**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                                                                                                                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                | ** ** | ** **                                                                                    |
| **For the quarterly period ended January 31, 2005**                                                                                       |
| ** **                                                                                                                                | ** ** | ** **                                                                                    |
| **OR**                                                                                                                                    |
| ** **                                                                                                                                | ** ** | ** **                                                                                    |
| **o**                                                                                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                | ** ** | ** **                                                                                    |
| **For the transition period from           to          ** |

 

**Commission file number 1-32215**

 

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**Jackson Hewitt Tax Service Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                     | **20-0779692**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S.  Employer Identification No.) |

 

**7 Sylvan WayParsippany, New Jersey 07054**

(Address of principalexecutive offices including zip code)

 

**(973) 496-1040**

(Registrant’s telephonenumber, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2 of theExchange Act).  Yes o  No ý

 

The number of sharesoutstanding of the registrant’s common stock was 37,626,049 as of February 28,2005.

 

 

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###### **JACKSON HEWITT TAX SERVICE,INC.**

###### ** **

**TABLE OF CONTENTS**

 
| **PART 1 - FINANCIAL INFORMATION** |                                                                                        |
|------------------------------------|---------------------------------------------------------------------------------------------|
|                               |                                                                                        | **Page** |
| Item  1.                           | Consolidated  Financial Statements (Unaudited):                                             | 3 |
|                               |                                                                                        |   |
|                               | Consolidated  Statements of Operations                                                      | 3 |
|                               |                                                                                        |   |
|                               | Consolidated Balance  Sheets                                                                | 4 |
|                               |                                                                                        |   |
|                               | Consolidated  Statements of Cash Flows                                                      | 5 |
|                               |                                                                                        |   |
|                               | Notes to  Consolidated Financial Statements                                                 | 6 |
|                               |                                                                                        |   |
| Item  2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18 |
|                               |                                                                                        |   |
| Item 3.                            | Quantitative and Qualitative Disclosures about  Market Risk                                 | 30 |
|                               |                                                                                        |   |
| Item 4.                            | Controls and Procedures                                                                     | 30 |
|                               |                                                                                        |   |
| **PART II - OTHER  INFORMATION**   |                                                                                        |
|                               |                                                                                        |   |
| Item 1.                            | Legal Proceedings                                                                           | 31 |
|                               |                                                                                        |   |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 31 |
|                               |                                                                                        |   |
| Item 3.                            | Defaults  Upon Senior Securities                                                            | 31 |
|                               |                                                                                        |   |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                        | 31 |
|                               |                                                                                        |   |
| Item 5.                            | Other  Information                                                                          | 31 |
|                               |                                                                                        |   |
| Item 6.                            | Exhibits                                                                                    | 31 |
|                               |                                                                                        |   |
|                               | Signatures                                                                                  | 32 |

 

2

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**PART 1****—FINANCIAL INFORMATION**

 

**Item 1****.* *Consolidated****FinancialStatement****s (Unaudited)**

 

**JACKSONHEWITT TAX SERVICE INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(Unaudited)**

**(Dollars inthousands, except per share amounts)**

 
| ** **                                               | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                             |       |                                     |       |                                    |       |   |   |   |   |
| Franchise operations revenues:                           |       |                                     |       |                                    |       |   |   |   |   |
| Royalty                                                  |       | $                                        | 20,197     |                                    | $          | 16,546 |   | $ | 21,186 |   | $ | 17,288 |   |
| Marketing and advertising                                |       | 9,414                                    |       | 7,829                                   |       | 9,869 |   | 8,182 |   |
| Financial product fees                                   |       | 13,673                                   |       | 10,345                                  |       | 16,863 |   | 11,624 |   |
| Other financial product revenues                         |       | 2,277                                    |       | 1,300                                   |       | 8,117 |   | 6,678 |   |
| Other                                                    |       | 3,663                                    |       | 3,811                                   |       | 8,324 |   | 8,077 |   |
| Service revenues from company-owned office  operations   |       | 24,013                                   |       | 19,695                                  |       | 25,076 |   | 20,995 |   |
| Total revenues                                           |       | 73,237                                   |       | 59,526                                  |       | 89,435 |   | 72,844 |   |
|                                                     |       |                                     |       |                                    |       |   |   |   |   |
| **Expenses**                                             |       |                                     |       |                                    |       |   |   |   |   |
| Cost of franchise operations                             |       | 6,577                                    |       | 6,079                                   |       | 19,875 |   | 17,927 |   |
| Marketing and advertising                                |       | 14,977                                   |       | 13,563                                  |       | 20,175 |   | 18,334 |   |
| Cost of company-owned office operations                  |       | 12,107                                   |       | 12,462                                  |       | 21,646 |   | 20,984 |   |
| Selling, general and administrative                      |       | 6,209                                    |       | 5,667                                   |       | 22,896 |   | 22,660 |   |
| Depreciation and amortization                            |       | 2,850                                    |       | 2,987                                   |       | 8,647 |   | 8,941 |   |
| Total expenses                                           |       | 42,720                                   |       | 40,758                                  |       | 93,239 |   | 88,846 |   |
|                                                     |       |                                     |       |                                    |       |   |   |   |   |
| **Income (loss) from operations**                        |       | 30,517                                   |       | 18,768                                  |       | (3,804 | ) | (16,002 | ) |
| Other income/(expense):                                  |       |                                     |       |                                    |       |   |   |   |   |
| Interest income                                          |       | 355                                      |       | 247                                     |       | 739 |   | 549 |   |
| Interest expense                                         |       | (2,022                                   | )          | (111                                    | )          | (4,539 | ) | (262 | ) |
| Income (loss) before income taxes                        |       | 28,850                                   |       | 18,904                                  |       | (7,604 | ) | (15,715 | ) |
| Provision for (benefit from) income taxes                |       | 11,304                                   |       | 7,510                                   |       | (2,980 | ) | (6,244 | ) |
| Net income (loss)                                        |       | $                                        | 17,546     |                                    | $          | 11,394 |   | $ | (4,624 | ) | $ | (9,471 | ) |
|                                                     |       |                                     |       |                                    |       |   |   |   |   |
| **Earnings (loss) per share:**                           |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                    |       | $                                        | 0.47       |                                    | $          | 0.30 |   | $ | (0.12 | ) | $ | (0.25 | ) |
| Diluted                                                  |       | $                                        | 0.46       |                                    | $          | 0.30 |   | $ | (0.12 | ) | $ | (0.25 | ) |
|                                                     |       |                                     |       |                                    |       |   |   |   |   |
| **Weighted average shares outstanding (in  thousands):** |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                    |       | 37,640                                   |       | 37,500                                  |       | 37,603 |   | 37,500 |   |
| Diluted                                                  |       | 38,030                                   |       | 37,500                                  |       | 37,603 |   | 37,500 |   |

 

The accompanying notes arean integral part of these Consolidated Financial Statements.

