the 1999 tax season. During the
1998 tax season, there were 207 U&R Tax Depot offices (13 of which were owned by
Tax Depot and the balance of which were owned by franchisees of Tax Depot)
extending from the Maritimes to British Columbia. In addition, the Company owned
and operated five tax preparation offices in Columbus, Ohio during the 1998 tax
season.
The Company seeks competitive advantage in its markets by (i) providing
prompt tax return preparation at a reasonable price, (ii) providing electronic
filing services, (iii) providing ancillary services, such as audit assistance,
tax return checking and taxation seminars, and (iv) offering a refund
anticipation loan program pursuant to which the Company will arrange, for a fee,
loans to customers based upon the size of the customers' tax refunds.
The Company intends to use the proceeds of this offering to expand its
operations in the United States. Until April 30, 1999, the Company's ability to
own or franchise tax preparation offices in the U.S. is limited by certain
restrictive covenants to which John T. Hewitt, the Company's Chairman, Chief
Executive Officer, President and founder, and John K. Seal, Vice President,
Treasurer and director of the Company, are subject. The Company will seek
further expansion of its operations in the United States after the termination
of those restrictive covenants. See "Risk Factors - Existence of Restrictive
Covenants and Potential for Litigation if Violated."
The Company's principal executive offices are located at 2610 Potters
Road, Virginia Beach, VA 23452 and its telephone number is (757) 340-7610.
The Offering
Securities offered..................... 310,000 shares of Class A Common
Stock
Securities to be outstanding after
the offering........................... 710,000 shares of Class A Common
....................................... Stock 90,000 shares of Class B Common
....................................... Stock
Use of proceeds........................ The proceeds of the offering, after
the payment of offering expenses,
are expected to be used by the
Company to purchase existing
tax practices in the U.S.,
establish up to 30 new tax return
preparation offices in the U.S.,
and develop software.
Risk factors........................... An investment in the Shares
involves a high degree of risk.
See "Risk Factors" beginning on
page 8 hereof for information
that should be considered by
prospective investors.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Shares. The cautionary statements set forth below and elsewhere in this
Prospectus should be read as accompanying forward-looking statements included
under "Business" and elsewhere herein. The risks described in the statements set
forth below could cause the Company's results to differ materially from those
expressed in or indicated by such forward-looking statements.
History of Operating Losses. The Company's operations commenced in
September 1997 with its purchase of a 60% interest in Tax Depot, an established
provider of tax preparation services in Canada. In addition, the Company
commenced tax preparation operations in Columbus, Ohio in 1998. As a recently
formed entity, the Company has minimal operating history upon which an
evaluation of its future prospects can be made. For its most recent fiscal year
ended April 30, 1998, although the Company did show a profit, its operating
expenses exceeded its revenues. A significant portion of the Company's income
was earned from gains on its investment portfolio. See "Consolidated Financial
Statements." There can be no guarantee that the Company will show a profit from
operations or from further appreciation of its investments in future years. The
Company's future viability, profitability and growth will depend upon its
ability to successfully operate and expand its Canadian operations and its
ability to commercialize its tax services through establishment of Company-owned
and franchised offices in the United States. The Company's prospects in the U.S.
must be considered in light of the risks, expenses and difficulties frequently
encountered in the establishment and development of a new business, particularly
in the tax return preparation industry which is characterized by intense
competition, two dominant national tax return preparation firms and ease of
market entry. There can be no assurance that any of the Company's efforts will
prove successful or that it will not incur operating losses in future years.
Lack of Public Market for Shares. No active market for the Shares will
exist following the closing of this offering, nor does the Company have any
immediate plans to list the Shares on an exchange. Further, information
regarding the Company and the Shares may not be readily available. Investors
should be prepared to hold their investment in the Shares indefinitely. See
"Market for Common Equity and Related Stockholder Matters."
Minimum Offering. The consummation of this offering is conditioned upon a
minimum of 40,000 Shares at a price of $12.50 per share (the "Minimum Offering
Amount") being sold within 30 days after the date of effectiveness of the
registration statement for this offering (the "Minimum Offering Date" ) and
together the "Minimum Conditions"). In the event that the Minimum Conditions are
not met, the Company is required to return the proceeds of any Shares which were
sold in this offering up to the Minimum Offering Date, with interest, and this
offering will be terminated. See "Plan of Distribution Repayment if Minimum
Conditions Not Met." If, however, the Minimum Conditions are satisfied and the
Company proceeds with this offering, there is a risk that the Company may
receive substantially less than the $3,875,000 sought in this offering. To the
extent that less than the maximum number of Shares is sold, the Company is
subject to increased risk that it will have insufficient funds to open all of
the offices and/or acquire all of the tax service practices that it anticipates
it will fund with the maximum proceeds of this offering, and to operate for the
3-year period that the Company anticipates it can operate if the maximum number
of Shares is sold. See "Risk Factors - Need for Additional Financing."
Need for Additional Financing. Although the Company expects that the net
proceeds of this offering will be sufficient to fund the Company's U.S.
operations for at least three years following its completion, this estimate is
based upon certain assumptions regarding the number of the Company's tax
preparation offices in both Canada and the United States operating during such
period, the cost of establishing and purchasing tax preparation offices,
operating expenses, revenues from tax return preparation in Canada and the
United States and similar matters, including the assumption that the maximum
number of Shares offered hereby is sold. If only the minimum number of Shares is
sold, the net proceeds together with all other sources of financing currently
available will still be able to sustain the Company's plans for three years but
at a much slower rate of growth since fewer and smaller offices would be opened.
See "Use of Proceeds." There can be no assurance that such assumptions will be
realized or that unforeseen costs will not be incurred. See "Business-Growth
Strategy." In addition, the Company will likely need additional capital in order
to expand its U.S. operations beyond the purchase of the existing practices and
the establishment of the 30 Company-owned offices that the Company plans to fund
through this offering. It is unlikely that cash flow from operations will be
sufficient to support material growth during the next several years of
operations. There can be no assurance that the Company will be able to obtain
capital as and when needed (either for operational purposes or to fund
expansion) upon terms acceptable to it.
Existence of Restrictive Covenants and Potential for Litigation if
Violated. Mr. Hewitt, the Company's Chairman, Chief Executive Officer and
President, and Mr. Seal, the Company's director, Vice President of Operations
and Treasurer, are subject to covenants not to compete with their former
employer, Jackson Hewitt Inc. ("Jackson Hewitt"), a national tax return
preparation service company, now owned by Cendant Corp., in any city, town or
county within the geographical limits of the United States, its territories and
possessions in which Jackson Hewitt or its franchises, "business partners" or
other business entities bearing its tradename were conducting business as of
December 9, 1996, or in which Jackson Hewitt had made plans or preparations, of
which Mr. Hewitt or Mr. Seal were aware, to locate a franchise or entity prior
to such date. The restrictive covenants expire on April 30, 1999. As of April
30, 1997, Jackson Hewitt had 1,296 franchised offices and 76 company-owned
offices in 41 states. The covenants pertaining to Messrs. Hewitt and Seal
effectively prohibit the Company from establishing offices in most large urban
or suburban areas, and thus from creating a national presence in the United
States, prior to the 2000 tax season. Accordingly, such covenants may adversely
affect the Company's growth, revenues and profitability at least until their
expiration.
In addition, Mr. Hewitt (and, derivatively, the Company) is subject to
covenants prohibiting his use of "confidential and proprietary information"
about or relating to Jackson Hewitt or its customers. As used in the covenant,
the term "confidential and proprietary information" is broadly defined to cover
production processes, marketing techniques, financial information, the "Hewtax"
interactive software package (the tax preparation computer software developed by
Mr. Hewitt and used by Jackson Hewitt), "operating principles," promotional
plans or strategies, sales methods and similar matters. In particular, there can
be no assurance that any proprietary computer software developed by the Company
would not be challenged by Jackson Hewitt as being derivative of the "Hewtax"
software and thus violative of the covenant. Mr. Seal and Martha O'Gorman,
Director of Marketing, are similarly prohibited from using confidential
information or trade secrets of Jackson Hewitt related to its operations and tax
preparation business. The confidentiality covenants of Messrs. Hewitt and Seal
and Ms. O'Gorman are, by their terms, perpetual.
Messrs. Hewitt and Seal and Ms. O'Gorman are also subject to
"non-disparagement covenants" which prohibit them from doing or saying anything
which might reasonably be expected to materially harm the business interests of
Jackson Hewitt. The non-disparagement covenant of Ms. O'Gorman expires on
November 20, 1998 and those of Messrs. Hewitt and Seal expire on April 30, 1999.
Although the Company believes that its proposed operations (which include
creating all of its own training, sales, operating and marketing materials and
using commercial or in-house developed software), and the activities of its
officers will not violate these covenants, in view of the broad nature of the
definitions of "confidential and proprietary information" and "trade secrets"
and the breadth of the non-disparagement covenants, there can be no assurance
that Jackson Hewitt will not seek to block one or more aspects of the Company's
operations (whether by seeking injunctive relief or otherwise) as contravening
these covenants. To date, Jackson Hewitt has commenced one suit against Mr.
Hewitt and Mr. Seal, as individuals, alleging breach of their restrictive
covenants and seeking injunctive relief suspending Messrs. Hewitt's and Seal's
activities in connection with the Company's Columbus, Ohio operations. See
"Legal Proceedings." Jackson Hewitt obtained a voluntary dismissal of the suit
shortly after its initial filing, but the dismissal was without prejudice and
therefore Jackson Hewitt may file another suit asserting the same or similar
claims. Although the Company was not a party to this suit and did not
participate in Messrs. Hewitt's and Seal's defense, if the Company is named a
party to any future legal actions brought by Jackson Hewitt alleging breach, in
connection with the Company's business, of the restrictive covenants binding on
Messrs. Hewitt and Seal and Ms. O'Gorman, the Company will rigorously defend
itself. It is likely to be very costly for the Company to defend such future
actions. There can be no assurance that even if the Company were to mount such
defense, it would prevail on the merits. The granting of an injunction against
the Company or any of Mr. Hewitt, Mr. Seal or Ms. O'Gorman could materially
adversely affect the Company's financial condition and operations and, in
certain instances, require the Company to seek alternatives to its then-current
business practices or terminate operations. Jackson Hewitt could also seek and,
if successful, be awarded damages which, depending upon the nature of the claim,
a court's view of the enforceability of the covenants and the facts relating to
such damages, may be substantial. Accordingly, if Jackson Hewitt were to make a
claim, succeed on the merits and be awarded damages, it is possible that
purchasers of the Class A Common Stock could lose some portion or all of their
investment in the Company.
Limited Potential for Revenue From U.S. Operations Until Expiration of
Restrictive Covenants. The Company is effectively prohibited from establishing
offices in most large urban and suburban areas in the United States prior to the
year 2000 tax season due to the restrictive covenants which do not expire until
April 30, 1999. Until such time as the Company can establish offices in these
areas, it will be largely dependent on its Canadian operations to generate
revenues for the immediate future.
Offering is Not Underwritten. The Shares are being offered by the Company
through John K. Seal, Vice President and a director. The offering is not being
conducted through an underwriter and the Shares are not being sold by a
broker-dealer registered with the Securities and Exchange Commission.
Lack of Copyright Registration of Software Program. The Company does not
expect that it will file for copyright registration for any software programs it
may develop. The Company's competitors could conceivably recreate, or "reverse
engineer," its tax preparation software and begin offering similar computerized
and standardized services. If this were to occur, the Company may not have any
practical legal recourse and could find that, in effect, it would be forced to
compete with its own system. However, because the Company's tax preparation
software will require updating at least annually to reflect changes in the tax
law, the Company believes that it would be difficult for any unauthorized party
to misappropriate the proprietary aspects of its software programs in a timely
and profitable manner. See "Business-Services Offered", -"Tax Preparation."
Importance of Refund Anticipation Loan Program and Electronic Filing. The
Company believes that its refund anticipation loan program will be an important
source of revenue in both the United States and Canada since members of its
targeted market typically desire tax refunds as quickly as possible. The success
of the program will depend, in part, on the continued availability of third
party financing for the loans. See "Business Services Offered - Refund
Anticipation Loan Program." To the extent that the Company does not recover the
full amount of a refund anticipation loan from the proceeds of the refund, the
Company's revenues may be adversely affected. While efforts will be made to
collect the shortfall from the customer, there can be no assurance that any or
all of the amount would be recovered. Additionally, an element critical to the
Company's operating strategy, and to the refund anticipation loan program in
particular, is the continuation of the IRS's and Revenue Canada's electronic
filing programs. Although the IRS has established a 98% electronic filing target
for the year 2000, the Company is aware of concerns expressed by the IRS and
certain members of Congress regarding the filing of fraudulent electronic
returns. The IRS has indicated that it has more difficulty catching fraudulent
refund claims from electronic returns than from traditional paper returns. Any
decision by either the IRS or Revenue Canada to suspend, terminate or
substantially modify its respective electronic return filing program could
materially adversely affect the Company's tax return preparation business, given
the Company's expectation that a large percentage of tax returns prepared by the
Company will be filed electronically.
