Jackson Hewitt Reports Fiscal 2006 Annual Results

PARSIPPANY, N.J., June 1 /PRNewswire-FirstCall/ -- Jackson Hewitt Tax Service Inc. today reported results for the fiscal year ended April 30, 2006. Driven by the filing of 3.66 million tax returns prepared by Jackson Hewitt offices during the year, total revenues increased to $275.3 million as compared to $232.5 million in the prior year. Net income increased to $57.9 million, or $1.59 per diluted share, as compared to $50.0 million, or $1.32 per diluted share, in the prior year.

Adjusted to exclude certain items, net income would have been $60.8 million and diluted earnings per share would have been $1.67, an increase of 32% and 37%, respectively, over the comparable prior year results. The adjustments, which are reconciled in a schedule at the end of this release, include the impact on revenues resulting from the prior agreement with Santa Barbara Bank & Trust and charges related to debt refinancing and litigation related costs.

The Board of Directors on May 31, 2006 authorized a $75 million share repurchase program and declared a 12 cents per share quarterly dividend, which represents a 50% increase. The dividend will be paid on July 14, 2006 to shareholders of record as of June 28, 2006.

"We are very pleased with the results of the past year," said Michael Lister, Chairman and Chief Executive Officer. "An early and aggressive start to the tax season, coupled with more locations, new themed advertising and enhanced products and services, was the catalyst for the great momentum that carried us through a very successful tax season. That momentum continues as we begin planning for success in 2007."

For the fiscal year, the number of tax returns prepared by the Company's national network of tax preparation offices increased by 10.2% to 3.66 million, principally driven by improved same store sales growth of 6% and a 9.8% increase in offices to 6,022. Average revenues per tax return prepared increased by 13.5% to $177.65. The network facilitated 3.43 million financial products, including Gold Guarantee(R), an increase of 12%.

Operating margins continued to expand due to operating leverage in the franchise model as well as a continued focus on growth in both revenue and profitability in the company-owned office operations segment. This resulted in another year of strong operating cash flow with a $125 million reduction in debt to $50.0 million and a cash balance of $15.2 million at April 30.

Franchise Operations

Revenues for the fiscal year increased by 20.2% to $203.7 million. Royalty revenues increased by 28.5% to $76.3 million and marketing and advertising revenues increased by 26.5% to $34.7 million as the Company successfully implemented its three-pronged strategy which included franchisees concentrating new office openings in particularly under-penetrated territories, enhancing products and services and updating the Company's advertising campaign. These efforts resulted in 11.3% growth in tax returns prepared, to 3.25 million, and a 13.7% increase in average revenues per tax return prepared. The average royalty, marketing and advertising rate increased to 19.2%, from 19.0%.

Financial product fees were $74.2 million for the year as a result of strong growth in total customers and improved product penetration rates. Revenue from the Gold Guarantee(R) product in 2006 of $8.5 million is included within financial product fees.

Under the new agreements with the providers of financial products to the Company's customers, the fees earned by the Company for technology support and access to its offices primarily consist of fixed fees with a small variable component tied to customer growth; these fees are included in "financial product fees". The Company no longer expects to earn "other financial product revenues" on refund anticipation loans that it facilitates.

Other revenues of $13.0 million includes fees generated from the sale of 205 territories during the year, in line with management's previously communicated expectations.

Income before income taxes increased by 21.7% to $126.4 million. Marketing expenses increased by 26.5%, in line with marketing and advertising revenue growth. Cost of franchise operations experienced more moderate increases and SG&A expenses declined, demonstrating the benefits of the franchise model.

Company-Owned Office Operations

Profitability further improved this year as company-owned office growth was more concentrated in existing territories. Service revenues increased by 13.7% and income before income taxes increased substantially as a percentage of revenues, from 11.5% to 18.0%, as the Company sold select markets in Texas and Massachusetts. Over the last two years, income before income tax margins in the company-owned segment have expanded from 4.1% to 18.0%.