 

3

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**JACKSONHEWITT TAX SERVICE INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

 

**(Unaudited)**

**(Dollars inthousands, except per share amounts)**

 
| ** **                                                                                                                              | ** ** | **As of**               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                              | ** ** | **January 31,****2005** | ** ** | **April 30,****2004** | ** ** |
| **Assets**                                                                                                                              |       |                    |       |   |   |
| Current assets:                                                                                                                         |       |                    |       |   |   |
| Cash and cash equivalents                                                                                                               |       | $                       | 717        |   | $ | 5,266 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,655 and $1,121, respectively                               |       | 55,768                  |       | 31,315 |   |
| Notes receivable, net                                                                                                                   |       | 3,618                   |       | 1,944 |   |
| Prepaid expenses and other                                                                                                              |       | 7,089                   |       | 4,810 |   |
| Deferred income taxes                                                                                                                   |       | 5,573                   |       | 5,074 |   |
| Total current assets                                                                                                                    |       | 72,765                  |       | 48,409 |   |
|                                                                                                                                    |       |                    |       |   |   |
| Property and equipment, net                                                                                                             |       | 34,639                  |       | 37,347 |   |
| Goodwill                                                                                                                                |       | 392,691                 |       | 392,368 |   |
| Other intangible assets, net                                                                                                            |       | 88,309                  |       | 89,902 |   |
| Due from Cendant Corporation                                                                                                            |       | —                  |       | 143,985 |   |
| Notes receivable, net                                                                                                                   |       | 3,883                   |       | 1,985 |   |
| Other non-current assets                                                                                                                |       | 14,946                  |       | 11,946 |   |
| Total assets                                                                                                                            |       | $                       | 607,233    |   | $ | 725,942 |   |
| ** **                                                                                                                              | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                           |       |                    |       |   |   |
| Current liabilities:                                                                                                                    |       |                    |       |   |   |
| Accounts payable and accrued liabilities                                                                                                |       | $                       | 29,076     |   | $ | 26,095 |   |
| Deferred revenues                                                                                                                       |       | 12,746                  |       | 5,558 |   |
| Short-term borrowings.                                                                                                                  |       | 12,000                  |       | — |   |
| Total current liabilities                                                                                                               |       | 53,822                  |       | 31,653 |   |
|                                                                                                                                    |       |                    |       |   |   |
| Long-term debt                                                                                                                          |       | 175,000                 |       | — |   |
| Deferred income taxes                                                                                                                   |       | 26,458                  |       | 26,335 |   |
| Other non-current liabilities                                                                                                           |       | 8,265                   |       | 12,858 |   |
| Total liabilities                                                                                                                       |       | 263,545                 |       | 70,846 |   |
| ** **                                                                                                                              | ** ** | ** **              | ** ** | ** ** | ** ** |
| Commitments and Contingencies (Note 12)                                                                                                 |       |                    |       |   |   |
|                                                                                                                                    |       |                    |       |   |   |
| Stockholders’ equity:                                                                                                              |       |                    |       |   |   |
| Common stock, par value $0.01; Authorized:  200,000,000 shares; Issued and outstanding: 37,624,449 and 37,500,000 shares,  respectively |       | 376                     |       | 375 |   |
| Additional paid-in capital                                                                                                              |       | 344,298                 |       | 475,844 |   |
| Retained earnings/(Accumulated deficit)                                                                                                 |       | (986                    | )          | 178,877 |   |
| Total stockholders’ equity                                                                                                         |       | 343,688                 |       | 655,096 |   |
| Total liabilities and stockholders’ equity                                                                                         |       | $                       | 607,233    |   | $ | 725,942 |   |

 

The accompanying notes arean integral part of these Consolidated Financial Statements.

 

4

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**JACKSONHEWITT TAX SERVICE INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(Unaudited)**

**(Dollars inthousands)**

 
| ** **                                                                   | ** ** | **Nine Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **Operating activities:**                                                    |       |                               |       |   |   |
| Net loss                                                                     |       | $                                  | (4,624     | ) | $ | (9,471 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                |       | 8,647                              |       | 8,941 |   |
| Amortization of Gold Guarantee product                                       |       | (1,182                             | )          | (630 | ) |
| Amortization of development advances                                         |       | 776                                |       | 628 |   |
| Amortization of deferred financing fees                                      |       | 387                                |       | — |   |
| Provision for uncollectible receivables                                      |       | 1,788                              |       | 2,096 |   |
| Decrease of bad debt reserve                                                 |       | —                             |       | (2,001 | ) |
| Stock-based compensation                                                     |       | 6,002                              |       | — |   |
| Provision for litigation settlement                                          |       | —                             |       | 8,899 |   |
| Deferred income taxes                                                        |       | (376                               | )          | (6,243 | ) |
| Changes in assets and liabilities,  excluding the impact of acquisitions:    |       |                               |       |   |   |
| Accounts receivable                                                          |       | (25,241                            | )          | (25,773 | ) |
| Notes receivable                                                             |       | (4,383                             | )          | (2,984 | ) |
| Prepaid expenses and other                                                   |       | (2,279                             | )          | (1,042 | ) |
| Other non-current assets                                                     |       | (1,699                             | )          | (981 | ) |
| Accounts payable and accrued liabilities                                     |       | 2,744                              |       | 3,466 |   |
| Deferred revenues                                                            |       | 9,592                              |       | 2,193 |   |
| Other non-current liabilities                                                |       | (2,933                             | )          | (355 | ) |
| Net cash used in operating activities                                        |       | (12,781                            | )          | (23,257 | ) |
|                                                                         |       |                               |       |   |   |
| **Investing activities:**                                                    |       |                               |       |   |   |
| Capital expenditures                                                         |       | (3,633                             | )          | (3,727 | ) |
| Funding of development advances                                              |       | (2,271                             | )          | (2,245 | ) |
| Cash paid for acquisitions                                                   |       | (1,698                             | )          | (2,220 | ) |
| Net cash used in investing activities                                        |       | (7,602                             | )          | (8,192 | ) |
|                                                                              |       |                                    |       |   |   |
| **Financing activities:**                                                    |       |                               |       |   |   |
| Proceeds from issuance of Notes                                              |       | 175,000                            |       | — |   |
| Cash portion of Special Dividend to Cendant  Corporation                     |       | (175,000                           | )          | — |   |
| Proceeds from borrowings from revolving  credit facility                     |       | 20,000                             |       | — |   |
| Repayment of borrowings from revolving  credit facility                      |       | (8,000                             | )          | — |   |
| Proceeds from issuance of common stock                                       |       | 304                                |       | — |   |
| Dividends paid to shareholders                                               |       | (5,266                             | )          | — |   |
| Debt issuance costs                                                          |       | (3,337                             | )          | — |   |
| Decrease in Due from Cendant Corporation                                     |       | 12,133                             |       | 38,309 |   |
| Net cash provided by financing activities                                    |       | 15,834                             |       | 38,309 |   |
|                                                                         |       |                               |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                        |       | (4,549                             | )          | 6,860 |   |
| Cash and cash equivalents, beginning of  period                              |       | 5,266                              |       | 1,543 |   |
| Cash and cash equivalents, end of period                                     |       | $                                  | 717        |   | $ | 8,403 |   |
|                                                                              |       |                               |       |   |   |
| Supplemental disclosure of non-cash  transactions:                           |       |                               |       |   |   |
| Special Dividend — Distribution of Due from  Cendant Corporation        |       | $                                  | 131,852    |   | $ | — |   |

 

The accompanying notes arean integral part of these Consolidated Financial Statements.

 

5

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**JACKSONHEWITT TAX SERVICE INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(Unlessotherwise noted, all dollar amounts are in thousands except per share amounts)**

 

**1.    BACKGROUNDAND BASIS OF PRESENTATION**

 

***Initial PublicOffering***

 

On June 25, 2004, CendantCorporation (“Cendant”) divested 100% of its ownership interest in JacksonHewitt Tax Service Inc. (“JHTS” or the “Company”) through an initial publicoffering (“IPO”). JHTS did not receive any proceeds from the sale of theCompany’s common stock by Cendant.  Incontemplation of the IPO, JHTS declared a stock dividend, which increased thenumber of common shares outstanding from 100 to 37,500,000. Stockholders’equity has been adjusted retroactively for the effect of the stock dividend forall periods presented prior to the separation from Cendant.

 

JHTS was incorporated inDelaware on February 20, 2004. Simultaneous with the incorporation, Cendantcontributed all outstanding shares of Jackson Hewitt Inc., a Virginiacorporation, to JHTS.  Jackson HewittInc. is a 100% owned subsidiary of JHTS. JHTS accounted for the contribution of outstanding shares as a change inreporting entities under common control and has recognized the outstandingshares at their carrying amounts at the date of transfer. Accordingly, theaccompanying consolidated financial statements have been prepared as thoughJHTS existed throughout the periods presented.