Government Regulation. The Company's future results of operations will
depend in part on its ability to comply with Canadian, provincial, United States
and state regulations affecting tax return preparers. Currently, there are no
onerous Canadian, provincial, United States and or state regulations affecting
the Company's operations (see "Business-Regulation"). However, the Company is
aware of at least three states that have passed laws relating to the
implementation of refund anticipation loan programs, and that others may be
considering similar legislation. The Company has no current plans to enter
markets where these laws exist but if at a future time, it does enter any such
markets, it will assure that the refund anticipation loan program is in full
compliance with those laws. In addition, the Company expects that many of its
tax return preparers will be hired after they successfully complete a tax school
offered by the Company to the general public. Some states and provinces have
implemented, or are considering implementing, laws or regulations governing
proprietary schools. The Company does not believe that existing laws and
government regulations will materially affect the Company's operations; however,
the Company cannot predict whether a change will occur in such laws and
regulations, and if so, the economic or business effect of such change. To the
extent that any legislation has the effect of limiting the profitability of the
Company's refund anticipation loan program, or requires the Company to alter its
proposed operations to comply with proprietary school requirements, the
Company's operations could be adversely affected.
Franchise Operations, United States Growth Limitation. The Company will
not be establishing a significant amount of United States franchises before the
year 2000 tax season; it expects to establish no more than 10 franchises for the
1999 tax season. Although the Company will begin the majority of its United
States operations with Company-owned tax preparation offices, the Company
anticipates that it will seek future growth primarily through establishing
franchise operations in the United States and expanding Tax Depot's franchise
operations in Canada. See "Business - Franchise Operations", -"General." There
can be no assurance that the Company will be able to sell United States
franchises or additional Canadian franchises on terms acceptable to it, or at
all, or that franchisees will be able to run franchised offices profitably. The
Company will seek to establish extensive training programs and quality-control
procedures with respect to its franchisees; however, there can be no assurance
that the programs and procedures will be effective in enabling franchisees to
run successful tax preparation businesses. In addition, failure by a franchisee
to provide service at acceptable levels may result in adverse publicity which
can materially adversely affect the Company's ability to compete in the
particular market in which the franchisee is located.
Liability for Franchisee Actions and Obligations. Both the Company and Tax
Depot will grant their franchisees a limited license to use their registered
service marks and, accordingly, there is risk that one or more of the
franchisees may be identified as being controlled by the Company or Tax Depot.
See "Business - General." In the event that a franchisee is not adequately
identified as a franchisee, the Company and/or Tax Depot could be held
vicariously liable for the debts and obligations of the franchisee so
misidentified.
Regulation of Franchise Operations. During the 1997 fiscal year, franchise
royalties accounted for 90% of Tax Depot's gross revenues. The profitability of
the Company's future operations will depend in large part on its ability to
comply with federal and state franchise regulations and Tax Depot's continued
ability to comply with Canadian and provincial franchise regulations. While
management currently believes that the Company and Tax Depot will be able to
comply with all applicable franchise regulations, there can be no assurance that
such regulations will not change and, if so, that any changes will not
materially adversely affect the Company's business. See "Business - Franchise
Operations -Regulation of Franchise Operations."
Need for a Large Pool of Low Cost Seasonal Labor. In conducting their
business operations, the Company, Tax Depot and their franchisees will depend,
in part, on the availability of employees willing to work for little more than
the minimum hourly wage, with minimal benefits, for periods of less than a year.
See "Business - Tax Return Preparers." The Company's success in managing its
business and any expansion of it will depend upon the ability of it and its
franchisees to hire, train and supervise additional personnel, and to deal with
turnover rates for lower paid employees, which may be substantial. Moreover, if
the supply of this labor pool is reduced in the future for reasons within or
outside of the Company's control or if the Company is required to provide its
employees more extensive and costly benefits, either as a result of competition
or governmental regulation, the expenses associated with the Company's
operations could be substantially increased without the Company receiving
offsetting increases in revenues.
Inability of Stockholders to Vote on Tax Practice Acquisitions. The
Company will have the ability, pursuant to the affirmative vote of its Board of
Directors, to acquire new or existing tax practices with the proceeds of this
offering. The Board of Directors will use its business judgment in approving
such acquisitions which are currently unspecified and is not required to submit
each prospective acquisition to a vote of the stockholders. There is a risk that
acquisitions approved by the Company's Board of Directors will not be disclosed
to the stockholders until after consummation of the acquisitions and that such
decision would not have been acceptable to the stockholders.
Importance of Key Employees. The Company's future success will depend in
material part upon the continued services of the Company's senior management,
particularly Mr. Hewitt as well as upon its ability to attract and retain
capable middle management (such as regional and district directors for
Company-owned offices and consultants for franchised offices, as well as
training directors, tax advisors and computer personnel) with the specific
executive skills necessary to assist the Company and its franchisees. The
Company currently employs one district director in the United States and one
district director in Canada. The Company will face competition for such
personnel from numerous other entities, including competing tax return
preparation firms, most of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to attract and
retain personnel, and the inability to do so could have a material adverse
effect on the Company. The unexpected loss of the services of any of these
management personnel could have a material adverse effect upon the Company. The
Company currently maintains for its benefit a $1,000,000 key man life insurance
policy on the life of Mr. Hewitt but does not have an employment contract with
Mr. Hewitt or any other member of senior management. See "Management."
Business is Highly Seasonal. The tax preparation business is highly
seasonal, with the vast bulk of revenues being earned in the January 1 through
April 15 "tax season" in the United States and the January 1 through April 30
"tax season" in Canada in each year. The Company anticipates that 80% or more of
its gross revenues for a fiscal year will be generated in the tax season for
that year. Both the Company and Tax Depot are is on a May 1 to April 30 fiscal
year and may operate at a loss during the first eight months of each fiscal year
.(Tax Depot switched from a calendar fiscal year on December 31, 1997). There
can be no assurance that the Company's activities during the "off-season" will
not cause the cash resources of the Company to be strained on a regular basis.
If the Company were unable to obtain adequate sources of capital to fund its
operations during the "off-season," it would be forced to curtail any existing
expansions plans, cut back on its work force or take other steps to address its
cash flow needs. Moreover, in view of the very compressed time period in which
the Company's revenues arise in each year, it may have little or no time to
respond to unforeseen changes in competitive conditions, markets, pricing, new
product offerings by its competitors and similar matters which could materially
adversely affect the Company's competitive position during the relevant tax
season.
Competition. The tax return preparation industry is characterized by
intense competition among numerous tax service providers, accounting firms and
others. Most of these competitors are more established than the Company, with
substantially greater marketing, financial, personnel and other resources than
are currently available to the Company. See "Business -Fees." In the low to
mid-income taxpayer market targeted by the Company, competition is dominated in
the United States by H&R Block, Inc. ("H&R Block") and Jackson Hewitt, both of
which are large, well established national service providers. H&R Block also
operates and is a major competitor in Canada; Jackson Hewitt currently has no
Canadian operations. Additionally, many taxpayers in the Company's target market
prepare their own returns. The Company will seek to compete by providing prompt
service (generally, the Company anticipates that a customer's return can be
prepared in approximately one hour, assuming the customer has assembled all
appropriate records) at a reasonable price that is competitive in each
geographic market (the Company estimates that its average charge per return for
the 1998 tax season was $90 in the United States and C$60 in Canada). There are
few significant barriers to entry into the industry, or to the adoption by
competitors of some or all of the Company's marketing or operational strategies.
Changes in Tax Laws. The tax laws of Canada and the United States have
undergone a period of rapid and substantial change, and the Company anticipates
that this will continue for the foreseeable future. Although the Company
believes that the complexity and rapidity of the changes will provide it with an
important marketing tool, it is anticipated that the Company will incur
significant yearly costs in maintaining the currency of its tax return
preparation software and tax preparer materials. In addition, there have been
numerous proposals for simplification of United States tax laws, including "flat
tax" and "modified flat tax" proposals. Adoption of any such proposals could
reduce demand for the Company's services in the United States; adoption of a
strict flat tax could reduce demand substantially.
Costs of Canadian Operations. The costs of opening additional Tax Depot
company offices and supporting franchises in Canada are not expected to be
materially less than the costs of opening or supporting comparable United States
offices. However, the Company anticipates that the average fee per return will
be approximately 33% less in Canada due to the less complex structure of
Canadian tax law. Accordingly, to achieve the same level of revenue per office
as a comparable United States office, a Canadian office will be required to
process more returns than a U.S. office. In addition, because the fees Tax Depot
will charge in Canada will be denominated in Canadian dollars there is risk that
fluctuations in the value of the Canadian dollar relative to the United States
dollar will result in losses from foreign currency exchanges. Canadian sales and
operations may also be affected by factors beyond the Company's control,
including imposition of governmental licensing or other controls or
restrictions, and changes in Canadian tax law.
Control by Principal Stockholder. The Company's common stock is divided
into two classes (see "Description of Capital Stock"). Purchasers in this
offering will own Class A Common Stock; all the outstanding Class B Common Stock
is owned by Mr. Hewitt, the President and Chief Executive Officer of the
Company. The Company's certificate of incorporation provides that the Class B
stockholders have the right to elect one more director than may be elected by
the Class A stockholders. As a consequence, Mr. Hewitt will have effective
control of the Board of Directors irrespective of how many shares of Class A
Common Stock are outstanding.
No Cash Dividends. Since its inception, the Company has not paid any cash
dividends on the Class A Common Stock or Class B Common Stock. The Company
intends to retain future earnings, if any, to provide funds for the operation of
its business and, accordingly, does not anticipate paying any cash dividends in
the reasonably foreseeable future. The payment of future dividends is within the
discretion of the Board of Directors and will depend upon the Company's future
earnings, if any, its capital requirements, financial condition and other
relevant factors.
Management Discretion in Allocating Proceeds. The Company expects to use
the proceeds of the offering to establish approximately 30 new tax preparation
offices at a cost of $50,000 each, purchase 18 existing tax practices at
approximately $100,000 each and develop new software with approximately
$475,000. See "Use of Proceeds." The Company's management, however, has the
flexibility to reallocate some or all of the proceeds among these uses as
business conditions necessitate and also to allocate some or all of the proceeds
to general corporate purposes. Accordingly, there is a risk that the proceeds
will not be used exactly as described in the Prospectus.
No Independent Directors. The Company does not currently have any
independent (non-employee) directors on its Board. It also does not have an
Audit Committee or a Compensation Committee. All decisions regarding the
business of the Company and its employee and officer compensation are currently
made by its officers. The Company expects to appoint two independent directors
before May 1999. It also intends to establish an Audit Committee and
Compensation Committee, the majority of whose members will be independent
directors.
Insurance Coverage. The Company maintains $2,000,000 of general liability
insurance. The Company does not carry insurance coverage for "errors and
omissions" to cover potential IRS imposed penalties for errors on prepared tax
returns. Historically, the cost of these penalties has not been significant to
the Company, however, there is a risk that in the future a large penalty could
be imposed that would have to be borne by the Company.
Arbitrary Determination of Offering Price. The offering price of the
Shares has been determined arbitrarily by the Company based upon the Company's
capital needs and does not necessarily bear any relationship to the Company's
assets, book value or financial condition, or to any other recognized criterion
of value.
Loss of Goodwill. Tax Depot has been operating under the "U&R Tax Depot"
name since May 1994. See "Business General." By early 1999, the Company expects
to change the name of the Tax Depot owned and franchised offices to "Liberty Tax
Service." Tax Depot may suffer a loss of goodwill associated with the name if
former and potential new customers are not aware of the name change.
