Jackson Hewitt Reports First Quarter Fiscal 2006 Results

PARSIPPANY, N.J., Aug. 25 /PRNewswire-FirstCall/ -- Jackson Hewitt Tax Service Inc. today reported financial results for the first quarter of fiscal 2006. Revenues in the current quarter were $6.1 million as compared to $8.8 million in the prior year period. The net loss in the current quarter of $13.2 million ($0.35 per share), as compared to a net loss of $11.4 million ($0.30 per share) in the prior year period, included a $2.7 million charge ($0.04 per share) related to the Company's debt refinancing as well as a $2.1 million decline ($0.03 per share) in revenue associated with the change in the Company's agreement with Santa Barbara Bank & Trust ("SBB&T"). Jackson Hewitt typically generates a loss in the first and second fiscal quarters due to the seasonal nature of the tax service business.

"With the record 2005 tax season behind us, the first quarter included significant events such as our debt refinancing that reduced borrowing costs and increased flexibility for our recently announced share repurchase program," said Michael Lister, Chairman and Chief Executive Officer. "In our second quarter, our franchisees and employees are finalizing plans for our annual tax course offerings and diligently preparing for the upcoming tax season in order to meet our customers' needs."

The Company's Board of Directors declared a quarterly cash dividend of $0.08 per share of common stock payable on October 14, 2005 to stockholders of record as of September 28, 2005.

Through the end of the first quarter, the Company repurchased 860,600 shares of common stock at a total cost of $20.3 million. As of July 31, 2005, approximately $41.1 million remained available under the previously announced share repurchase program.

Revenues declined principally due to a change in the agreement with SBB&T which resulted in lower other financial product revenues earned beginning in the 2005 tax season. As a result, the current quarter included $0.8 million ($0.01 per share) of other financial product revenues related to SBB&T refund anticipation loans facilitated in prior years, as compared to $2.9 million earned in the first quarter of fiscal 2005. The results for the prior year period also included a $4.5 million stock-based compensation charge related to the Company's initial public offering ("IPO").

Franchise Operations

Revenues in the current quarter were $5.8 million as compared to $8.3 million in the prior year period. The decline was primarily attributable to the change associated with the SBB&T agreement that became effective with the 2005 tax season. The Company now earns primarily a fixed fee during tax season when refund anticipation loans are facilitated with SBB&T. It is anticipated that other financial product revenues will continue to decline in the first two quarters of each fiscal period, on a year over year basis.

Financial product fees increased to $1.8 million in the current quarter, reflecting growth in the Gold Guarantee(R) program in 2005. Other revenues of $2.0 million included $1.1 million from the sale of 52 new territories to franchisees.

Cost of operations increased by $0.7 million in the current quarter, largely due to higher costs related to growth in the Gold Guarantee program. Marketing and advertising expenses increased by $0.5 million in anticipation of growth in the business. Loss before income taxes was $6.9 million, as compared to $3.3 million in the same period last year.

Company Owned-Office Operations

The loss before income taxes was $5.3 million in the current quarter as compared to $6.3 million in the prior year period primarily due to a $0.5 million recovery of previously written-off receivables as well as modest declines in other expenses.

Corporate and Other

General and administrative expenses increased primarily due to incremental costs following the IPO such as directors' and officers' insurance and other administrative expenses incurred for the entire current fiscal quarter as compared to just over one month in the prior year period beginning at the date of the IPO. In addition to the $2.7 million non-cash write-off of deferred financing costs, interest expense increased by $1.3 million, primarily due to a full quarter of interest expense on the outstanding debt that was established in last year's first quarter and higher interest rates. In 2005, the Company incurred a $4.5 million stock-based compensation charge related to the IPO.

New Credit Facility

The Company established a new $250 million, five-year unsecured revolving credit facility that replaced its previous term debt and revolving credit line. The new credit facility reduces the borrowing spread by approximately 0.50% annually and additionally reduces the amortization of deferred financing costs by approximately $500,000 annually.

Conference Call

Michael Lister, Chairman and Chief Executive Officer, and Mark Heimbouch, Chief Financial Officer, will host a live webcast over the internet later this morning at 11:00 a.m. Eastern Time to discuss the quarter's results. Please visit the investor relations tab of the Company's website, http://www.jacksonhewitt.com/, at least 10 minutes prior to the beginning of the call in order to access the webcast.