Average revenues per tax return prepared increased by 11.4% to $174.06. The number of tax returns prepared grew by 2%, to 0.41 million. Adjusted to exclude the sale of select markets in Texas and Massachusetts to existing franchisees prior to the start of the 2006 tax season, tax return growth was 8% and service revenue growth was 20%.

Corporate and Other

Loss before income taxes increased by $13.9 million. Incremental expenses included $4.5 million for increased employee-related costs, $3.8 million for an accrual of litigation related costs, $2.7 million for a non-cash charge related to refinancing of the Company's debt in the first quarter, $1.4 million for Sarbanes-Oxley compliance costs and $1.0 million for incremental stock-based compensation costs. In the prior year, a $4.5 million non-cash charge was incurred related to the issuance to employees of vested stock options and common stock at the time of the IPO in June 2004.

Interest expense increased from $6.7 million to $8.3 million primarily as a result of generally higher market interest rates.

Conference Call

Michael Lister, Chairman and Chief Executive Officer, and Mark Heimbouch, Chief Financial Officer, will host a live webcast over the internet today, Thursday, June 1, 2006, at 11:00 a.m. Eastern Time. 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.

About Jackson Hewitt Tax Service Inc.

Jackson Hewitt Tax Service Inc. , with over 6,000 franchised and company-owned offices throughout the United States during the 2006 tax season, is an industry leader providing full service individual federal and state income tax preparation. Most offices are independently owned and operated. The Company is based in Parsippany, New Jersey. More information may be obtained at http://www.jacksonhewitt.com/. To locate the Jackson Hewitt Tax Service office nearest to you, call 1-800-234-1040.

Contacts: Investor Relations: Media Relations: David Kraut Sheila Cort Vice President, Vice President, Treasury and Investor Relations Corporate Communications 973-630-0821 973-630-0680

This press release contains statements, including without limitation, statements related to our share repurchase program and the manner in which we earn financial product revenues, that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward looking statements involve risks and uncertainties, 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; the Company's ability to maintain its quarterly dividend at the current level, government initiatives that simplify tax return preparation, improvements in the timing and efficiency of processing tax returns or a decrease in the number of tax returns filed or the size of tax refunds; 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 and retailers; the Company's compliance with revolving credit facility covenants; the Company's exposure to litigation; the seasonality of the Company's business and its effect on the stock price; and the effect of market conditions within the tax return preparation industry.

Additional information concerning these and other risks 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 other public filings with the Securities and Exchange Commission ("SEC"). Copies are available from the SEC or the Company's website. The Company assumes no obligation, and the Company expressly disclaims any obligation, to update or alter any forward-looking statements.