USE OF PROCEEDS
Assuming this offering is fully sold, the net proceeds, after deducting
estimated offering expenses of $100,000, will be approximately $3,775,000. The
Company expects to use the net proceeds as follows1:
Aggregate
Use Cost Percentage
Establishment of new tax preparation
offices (30 offices at $50,000 each)(2): $1,500,000 40%
Purchase of existing tax practices
(18 practices at $100,000 each)(3): $1,800,000 48%
Software development: 475,000 12%
========== =====
$3,775,000 100%
========== =====
In the event that only the Minimum Offering Amount is sold, the net
proceeds, after deducting estimated offering expenses of $100,000, will be
approximately $400,000. The Company expects to use the net proceeds
as follows:
Purchase of existing tax practices
(8 practices at $50,000 each (4).): $400,000 100%
The proceeds of the sale of additional Shares (above the Minimum Offering
Amount) will be applied to purchasing additional tax practices, then to software
development and finally to the establishment of new tax preparation offices.
- ------------------
1 The Company also expects to open about 100 new franchised locations (90%
in Canada and 10% in the United States), however, none of the proceeds will be
allocated to the costs of these franchises.
2 Most of these new offices are expected to be opened in Canada, however, a
small amount may be opened in the United States. The Company has not yet entered
into any agreements for these new offices.
3 Existing tax practices are expected to be opened in both the Canadian and
United States markets. The Company has not yet entered into any agreements to
purchase these practices.
4 The Company will purchase less expensive practices if only the minimum
offering proceeds are received.
While the foregoing represents the Company's best estimate of its expected
use of net proceeds, the amounts actually expended for the purposes set forth
above may vary significantly depending upon numerous factors, including the
actual costs incurred in purchasing existing tax practices, leasing and
furnishing office space, and personnel costs. The Company reserves the right to
reallocate proceeds among the foregoing uses and for general corporate purposes.
DILUTION
The offering price per Share is more than the price paid per share for
the Company's securities in the past. Thus, purchasers in the offering will
experience immediate dilution of the value of their shares in the amount of
$4.65 per share.
In connection with the incorporation of the Company, Mr. Hewitt purchased
1,000 shares of Class B Common Stock for $.10 per share. In December 1996, Mr.
Hewitt capitalized the Company by contributing to it certain securities with an
aggregate market price at the time of contribution of $176,000. In return
therefor, Mr. Hewitt was issued 44,000 shares of Class B Common Stock resulting
in a price per share of $4.00. In July 1997, the Company sold 200,000 shares of
Class A Common Stock to a select group of investors for a price of $10.00 per
share. On January 10, 1997, the Company declared a stock dividend of one share
of Class A Common Stock or Class B Common Stock for each such share outstanding,
resulting in an aggregate of 400,000 shares of Class A Common Stock and 90,000
shares of Class B Common Stock outstanding as of the date of this
Prospectus.
At April 30, 1998, the net tangible book value of the Company's Class A
Common Stock combined with the Class B Common Stock (which is convertible into
Class A Common Stock) was approximately $5.12 per share. Net tangible book value
represents the amount of the Company's shareholders' equity (net tangible assets
less liabilities; $2,509,085) divided by the number of shares outstanding;
490,000.
Net book value dilution per share represents the difference between the
amount per share paid by purchasers of the Class A Common Stock in the offering,
$12.50 and the pro forma net book value per share of the Common Stock
immediately after completion of the offering. After giving effect to the sale by
the Company of 310,000 shares of Class A Common Stock in the offering (assuming
that the maximum number of shares offered is sold) and the application of the
estimated net proceeds therefrom, the pro forma net book value of the Company
would have been 6,284,085 or $7.85 per share. This represents an immediate
increase in net book value of $2.73 per share to the existing stockholders and
an immediate dilution in net book value of $4.65 per share to purchasers of the
Class A Common Stock in the offering, as illustrated in the following table.
Public offering price per share $12.50
Net book value per share as of April 30, 1998 $5.12
Increase per share attributable to new investors $2.73
Pro forma net book value per share after the offering $7.85
Net book value dilution per share to new investors $4.65
The following table sets forth the difference between the existing
stockholders and the purchasers of shares in the offering with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid:
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
Existing
Stockholders 490,000 61.25% $2,176,100 36% $ 4.44
New Investors 310,000 38.75% $3,875,000 64% $12.50
------- ------- ---------- ----
Total 800,000 100.00% $6,051,100 100%
PLAN OF DISTRIBUTION
The Shares are being offered by the Company, on a best efforts basis,
through John K. Seal, a director, Vice President and Treasurer of the Company.
Mr. Seal will not receive any separate compensation for his efforts to sell the
Shares.
Minimum Offering Amount; Escrow Arrangements. The Minimum Offering Amount
is 40,000 Shares at $12.50 per Share and the Minimum Offering Date is 30 days
after the date of effectiveness of the Registration Statement. The Company has
entered into an agreement with First Union National Bank (the "Escrow Agent"), a
national bank which is not affiliated with the Company, Tax Depot, or any of the
officers or directors of the Company or Tax Depot to act as Escrow Agent. The
Escrow Agent will set up an interest bearing escrow account (the "Escrow
Account") into which the proceeds of any Shares sold through the Minimum
Offering Date will be placed.
Officers and directors of the Company may purchase Shares as part of this
offering but are not obligated to do so. Any such purchases will be on terms
identical to those applicable to other investors. The Company has been advised
that officers and directors currently intend to purchase an aggregate of
22,900 Shares in this offering (15,000 by John Hewitt, 5,000 by John Seal, 1,400
by Martha O'Gorman and 1,500 by Donna Halligan). The purchases of Shares by
officers and directors may be used to meet the Minimum Offering Amount.
Repayment if Minimum Conditions Not Met. In the event that the Minimum
Conditions are not met, either by receipt of proceeds from the sale of the
Minimum Offering Amount or by subscription commitments therefor, the Escrow
Agent will return the subscription proceeds from the sale of the Shares to
the investors with a pro rata share of earned interest. Thereafter, no more
Shares will be offered for sale and any outstanding subscriptions will become
null and void.
Satisfaction of Minimum Conditions. The Escrow Agent will determine that
the Minimum Conditions are met if, on the Minimum Offering Date, the funds in
the Escrow Account are equal to the Minimum Offering Amount or the Escrow Agent
has firm subscriptions for Shares equal to the Minimum Offering Amount or a
combination thereof. Once the Minimum Conditions have been met, the Escrow Agent
will release the funds in the Escrow Account to the Company and close the
account. Proceeds from subsequent sales of Shares will not be escrowed.
LEGAL PROCEEDINGS
To date, officers of the Company have been involved in one legal
proceeding which was voluntarily dismissed by the plaintiff without prejudice
and Tax Depot was a party to one action that was recently dismissed and is a
party to one pending action which arose in the ordinary course of its business.
Management does not believe that such proceeding will, individually or in the
aggregate, have a material adverse effect on the financial condition or
operations of the Company.
In January 1998, Jackson Hewitt filed a complaint in Virginia Beach
Circuit Court against Messrs. Hewitt and Seal in their individual capacities.
The complaint alleged breach of their respective covenants not to compete (see
"Risk Factors - Existence of Restrictive Covenants and Potential for Litigation
if Violated") in connection with the operation of the Company's tax preparation
offices in Columbus, Ohio. The complaint also alleged that each of Mr. Hewitt
and Mr. Seal had tortiously interfered with Jackson Hewitt's contract with the
other man. Jackson Hewitt sought a declaratory judgment and a preliminary
injunction requiring Messrs. Hewitt and Seal to suspend their Columbus, Ohio
operations. Jackson Hewitt voluntarily dismissed both suits, without prejudice,
in early February 1998. Although the Company was not a party to the suit and did
not participate in Messrs. Hewitt's and Seal's defense, the Company intends to
vigorously defend itself if named as a party in any future legal actions that
Jackson Hewitt may bring alleging breach, in connection with the Company's
business, of the restrictive covenants binding Mr. Hewitt, Mr. Seal and Ms.
O'Gorman.
In February 1995, a predecessor to Tax Depot filed a trade mark
application with the Registrar of Trade Marks in Ottawa, Canada for the "Tax
Depot" mark. In July 1996, the registration was opposed by Ms. Heidi Gordash,
who alleged prior use. On July 17, 1998, the matter was settled. Pursuant to
such settlement, Tax Depot agreed to change its trade name to Liberty Tax
Service by May 1999 and Ms. Gordash withdrew her suit with prejudice.
Finally, a tax rebate discounting agent for Tax Depot, who acted solely as
an agent for Tax Depot in financing tax rebate discounts and not as an employee
or franchisee, has been sued by a group of clients for whom she is alleged to
have prepared inaccurate and/or fraudulent returns in order to increase their
rebates. Both H&R Block and Tax Depot were also named as parties to this suit.
Tax Depot believes it has no liability for the agent's actions and intends to
vigorously defend this suit.
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 and duly qualified. See "Description of
Capital Stock - General" for a description of the rights of holders of each
class of Common Stock with respect to the election of directors. Directors
receive no compensation for serving as directors. All officers serve at the
discretion of the Board of Directors.
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 Own Percent of Class
---------------------- --------------------
Beneficial Owner Class A Class B Class A Class B
- ---------------- ------- ------- ------- -------
Directors and Executive
Officers: (1)
John T. Hewitt 141,150(2) 90,000 35% 100%
John K. Seal 13,162(3) 0 4% 0
Martha O'Gorman 4,000(4) 0 1% 0
Donna Halligan 7,000(5) 0 2% 0
Kathleen Curry 4,000(6) 0 1% 0
Karen Robinson 4,000(7) 0 1% 0
All Directors and Executive
Officers as a group
(six persons) 173,312(8) 90,000 41% 100%
Other owners of 5% or
more of outstanding Shares:
Scott Lake Holdings Ltd.(9) 100,000 0 25% 0
- --------------
(1) The address for each director and executive officer is 2610 Potters Road,
Virginia Beach, Virginia 23452.
(2) includes 5,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(3) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(4) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(5) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(6) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(7) includes 4,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(8) includes 25,000 shares of Class A Common Stock issuable pursuant to
outstanding options.
(9) The address for Scott Lake Holdings, Ltd. is 280-6815 8th St. N.E.,
Calgory Alberta T2P7B7 and the beneficial owner is Gary Ibbotson, a
director of Tax Depot.
DESCRIPTION OF CAPITAL STOCK
General. The Company is authorized to issue 1,000,000 shares of capital
stock, consisting of 800,000 shares of Class A Common Stock, 100,000 shares of
Class B Common Stock and 100,000 shares of Preferred Stock, all par value $1.00
per share. As of the date of this Prospectus, there were 400,000 shares of Class
A Common Stock , and 90,000 shares of Class B Common Stock outstanding. The
Preferred Stock has not yet been designated and so no shares are outstanding.
Holders of both Class A and Class B Common Stock are entitled to dividends
when, as and if declared by the Board of Directors and in such amounts as the
Board of Directors may deem advisable. See "Risk Factors - No Cash Dividends."
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of Common Stock are entitled, after
payment or provision for payment of the debts or other liabilities of the
Company, and subject to the prior rights of holders of any Preferred Stock which
may then be outstanding (none is currently designated under the Company's
certificate of incorporation), to share ratably in the remaining assets of the
Company. Neither class of Common Stock possesses preemptive rights.
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote at a meeting of stockholders. However,
with respect to the election of directors, holders of each class of Common
Stock, voting as a class, are entitled to elect directors on a pro rata basis in
proportion to the number of shares outstanding in each class, except that
holders of the Class A Common Stock are entitled to elect one less director than
the number of directors elected by holders of the Class B Common Stock. Voting
in each class is on a non-cumulative basis.
A holder of the Class B Common Stock may, at the holder's option, elect to
convert the Class B Common Stock into an equal number of fully paid and
non-assessable shares of Class A Common Stock. The right may be exercised with
respect to any portion or all of a holder's shares and at any time.
Preferred Stock may be issued in the future. If the Company's Board of
Directors does designate a class of preferred stock for issuance, it will be
offered for sale to promoters on the same terms as to existing stockholders.
Alternatively, such issuance will be approved by a majority of the Company's
independent directors who do not have an interest in the transaction and who
have access, at the Company's expense, to legal counsel.
For one year following the date of effectiveness of the offering, the
Company will not issue or reserve for issuance, more than 83,250 stock options.
There is no public market for the Company's securities and it is not
anticipated that a market will develop for the Shares following this offering.
Anti-Takeover Provisions of Delaware Law. As a Delaware corporation, the
Company is subject to certain anti-takeover provisions of the Delaware General
Corporation Law (the "Delaware Law"). Under the business combination provisions
of Section 203 of the Delaware Law ("Section 203"), a Delaware corporation may
not engage in any business combination with any interested stockholder for a
period of three years following the date such stockholder became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, or (ii) upon
completion of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, (a) shares owned by persons who are directors and also officers and
(b) employee stock plans, in certain instances), or (iii) on or after such date
the business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders by at least 66% of the outstanding
voting stock that is not owned by the interested stockholder. Section 203
defines an interested stockholder to be any person who (i) owns, directly or
indirectly, 15% or more of the outstanding voting stock of the corporation or
(ii) is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately before the date on which it is sought to be
determined whether such person (and the affiliates and the associates of such
person) is an interested stockholder. Section 203 defines business combinations
to include certain mergers, consolidations, asset sales, transfers and other
transactions resulting in a financial benefit to the interested stockholder.