 

***Description ofBusiness***

 

Under the brand name JacksonHewitt Tax Service®, JHTS, through its subsidiaries, providescomputerized preparation of federal and state personal income tax returnsthrough a network of franchised and company-owned offices. The consolidatedfinancial statements include the accounts and transactions of JHTS and itssubsidiaries as well as entities in which JHTS directly or indirectly has acontrolling financial interest.

 

***Basis ofPresentation***

 

The accompanying unauditedinterim consolidated financial statements as of January 31, 2005 and for thethree and nine months ended January 31, 2005 and 2004, have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial statements and the rules and regulations of theSecurities and Exchange Commission (“SEC”) for interim financialstatements.  These interim financialstatements should be read in conjunction with the financial statements andother financial information included in the Company’s registration statement onForm S-1 for the fiscal year ended April 30, 2004 which were filed with the SECon June 21, 2004.

 

In presenting theconsolidated financial statements, management makes estimates and assumptionsthat affect the amounts reported and related disclosures. Estimates, by theirnature, are based on judgment and available information. Accordingly, actualresults could differ from those estimates. In the opinion of management, theaccompanying interim consolidated financial statements contain all normal andrecurring adjustments necessary for a fair presentation of the Company’sfinancial position, results of operations and cash flows.  The results of operations for the interimperiods reported are not necessarily indicative of the results of operationsthat may be expected for any future interim periods or for the full fiscalyear.

 

The Company’s results ofoperations and cash flows for the period from May 1, 2004 through the IPO dateand for the three and nine months ended January 31, 2004, reflect thehistorical results of operations and cash flows of the business divested byCendant in the IPO.  As a result, theaccompanying consolidated financial statements may not necessarily reflect theCompany’s results of operations and cash flows in the future or what the Company’sresults of operations and cash flows would have been had JHTS been astand-alone public company during these periods.  See Note 8, “Related Party Transactions,” fora more detailed description of the Company’s transactions with Cendant.

 

***Comprehensive Income (Loss)***

 

The Company’s comprehensive income (loss) is solely comprised of netincome (loss).

 

***Reclassifications***

 

Certain amounts presented in the prior year consolidated financialstatements have been reclassified to conform to the current year presentation.

 

**2.****    RECENT ACCOUNTING PRONOUNCEMENT AND****SIGNIFICANT ACCOUNTING POLICIES**

 

***Recent Accounting Pronouncement***

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which eliminatesthe alternative to measure stock-based compensation awards using the intrinsicvalue approach permitted by Accounting Principles Board Opinion (“APB”)No. 25, “Accounting for Stock Issued to Employees” and by SFAS No. 123,“Accounting for Stock-Based Compensation.” The Company is required to adopt the provisions ofSFAS No. 123R on August 1, 2005. As discussed below, onJanuary 1, 2003, the Company adopted the fair value method of accountingfor stock-based compensation provisions of SFAS No. 123 and thetransitional provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure.” As a result, the Company has been recording stock-based compensationexpense since January 1, 2003 for employee stock awards that were grantedor modified subsequent to December 31, 2002. In addition, the Company’scurrent practice with respect to forfeitures is to recognize the relatedbenefit upon forfeiture of the award. Upon adoption of SFAS No. 123R,the Company will be required to recognize compensation expense net of estimatedforfeitures upon the issuance of the award. Although the Company has not yetcompleted its assessment of adopting SFAS No. 123R, it does notbelieve that such adoption will significantly affect its net income (loss),financial position or cash flows.

 

 

6

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***Stock-Based Compensation***

 

Effective with the IPO, theCompany adopted the 2004 Equity and Incentive Plan under which the Company’semployeesand selectedothers may be granted certain equity-based awards.  As discussed more fully below, the Companyaccounts for such stock-based compensation in accordance with the provisions ofSFAS No. 123 as amended by SFAS No. 148.

 

Prior to the IPO, Cendantcommon stock awards were granted to the Company’s employees under Cendant’sstock plans. Prior to January 1, 2003, the Company measured stock-basedcompensation using the intrinsic value approach under APB No. 25, as permittedby SFAS No. 123. Accordingly, the Company did not recognize stock-basedcompensation expense upon the issuance of stock options to the Company’semployees because the option terms were fixed and the exercise price equaledthe market price of the underlying common stock on the date of grant.Therefore, the Company was not allocated compensation expense upon Cendant’sissuance of stock options to the Company’s employees.

 

On January 1, 2003, theCompany (in conjunction with Cendant’s adoption) adopted the fair value methodof accounting for stock-based compensation provisions of SFAS No. 123. TheCompany also adopted SFAS No. 148 in its entirety on January 1, 2003, whichamended SFAS No. 123 to provide alternative methods of transition for avoluntary change to the fair value based method of accounting. As a result, theCompany now expenses all employee stock awards over their vesting period, whichis typically four years, based upon the fair value of the award on the date ofgrant.   The fair value of stock optionsis estimated at the grant date using the Black-Scholes option-pricingmodel.  As the Company elected to use theprospective transition method, Cendant allocated expense to the Company onlyfor employee stock awards that were granted or modified subsequent to December 31,2002.

 

The following tableillustrates the effect on net income (loss) and earnings (loss) per share forthe three and nine months ended January 31, 2004, respectively, as if the fairvalue based method had been applied to all employee stock awards granted byCendant to the Company’s employees.

 
| ** **                                                                                                                                          | ** ** | **Three Months Ended January 31, 2004** | ** ** | **Nine Months Ended January 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| Net income (loss), as reported                                                                                                                      |       | $                                            | 11,394     |                                        | $          | (9,471 | ) |
| Add back: stock-based employee compensation  expense allocated from Cendant and included in reported net income (loss),  net of related tax effects |       | 73                                           |       | 227                                         |       |
|                                                                                                                                                |       |                                         |       |                                        |       |
| Less: total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects     |       | (160                                         | )          | (605                                        | )          |
| Pro forma net income (loss)                                                                                                                         |       | $                                            | 11,307     |                                        | $          | (9,849 | ) |
|                                                                                                                                                |       |                                         |       |                                        |       |
| Earnings (loss) per share, as reported:                                                                                                             |       |                                         |       |                                        |       |
| Basic                                                                                                                                               |       | $                                            | 0.30       |                                        | $          | (0.25 | ) |
| Diluted                                                                                                                                             |       | $                                            | 0.30       |                                        | $          | (0.25 | ) |
|                                                                                                                                                |       |                                         |       |                                        |       |
| Earnings (loss) per share, pro forma:                                                                                                               |       |                                         |       |                                        |       |
| Basic                                                                                                                                               |       | $                                            | 0.30       |                                        | $          | (0.26 | ) |
| Diluted                                                                                                                                             |       | $                                            | 0.30       |                                        | $          | (0.26 | ) |

 

See Note 10, “Stock-BasedCompensation,” for a more detailed description of the awards granted under theCompany’s 2004 Equity and Incentive Plan.

 

***Other Financial Product Revenues***

 

Otherfinancial product revenues represent a portion of the revenues the Companyearns from the facilitation of refund anticipation loans.  Santa Barbara Bank & Trust (“SBB&T”)is the financial institution that provided approximately 80% of the refundanticipation loans facilitated by the Company during the third quarter offiscal 2005.  On May 5, 2004, the Companyrenegotiated its agreement with SBB&T which became effective with refundanticipation loans facilitated during the current tax season.  In lieu of earning revenues based upon theamount of finance fees and uncollected loans, the new agreement with SBB&Tprovides for the following: (a) a fixed fee of $16.00 for each refundanticipation loan facilitated by the Company’s network; (b) the greater of anadditional fee of $2.00 for each refund anticipation loan facilitated by theCompany’s network in calendar 2005 or a portion of refund anticipation loanscollected during calendar 2005 that were originated during or prior to lastyear’s tax season; and (c) a variable fee equal to 50% of the amount by whichthe net amount of finance fees received by SBB&T exceeds uncollected loansby a threshold amount of at least 1.0% of the aggregate principal amount ofrefund anticipation loans made by SBB&T to the Company’s customers.