JACKSON HEWITT TAX SERVICE INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) As of As of April 30, 2006 April 30, 2005 Assets Current assets: Cash and cash equivalents $15,150 $113,264 Accounts receivable, net of allowance for doubtful accounts of $1,168 and $1,840, respectively 20,184 15,187 Notes receivable, net 4,830 3,156 Prepaid expenses and other 8,755 7,542 Deferred income taxes 4,285 3,446 Total current assets 53,204 142,595 Property and equipment, net 35,808 33,942 Goodwill 392,700 392,691 Other intangible assets, net 86,085 87,634 Notes receivable, net 3,453 2,765 Other non-current assets, net 16,535 15,462 Total assets $587,785 $675,089 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $44,030 $27,581 Income taxes payable 47,913 21,339 Deferred revenues 9,304 7,834 Total current liabilities 101,247 56,754 Long-term debt 50,000 175,000 Deferred income taxes 36,270 36,005 Other non-current liabilities 12,377 11,093 Total liabilities 199,894 278,852 Stockholders' equity: Common stock, par value $0.01 Authorized: 200,000,000 shares Issued: 37,843,898 and 37,634,327 shares, respectively 378 376 Additional paid-in capital 350,526 344,908 Retained earnings 97,381 50,953 Accumulated other comprehensive income 933 - Less: Treasury stock, at cost: 2,538,197 and zero shares, respectively (61,327) - Total stockholders' equity 387,891 396,237 Total liabilities and stockholders' equity $587,785 $675,089 JACKSON HEWITT TAX SERVICE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months Fiscal Year Ended Ended April 30, April 30, 2006 2005 2006 2005 Revenues Franchise operations revenues: Royalty $45,666 $38,174 $76,255 $59,360 Marketing and advertising 20,764 17,547 34,694 27,416 Financial product fees (a) 53,022 19,127 74,201 35,990 Other financial product revenues (a) - 25,817 5,518 33,934 Other 4,787 4,442 12,986 12,766 Service revenues from company-owned office operations 40,756 37,945 71,629 63,021 Total revenues 164,995 143,052 275,283 232,487 Expenses Cost of franchise operations 10,193 7,551 31,496 27,426 Marketing and advertising 18,335 12,791 40,977 32,966 Cost of company-owned office operations 22,415 21,282 46,479 42,928 Selling, general and administrative (b), (c) 13,240 7,501 39,936 30,397 Depreciation and amortization 3,186 2,751 11,428 11,398 Total expenses 67,369 51,876 170,316 145,115 Income from operations 97,626 91,176 104,967 87,372 Other income/(expense): Interest income 491 745 1,924 1,484 Interest expense (1,637) (2,161) (8,301) (6,700) Write-off of deferred financing costs (d) - - (2,677) - Gain on sale of assets, net - - 520 - Income before income taxes 96,480 89,760 96,433 82,156 Provision for income taxes 38,523 35,185 38,504 32,205 Net income $57,957 $54,575 $57,929 $49,951 Earnings per share: Basic $1.64 $1.45 $1.61 $1.33 Diluted $1.62 $1.44 $1.59 $1.32 Weighted average shares outstanding: Basic 35,320 37,651 36,061 37,615 Diluted 35,827 37,835 36,445 37,752 Notes to Consolidated Statements of Operations: (a) The Company executed new agreements with its financial product providers which became effective in the 2006 tax season. Under these agreements, the fees earned by the Company for technology support and access to its offices primarily consist of fixed fees with a small variable component tied to customer growth; both fees are included in "financial product fees". The Company no longer expects to earn "other financial product revenues" on refund anticipation loans that it facilitates. (b) In fiscal 2005, the Company incurred a $4.5 million stock-based compensation charge in connection with the initial public offering. (c) In fiscal 2006, the Company incurred litigation related costs of $3.8 million. (d) 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 Fiscal Year Ended Ended April 30, April 30, 2006 2005 2006 2005 Revenues Royalty $45,666 $38,174 $76,255 $59,360 Marketing and advertising 20,764 17,547 34,694 27,416 Financial product fees (a) 53,022 19,127 74,201 35,990 Other financial product revenues (a) - 25,817 5,518 33,934 Other 4,787 4,442 12,986 12,766 Total revenues 124,239 105,107 203,654 169,466 Expenses Cost of operations 10,193 7,551 31,496 27,426 Marketing and advertising 14,933 9,539 34,691 27,416 Selling, general and administrative 494 770 3,447 4,130 Depreciation