The restrictions imposed by Section 203 do not apply to a corporation if
(i) the corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 or (ii) the corporation, by
the action of stockholders holding a majority of outstanding stock, adopts an
amendment to its certificate of incorporation or by-laws expressly electing not
to be governed by Section 203 (such amendment will not be effective until 12
months after adoption and does not apply to any business combination between the
corporation and any person who became an interested stockholder of the
corporation on or before such adoption). The Company has not elected out of
Section 203. Section 203 could make it more difficult for a third party to gain
control of the Company, and have a depressive effect on the price obtainable for
the Class A Common Stock.
EXPERTS
The financial statements of the Company as of April 30, 1998 and April 30,
1997 included in this Prospectus or in this Registration Statement of which this
Prospectus forms a part, have been audited by Hamilton Dwyer & Company, P.C.,
independent certified public accountants whose report thereon appears herein and
elsewhere in the Registration Statement. Such financial statements are included
in reliance upon the reports of Hamilton Dwyer & Company, P.C., given upon the
authority of such firm as an expert on accounting and auditing.
The financial statements of Tax Depot for the fiscal year ended 1996 and
1997 included in this Prospectus or in this Registration Statement of which this
Prospectus forms a part, have been audited by BDO Dunwoody, independent
chartered public accountants whose report thereon appears herein and elsewhere
in the Registration Statement. Such financial statements are included in
reliance upon the reports of BDO Dunwoody, given upon the authority of such firm
as experts on accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the Delaware Law, the Company's
certificate of incorporation provides that directors of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware Law, relating
to prohibited dividends or distributions or the repurchase or redemption of
stock, or (iv) for any transaction in which the director derives an improper
personal benefit. In addition, the Company's bylaws provide for indemnification
of the Company's officers and directors to the fullest extent permitted under
Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions or otherwise, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
The Company maintains directors' and officers' liability insurance against
any actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including such as fraudulent, dishonest or criminal acts or self-dealing.
BUSINESS
General
The Company is a Delaware corporation formed in October 1996 to provide
retail income tax return preparation services for taxpayers primarily in the
lower- to middle-income tax brackets. The Company intends to provide its
services through both Company-owned and franchised offices in selected
locations. The Company seeks competitive advantage in its markets by (i)
providing prompt tax return preparation at a reasonable price, (ii) providing
electronic filing services, (iii) providing ancillary services, such as audit
assistance, tax return checking and taxation seminars, and (iv) offering a
refund anticipation loan program under which the Company will arrange, for a
fee, loans to customers based upon the size of the customers' expected tax
refunds.
The Company owns a majority interest in Tax Depot, which has been
providing tax preparation services in Canada since 1972. During the 1998 tax
season, there were 207 Tax Depot offices, 13 of which were owned by Tax Depot
and the remainder of which were owned by Tax Depot franchisees. In addition, the
Company operated five tax preparation offices in Columbus, Ohio. All Tax Depot
offices currently operate under the "U&R Tax Depot" name, while the Company's
Columbus, Ohio offices operate under the "Liberty Tax Service" name. The Company
expects that Tax Depot Tax Depot and its franchisees will also operate their tax
return preparation offices under this service mark by early 1999 pursuant to a
license agreement that Tax Depot will enter into with the Company.
As of April 30, 1998, the Company had 32 employees and Tax Depot had 52
employees. Upon the conclusion of the tax season, as of May 15, 1998, the
Company had 21 employees and Tax Depot had 15 employees.
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. See "Risk Factors -
Importance of Refund Anticipation Loan Program and Electronic Filing." The
Company will also, for a fee, electronically file returns prepared by non-client
taxpayers or other tax preparers.
Refund Anticipation Loan Program. Because the Company believes that the
speed of obtaining a refund, or cash in anticipation of a refund, will be
important to the Company's targeted market, and in order to compete with other
tax return preparation firms, the Company will offer a refund anticipation loan
service. A refund anticipation loan is a loan made to a taxpayer, secured by the
anticipated tax refund payment, and with full recourse to the taxpayer. Refund
loans will either be provided directly by the Company using line of credit
financing or by a third party lender as arranged by the Company. These loans
will enable the Company's customers to receive their refunds within 24 hours of
the time the return is filed with the IRS or Revenue Canada. The Company
anticipates that as many as 25% of the Company's customers will utilize this
service.
The procedure with respect to third party refund loans will generally be
as follows:
o The customer's return is prepared;
o The customer completes a refund anticipation loan application (in
which the taxpayer/borrower assigns the rights to the refund to
the lending institution);
o The tax preparer or other office worker electronically transmits the
customer's tax return to Company headquarters which files the tax
returns electronically with the IRS or Revenue Canada;
o Revenue Canada or the IRS acknowledge that the return is
mathematically correct and Revenue Canada acknowledges that no
government liens exist against the customer;
o Once approved by the IRS or Revenue Canada, the tax return is
electronically messengered to the participating bank for final
approval;
o Upon confirmation from the bank of a loan approval, the Company
electronically advises the originating office of the approval; and
o The originating office prints out a check for the amount of the
approved loan (the refund amount less bank charges and the Company's
return preparation fee which includes a loan application fee), which
can then be distributed to the customer.
Substantially the same procedures will be followed when the Company
provides the loan directly, except that no third party approval of the loan will
be required.
Typically within two to three weeks of the electronic filing, the IRS
or Revenue Canada wires the refund amount directly to the lender. Fees for the
loan and the preparation of the return are deducted from the check amount,
thereby requiring no cash outlay by the taxpayer and assuring payment to the
Company. The costs of writing off bad debt that may be incurred in the program
are factored into the fees charged for the loans, however, the Company will make
reasonable attempts to collect any unrecovered funds. See "Risk Factors -
Importance of Refund Anticipation Program."
During the 1998 tax season, the Company had arrangements with the Bank of
Montreal (for Canadian loans) and Bank One (for U.S. loans). The Bank of
Montreal provided Tax Depot with a $9.25 million line of credit to fund refund
loans. The facility bore interest at the prime rate as reported in The Wall
Street Journal plus 1%, and was personally guaranteed by Mr. Hewitt and Gary
Ibbotson, one of Tax Depot's directors. The facility expired in May 1998, but
the Company expects to renew it in January 1999 for the 1999 tax season. The
line of credit provided the funds by which Tax Depot made refund anticipation
loans generating revenues of 15% of the first C$300 loaned and 5% of
the balance. (If the loan was made by a franchisee using Tax Depot's line of
credit, Tax Depot received 48% of this revenue.) The Company's arrangement with
Bank One was established through Drake Software, a third party provider of tax
preparation software. Under the arrangement, Bank One funded the loans for a fee
of $70-80 per refund; Drake Software received a fee of $2 per refund for its IRS
transmittal services and the Company received a de minimis referral fee from
Bank One plus the $25 loan application fee from each customer.
Training Programs and Other Ancillary Services. The Company provides
extensive training for tax preparers at Company-owned offices. These employee
training sessions cover substantive tax law, policies and procedures for office
conduct, use of computer software and client interaction. Additionally, the
Company provides training to franchisees. These sessions are devoted to
operational aspects of the business. Training of franchisee employees with
respect to tax law, policies and procedures and software use is provided by the
franchisee after he or she has completed the Company's training. The Company
does not train franchisee employees.
The Company will also offer certain ancillary services which will be
covered by the initial fee paid by the customer, including audit assistance, tax
return checking, taxation seminars and schools.
Growth Strategy
The Company intends to follow a growth strategy involving the
establishment of both Company- and franchisee-owned offices as well as the
acquisition of independent tax practices. Initially, the Company intends to open
up to 30 Company-owned offices and up to 10 franchise locations in the United
States for operation during the 1999 tax season. See "Use of Proceeds."
Thereafter the Company will seek to implement a more extensive franchise program
which it anticipates will be the primary source of its growth. See "Business -
Franchise Operations" and "Risk Factors - Franchise Operations, United States
Growth Limitation." The Company will also seek to grow through the acquisition
of existing tax return preparation practices. The Company anticipates that, for
the immediate future, any such acquisitions will be for cash (see "Use of
Proceeds"); however, the Company is not restricted from using securities of the
Company for such acquisitions and may do so if the opportunity arises. The
Company anticipates that growth of Tax Depot's operations will be through
franchising; Tax Depot expects to grant up to 120 new franchises for the 1999
tax season.
The Company's ability to open additional Company-owned offices and to
acquire additional tax practices, and the size of the markets and the offices in
which they are opened, will depend upon the Company's ability to generate funds
through operations, to obtain financing or to attract additional capital, while
the Company's ability to establish a franchise program will depend upon the
Company's ability to develop a franchising structure and to attract desirable
franchisees. There can be no assurance that the Company will be successful in
any such endeavors. See "Risk Factors - History of Operating Losses," " - Need
for Additional Financing," " - Competition" and " - Franchise Operations,
United States Growth Limitation."
As a result of certain restrictive covenants binding upon John T. Hewitt,
the Company's Chairman, Chief Executive Officer and President, and John K. Seal,
the Company's Director of Operations and Treasurer, the Company will only seek
to expand, through the 1999 tax season, in selected regional markets in the
United States, although such markets have not been determined as of the date
hereof. See "Risk Factors - Existence of Restrictive Covenants and Potential for
Litigation if Violated" for a description of the restrictive covenants
pertaining to Messrs. Hewitt and Seal. The Company will, however, be able to
focus its business activities more broadly in the Canadian market.
A second aspect of the Company's growth strategy involves achieving
"critical mass" in any market it enters, defined by the Company as having at
least one office for every 200,000 residents in the market area. The Company
believes that it is necessary to achieve this critical mass in order to provide
efficient marketing and advertising programs, and to effectively develop market
share. The Company intends to enter a particular market only when it believes it
can attain critical mass within one year. As a consequence of the foregoing, the
Company anticipates that it will seek to expand regionally rather than
attempting to establish a national presence.
Management Structure
Both Tax Depot's and the Company's managerial control system is based upon
a central office-regional management format. The central office is responsible
for overall policy, advertising, marketing, training, software updating and
franchising. Tax Depot currently has two management offices in Canada and the
Company has its management office at the Virginia Beach headquarters. As the
Company's U.S. operations expand, the Company intends to implement its policies
through regional and district managers (who will supervise groups of
Company-owned offices) and franchise consultants (who will supervise groups of
franchised offices). Each Company-owned office will be overseen by an office
manager. Thereafter, the management structure will be implemented as the growth
in the number of Company-owned and franchised offices requires.
Fees
The Company anticipates that revenues will be derived from (i) fees for
tax preparation services, (ii) fees for electronically filing tax forms for
non-customers, (iii) fees from customers for initiating tax refund loans (and
possibly referral fees from lenders), (iv) fees and royalties from franchisees,
and (v) proceeds from selling purchased practices to franchisees.
The Company's fees for specific tax services will differ by region and by
franchisee. The Company will provide franchisees with a listing of suggested
prices for all tax preparation services provided by its offices. Franchisees,
however, will have complete pricing autonomy. Company-owned stores will adhere
to the price schedules which management recommends for their markets. The
Company estimates that the average fee per tax return will be approximately $90
in the United States and C$60 in Canada. For individuals who prepare their own
returns or have them prepared elsewhere, the Company will charge a fee,
currently C$30 in Canada and estimated to be $35 in the United States, for the
electronic filing of the return. The Company does not charge customers in
Canada, and will not charge customers in the United States, an additional fee
for filing electronically if the Company prepares the return nor does it
anticipate charging interest or late fees.
The Company anticipates that it will charge customers a fee of
approximately $70 to $80 for arranging refund anticipation loans, which the
Company will pay to the bank providing the funding. If the Company provides the
loan directly through line of credit financing, it will retain this bank fee. In
either case, however, the Company will also keep the $25 loan application fee
which will be included in the tax return preparation fee paid by the customer.