 

Additionally,if the amount of uncollected loans exceeds the net finance fees received bySBB&T, the Company has agreed to reimburse SBB&T in an amount equal to50% of such difference.  Until it becomesdeterminable that the Company will not have to reimburse SBB&T an amountequal to 50% of such difference, the Company has deferred revenues of $7.2million as of January 31, 2005 representing the fixed fee of $16.00 related torefund anticipation loans facilitated through SBB&T by the Company’snetwork during the third quarter of fiscal 2005.  The Company continues to receive a portion ofthe collections with respect to refund anticipation loans facilitated bySBB&T in prior years.  Under theCompany’s current agreement with Household Tax Masters Inc., the Company’sother provider of refund anticipation loans, the Company continues to earnother financial product revenues based on the amount of finance fees collectedand uncollected loans.

 

On March 14, 2005, theCompany amended its agreement with SBB&T that, among other things, includeda change for the current tax season whereby the Company will receive anadditional fee of up to $5.00 for each refund anticipation loanfacilitated.  The amount of the additional fee applies to refundanticipation loan balances that exceed $2,500.00.

 

7

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***Advertising Expenses***

 

Advertising is expensed inthe period the advertising occurs. Advertising expenses were $13,690 and $10,275 for the three months endedJanuary 31, 2005 and 2004, respectively, and $16,365 and $12,968 for the ninemonths ended January 31, 2005 and 2004, respectively.

 

**3.    COMPUTATION OF EARNINGS (LOSS) PER SHARE**

 

The computation of basicearnings (loss) per share is calculated by dividing net income (loss) availableto the Company’s common stockholders by the weighted average number of commonshares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income(loss) available to the Company’s common stockholders by an adjusted weightedaverage number of common shares outstanding assuming conversion of potentiallydilutive securities arising from stock options outstanding.

 

The following table presentsthe computation of basic and diluted earnings (loss) per share:

 
| ** **                                        | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Net income, basic and diluted                     |       | $                                        | 17,546     |   | $ | 11,394 |   |
| Weighted average shares outstanding (000’s): |       |                                     |       |   |   |
| Basic                                             |       | 37,640                                   |       | 37,500 |   |
| Diluted                                           |       | 38,030                                   |       | 37,500 |   |
| Earnings per share:                               |       |                                     |       |   |   |
| Basic                                             |       | $                                        | 0.47       |   | $ | 0.30 |   |
| Diluted                                           |       | $                                        | 0.46       |   | $ | 0.30 |   |

 
| ** **                                        |       | **Nine Months  Ended  January 31,** |       |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004** |   |
| Net loss, basic and diluted                       |       | $                                        | (4,624     | ) | $ | (9,471 | ) |
| Weighted average shares outstanding (000’s): |       |                                     |       |   |   |
| Basic and diluted                                 |       | 37,603                                   |       | 37,500 |   |
| Loss per share:                                   |       |                                     |       |   |   |
| Basic and diluted                                 |       | $                                        | (0.12      | ) | $ | (0.25 | ) |

 

Stock options to purchase2,012,611 shares of common stock were outstanding as of January 31, 2005.  These stock options were not included in thecomputation of diluted net loss per share for the nine months ended January 31,2005 because the effect would have been antidilutive.

 

8

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**4.    GOODWILLAND OTHER INTANGIBLE ASSETS, NET**

 

Goodwill and otherintangible assets at January 31, 2005 were as follows:

 
| ** **                                               | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------------------|------------|
| **Amortizable other intangible assets:**                 |       |                        |       |                          |       |                      |       |
| Franchise agreements (a)                                 |       | $                           | 16,117     |                          | $          | (10,784                   | )          | $ | 5,333 |   |
| Customer relationships (b)                               |       | 7,170                       |       | (5,194                        | )          | 1,976                     |       |
| Total amortizable other intangible assets                |       | $                           | 23,287     |                          | $          | (15,978                   | )          | $ | 7,309 |   |
|                                                     |       |                        |       |                          |       |                      |       |
| **Unamortizable goodwill and other intangible  assets:** |       |                        |       |                          |       |                      |       |
| Goodwill                                                 |       |                        |       |                          |       | $                         | 392,691    |   |
| Jackson Hewitt trademark                                 |       |                        |       |                          |       | $                         | 81,000     |   |

 

----

(a)  Amortizedover a period of 10 years.

(b)  Amortizedover a period of 5 years.

 

The changes in the carryingamount of goodwill by segment were as follows:

 
| ** **                  | ** ** | **Franchise  Operations** | ** ** | **Company-  Owned  Office  Operations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------|------------|-----------------------------------------|------------|-----------|------------|
| Balance at April 30, 2004   |       | $                         | 336,767    |                                    | $          | 55,601    |       | $ | 392,368 |   |
| Additions                   |       | —                    |       | 677                                     |       | 677       |       |
| Purchase price adjustments  |       | —                    |       | (354                                    | )          | (354      | )          |
| Balance at January 31, 2005 |       | $                         | 336,767    |                                    | $          | 55,924    |       | $ | 392,691 |   |

 

The changes in the carryingamount of other intangible assets, net, by segment were as follows:

 
| ** **                  | ** ** | **Franchise  Operations** | ** ** | **Company-  Owned  Office  Operations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------|------------|-----------------------------------------|------------|-----------|------------|
| Balance at April 30, 2004   |       | $                         | 87,473     |                                    | $          | 2,429     |       | $ | 89,902 |   |
| Additions                   |       | 65                        |       | 479                                     |       | 544       |       |
| Amortization                |       | (1,205                    | )          | (932                                    | )          | (2,137    | )          |
| Balance at January 31, 2005 |       | $                         | 86,333     |                                    | $          | 1,976     |       | $ | 88,309 |   |

 

During the nine months endedJanuary 31, 2005 the Company acquired four independent tax practices.  Cash payments related to these acquisitionstotaled $720, with additional cash payments of $320 due by the end of the firstquarter of fiscal 2006.  Under theacquisition agreements, the Company may be required to pay additionalconsideration of approximately $365 by the end of the third quarter of fiscal2006 upon the acquired entities achieving specified revenue levels in futureperiods.  When the contingency isresolved and the additional consideration is distributable, the Company willrecord the fair value of the consideration issued, if any, as an additionalcost of the acquired entities.

 

9

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Amortization expenserelating to the Company’s other amortizable intangible assets was as follows:

 
| ** **             | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Franchise agreements   |       | $                                        | 376        |                                    | $          | 402 |   | $ | 1,205 |   | $ | 1,178 |   |
| Customer relationships |       | 317                                      |       | 347                                     |       | 932 |   | 1,302 |   |
| Total                  |       | $                                        | 693        |                                    | $          | 749 |   | $ | 2,137 |   | $ | 2,480 |   |

 

Estimated amortizationexpense related to the Company’s amortizable other intangible assets for eachof the respective periods in the fiscal years ended April 30 is as follows:

 
| ** **                            | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| Remaining three months in fiscal 2005 |       | $          | 640        |   |
| 2006                                  |       | $          | 2,454      |   |
| 2007                                  |       | $          | 2,203      |   |
| 2008                                  |       | $          | 1,299      |   |
| 2009                                  |       | $          | 224        |   |
| Thereafter                            |       | $          | 489        |   |

 

**5.    NOTESRECEIVABLE, NET**

 

The Company periodicallyfinances a portion of the initial franchise fee associated with new territorysales under promissory notes receivable from franchisees. These notes accrueinterest annually, ranging from 8% to 12%, and are typically due in four annualinstallments, including accrued interest, at February 28th of each year. Thesenotes are recorded in the Consolidated Balance Sheets at cost, and are reviewedperiodically for collectibility based on the underlying franchisee’s paymenthistory, financial status and revenue base. The resulting provision is includedwithin cost of franchise operations in the Consolidated Statements ofOperations.