and amortization 2,455 1,998 8,706 7,645 Total expenses 28,075 19,858 78,340 66,617 Income from operations 96,164 85,249 125,314 102,849 Other income/(expense): Interest income 192 315 1,121 1,029 Income before income taxes $96,356 $85,564 $126,435 $103,878 Note to Franchise Results of Operations: (a) The Company executed new agreements with its financial product providers which became effective in the 2006 tax season. Under these agreements, the fees earned by the Company for technology support and access to its offices primarily consist of fixed fees with a small variable component tied to customer growth; both fees are included in "financial product fees". The Company no longer expects to earn "other financial product revenues" on refund anticipation loans that it facilitates. JACKSON HEWITT TAX SERVICE INC. COMPANY-OWNED OFFICE RESULTS OF OPERATIONS (Unaudited) (In thousands) Three Months Fiscal Year Ended Ended April 30, April 30, 2006 2005 2006 2005 Revenues Service revenues from operations $40,756 $37,945 $71,629 $63,021 Expenses Cost of operations 22,415 21,282 46,479 42,928 Marketing and advertising 3,402 3,252 6,286 5,550 Selling, general and administrative 1,363 995 3,772 3,554 Depreciation and amortization 731 753 2,722 3,753 Total expenses 27,911 26,282 59,259 55,785 Income from operations 12,845 11,663 12,370 7,236 Other income/(expense): Interest income - - - 25 Gain on sale of assets, net - - 520 - Income before income taxes $12,845 $11,663 $12,890 $7,261 JACKSON HEWITT TAX SERVICE INC. CORPORATE AND OTHER (Unaudited) (In thousands) Three Months Fiscal Year Ended Ended April 30, April 30, 2006 2005 2006 2005 Expenses (a) General and administrative $10,317 $6,031 $26,109 $17,006 Stock-based compensation 766 350 2,808 1,844 Stock-based compensation related to initial public offering - - - 4,508 Litigation related costs 300 - 3,800 - Litigation settlement recovery - (645) - (645) Total expenses 11,383 5,736 32,717 22,713 Loss from operations (11,383) (5,736) (32,717) (22,713) Other income/(expense): Interest income 299 430 803 430 Interest expense (1,637) (2,161) (8,301) (6,700) Write-off of deferred financing costs (b) - - (2,677) - Loss before income taxes $(12,721) $(7,467)$(42,892)$(28,983) Notes to Corporate and Other: (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. SELECTED KEY OPERATING STATISTICS (Unaudited) Operating Statistics: Three Months Fiscal Year Ended Ended April 30, April 30, 2006 2005 2006 2005 Offices: Franchise operations 5,379 4,871 5,379 4,871 Company-owned office operations 643 613 643 613 Total offices - system 6,022 5,484 6,022 5,484 Tax returns prepared (in thousands): Franchise operations 1,997 1,879 3,246 2,917 Company-owned office operations 258 258 412 403 Total tax returns prepared - system 2,255 2,137 3,658 3,320 Average revenues per tax return prepared: Franchise operations (1) $173.26 $155.69 $178.10 $156.61 Company-owned office operations (2) $158.25 $146.87 $174.06 $156.18 Average revenues per tax return prepared - system $171.55 $154.60 $177.65 $156.56 Financial products (in thousands)(3) 2,146 2,022 3,430 3,052 Average financial product fees per financial product (4) $24.71 N/A $21.63 N/A Notes: (1) Calculated as total revenues earned by the Company's franchisees, which does not represent revenues earned by the Company, divided by the number of tax returns prepared by the Company's franchisees (see calculation below). The Company earns royalty and marketing and advertising revenues, which represent a percentage of the revenues received by the Company's franchisees. (2) Calculated as tax preparation revenues and related fees earned by company-owned offices (as reflected in the Consolidated Statements of Operations) divided by the number of tax returns prepared by company- owned offices. (3) Consists of refund-based financial products and Gold Guarantee(R) products. (4) Calculated as revenues earned from financial product fees (as reflected in the Consolidated Statements of Operations) divided by the number of financial products facilitated. Prior period data is not comparable due to new financial product agreements effective in 2006 tax season. Calculation of average revenues per tax return prepared in Franchise Operations: Three Months Fiscal Year Ended Ended April 