The actual amount of such fees will depend upon local competitive conditions,
the level of bank fees actually charged and customer acceptance. In Canada, the
Tax Rebate Accounting Act limits the amount that a tax service provider or
lender may charge for these loans: the taxpayer must receive not less than 85%
of the first C$300 of the anticipated refund and 95% of the balance. Most of
these loans are made by Tax Depot franchisees under an arrangement where Tax
Depot funds the loan and keeps 48% of the fee while the other 52% is kept by the
franchisees (franchisees may instead fund the loans themselves and pay royalties
to Tax Depot although it is expected that less than 10% will request this
arrangement).
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 which will likely be similar to the
structure of Tax Depot's program in Canada.
In return for the fees paid, the Company may provide some or all of the
following products and services to its franchisees: (i) a minimum of four days
of initial training in business operations, (ii) the use of the Company's tax
return preparation software and regular updates to the software, (iii) a joint
advertising program which will be funded through the advertising fees paid by
both franchisee and Company operated offices, (iv) annual tax training programs
which assist franchisees in training seasonal tax preparation employees, (v)
standardized operating manuals, (vi) field support in the areas of management,
systems, software and questions regarding tax law interpretation, and (vii)
access to the Company's refund anticipation loan program. Franchisees will be
subject to a quality control system to be developed by the Company, which will
include statistical measurements, office visits and customer interviews by
Company personnel.
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) wilfully attempts
to understate a taxpayer's tax liability or (iv) aids or abets in the
understatement of such tax liability. In addition, several states of the United
States have enacted or are considering enactment of legislation which would
regulate tax return preparers. The Company does not carry errors and omissions
insurance to cover any penalties that may be imposed. See "Risk Factors -
Insurance Coverage."
The Company will be subject to regulation in connection with its franchise
operations in the United States and in the Province of Alberta, Canada (see
"Business - Franchise Operations: Regulation of Franchise Operations" and "Risk
Factors - Regulation of Franchise Operations"). In addition, refund anticipation
loan programs and proprietary schools (such as the Company's proposed tax
training programs) are regulated in some states.
See "Risk Factors - Government Regulation."
Competition
The tax return preparation and electronic filing business is highly
competitive. The Company believes that its competition will come primarily from
three sources: (i) large return preparation services such as H&R Block and
Jackson Hewitt, (ii) numerous small or seasonal tax preparation services,
including accounting and law firms, and (iii) individuals who prepare their own
returns. Many of the firms offering tax preparation services, and many firms not
otherwise in the tax preparation business, provide electronic filing and refund
loan services to the public. In particular, both H&R Block and Jackson Hewitt
have programs, including refund anticipation loan programs, that are
substantially similar to those the Company proposes to provide. Commercial tax
return preparers and electronic filers are highly competitive with regard to
price, service and reputation for quality. This competitiveness may restrict
growth opportunities for the Company and the prices the Company can charge for
its services.
H&R Block dominates the industry. As of April 30, 1997, the date of its
most current annual report on Form 10-K, H&R Block had 9,937 offices in
operation in the United States, Canada, Australia and Europe, of which 4,722
were owned by franchisees. In the United States alone, H&R Block operated 8,554
offices. H&R Block also estimated that during its fiscal year ended April 30,
1997, it served approximately 18,190,000 taxpayers world-wide, of which
approximately 15,600,000 were in the United States, and prepared approximately
14,302,000 individual United States income tax returns (of which approximately
7,279,000 were filed electronically), constituting about 13% of the IRS's
estimate of total United States individual income tax returns filed during 1997.
In addition, as of that date H&R Block operated 1,021 offices in Canada, and
filed approximately 2,156,000 Canadian returns with Revenue Canada during the
fiscal year ended April 30, 1997. Because of its size, wide-spread name
recognition and the availability of capital to it, the Company believes that H&R
Block will offer formidable competition to the Company's efforts to establish
and expand its tax return preparation business.
Jackson Hewitt, which is now owned by Cendant Corp., is the second largest
provider of retail income tax preparation services in the United States.
According to its Annual Report on Form 10-KSB for the fiscal year ended April
30, 1997, Jackson Hewitt had 1,296 franchised offices and 76 company-owned
offices in 41 states as of that date. Jackson Hewitt filed 875,000 tax returns
in its fiscal year ended April 30, 1997, 735,000 of which were filed
electronically. Although Jackson Hewitt has no operations in Canada, the Company
believes that once the Company is able to establish a broader base of offices in
the United States (upon the expiration of the restrictive covenants pertaining
to Mr. Hewitt; see "Risk Factors - Existence of Restrictive Covenants"), Jackson
Hewitt will offer strong competition in many of the markets which the Company
will seek to enter.
Computer Systems and Year 2000 Issue
The "year 2000 issue" is the result of computer programs being written
using two digits, rather than four digits, to identify the year in a date field.
("Non-Compliant Systems"). Non-Compliant Systems which have date sensitive
software, will not be able to distinguish between the year 2000 and the year
1900. This could result in miscalculations or an inability to process
transactions, send invoices or engage in similar normal business activities.
Based upon a recent assessment by the Company, the Company has in place
year 2000 capable systems. Any software purchased or developed by the Company in
the future will be year 2000 capable. Additionally, the Company will only use
transmittal services (for transmitting returns to the IRS), check printing
companies and other suppliers that have year 2000 compliant systems. As a
result, the Company does not anticipate significant expenses in this regard.
JTH Tax, Inc.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Pro Forma Condensed Consolidated Financial Information reflects
financial information with respect to the acquisition of 60% of the Tax
Depot, Inc. on September 1, 1997 for approximately $728,000 in cash. The
purchase was effected by the sale of 150 previously unissued shares of Tax
Depot, Inc. resulting in a 60% ownership after the purchase of the stock.
The acquisition was accounted for under the purchase method of accounting.
The financial statements of Tax Depot, Inc., a Canadian company, acquired
and included in the Pro Forma Condensed Consolidated Financial Information
were translated from Canadian dollars to U.S. dollars at the rate of 0.723
with respect to the 1998 statement of operations.
The Pro Forma Condensed Consolidated Financial Information was prepared as
if the acquisition took place on May 1, 1997 ( the beginning of JTH Tax,
Inc.'s fiscal year). The Pro Forma Condensed Consolidated Financial
Information should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Prospectus.
The Pro Forma Condensed Consolidated Financial Information is unaudited and
is not necessarily indicative of the consolidated results which actually
would have occurred if the above transactions had been consummated at the
beginning of the period presented.
JTH Tax, Inc
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1998
(In thousands)
(unaudited)
JTH Tax Tax Depot Adjustments ProForma
Inc. (1) Inc. (2) Combined
-------- --------- ------------ ---------
Revenue, principally tax
preparation and
franchise royalties $1,148 $ 56 $1,204
------ ------- ----------- ------
Total operating expenses 1,952 209 12 (3) 2,173
------ ------- ----------- -------
Operating (loss) (804) (153) 12 (969)
------ ------- ----------- -------
Other income
and (expenses) 1,718 10 1,728
------ -------- ----------- -------
Income before provision
for income taxes
and minority interest 914 (143) (12) 759
Provision
for income taxes 371 (4) 371
------ -------- ----------- -------
Income before
minority interest 543 (143) (12) 388
Minority interest
in loss of subsidiary (112) (49) (161)
------ -------- ----------- -------
Net income $ 655 $ (94) $(12) $ 549
Net income per share $ 1.83
- -------------------
(1) Includes the operation of JTH Tax, Inc. for the twelve months ended
April 30, 1998 and its subsidiary, Tax Depot, Inc. for the eight month
period September 1, 1997 to April 30, 1998.
(2) Includes the operations of the Tax Depot, Inc. prior to acquisition for
the four month period of
May 1, 1997 to August 31, 1997.
(3) To record amortization of intangibles for the period prior to acquisition
arising from the acquisition on September 1, 1997. Such amortization
expense is based on a lives of 15 to 40 years.
(4) Tax depot, Inc. files tax returns in Canada and no provision for taxes has
been made for any possible benefits resulting from the loss.
MANAGEMENT DISCUSSION AND ANALYSIS
SUMMARY OPERATING DATA FROM CONSOLIDATED
OPERATIONS DEVELOPMENT
STAGE COMPANY IN 1997
4/30/97 4/30/98
------- -------
REVENUE 0 1,148,275
INCOME FROM OPERATIONS (loss) (17,500) (804,149)
OTHER INCOME 11,501 1,718,048
NET INCOME (LOSS) (5,999) 654,050
SUMMARY BALANCE SHEET FOR CONSOLIDATED OPERATIONS
4/30/97 4/30/98
------- -------
CURRENT
ASSETS 467,590 2,604,128
CASH 18,876 686,871
WORKING CAPITAL 17,323 2,171,464
TOTAL ASSETS 483,564 3,383,705
TOTAL LIABILITIES 50,267 479,850
STOCKHOLDER'S EQUITY 433,297 2,903,885
The Company was a development stage company during 1997. The Company is in
the tax return preparation business which is a seasonal business. On September
1, 1997, four months into fiscal 1998, the Company purchased a 60% ownership of
the Tax Depot Inc., a Canadian income tax preparation franchiser. 1998 financial
information includes eight months of Tax Depot operations, however a substantial
portion of Tax Depot's business takes place in these eight months as Tax Depot
is a seasonal tax return preparation business. Tax Depot had 126 offices in tax
season 1997, two of which were Company owned. Prior to tax season 1998, Tax
Depot sold the two Company owned offices for a profit of $20,065. The Tax Depot
purchased one existing franchise office and opened twelve new Company owned
offices for tax season 1998. In addition, Tax Depot awarded 68 new franchise
locations.
Total revenue for 1998 was $1,148,275 compared to zero in 1997. Over 70%
of the Company's 1998 revenue was attributable to Tax Depot Inc. In an effort to
build brand name recognition in Canada and to attract new franchisees and
customers, in 1998 the Company spent $312, 700 on advertising expenses. These
advertising expenses included advertising for a Canadian home study tax course,
Canadian franchise opportunities, and a Canadian national television
advertisement for tax return preparation during the tax season. These
advertising expenses included advertising production costs. The Company's 1998
revenue included a profit of $1,665,494 on its investment portfolio. This was an
extraordinary event, due in large part to a portfolio which was then heavy in
Jackson Hewitt Inc. stock. The Jackson Hewitt Inc. stock was sold when Jackson
Hewitt Inc. was purchased by Cendant Corp. and thus the extraordinary event is
unlikely to be repeated in the future. The remainder of the income, $52,554,
which constitutes the Company's other income was realized from investment
instruments held in the Company's portfolio other than Jackson Hewitt Inc.
stock.
Revenues from tax return preparation and tax discounting fees were
$746,778 in 1998 and zero in 1997. A significant portion of this revenue is
attributed to Tax Depot. Royalties from Tax Depot franchisees were $278,342 in
1998 and zero in 1997. Tax Depot added 68 franchise locations and improved
performance in the existing franchise locations. Selling, General &
Administrative expenses increased to $1,952,424 in l998 from $17,500 in 1997
primarily from start up operations in the United States and increased expenses.
Losses from operations in 1998 were ($804,149) versus ($17,500) in 1997.
This was due primarily to our startup operations in the United States where the
Company began staffing up for future expansion by hiring four executives from
Jackson Hewitt Inc., the second largest retail tax operation in the world, and
management support for Canadian operations. The Company opened five locations in
Columbus, Ohio. Four of these five locations were new locations, one location
was opened as a result of a purchase, for $110,000, of an existing tax practice.
These five locations served over 5,000 customers in 1998. The Company believes
that a combination of purchasing tax practices and opening new locations (in the
same market) is the most effective growth strategy. Furthermore, in an effort to
attract high quality franchises, the Company will waive the $10,000 franchise
fee through December 31, 1998.
At April 30, 1998, the Company had working capital of $686,871. This was
an increase of $667,995 from $18,876 as of April 30, 1997. The increase in cash
was primarily due to the proceeds from a July 1997 private placement of stock
which generated $1,942,883 and from 1998 profits of $654,050. There was a
significant decrease in cash flow due to accounts receivable of $1,009,788. Most
of this is due to loans made to Canadian tax filers for which the Company
expects to be repaid in Fiscal 1999. The Company purchased equipment and
furniture for $178, 282. The Company also purchased investment securities with a
value of $734,898 at year-end 1998.
Currently, to maintain its working capital the Company utilizes its
investment portfolio. The Company does not have a line of credit at any banking
establishment nor does the Company intend to pursue such a line of credit or
other external means of financing for working capital purposes. The Company may
establish lines of credit for refund anticipation loan funding. Management
believes that, for the short term, current assets are sufficient to satisfy
current liabilities without the need for additional capital. In addition,
management estimates that this offering will satisfy the Company's foreseeable
long-term requirements for additional capital. However there can be no assurance
that additional financing will not be needed or, if needed, that it will be
available on terms favorable to the Company.