 
| ** **                               | ** ** | **As of**             | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **January 31,  2005** | ** ** | **April 30,  2004** | ** ** |
| Notes receivable                         |       | $                     | 12,078     |   | $ | 7,480 |   |
| Less allowance for uncollectible amounts |       | (4,577                | )          | (3,551 | ) |
| Notes receivable, net                    |       | 7,501                 |       | 3,929 |   |
| Less current portion                     |       | 3,618                 |       | 1,944 |   |
| Notes  receivable, net—non-current  |       | $                     | 3,883      |   | $ | 1,985 |   |

 

**6.    DEVELOPMENTADVANCES**

 

TheCompany maintains a program in which it advances monies directly to independenttax practices for the conversion of such operations to the Jackson Hewitt brandas franchisees and/or to advance monies to existing franchisees to assist intheir business expansion through the acquisition of independent tax practices.These development advances are capitalized and made in the form of promissorynotes that are typically forgivable over a ten-year period, subject to theachievement of certain performance standards. Amortization of developmentadvances is included in cost of franchise operations in the ConsolidatedStatements of Operations. Development advances were $7,922 and $6,616 as ofJanuary 31, 2005 and April 30, 2004, respectively, and are included in othernon-current assets in the Consolidated Balance Sheets.

 

10

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**7.    ACCOUNTSPAYABLE AND ACCRUED LIABILITIES**

 

Accounts payable and accruedliabilities consist of the following:

 
| ** **                                      | ** ** | **As of**             | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **January 31,  2005** | ** ** | **April 30,  2004** | ** ** |
| Accounts payable                                |       | $                     | 2,548      |   | $ | 2,168 |   |
| State income taxes payable                      |       | 1,549                 |       | 1,473 |   |
| Accrued payroll and related liabilities         |       | 8,975                 |       | 6,653 |   |
| Litigation settlement                           |       | 3,416                 |       | 2,672 |   |
| Accrued marketing and advertising               |       | 7,776                 |       | 8,946 |   |
| Accrued purchase price                          |       | 370                   |       | 1,814 |   |
| Other accrued liabilities                       |       | 4,442                 |       | 2,369 |   |
| Total accounts payable and accrued  liabilities |       | $                     | 29,076     |   | $ | 26,095 |   |

 

**8.    RELATEDPARTY TRANSACTIONS**

 

***Special DividendPaid to Cendant***

 

Upon completion of the IPOin June 2004, the Company declared a special dividend to Cendant in the amountof $306,852 (the “Special Dividend”). The $175,000 cash portion of this Special Dividend was funded entirelyfrom the net proceeds of five-year floating rate senior unsecured notes (the “Notes”),as discussed more fully in Note 9, “Long-Term Debt and Credit Facility.”  The remaining $131,852 represents thedistribution of a receivable from Cendant.

 

The Company recorded theSpecial Dividend as a reduction to retained earnings of $175,239 and areduction to additional paid-in capital of $131,613.  The amount by which retained earnings wasreduced represents the accumulation of all earnings by the Company up to theIPO date at which time the Company began operating as a separate publiccompany.

 

***Allocation andFunding of Expenses***

 

Through the IPO date, theCompany was allocated general corporate overhead expenses from Cendant forcorporate-related functions as well as other expenses directly attributable tothe Company. Cendant allocated corporate overhead to the Company based on apercentage of the Company’s forecasted revenues and allocated other expensesthat directly benefited the Company based on the Company’s actual utilizationof the services. Corporate expense allocations included executive management,finance, human resources, information technology, legal and real estatefacility usage. These amounts are included in selling, general andadministrative expenses in the Consolidated Statements of Operations. TheCompany believes the assumptions and methodologies underlying the allocationsof general corporate overhead and direct expenses from Cendant to the Companywere reasonable and are consistent with the amounts that would have beenincurred if the Company had performed these functions as a stand-alone company.

 

All allocated overheadexpenses as well as direct charges were included in Due from CendantCorporation in the Consolidated Balance Sheets. No interest was charged byCendant or received by the Company in any period presented with respect tointercompany balances. Cendant used cash swept from the Company’s bank accountsto fund these disbursements.

 

11

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The major categories ofintercompany activity between the Company and Cendant were as follows:

 
| ** **                                                      | ** ** | **Period  from May 1, 2004  to the IPO Date** | ** ** | **Nine Months  Ended January 31,  2004** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| Due from Cendant as of April 30, 2004 and  2003                 |       | $                                             | 143,985    |                                     | $          | 93,664 |   |
| Corporate allocations                                           |       | (750                                          | )          | (2,924                                   | )          |
| Payroll and related                                             |       | (5,461                                        | )          | (16,106                                  | )          |
| Accounts payable funding                                        |       | (12,878                                       | )          | (38,329                                  | )          |
| Income taxes                                                    |       | 2,509                                         |       | 152                                      |       |
| Cash sweeps                                                     |       | 4,447                                         |       | 18,898                                   |       |
| Subtotal                                                        |       | (12,133                                       | )          | 55,355                                   |       |
| Special Dividend - distribution of Due from  Cendant            |       | (131,852                                      | )          | —                                   |       |
| Due from Cendant as of the IPO date and as  of January 31, 2004 |       | $                                             | —     |                                     | $          | 55,355 |   |

*** ***

***TransitionalAgreement and Other Related Agreements***

 

Upon completion of the IPO,the Company entered into a transitional agreement with Cendant to provide foran orderly transition to being an independent company and to govern thecontinuing arrangements between the Company and Cendant. The Company alsoentered into a sublease agreement for its corporate headquarters in Parsippany,New Jersey and a sublease assignment and assumption agreement for itstechnology facility in Sarasota, Florida. Under the transitional agreement,Cendant agreed to provide the Company with various services, including servicesrelating to facilities, human resources and employee benefits, payroll,financial systems management, treasury and cash management, accounts payableservices, tax support, event marketing, franchise field audit services,telecommunications services, information technology services, call supportservices and public and regulatory affairs. The transitional agreement alsocontains agreements relating to indemnification, tax sharing and taxindemnification, access to information and non-solicitation of employees.

 

Under thetransitional agreement, the cost of each transitional service generallyreflects the same payment terms and is calculated using the same costallocation methodologies for the particular service as those associated withthe costs in the Company’s historical consolidated financial statements. Thetransitional agreement was negotiated in the context of a parent-subsidiaryrelationship.  The provisions of many ofthe services were transitioned at similar costs to those allocated by Cendanthistorically. Additionally, all of the services provided under the transitionalagreement may be terminated by the Company, without penalty, upon not less than30 days prior written notice to Cendant, except for information technologyservices which will require a termination payment to Cendant in an amount equalto the unamortized lease costs of computer hardware specific to the Company’smainframe environment, as well as for any unpaid actual costs incurred byCendant with respect to these services. For almost all services provided, Cendant does not have the ability toterminate the provision of the services prior to the expiration date, with theexception of telecommunications services, franchise field audit services andcall support services, which Cendant may terminate upon prior written notice tothe Company of 180 days, 120 days, and 120 days, respectively.  Cendant may terminate the sublease for theCompany's Parsippany, New Jersey corporate headquarters prior to the expirationdate upon 120 days prior written notice, but Cendant is required torelocate the Company, at Cendant's cost, to mutually acceptable office space.As of January 31, 2005, the Company has not received any such notice fromCendant. There are no fixed or minimum contractual purchase obligationsunder the transitional agreement and other related agreements.