This press release contains forward-looking statements based upon current information and expectations, including the Company's expectations regarding the continuation of its share repurchase program. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including but not limited to: the Company's ability to achieve the same level of growth in revenues and profits that it has in the past; government initiatives that simplify tax return preparation and government legislation and regulation of the industry and products and services, including refund anticipation loans; the success of the Company's franchise operations; changes in the Company's relationship with financial product providers; the seasonality of the Company's business and its effect on the stock price; the Company's compliance with its revolving credit facility covenants; the Company's exposure to litigation; and, the effect of market conditions within the tax return preparation industry. Additional information concerning these and other factors that could impact the Company's business can be found in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2005 and its other public filings with the Securities and Exchange Commission ("SEC"). Copies are available from the SEC or the Jackson Hewitt website. The Company assumes no obligation to update any forward- looking statements or information, which speak only as of the date they were made.

About Jackson Hewitt Tax Service Inc.

Jackson Hewitt Tax Service Inc. is the second largest tax preparation service company in the United States, with over 5,400 franchised and company-owned offices in 49 states and the District of Columbia. Specializing in electronic filing (IRS e-file), the Company provides full service, individual federal and state income tax preparation and facilitates related financial products. Most Jackson Hewitt offices are independently owned and operated. Jackson Hewitt is based in Parsippany, New Jersey. More information about the Company may be obtained by visiting the Company's website at http://www.jacksonhewitt.com/.