It is expected that the "year 2000 issue" will have little to no effect on
the Company. Software used for tax return preparation is of utmost importance to
the Company. The Company currently uses and expects to continue to rely upon
third party software for tax return preparation. The Company's assessments of
such third party software indicate that the software is capable of handling year
2000 issues without problem. Any software considered for purchase or use in the
future will be assessed to verify year 2000 compliance prior to acquisition of
such software. All of the internal software developed by the Company is year
2000 compliant. For internal accounting purposes, the Company utilizes third
party software which is year 2000 compliant.
The accompanying financial statements of JTH Tax Inc. do not reflect FAS
No. 130: Reporting for Comprehensive Income. The Company had other comprehensive
income consisting of unrealized gains on available for sale marketable
securities of $2,541 and $264,000, respectively in 1998 and 1997, as well as,
foreign currency translation adjustments of ($45,201) in 1998 and zero in 1997.
The accompanying financial statement of the Company has not addressed FAS 131:
Disclosures About Segments of an Enterprise and Related Information, nor FAS
133: Accounting for Derivative Instruments and Related Activities. The Company's
fiscal year end was April 30, 1998 and these disclosure requirements were not
effective for that time period. The Company does not expect FAS 131 to
significantly affect the future financial disclosure of the Company as the
Company intends to continue to fully disclose the effect of Tax Depot (Canadian)
operations on the Company. Furthermore, the Company does not expect FAS 133 to
significantly affect future financial results as the Company does not now, nor
does it expect to, deal in derivatives.
Certain Relationships and Related Transactions
The Company has not made any loans to officers and directors, however it
has received one loan from its President, John Hewitt which is now paid off and
has made one loan to its subsidiary Tax Depot. The loan from John Hewitt for
$250,000 was made on February 13, 1998 and was repaid on February 30, 1998 with
interest. On February 6, 1998, the Company loaned Tax Depot $262,135 (C$376,634)
at 8% interest. As of July 31, 1998 none of the loan has been repaid and the
balance was $291,682. Tax Depot also owes the Company $319,783 as of July 31,
1998 for services rendered.
Ledgewood Law Firm, P.C. ("Ledgewood") acted as counsel to the Company
in connection with its organization and the offering. Ellen McDowell,
Esquire, is an associate with Whittlesey, McDowell & Holtz, P.C. which an
affiliate of Ledgewood. Ms. McDowell is the sister of John Hewitt, President
and Chief Executive Officer of the Company. She is also a stockholder (less
than 5%) of the Company. The Company has paid Ledgewood $71,665 in fees over
the last two years and fees are not expected to exceed this level in the
future.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for any of the Company's securities, and,
following this offering, it is not anticipated that a market will develop for
the Class A Common Stock offered hereby. As of the date of this Prospectus,
there were 34 holders of record of the Class A Common Stock and one holder of
record of the Class B Common Stock. All of the shares of Class A Common Stock
and Class B Common Stock outstanding as of the date of this Prospectus are
"restricted securities" as defined under Rule 144 of the Securities Act, and
none of such securities may be resold pursuant to Rule 144. As of the date of
this Prospectus, there were 31,900 shares issuable pursuant to outstanding
options.
EXECUTIVE COMPENSATION
No executive officer or director received any compensation during 1996. In
1997, Mr. Hewitt received a salary of $30,000. In 1998, Mr. Hewitt will receive
$30,000 in addition to the stock options to purchase 5,000 shares of Class A
Common Stock at $11 per share that he received earlier in 1998. The other
executive officers of the Company will receive compensation in 1998 as follows:
John Seal, $40,000; Donna Halligan, $40,000; Martha O'Gorman, $40,000; Kathleen
Curry, $45,000; and Karen Robinson, $31,000. Additionally, these other executive
officers each received stock options to purchase 4,000 shares of Class A Common
Stock at $10 per share in May 1998. No executive officer of the Company has
received an aggregate annual compensation in excess of $100,000 since the
Company's formation.
REPORTS TO STOCKHOLDERS
The Company provides annual reports with audited financial statements to
its stockholders.
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ....................................................... 3
FINANCIAL STATEMENTS
Balance Sheet ......................................................... 4
Statement of Operations................................................ 5
Statement of Cash Flows................................................ 6
Notes to Financial Statements .........................................7-10
Hamilton Dwyer
& Company, P.C.
____________________________
Certified Public Accountants
- ----------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JTH Tax Inc.
We have audited the accompanying balance sheet of JTH Tax Inc. (a
Corporation) as of April 30, 1997, and the related statements of
operations, changes in stockholder's equity, and cash flows for the seven
months then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JTH Tax Inc. as of
April 30, 1997, and the results of its operations and its cash flows for
the seven months then ended in conformity with generally accepted
accounting principles.
January 7, 1998
/s/ Hamilton Dwyer & Company, P.C.
----------------------------------
Hamilton Dwyer & Company, P.C.
Member American Institute Certified Public Accountants, Tax Division
Member of Virginia Society Certified Public Accountants
-----------------------------------------------------------------
3800 Poplar Hill Rd, Chesapeake, VA 23321 P. O. Box 6189, Ports VA 23703
(757)483-3555 Fax (757) 484-7493
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
BALANCE SHEET
APRIL 30, 1997
---------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 18,876
Prepaid expenses 850
Investment securities:
Trading securities 7,864
Available-for-sale securities 440,000
-------
Total current assets 467,590
-------
FIXED ASSETS:
Furniture and fixtures 16,506
Accumulated depreciation 532
-------
Net fixed assets 15,974
-------
TOTAL ASSETS $ 483,564
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 267
Loans from related parties 50,000
-------
Total current liabilities 50,267
-------
STOCKHOLDER'S EQUITY:
Common stock 45,000
Paid in capital 130,296
Unrealized gain on securities
available-for-sale 264,000
Retained earnings (deficit) (5,999)
-------
Total stockholder's equity 433,297
-------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 483,564
=======
See accompanying notes and accountant's report.
- 4 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1997
---------------------------------------------
REVENUE $ -
--------
OPERATION EXPENSES:
Payroll 1,513
Advertising 200
Business taxes and license 372
Cleaning and janitorial 240
Depreciation 532
Equipment rental 599
Insurance 488
Miscellaneous 100
Occupancy 3,160
Printing 570
Postage 640
Professional fees 1,290
Supplies 473
Telephone 907
Travel 6,048
Utilities 368
-------
Total expenses 17,500
-------
LOSS FROM OPERATIONS (17,500)
OTHER INCOME:
Gain on investments 11,501
-------
NET LOSS $ (5,999)
=======
Loss per share $ 0.13
=======
See accompanying notes and accountant's report.
- 5 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED APRIL 30, 1997
---------------------------------------------
Class Class
A B Additional
Common Common Paid In Retained
Stock Stock Capital Earnings
------ ------- ---------- --------
Stock issued
at incorporation $ - $ 45,000 $ 130,296 $ -
Net loss - - - (5,999)
------ ------ -------- --------
BALANCE AT
APRIL 30, 1997 $ - $ 45,000 $ 130,296 $ (5,999)
======= ========= ========= =========
See accompanying notes and accountant's report.
- 6 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,999)
Adjustments to reconcile total net loss to
net cash provided by operating activities:
Depreciation and amortization 532
Net realized gains on securities (11,501)
(Increase) in prepaid expenses (850)
Increase in accounts payable 267
-------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (17,551)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of trading securities 58,997
Purchases of furniture and equipment (16,506)
Purchases of trading securities (55,360)
Purchases of available-for-sale securities (176,000)
-------
NET CASH (USED) IN
INVESTING ACTIVITIES (188,869)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 50,000
Proceeds from sale of capital stock 175,296
-------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 225,296
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,876
-------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD -
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,876
=======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid (net of amount capitalized) $ -
=======
Income taxes paid $ -
=======
See accompanying notes and accountant's report.
- 7 -
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JTH Tax, Inc. is a Delaware corporation created to provide services including
personal income tax return preparation and personal income tax refund
discounting as well as sales of franchise to individuals primarily in Canada.
ACCOUNTING METHOD
The financial statements have been prepared on the accrual method of accounting
which means revenue is recognized when earned, rather than when received and
expenses are recognized when incurred rather than when paid.
INCOME TAXES
JTH, Tax, Inc. has elected S Corporation status effective with the first fiscal
year ending April 30, 1997. An S Corporation pays no federal or state income
taxes. Its separately stated items of income, loss, deduction or credit pass
through to the stockholder and is reported on his personal federal and state
income tax returns.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations; renewals and betterments that materially
extend the life of the assets are capitalized. Gains or losses on dispositions
of property and equipment are included in operations in the year of disposal.
Depreciation is computed using the straight line method with useful lives of
five to seven years.
Note 2 - CAPITAL STOCK
JTH Tax, Inc. is authorized to issue 1,000,000 shares of capital stock,
consisting of 800,000 shares of Class A Common Stock, par value $1.00 per share,
100,000 shares of Class B Common Stock, par value $1.00 per share and 100,000
shares of Preferred Stock, par value $1.00 per share. As of April 30, 1997,
there are no shares of Class A Common Stock, 45,000 shares of Class B Common
Stock outstanding and no shares of Preferred Stock outstanding.
-8-
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 3 - DEVELOPMENT STAGE OPERATIONS
JTH Tax, INC. was formed in October 1996 to provide retail income tax return
preparation services for taxpayers primarily in the lower to middle income
brackets. The Company will initially offer its services in Canada and may offer
services in the United States in the future. As of the financial statement date
the Company has not commenced offering its tax return preparation services to
the public.
Note 4- RELATED PARTY TRANSACTIONS
JTH Tax, INC. has received advances from its stockholder totaling $50,000. The
advances bear interest at the rate of 10% per annum and are payable in full on
July 1, 1997.
Note 5 - LEASE COMMITMENTS
The Company leases two offices under separate agreements which are classified as
operating leases. One lease expires on May 31, 1999 and is renewable at the
company's option. The remaining lease is on a month to month basis. During the
current seven months the occupancy expense was $3,160.
Future minimum lease payments under these agreements are as follows:
Year ending 1998 $ 11,520
1999 11,520
2000 960
--------
Total $ 24,000
========
-9-
JTH TAX INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEVEN MONTHS ENDED APRIL 30, 1997
---------------------------------------------
Note 6 - MARKETABLE SECURITIES
The Company's marketable securities consist of equity securities that have a
readily determinable fair market value. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates such
determinations at each balance sheet date.
Securities have been classified in the balance sheet according to management's
intent as either available for sale, held to maturity or trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale and held to
maturity securities are reported as a component of stockholder's equity.
Cost and fair value of marketable securities available for sale at April 30,
1997 are as follows:
Unrealized Fair
Cost Gains Value
Securities $ 176,000 $ 264,000 $ 440,000
Note 7 - GAIN ON INVESTMENTS
The Company purchased and sold publicly traded stock through out the seven month
period of operation. These transactions resulted in a net realized gain on
investments of $11,501.
-10-
JTH TAX INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1998
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ...................................................... 3
FINANCIAL STATEMENTS
Balance Sheet ........................................................ 4-5
Statement of Operations............................................... 6
Schedule of Operating Expenses........................................ 7
Statement of Changes in Stockholders' Equity.......................... 8
Statement of Cash Flows............................................... 9
Notes to Financial Statements......................................... 10-14
Hamilton Dwyer
& Company, P.C.
____________________________
Certified Public Accountants
- ----------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of JTH Tax Inc.
We have audited the accompanying consolidated balance sheet of JTH Tax
Inc. (a Corporation) as of April 30, 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit. We did not audit the
financial statements of Tax Depot Inc., a subsidiary, which statements
reflect total assets and revenues constituting 37 percent and 81 percent,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Tax Depot Inc.,
is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
and the report of the other auditors provides a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of JTH Tax Inc. as of April
30, 1998 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Hamilton Dwyer & Company, P.C.
----------------------------------
Hamilton Dwyer & Company, P.C.
June 10, 1998
Member American Institute Certified Public Accountants, Tax Division
Member of Virginia Society Certified Public Accountants
-----------------------------------------------------------------
3800 Poplar Hill Rd, Chesapeake, VA 23321 P. O. Box 6189, Ports VA 23703
(757) 483-3555 Fax (757) 484-7493
JTH TAX INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
---------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 686,871
Accounts receivable 1,009,788
Trading securities (Note 3) 504,507
Employee advances 94,697
Prepaid expenses 27,538
Prepaid income taxes (Note 1) 280,727
-------------
Total current assets 2,604,128
-------------
FIXED ASSETS: (Note 1)
Furniture and fixtures 179,893
Leasehold improvements 9,895
Accumulated depreciation 36,222
-------------
Net fixed assets 153,566
-------------
OTHER ASSETS:
Available for sale securities (Note 3) 230,391
Utility deposit 850
Intangibles, net of accumulated
amortization of $8,125 394,770
-------------
Total other assets 626,011
-------------
TOTAL ASSETS $ 3,383,705
=============
See accompanying notes and accountant's report.