 

The Companycompleted most transition agreements with Cendant during the third quarter offiscal 2005 and is now predominantly operational on its own financial systemsand infrastructure.  The Company hascompleted the implementation of its own back office systems including human resourcesand employee benefits, payroll, financial systems management, treasury and cashmanagement, accounts payable and tax support. Remaining relationships, for which the Company relies on Cendant andwhich the Company is continuing to evaluate, include the sublease of theCompany's corporate headquarters in Parsippany, New Jersey, as well as datacenter management capabilities and ongoing telecommunication services.

 

For the three and ninemonths ended January 31, 2005, the Company incurred $825 and $1,793 of expensesrelated to such transitional and other related agreements with Cendant,respectively, which are included in cost of franchise operations and selling,general and administrative.

 

**9.     LONG-TERM DEBT AND CREDIT FACILITY**

 

***Floating Rate SeniorUnsecured Notes***

 

On June 25, 2004, inconjunction with the IPO, the Company issued $175,000 of five-year floatingrate senior unsecured notes through a private placement.  The purpose of the Notes issuance was to fundthe cash portion of the Special Dividend paid to Cendant upon Cendant’sdivestiture of its entire ownership in the Company.  The Notes bear interest based on thethree-month London Inter-Bank Offer Rate (“LIBOR”) plus 1.5%.  The rate on the Notes as of January 31, 2005was 4.05%.  Interest is payable quarterlyin March, June, September and December, with the first payment made inSeptember 2004.  The Company is requiredto pay the entire principal amount on June 25, 2009, but has the option toprepay all or a portion of the Notes at any time on or after June 25, 2005.

 

Interest expense under theNotes amounted to $1,654 and $3,642 for the three and nine months ended January31, 2005, respectively.

 

12

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In connection with theissuance of the Notes, the Company incurred $1,728 of financing fees which havebeen deferred and are being amortized to interest expense over the life of theNotes.  Amortization of such feesamounted to $86 and $201 for the three and nine months ended January 31, 2005,respectively.  Unamortized financing feesas of January 31, 2005 amounted to $1,527, which is included in othernon-current assets in the Consolidated Balance Sheets.

 

The agreement governing theNotes contains substantially similar provisions and covenants to thosecontained in the Credit Facility described below, as well as customary event ofdefault provisions and other terms and conditions that are consistent withthose contained in similar debt obligations of issuers with a credit qualitysimilar to JHTS. The agreements that govern the Notes and Credit Facility,discussed below, were amended on January 7, 2005 to permit the Company torepurchase additional shares of common stock.  As of January 31, 2005, the Company was incompliance with these covenants.

 

***Credit Facility***

 

On June 25, 2004, theCompany established a $100,000 five-year revolving credit facility (the “CreditFacility”).  Borrowings under the CreditFacility are to be used to finance working capital needs, potentialacquisitions and other general corporate purposes.  The Credit Facility provides for loans in theform of Eurodollar or Alternate Base Rate borrowings.  Eurodollar borrowings bear interest at theadjusted LIBOR, as defined in the Credit Facility, plus 1.25% per annum.  Alternate Base Rate borrowings bear interestprimarily at the prime rate, as defined in the agreement, plus 0.25% perannum.  The Company may also use theCredit Facility to issue letters of credit for general corporate purposes.  The Credit Facility carries an annual facilityfee of 0.25% of the total commitment amount of $100,000, which is payablequarterly.  Any borrowings made under theCredit Facility must be repaid by the expiration date of the Credit Facility.

 

In connection with enteringinto the Credit Facility, the Company incurred $1,609 of financing fees, whichhave been deferred and are being amortized to interest expense over thefive-year term of the Credit Facility. Amortization of financing fees amounted to $83 and $185 for the threeand nine months ended January 31, 2005, respectively.  Unamortized financing fees as of January 31,2005 amounted to $1,424, which is included in other non-current assets in theCompany’s Consolidated Balance Sheets.

 

Borrowings outstanding underthe Credit Facility were $12,000 as of January 31, 2005.  Interest expense associated with borrowingsunder the Credit Facility amounted to $80 for the three and nine months endedJanuary 31, 2005.

 

The Credit Facilityagreement contains covenants, including the requirement that the Companymaintain certain financial covenants, such as a maximum consolidated leverageratio of 3.25 to 1.00 and a minimum consolidated fixed charge coverage ratio of3.00 to 1.00 each through at least April 30, 2005. The consolidated leverageratio is the ratio of consolidated debt to consolidated Earnings BeforeInterest, Taxes, Depreciation and Amortization (“EBITDA”), each as defined inthe Credit Facility. The consolidated fixed charge coverage ratio is the ratioof consolidated EBITDA to consolidated fixed charges.  Consolidated fixed charges includeconsolidated interest expense and regular quarterly dividends paid on theCompany’s common stock, each as defined in the Credit Facility.

 

The Credit Facility containsvarious customary restrictive covenants that limit the Company’s ability to,among other things, (i) incur additional indebtedness or guarantees, (ii)create liens or other encumbrances on the Company’s property, (iii) enter intoa merger or similar transaction, (iv) sell or transfer the Company’s propertyexcept in the ordinary course of business, and (v) make dividend and otherrestricted payments.  The Credit Facilitylimits the maximum amount of restricted payments to 30% of the Company’scumulative consolidated net income for the period commencing on May 1, 2003 andending on April 30 of the fiscal year preceding the year in which suchrestricted payments are made.  Inaddition, the Company has the ability to repurchase the greater of 500,000shares or the actual number of common stock options exercised during that fiscalyear.

 

As of January 31, 2005, theCompany was in compliance with these covenants.

 

**10.   STOCK-BASEDCOMPENSATION**

 

***Stock Compensation Plans***

 

Followingthe IPO, the Company adopted the 2004 Equity and Incentive Plan, which providesfor the grant of incentive stock options, nonqualified stock options, stockappreciation rights, restricted stock, restricted stock units (“RSUs”) and/orother stock- or cash-based awards representing the Company’s common stock tonon-employee directors, officers, employees, advisors and consultants who areselected by the Company’s Compensation Committee for participation in theplan.  In addition, the Company hasauthorized a stock purchase plan under which eligible employees have theability to purchase shares of the Company’s common stock at 95% of marketvalue.** **No stock has been offered for purchase under this plan as ofJanuary 31, 2005.

 

13

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***Exchange Transaction***

 

Priorto the IPO, certain employees of the Company were granted stock options andRSUs under Cendant’s stock-based compensation plans.  In connection with the IPO and pursuant tothe consent of each holder, the Company issued to employees 903,935 vestedstock options and 100,880 shares of common stock in exchange for their Cendantstock options and RSUs.  The exchangetransaction was structured to provide the same relative value to employees asthe Cendant awards held by such employees prior to the IPO.  As a result of the exchange transaction, theCompany incurred stock-based compensation expense of $4,508, of which $1,865was related to the issuance to employees of vested stock options in exchangefor their Cendant stock options and $2,643 was related to the issuance toemployees of common stock, which is included in selling, general andadministrative expenses in the Consolidated Statement of Operations for thenine months ended January 31, 2005.

 

***Stock Options***

 

Underthe Company’s 2004 Equity and Incentive Plan, stock options, except thosegranted pursuant to the exchange transaction described above, are generallygranted with an exercise price equal to the market price of a share of commonstock on the date of grant, have a term of ten years or less and vest withinfour years from the date of grant.  As ofJanuary 31, 2005, there were four million stock options authorized for grant topurchase JHTS common stock under the Company’s 2004 Equity and Incentive Plan,including the stock options issued by the Company in exchange for Cendant stockoptions at the IPO date, of which 1,963,820 stock options were available forgrant as of January 31, 2005.

 

Followingthe IPO (in the first quarter of fiscal 2005) the Company incurred a $1,865charge to stock-based compensation expense representing the issuance toemployees of vested stock options to purchase 903,935 shares of common stock inexchange for their Cendant stock options. In addition, during the nine months ended January 31, 2005 the Companyhas granted new stock options to employees to purchase 1,158,828 shares ofcommon stock and as a result incurred stock-based compensation expense of $426and $1,009 for the three and nine months ended January 31, 2005, respectively.