JACKSON HEWITT TAX SERVICE INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) As of As of July 31, 2005 April 30, 2005 --------------- --------------- Assets Current assets: Cash and cash equivalents (a) $1,565 $113,264 Accounts receivable, net of allowance for doubtful accounts of $1,878 and $1,840, respectively 2,453 15,187 Notes receivable, net 3,561 3,156 Prepaid expenses and other 7,048 7,542 Deferred income taxes 4,238 3,446 --------------- --------------- Total current assets 18,865 142,595 Property and equipment, net 32,499 33,942 Goodwill 392,877 392,691 Other intangible assets, net 87,001 87,634 Notes receivable, net 3,385 2,765 Other non-current assets, net 13,395 15,462 --------------- --------------- Total assets $548,022 $675,089 =============== =============== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $13,180 $27,581 Income taxes payable 8,959 21,339 Deferred revenues 8,152 7,834 --------------- --------------- Total current liabilities 30,291 56,754 Long-term debt (a) 110,000 175,000 Deferred income taxes 36,761 36,005 Other non-current liabilities 8,370 11,093 --------------- --------------- Total liabilities 185,422 278,852 --------------- --------------- Stockholders' equity: Common stock, par value $0.01 Authorized: 200,000,000 shares Issued: 37,762,412 and 37,634,327 shares, respectively 378 376 Additional paid-in capital 347,733 344,908 Retained earnings 34,762 50,953 Less: Treasury stock, at cost: 860,600 and zero shares, respectively (20,273) - --------------- --------------- Total stockholders' equity 362,600 396,237 --------------- --------------- Total liabilities and stockholders' equity $548,022 $675,089 =============== =============== Note to the Consolidated Balance Sheets: (a) In June 2005, the Company repaid the entire $175.0 million of five- year floating rate senior unsecured notes with cash from operations and borrowings under its five-year unsecured revolving credit facility. JACKSON HEWITT TAX SERVICE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Ended July 31, --------------------------------- 2005 2004 --------------- --------------- Revenues Franchise operations revenues: Royalty $455 $600 Marketing and advertising 210 275 Financial product fees 1,846 1,702 Other financial product revenues 1,310 3,496 Other 1,982 2,259 Service revenues from company-owned office operations 304 451 --------------- --------------- Total revenues 6,107 8,783 --------------- --------------- Expenses Cost of franchise operations 7,512 6,854 Marketing and advertising 2,683 2,212 Cost of company-owned office operations 4,179 4,617 Selling, general and administrative (a) 6,837 10,480 Depreciation and amortization 2,659 2,839 --------------- --------------- Total expenses 23,870 27,002 --------------- --------------- Loss from operations (17,763) (18,219) Other income/(expense): Interest income 730 152 Interest expense (2,034) (757) Write-off of deferred financing costs (b) (2,677) - --------------- --------------- Loss before income taxes (21,744) (18,824) Benefit from income taxes (8,537) (7,378) --------------- --------------- Net loss $(13,207) $(11,446) =============== =============== Loss per share: Basic and diluted $(0.35) $(0.30) =============== =============== Notes to the Consolidated Statements of Operations: (a) In the three months ended July 31, 2004, the Company incurred a $4.5 million stock-based compensation charge in connection with the initial public offering. (b) Represents a non-cash charge associated with the repayment of $175.0 million five-year floating rate unsecured notes and the termination of the Company's $100.0 million five-year revolving credit facility. JACKSON HEWITT TAX SERVICE INC. FRANCHISE RESULTS OF OPERATIONS (Unaudited) (In thousands) Three Months Ended July 31, --------------------------------- 2005 2004 --------------- --------------- Revenues Royalty $455 $600 Marketing and advertising 210 275 Financial product fees 1,846 1,702 Other financial product revenues 1,310 3,496 Other 1,982 2,259 --------------- --------------- Total revenues 5,803 8,332 --------------- --------------- Expenses Cost of operations 7,512 6,854 Marketing and advertising 2,499 1,971 Selling, general and administrative 881 1,014 Depreciation and amortization 1,983 1,892 --------------- --------------- Total expenses 12,875 11,731 --------------- --------------- Loss from operations (7,072) (3,399) Other income/(expense): Interest income 189 146 --------------- --------------- Loss before income taxes $(6,883) $(3,253) =============== =============== JACKSON HEWITT TAX SERVICE INC. COMPANY-OWNED OFFICE RESULTS OF OPERATIONS (Unaudited) (In thousands) Three Months Ended July 31, --------------------------------- 2005 2004 --------------- -------------- Revenues Service revenues from operations $304 $451 --------------- --------------- Expenses Cost of operations 4,179 4,617 Marketing and advertising 184 241 Selling, general and administrative 612 920 Depreciation and amortization 676 947 --------------- --------------- Total expenses 5,651 6,725 --------------- --------------- Loss from operations (5,347) (6,274) Other income/(expense): Interest income - 6 --------------- --------------- Loss before income taxes $(5,347) $(6,268) =============== =============== JACKSON HEWITT TAX SERVICE INC. CORPORATE AND OTHER RESULTS OF OPERATIONS (Unaudited) (In thousands) Three Months Ended July 31, --------------------------------- 2005 2004 --------------- --------------- Expenses (a) General and administrative $5,344 $4,038 Stock-based compensation charge related to initial public offering - 4,508 --------------- --------------- Total expenses 5,344 8,546 --------------- --------------- Other income/(expense): Interest income 541 - Interest expense (2,034) (757) Write-off of deferred financing costs (b) (2,677) - --------------- --------------- Loss before income taxes $(9,514) $(9,303) =============== =============== Notes to Corporate and Other Results of Operations: (a) Included in selling, general and administrative in the Consolidated Statements of Operations. (b) Represents a non-cash charge associated with the repayment of $175.0 million five-year floating rate unsecured notes and the termination of the Company's $100.0 million five-year revolving credit facility. JACKSON HEWITT TAX SERVICE INC. ADJUSTED RESULTS OF OPERATIONS (unaudited) (In thousands, except per share amounts) Three Months Ended July 31, --------------------------------- 2005 2004 --------------- --------------- Total revenues, as reported $6,107 $8,783 Less: Other financial product revenues related to SBB&T, as reported (a) (771) (2,919) --------------- --------------- Total revenues, as adjusted $5,336 $5,864 =============== =============== Net loss, as reported $(13,207) $(11,446) Less: Other financial product revenues related to SBB&T, as reported (771) (2,919) Add: Stock-based compensation charge related to initial public offering - 4,508 Add: Write-off of deferred financing costs (b) 2,677 - Adjustment to as reported benefit from income taxes 748 623 --------------- --------------- Net loss, as adjusted $(12,049) $(10,480) =============== =============== Loss per share, as reported Basic and diluted $(0.35) $(0.30) =============== =============== Loss per share, as adjusted Basic and diluted $(0.32) $(0.28) =============== =============== Notes to Adjusted Results of Operations: A "non-GAAP financial measure" is defined as a numerical measure of a company's performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles ("GAAP") in the United States. In the schedule presented above, the Company has included a comparison of such non-GAAP financial measures to the most directly comparable GAAP financial measures. Management believes the above presentation of total revenues, net loss and loss per share on an "as adjusted" basis, which are non-GAAP financial measures, is necessary to reflect the impact of the current agreement with SBB&T as if such agreement was in effect for all periods presented as well as to reflect the impact of adjusting certain significant items in the results of operations in order to help investors compare, on an equivalent basis, the Company's financial results for the current period presented to its financial results for the prior period presented. (a) The Company's current agreement with SBB&T became effective with the facilitation of refund anticipation loans ("RALs") beginning in January 2005. Other financial product revenues were adjusted to exclude revenues under the prior agreement in which the Company primarily earned a portion of the difference between finance fees paid by customers to SBB&T and the loan amounts that SBB&T was unable to collect and has been prepared as if the current agreement had been in effect for RALs facilitated in all prior periods. (b) Represents a non-cash charge associated with the repayment of $175.0 million five-year floating rate unsecured notes and the termination of the Company's $100.0 million five-year revolving credit facility.