- 4 -
---------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 336,943
Franchise deposits 85,609
Capital lease 10,112
------------
Total current liabilities 432,664
------------
LONG-TERM LIABILITIES:
Deferred income taxes 47,186
------------
STOCKHOLDERS' EQUITY (Note 4)
Common stock, class A 200,000
Common stock, class B 45,000
Additional paid in capital 1,873,179
Unrealized gain (Note 3) 2,541
Minority interest in subsidiary 180,285
Equity adjustment from foreign
currency translation (Note 1) (45,201)
Retained earnings 648,051
------------
Total stockholders' equity 2,903,885
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,383,705
=============
- 5 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1998
---------------------------------------------
REVENUE:
Tax preparation - net of discounts $ 746,778
Franchise royalties 278,342
Tuition 57,923
Franchise sales 20,065
Commission income 29,135
Miscellaneous income 16,032
-------------
Total revenue 1,148,275
-------------
OPERATING EXPENSES (see schedule) 1,952,424
-------------
NET LOSS FROM OPERATIONS (804,149)
-------------
OTHER INCOME AND (EXPENSES):
Interest income 19,417
Dividends 41,924
Gain on investment 1,665,494
Interest expense (8,787)
-------------
Total other income and expenses 1,718,048
-------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 913,899
Provision for Income Taxes (Note 6) 371,459
-------------
INCOME BEFORE MINORITY INTEREST 542,440
Minority interest in subsidiary's loss 111,610
-------------
NET INCOME $ 654,050
=============
Earnings per common share - Net Income $ 2.18
=============
See accompanying notes and accountant's report.
- 6 -
JTH TAX INC.
CONSOLIDATED SCHEDULE OF OPERATING EXPENSES
YEAR ENDED APRIL 30, 1998
---------------------------------------------
OPERATING EXPENSES:
Advertising $ 312,700
Amortization 24,466
Bad debts 35,882
Bank Charges 33,847
Depreciation 15,227
Equipment rental 14,641
Insurance 65,990
License and taxes 36,014
Miscellaneous 14,797
Office supplies 23,545
Operating lease 2,017
Payroll 734,768
Postage 58,621
Practice development 8,513
Printing 8,359
Professional development 9,617
Professional fees 79,349
Repairs and maintenance 8,340
Rent 66,500
Supplies 119,645
Telephone 96,870
Temporary service 37,987
Travel 134,330
Utilities 10,399
-------------
Total operating expense $ 1,952,424
=============
See accompanying notes and accountant's report.
- 7 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED APRIL 30, 1998
---------------------------------------------
Class Class
A B Additional
Common Common Paid In Retained
Stock Stock Capital Earnings
------ ------ --------- --------
Stock issued for
cash through
April 30, 1997 $ - $ 45,000 $ 130,296 $ -
Prior years
Net loss - - - (5,999)
-------- ------ --------- --------
Balance at
April 30, 1997 - 45,000 130,296 (5,999)
Stock issued
for cash in
current year 198,500 - 1,787,304 -
Stock issued for
services in
current year 1,500 - 13,500 -
Net income for the
current year - - - 654,050
-------- ------- ---------- -------
BALANCE AT
APRIL 30, 1998 $ 200,000 $ 45,000 $ 1,931,100 $ 648,051
======== ======= ========== =======
See accompanying notes and accountant's report.
- 8 -
JTH TAX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1998
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 654,050
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 43,815
Foreign currency translation (45,201)
Net gain on securities (1,665,494)
Minority interest in subsidiary's loss (111,610)
Changes in operation assets and liabilities:
Accounts receivable (1,009,788)
Prepaid expenses (27,538)
Prepaid income taxes (280,727)
Employee advances (94,697)
Franchise deposits 85,608
Accounts payable 286,676
Income taxes payable 47,186
-------------
NET CASH USED BY OPERATING ACTIVITIES (2,117,720)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (178,282)
Purchase of tax service (106,000)
Sales of trading securities 4,343,722
Purchases of trading securities (2,996,329)
Purchases of available-for-sale securities (230,391)
------------
NET CASH USED IN INVESTING ACTIVITIES 832,720
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 1,942,883
Proceeds from short-term debt 10,112
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,952,995
------------
NET INCREASE IN CASH 667,995
CASH AT BEGINNING OF YEAR 18,876
------------
CASH AT END OF YEAR $ 686,871
- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid (net of amount capitalized) $ 13,912
============
Income taxes paid $ 605,000
============
See accompanying notes and accountant's report.
- 9 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JTH Tax, Inc. a Delaware corporation and it's subsidiary Tax Depot, Inc. is
incorporated under the Company's Act of Manitoba, Canada. Both companies are
engaged in providing services including personal income tax return preparation
and personal income tax refund discounting as well as sales of franchises to
provide these services in Canada and the United States. These services are
provided through company-owned operations and franchised agents.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
parent company JTH Tax, Inc. and its subsidiary Tax Depot, Inc. (60% ownership)
after elimination of significant intercompany accounts and transactions. These
financial statements have been prepared using the purchase method of
consolidation. All significant intercompany transactions and balances have been
eliminated on consolidation.
ACCOUNTING METHOD
The financial statements have been prepared on the accrual method of accounting
which means revenue is recognized when earned, rather than when received and
expenses are recognized when incurred rather than when paid.
TRANSLATION OF FOREIGN CURRENCIES
The financial statement is stated in United States currency. The Tax Depot, Inc.
was translated to United States dollars as of April 30, 1998 at the rate of
0.696 per dollar. A foreign currency translation adjustment of ($45,201.) is
reflected in the equity section of the Balance Sheet to recognize the changes
for the current year.
INCOME TAXES
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities, as measured by the current enacted tax rates. Deferred tax
expense is the result of changes in the deferred tax asset and liability.
- 10 -
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
JTH Tax, Inc. had previously elected S Corporation status that was effective
with the first fiscal year ending April 30, 1997. An S Corporation pays no
federal or state income taxes. Its separately stated items of income, loss,
deduction or credit pass through to the stockholders' and is reported on their
personal federal and state income tax returns. However, as of July 30, 1997 a
second class of stock was issued and automatically revoked the Subchapter S
election. Accordingly, the C Corporation pays federal and state income taxes on
it's profits using the cash basis of accounting. A provision for income taxes
has been established on the accompanying statements for the tax related to the
income from the last nine months of the year.
INTANGIBLE ASSETS
Intangible assets are being amortized using the straight line as follows:
Goodwill 15 to 40 years
Customer list 15 years
Covenant not to compete 15 years
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations, renewals and betterments that materially
extend the life of the assets are capitalized. Gains or losses on dispositions
of property and equipment are included in operations in the year of disposal.
Depreciation is computed using the straight line method..
Note 2 - RELATED PARTY TRANSACTIONS
The Tax Depot, Inc. has a liability of $376,634, Canadian currency, ($262,135
United States currency) that has arisen from the sale and purchase of services
from JTH Tax Inc. There is also an outstanding loan of $400,000, Canadian
currency ($280,800 United States currency) at year end. These items have been
eliminated on consolidation.
Note 3 - MARKETABLE SECURITIES
The Company's marketable securities consist of debt and equity securities that
have a readily determinable fair market value. Management determines the
appropriate classification of its investments at the time of purchase and
reevaluates such determinations at each balance sheet date.
-11-
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 3 - MARKETABLE SECURITIES (Continued)
Securities have been classified in the balance sheet according to management's
intent as either available for sale, held to maturity or trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale and held to
maturity securities are reported as a component of stockholders' equity.
Since the Company does not intend to sell certain securities in the near term,
they have been classified as "available for sale" and accordingly, are carried
at fair value, with unrealized gains and losses, net of tax, reported as a
separate component within the stockholders' equity section of the balance sheet.
Realized gains and losses on all marketable securities are determined by
specific identification and are charged or credited to current earnings.
Cost and fair value of marketable securities available for sale at April 30,
1998 are as follows:
Unrealized Unrealized Fair
Cost Gains Loss Value
Securities $ 227,849 $ 2,541 $ - $ 230,391
Note 4 - CAPITAL STOCK
JTH Tax, Inc. is authorized to issue 1,000,000 shares of capital stock,
consisting of 800,000 shares of Class A Common Stock, par value $1.00 per share,
100,000 shares of Class B Common Stock, par value $1.00 per share and 100,000
shares of Preferred Stock, par value $1.00 per share. As of the date of this
report, there are 400,000 shares of Class A Common Stock, 45,000 shares of Class
B Common Stock and no shares of Preferred Stock outstanding.
In the second quarter of the fiscal year the Company issued 200,000 shares of
Class A Common Stock at $10.00 per share totaling $2,000,000.
In 1998 the Board of Directors authorized a one-for-one stock split of the A
Shares to be distributed on January 10, 1998, to shareholders of record. The
earnings per share have been adjusted for the period presented to reflect the
change in capital stock that resulted from the stock split.
-12-
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 5 - PURCHASE OF TAX DEPOT, INC.
On September 1, 1997 the Company acquired a 60% interest in the Tax Depot, Inc.,
a Canadian corporation, for a cash payment of $728,463. The financial
information of Tax Depot, Inc. is accounted for in the accompanying statements
using the purchase method. The acquisition resulted in goodwill of $290,621
which is being amortized over forty years.
Note 6 - INCOME TAXES
The provision for income taxes for JTH Tax Inc. consists of the following:
Current tax expense:
Federal $ 272,827
State 51,446
-----------
Total current 324,273
------------
Deferred tax expense:
Federal 40,281
State 6,905
------------
Total deferred 47,186
------------
Total provision for income taxes $ 371,459
===========
Tax Depot Inc. (a subsidiary) had a loss from it's current operations in Canada
and that loss is available for income tax purposes as a loss carry-forward until
April 30, 2005.
Note 7 - LEASE COMMITMENTS
The Company leases various office space under separate agreements which are
classified as operating leases. These leases have initial periods which expire
at different times, with expirations ranging from 11 to 47 months. These leases
are renewable, at the Company's option. Rent expense under these agreements was
$66,500 for the current year.
-13-
JTH TAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
---------------------------------------------
Note 7 - LEASE COMMITMENTS (Continued)
Future minimum lease payment under these agreements are as follows:
Year ending 1999 $ 67,412
2000 38,702
2001 37,742
2002 34,597
---------
Total $ 178,453
==========
Note 8 - DEVELOPMENT STAGE OPERATIONS
JTH Tax, INC. was formed in October 1996 to provide retail income tax return
preparation services. For the year ended April 30, 1997, the Company operated as
a development stage company. Beginning in the current year, the Company started
to provide tax return preparation services and operated in both Canada and the
United States.
Note 9 - CAPITAL LEASE
The Company acquired computer equipment under the provisions of a short-term
lease. For financial reporting purposes, minimum lease payments relating to the
computer equipment have been capitalized. The lease expires in 1998. The leased
property under capital lease as of April 30, 1998 had a cost of $13,483. The
future minimum lease payments under capital lease is $10,905, with $793
representing interest. The present value of net minimum lease payments is
$10,112, which is all due in the current year.
Note 10 - INVESTMENT INCOME
The Company acquired and sold publicly traded stock through out the year. These
transactions resulted in a net gain on investments of $1,665,494. At year end,
the Company continued to hold an interest in publicly traded investments and
this is further discussed in the footnote for marketable securities.
-14-
TAX DEPOT INC.