 

Thetable below summarizes the stock option activity of the Company’s stock optionsduring the nine months ended January 31, 2005:

 
| ** **                                                                                                | ** ** | **Number of  Stock  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------------|------------|
| Cendant stock options related to the  Company’s employees prior to the IPO as of April 30, 2004 | ** ** | 1,396,595                     |       | $                                      | 16.06      |   |
|                                                                                                      |       |                          |       |                                   |       |
| Converted JHTS stock options from Cendant  stock options at the IPO date                                  |       | 903,935                       |       | $                                      | 13.97      |   |
| Stock options granted                                                                                     |       | 1,158,828                     |       | $                                      | 17.08      |   |
| Stock options exercised                                                                                   |       | (23,569                       | )          | $                                      | 12.93      |   |
| Stock options cancelled or expired                                                                        |       | (26,583                       | )          | $                                      | 16.55      |   |
| Stock options outstanding as of  January 31, 2005                                                    |       | 2,012,611                     |       | $                                      | 15.74      |   |

 

The table below summarizesinformation regarding the Company’s outstanding and exercisable stock optionsissued to the Company’s employees as of January 31, 2005:

 
| ** **       | ** ** | **Outstanding Stock Options** | ** ** | **Exercisable Stock Options**                       | ** ** |
|------------------|------------|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **Number of  Stock  Options** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Stock  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.01 to $9.99   |       | 60,257                        |       | 6.2                                                 |       | $ | 9.08 |   | 60,257 |   | $ | 9.08 |   |
| $10.00 to $16.99 |       | 782,666                       |       | 5.9                                                 |       | $ | 14.25 |   | 782,666 |   | $ | 14.25 |   |
| $17.00 to $20.00 |       | 1,169,688                     |       | 9.2                                                 |       | $ | 17.08 |   | 33,510 |   | $ | 17.19 |   |
|             |       | 2,012,611                     |       |                                                |       | $ | 15.74 |   | 876,433 |   | $ | 14.01 |   |

 

14

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The weighted average grant date fair value of the JHTS stock optionsgranted during the three and nine months ended January 31, 2005 was $8.31 and$6.04, respectively.  The fair value ofthese stock options is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions for thestock options granted in each of the following periods in fiscal 2005:

 
| ** **                      | ** ** | **Three Months  Ended  January 31, 2005** | ** ** | **Nine Months  Ended  January 31, 2005** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| Dividend yield                  |       | 1.2                                            | %          | 1.6                                           | %          |
| Expected volatility             |       | 31.3                                           | %          | 31.3                                          | %          |
| Risk-free rate of return        |       | 3.9                                            | %          | 4.4                                           | %          |
| Expected holding period (years) |       | 7.5                                            |       | 7.5                                           |       |

 

***Restricted Stock Units***

 

Followingthe IPO, Cendant RSUs held by the Company’s employees were cancelled andconverted into JHTS awards.  As a result,the Company issued to employees 100,880 shares of the Company’s common stock inexchange for the unvested Cendant RSUs that were held by such employees priorto the IPO and incurred a stock-based compensation charge of $2,643 in thequarter ended July 31, 2004.

 

Thefollowing table presents the total number of shares of common stock representedby RSUs granted to the Company’s employees and non-employee directors,including those RSUs granted in connection with the exchange transaction, as ofJanuary 31, 2005.

 
| ** **                                                                               | ** ** | **RSUs** | ** ** | **Weighted  Average  Grant  Price** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|-------------------------------------|------------|
| Cendant RSUs related to JHTS employees as  of April 30, 2004                             |       | 106,497  |       | $                                   | 13.76      |   |
| Transferred (1)                                                                          |       | 8,844    |       | $                                   | 13.64      |   |
| Forfeited (2)                                                                            |       | (5,718   | )          | $                                   | 13.64      |   |
| Cendant RSUs to be exchanged for JHTS  common stock at the IPO date                      |       | 109,623  |       | $                                   | 13.76      |   |
|                                                                                     |       |     |       |                                |       |
| JHTS awards issued in exchange for unvested  Cendant RSUs at the IPO date                |       | 100,880  |       | $                                   | 17.29      |   |
| Vested                                                                                   |       | (100,880 | )          | $                                   | 17.29      |   |
| Granted at fair value                                                                    |       | 22,156   |       | $                                   | 18.20      |   |
| Number of shares of common stock  represented by RSUs outstanding as of January 31, 2005 |       | 22,156   |       | $                                   | 18.20      |   |

 

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(1)                                  Represents RSUs attributable to the movementof employees between JHTS and Cendant.

(2)                                  Represents RSUs attributable to employees whodeparted from JHTS prior to the IPO date.

 

**11.    SEGMENTINFORMATION**

 

The Company manages andevaluates the operating results of the business in two segments:

 

•                  Franchise Operations — This segment consistsof the operations of the Company’s franchise business, including royalty andmarketing and advertising revenues, financial product fees, other financialproduct revenues and other revenues;

 

•                  Company-Owned Office Operations — Thissegment consists of the operations of the Company’s owned offices for which theCompany recognizes service revenues for the preparation of tax returns andrelated services.

 

Management evaluates theoperating results of each of its reportable segments based upon revenues andincome (loss) before income taxes.

 

15

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| ** **                                | ** ** | **Franchise  Operations** | ** ** | **Company-  Owned  Office  Operations** | ** ** | **Corporate  and Other (a)** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------|------------|
| ***Three months ended January 31, 2005*** | * *   | * *                  | * *   | * *                                | * *   | * *                          | * *   | * *  | * *   |
| Revenues                                  |       | $                         | 49,224     |                                    | $          | 24,013                            |       | $         | —     |   | $ | 73,237 |   |
|                                      |       |                      |       |                                    |       |                              |       |      |       |
| Income (loss) before income taxes         |       | $                         | 26,443     |                                    | $          | 8,426                             |       | $         | (6,019     | ) | $ | 28,850 |   |
|                                      |       |                      |       |                                    |       |                              |       |      |       |
| ***Three months ended January 31, 2004*** |       |                      |       |                                    |       |                              |       |      |       |
| Revenues                                  |       | $                         | 39,831     |                                    | $          | 19,695                            |       | $         | —     |   | $ | 59,526 |   |
|                                      |       |                      |       |                                    |       |                              |       |      |       |
| Income (loss) before income taxes         |       | $                         | 20,317     |                                    | $          | 2,597                             |       | $         | (4,010     | ) | $ | 18,904 |   |

 
| ** **                               | ** ** | **Franchise  Operations** | ** ** | **Company-  Owned  Office  Operations** | ** ** | **Corporate  and Other (a)** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------|------------|
| ***Nine months ended January 31, 2005*** |       |                      |       |                                    |       |                              |       |      |       |
| Revenues                                 |       | $                         | 64,359     |                                    | $          | 25,076                            |       | $         | —     |   | $ | 89,435 |   |
|                                     |       |                      |       |                                    |       |                              |       |      |       |
| Income (loss) before income taxes        |       | $                         | 18,314     |                                    | $          | (4,402                            | )          | $         | (21,516    | ) | $ | (7,604 | ) |
|                                     |       |                      |       |                                    |       |                              |       |      |       |
| ***Nine months ended January 31, 2004*** |       |                      |       |                                    |       |                              |       |      |       |
| Revenues                                 |       | $                         | 51,849     |                                    | $          | 20,995                            |       | $         | —     |   | $ | 72,844 |   |
|                                     |       |                      |       |                                    |       |                              |       |      |       |
| Income (loss) before income taxes        |       | $                         | 10,423     |                                    | $          | (8,805                            | )          | $         | (17,333    | ) | $ | (15,715 | ) |

 

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(a)          Represents unallocated corporate overheadsupporting segments including legal, finance, human resources, real estatefacilities and strategic development activities, as well as interestexpense.  Beginning in fiscal 2005,corporate and other expenses also include incremental costs related to being anindependent public company, including additional insurance costs andstock-based compensation.