30, April 30, (dollars in thousands, except per tax return prepared data) 2006 2005 2006 2005 Total revenues earned by the Company's franchisees (A) $346,062 $292,592 $578,175 $456,820 Average royalty rate (B) 13.20% 13.05% 13.19% 12.99% Marketing and advertising rate (C) 6.00% 6.00% 6.00% 6.00% Combined royalty and marketing and advertising rate (B plus C) 19.20% 19.05% 19.19% 18.99% Royalty revenues (A times B) $45,666 $38,174 $76,255 $59,360 Marketing and advertising revenues (A times C) 20,764 17,547 34,694 27,416 Total royalty and marketing and advertising revenues $66,430 $55,721 $110,949 $86,776 Number of tax returns prepared by the Company's franchisees (D) 1,997 1,879 3,246 2,917 Average revenues per tax return prepared by the Company's franchisees (A divided by D) $173.26 $155.69 $178.10 $156.61 Amounts may not recalculate precisely due to rounding differences. JACKSON HEWITT TAX SERVICE INC. ADJUSTED RESULTS OF OPERATIONS (unaudited) (dollars in thousands, except per share amounts) Three Months Ended April 30, 2006 2005 % Change Total revenues, as reported $164,995 $143,052 15% Less: Other financial products revenues related to SBB&T, as reported - (24,326) Add: Other financial products revenues if 2005 agreement with SBB&T had been in effect for RALs facilitated in all prior periods (a) - 19,031 Total revenues, as adjusted $164,995 $137,757 20% Net income, as reported $57,957 $54,575 6% Less: Other financial products revenues related to SBB&T, as reported - (24,326) Add: Other financial products revenues if 2005 agreement with SBB&T had been in effect for RALs facilitated in all prior periods (a) - 19,031 Less: Stock-based compensation charge related to the IPO (b) - - Less: Write-off of deferred financing costs (c) - - Less: Litigation settlement recovery - (645) Less: Litigation related costs 300 - Adjustment to as reported provision for income taxes 120 (2,328) Net income, as adjusted $58,137 $50,963 14% Earnings per share, as reported Basic $1.64 $1.45 13% Diluted $1.62 $1.44 13% Earnings per share, as adjusted Basic $1.65 $1.35 22% Diluted $1.62 $1.35 20% JACKSON HEWITT TAX SERVICE INC. ADJUSTED RESULTS OF OPERATIONS (unaudited) (dollars in thousands, except per share amounts) Fiscal Years Ended April 30, 2006 2005 % Change Total revenues, as reported $275,283 $232,487 18% Less: Other financial products revenues related to SBB&T, as reported (2,932) (30,700) Add: Other financial products revenues if 2005 agreement with SBB&T had been in effect for RALs facilitated in all prior periods (a) 1,232 20,596 Total revenues, as adjusted $273,583 $222,383 23% Net income, as reported $57,929 $49,951 16% Less: Other financial products revenues related to SBB&T, as reported (2,932) (30,700) Add: Other financial products revenues if 2005 agreement with SBB&T had been in effect for RALs facilitated in all prior periods (a) 1,232 20,596 Less: Stock-based compensation charge related to the IPO (b) - 4,508 Less: Write-off of deferred financing costs (c) 2,677 - Less: Litigation settlement recovery - (645) Less: Litigation related costs 3,800 - Adjustment to as reported provision for income taxes 1,907 (2,446) Net income, as adjusted $60,799 $46,156 32% Earnings per share, as reported Basic $1.61 $1.33 21% Diluted $1.59 $1.32 20% Earnings per share, as adjusted Basic $1.69 $1.23 37% Diluted $1.67 $1.22 37% 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 of America. 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 income and earnings per share on an "as adjusted" basis, which are non- GAAP financial measures, is necessary to reflect the impact of the agreement with Santa Barbara Bank & Trust ("SBB&T") for the 2005 tax season 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 periods presented to its financial results for prior periods presented. (a) The Company entered into an agreement with SBB&T which was effective with the facilitation of refund anticipation loans ("RALs") for the 2005 tax season. 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 agreement had been in effect for RALs facilitated in all prior periods. (b) In fiscal 2005, the Company incurred a $4.5 million stock-based compensation charge in connection with the initial public offering. (c) 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.