Statement of Cash Flows
Reconcilliation of Results Reported in Accordance
With Generally Accepted Accounting Principles
(GAAP) in Canada with ("U.S.") GAAP
- ------------------------------------------------------------------------------------------
For the period ended August 31 August 31
1997 1996
- ------------------------------------------------------------------------------------------
(in Canadian Dollars)
Operating Activities
Net Income for the period $ 1,924 $ 153
Adjustment to reconcile net income from operations
to net cash provided by (used in) operating activities
Amortization 9,424 -
Decrease (increase) in accounts receivable 146,091 (57,793)
Decrease (increase) in prepaids (1,636) 5,043
Increase (decrease) in accounts payable (37,821) 9,351
Increase (decrease) in income taxes payable (3,996) 348
-------- --------
113,986 (42,898)
--------- --------
Investment Activities
Purchase of capital assets (108,423) -
Purchase of goodwill (35,032) -
---------- --------
(143,455) -
---------- --------
Financing Activities
Increase (decrease) in due to related parties 13,130 (10,480)
Increase in bank overdraft 16,339 25,998
---------- --------
29,469 15,518
Decrease in cash - (27,380)
Cash, beginning of period - 27,380
---------- --------
Cash, end of period - -
- --------------------------------------------------------------------------------------------
[BDO Dunwoody Chartered Accountants and Consultants LOGO]
BDO Dunwoody Chartered Accountants and Consultants
Wawanesa Building
5th Floor, 191 Broadway
Winnipeg Manitoba Canada R3C 3T8
Telephone: (204) 956-7200
Telefax: (204) 926-7201
- --------------------------------------------------------------------------------
Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders of TAX DEPOT INC.
We have audited the consolidated balance sheet of TAX DEPOT INC. as at April 30,
1998 and the consolidated statements of operations retained earnings and changes
in financial position for the period then ended. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at April 30, 1998
and the results of its operations and the changes in its financial position for
the period then ended in accordance with Canadian generally accepted accounting
principles.
BDO DUNWOODY
/s/ BDO Dunwoody
Chartered Accountants
Winnipeg, Manitoba
June 3, 1998
[BDO Dunwoody Chartered Accountants and Consultants LOGO]
BDO Dunwoody Chartered Accountants and Consultants
Wawanesa Building
5th Floor, 191 Broadway
Winnipeg Manitoba Canada R3C 3T8
Telephone: (204) 956-7200
Telefax: (204) 926-7201
- --------------------------------------------------------------------------------
Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders of TAX DEPOT INC.
We have audited the consolidated balance sheet of TAX DEPOT INC. as at August
31, 1997 and 1996 and the consolidated statements of operations, retained
earnings and changes in financial position for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at August 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years then ended in accordance with Canadian generally accepted
accounting principles.
BDO DUNWOODY
/s/ BDO Dunwoody
Chartered Accountants
Winnipeg, Manitoba
November 25, 1997
Tax Depot Inc.
Consolidated Financial Statements
For the year ended August 31, 1997
Tax Depot Inc.
Consolidated Financial Statements
For the year ended August 31,1997
CONTENTS
Auditors' Report 2
Financial Statements
Balance Sheet 3
Statement of Retained Earnings 4
Statement of Operations 5
Statement of Changes in Financial Position 6
Summary of Significant Accounting Policies 7
Notes to Financial Statements 8
Tax Depot Inc.
Consolidated Balance Sheet
August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Assets
Current
Accounts receivable $ 276,532 $ 422,622
Income taxes recoverable 1,948
Prepaid expenses 21,949 20,313
-------------------------
300,429 442,935
Capital Assets (Note 1) 102,502 -
Other Assets (Note 2) 31,528 -
-----------------------------
$ 434,459 $ 442,935
- --------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Current
Bank overdraft $ 42,337 $ 25,998
Accounts payable and accrued liabilities 6,741 44,562
Income taxes payable - 2,048
Due to related parties (Note 3) 383,240 370,110
-------------------------
$ 432,318 $ 442,718
Shareholder's equity
Share capital (Note 4) 100 100
Retained earrings 2,041 117
2,141 217
-------------------------
$ 434,459 $ 442,935
- --------------------------------------------------------------------------------
On behalf of the Board:
Director
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
Tax Depot Inc.
Consolidated Statement of Retained Earnings
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Retained earnings, beginning of year $ 117 $ (36)
Net Income for the year 1,924 153
-----------------------
Retained earnings, end of year $ 2,041 $ 117
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
Tax Depot Inc.
Consolidated Statement of Operations
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Sales $ 1,931,276 $ 2,058,006
----------------------------
Expenses
Advertising and promotion 132,759 123,620
Amortization 9,424 -
Bad debts 83,907 32,168
Bank charges 22,219 16,833
Consulting and other professional fees 84,891 78,936
Data processing 2,894 23,873
Equipment rental 42,568 39,383
Maintenance, taxes and insurance 51,395 63,715
Postage and delivery 56,542 53,083
Supplies 127,123 136,015
Tax discounting 746,532 884,021
Tax discounting - financing costs 30,167 81,601
Telephone 51,987 53,283
Travel and auto 42,111 107,574
Wages and benefits 444,833 361,700
----------------------------
1,929,352 2,055,805
----------------------------
Income before income taxes 1,924 2,201
Income taxes - 2,048
----------------------------
Net income for the year $ 1,924 $ 153
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
Tax Depot Inc.
Consolidated Statement of Changes in Financial Position
For the year ended August 31 1997 1996
- --------------------------------------------------------------------------------
In Canadian Dollars
Cash provided by (used in)
Operating activities
Net income for the year $ 1,924 $ 153
Items not involving cash
Amortization 9,424 -
--------------------------
11,348 153
Changes in non-cash working capital balances
Accounts receivable 146,091 (57,793)
Prepaid expenses (1,636) 5,043
Due from related parties 3,130 (10,480)
Accounts payable and accrued liabilities (37,821) 9,351
Income taxes recoverable/payable (3,996) 348
--------------------------
127,116 (53,378)
--------------------------
Investing activities
Purchase of capital assets (108,423) -
Purchase of goodwill (35,032) -
--------------------------
(143,455) -
Increase (decrease) in cash position during the year (16,339) (53,378)
Cash position, beginning of year (25,998) 27,380
--------------------------
Cash position, end of year (42,337) (25,998)
- --------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements
Tax Depot Inc.
Summary of Significant Accounting Policies
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
Nature of Business
The company is incorporated under the Companies Act of Manitoba and is engaged
in providing services including personal income tax return preparation and
personal income tax refund discounting throughout company-owned operations and
franchised agents.
Basis of Consolidation
These financial statements have been prepared using the purchase method of
consolidation. The assets and liabilities of the acquired companies are
initially recorded at their cost. The results of operations of the acquired
companies are included from the dates of acquisition. All significant
intercompany transactions and balances have been eliminated on consolidation.
The following subsidiaries' assets, liabilities, and operations are included in
these financial statements:
U & R/Tax Depot (Alberta) Inc. -100% owned
U & R Tax Services (N.S.) Limited -100% owned
Capital Assets
Capital assets are stated at cost less accumulated amortization. Amortization
based oil the estimated useful life of the asset is calculated as follows:
Office equipment ID% to 30% straight line Leasehold Improvements straight line
over term of lease
Other Assets
Goodwill is stated at cost less accumulated amortization. Amortization of
goodwill is provided on a straight line basis over its estimated useful life of
10 years.
Financial Instruments
The company's financial instruments consist of accounts receivable, income taxes
recoverable, bank overdraft, accounts payable and accrued liabilities, income
taxes payable and due to related parties. Unless otherwise noted, it is
management's opinion that the company is not exposed to significant interest,
currency or credit risks arising from these financial instruments. The fair
values of these financial instruments approximate their carrying values, unless
otherwise noted.
Tax Depot Inc.
Notes to Consolidated Financial Statements
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
1. Capital Assets 1997 1996
Cost Accumulated Cost Accumulated
Amortization Amortization
Office equipment $101,336 $ 5,921 $ - $ -
- -
Leasehold Improvements 7,087 - -
----------------------------------------------------
- -
$108,423 $ 5,921 $ - $ -
----------------------------------------------------
- -
Net book value $ 102,502 $ -
---------------------------------------------
- --------------------------------------------------------------------------------
2. Other Assets 1997 1996
Cost Accumulated Cost Accumulated
Amortization Amortization
Goodwill $ 35,032 $ 3,504 $ - $ -
--------------------------------------------------------
Net book value $ 31,528 $ -
--------------------------------------
Tax Depot Inc.
Notes to Consolidated Financial Statements
August 31, 1997
- ------------------------------------------------------------------------------
In Canadian Dollars
3. Related Party Transactions
The following table summarizes the company's related party transactions for the
year:
1997 1996
--------------------------
Sales of services to direct parent company $ 1,931,275 $ 2,058,006
Rental of asset from direct parent company 34,943 31,948
Interest oil, tax discounting advances from direct
parent company 30,157 81,601
These transactions are in the normal course of operations, and are measured at
the exchange amount, which is the amount of consideration established and agreed
to by the related parties.
At the end of the year, the amounts due to related entities are as follows:
1997 1996
--------------------------
Direct parent company $ 236,330 $ 362,876
Wholly-owned subsidiary of parent company 90,631 7,234
Other entity under common control 55,779 -
--------------------------
$ 333,240 $ 370,110
These balances are payable on demand and have arisen from the sale and purchase
of services referred to above.
- ------------------------------------------------------------------------------
4. Share Capital
1997 1996
------------------------
Authorized
Unlimited number of common shares
Issued
100 common shares $ 100 $ 100
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
See "Indemnification of Directors and Officers" in Prospectus
Item 25. Other Expenses of Issuance and Distribution
Registration and filing fees:
Securities and Exchange Commission: $ 1,143
Blue Sky: * 11,170
Printing: * 6,500
Accounting * 10,000
Total other expenses: * 71,187
--------
Total expenses: *$100,000 5
*____________________
*estimated
Item 26. Recent Sales of Unregistered Securities
In connection with incorporation of the Company in October 1996, John
Hewitt purchased 1,000 shares of Class B Common Stock for $.10 per share. In
December 1996, Mr. Hewitt contributed securities having an aggregate market
value of $176,000 in exchange for 44,000 shares of Class B Common Stock. In July
1997, the Company sold 200,000 shares of Class A Common Stock, at $10.00 per
share, to accredited investors in a private offering pursuant to Rule 506
promulgated under the Securities Act.
Item 27. Exhibits
10.4 Form of Franchise Agreement
10.5 Franchise Disclosure Document
23.1 Consent of Hamilton Dwyer & Company, P.C.
23.2 Consent of BDO Dunwoody
- ---------------
5 Offering expenses will comprise 3% of the maximum offering amount and 20%
of the minimum offering amount.
27 Financial data schedule
99.2 Escrow Agreement
99.3 Lock-Up Agreement
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
If the Company registers securities in the future under Rule 415 of
the Securities Act, the Company will file, during any period in which it offers
or sells securities, a post-effective amendment to this Registration Statement
to: (i) include any prospectus required by section 10(a)(3) of the Securities
Act, (ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement; and notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any derivation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement, and (ii)
include any additional or changed material information in the plan of
distribution. The Company will also treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering for determining
liability under the Securities Act and file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Virginia Beach, Commonwealth of
Virginia, on August 27, 1998
JTH TAX, INC.
By: /s/ John T. Hewitt
------------------------
JOHN T. HEWITT, Chairman,
Chief Executive Officer and President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
/s/ John T. Hewitt Date: August 27, 1998
- -------------------------------------
JOHN T. HEWITT, Chairman, Chief
Executive Officer and President
/s/ John K. Seal Date: August 27, 1998
- -------------------------------------
JOHN K. SEAL, Vice President of
Operations, Treasurer (Chief
Financial Officer and Chief
Accounting Officer) and Director
/s/ Martha O'Gorman Date: August 27, 1998
- ----------------------------------
MARTHA O'GORMAN, Vice President of
Marketing, and Director
/s/ Donna Halligan Date: August 27, 1998
- ----------------------------------
DONNA HALLIGAN, Vice President of
Franchise Support, Secretary
and Director
/s/ Kathleen Curry Date: August 27, 1998
- ---------------------------------
KATHLEEN CURRY, Vice President of
Technology, Legal Counsel and Director
By: /s/ John T. Hewitt Date: August 27, 1998
- -----------------------------------
John T. Hewitt, as attorney-in-fact for
each such person pursuant to power of
attorney heretofore filed as part of this
Registration Statement
- -------------------- COMPARISON OF NOTES --------------------
The Company also expects to open about 100 new franchised locations (90% in
Canada and 10% in the United States), however, none of the proceeds will be
allocated to the costs of these franchises.
- -Next footnote-
Most of these new offices are expected to be opened in Canada, however, a small
amount may be opened in the United States. The Company has not yet entered into
any agreements for these new offices.
- -Next footnote-
Existing tax practices are expected to be opened in both the Canadian and United
States markets. The Company has not yet entered into any agreements to purchase
these practices.
- -Next footnote-
The Company will purchase less expensive practices if only the minimum offering
proceeds are received.
- -Next footnote-
Offering expenses will comprise 3% of the maximum offering amount and 20% of the
minimum offering amount.