 

**12.    COMMITMENTSAND CONTINGENCIES**

 

***Commitments***

 

Purchaseobligations as of January 31, 2005 in connection with marketing arrangementsare as follows:

 
| ** **                            | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| Remaining three months in fiscal 2005 |       | $          | 259        |   |
| 2006                                  |       | 1,684      |       |
| 2007                                  |       | 1,293      |       |
| 2008                                  |       | 87         |       |
| 2009 and thereafter                   |       | —     |       |
| Total                                 |       | $          | 3,323      |   |

*** ***

***Guarantees***

 

The Company provides aguarantee that could require it to make future minimum rental payments under aleasing arrangement in the event that the primary obligor does not meet itsrequired payments for the current and next tax season.  The Company has not recorded a liability onthe Consolidated Balance Sheet with respect to this guarantee.  As of January 31, 2005 the maximum potentialpayment under this arrangement totals $796. There have been no amounts paid by the Company under this arrangement inthe past and there is no expectation that the Company will be required to makepayment in the future.

 

TheCompany routinely enters into contracts that include embedded indemnificationsthat have characteristics similar to guarantees, including obligations toprotect counter parties from losses arising from the following: (a) tax,legal and other risks related to the purchase of businesses; (b) penalties andinterest assessed by federal and state taxing authorities in connection withtax returns prepared for customers by company-owned offices;(c) indemnification of the Company’s directors and officers; (d)indemnities of various lessors in connection with facility leases for certainclaims arising from such facility or lease; and (e) third-party claimsrelating to various arrangements in the normal course of business. Typically,there is no stated maximum payment related to these indemnifications, and theterm of indemnities may vary and in many cases is limited only by theapplicable statute of limitations. The likelihood of any claims being assertedagainst the Company and the ultimate liability related to any such claims, ifany, is difficult to predict. While there have not been any indemnificationpayments by JHTS under these arrangements in the past, there can be noassurance that the Company will not be obligated to make such payments in thefuture.

 

16

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***Legal Proceedings***

 

On August 27, 2002, aplaintiff group comprising 154 franchisees filed an action against the Companyand SBB&T in the Superior Court of New Jersey, Morris County. The suitalleged, among other things, that the Company breached an agreement with theplaintiffs by not paying them a portion of surpluses in refund anticipationloan loss reserves. The plaintiffs sought a declaratory judgment, anaccounting, payment of an incentive rebate, unspecified compensatory and punitivedamages, treble damages and attorneys’ fees. By an order dated December 6,2002, the court dismissed the conversion and fraud counts of the complaint withprejudice. The plaintiffs filed an amended complaint on March 17, 2003. Theparties submitted the matter to mediation in July 2003, which resulted in asettlement in which the Company agreed, among other things, to make a $2,000cash payment, spend an additional $2,000 on regional advertising from 2004through 2006, pay additional rebates to franchisees of up to $3.00 per refundanticipation loan processed during the 2004 through 2006 tax seasons, subjectto performance criteria, and implement a temporary royalty fee reductionprogram for certain new franchise offices. On December 19, 2003, the courtissued a ruling enforcing the settlement and dismissed the action withprejudice. As of January 31, 2005, 152 plaintiffs in the action have executedthe settlement agreement, and one has appealed the enforcement order ofDecember 19, 2003. Accordingly, a $10,410 charge was recognized in fiscal 2004of which $8,899 was recorded during the nine months ended January 31, 2004 andis included within selling, general and administrative expense in theaccompanying Consolidated Statement of Operations.  As of January 31, 2005, $3,416 of the Company’slitigation settlement accrual is included in accounts payable and accruedliabilities and $2,703 is included in other non-current liabilities in theConsolidated Balance Sheet.

 

OnApril 4, 2003, Canieva Hood and Congress of California Seniors brought apurported class action suit against SBB&T and the Company in the SuperiorCourt of California (Santa Barbara) in connection with the provision of refundanticipation loans, seeking declaratory relief as to the lawfulness of thepractice of cross-lender debt collection, the validity of Santa Barbara’scross-lender debt collection provision and whether the method of disclosure tocustomers with respect to the provision is unlawful or fraudulent. The Companywas joined in the action for allegedly collaborating, and aiding and abetting,in the actions of SBB&T.  The Companyfiled a demurrer and subsequently answered the amended complaint, denying anyliability.  The case is in its discoveryand pretrial stage.  The Company believesit has meritorious defenses to the claims and is defending against themvigorously.  Ms. Hood has also filed aseparate suit against the Company and Cendant on December 18, 2003 in the OhioCourt of Common Pleas (Montgomery County) and is seeking to certify a class inthe action. The allegations relate to the same set of facts as the Californiaaction. The Company filed a motion to stay or dismiss, which was denied, andsubsequently answered the Complaint, denying any liability.  The case is in its discovery and pretrialstage.  The Company believes it hasmeritorious defenses to the claims and is defending against them vigorously.

 

OnJune 18, 2004, Myron Benton brought a purported class action against SBB&Tand the Company in the Supreme Court of the State of New York (County of NewYork) in connection with disclosures made in connection with the provision ofrefund anticipation loans, alleging that the disclosures and related practicesare fraudulent and otherwise unlawful, and seeking equitable and monetaryrelief.  The Company filed a Motion todismiss that complaint.  In response,Benton withdrew his original complaint and filed an amended complaint onJanuary 3, 2005.  The Company filed amotion to dismiss the amended complaint, which is currently pending.  While this matter is at a preliminary stage,the Company believes it has meritorious defenses to the claims and intends todefend them vigorously.

 

The Company is from time totime subject to other legal proceedings and claims in the ordinary course ofbusiness, none of which the Company believes are likely to have a materialadverse effect on the Company’s financial position, results of operations orcash flows.  However, there can be noassurance that such litigation, or any future litigation, will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

 

**13.    SUBSEQUENTEVENT**

 

***Declaration of Dividend***

 

On March 10, 2005, the Company’s Board of Directors declared aquarterly cash dividend of $0.07 per share of common stock, payable on April15, 2005, to common stockholders of record on March 29, 2005.

 

17

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**Item 2****. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*Thefollowing discussion may be understood more fully by reference to theconsolidated financial statements, notes to the consolidated financialstatements and management’s discussion and analysis of financial condition andresults of operations contained in our initial registration on Form S-1 filedwith the Securities and Exchange Commission (“SEC”) on June 21, 2004.*

 

**FORWARD-LOOKING STATEMENTS**

 

**(Cautionary Statements Under the Private SecuritiesLitigation Reform Act of 1995)**

 

Certainstatements in this report, including but not limited to those contained in “Guarantees”and “Legal Proceedings” in Note 12 to Item 1, and “Overview”, “Separation fromCendant Corporation and Related Party Transactions”, “Key Trends andUncertainties Affecting Our Results”, “Liquidity and Capital Resources” and “FutureCash Requirements and Sources of Cash” in Item 2, are “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995 with respect to the financial condition, results of operations, cashflows, plans, objectives, future performance and business of JHTS.  All statements in this quarterly report ,other than statements that are purely historical, are forward-lookingstatements.  Forward-looking statementsinclude statements preceded by, followed by or that otherwise include the words“believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”,“may increase”, “may fluctuate” and similar expressions or future orconditional verbs such as “will”, “should”, “would”, “may” and “could.”  These forward-looking statements involverisks and uncertainties.  Actual resultsmay differ materially from those contemplated (expressed or implied) by suchforward-looking statements, because of, among other things, the followingpotential risks and uncertainties:

 

•                  our ability to achieve the same level ofgrowth in revenues and profits that we have in the past;

 

•                  government initiatives that simplify taxreturn preparation, improve the timing and efficiency of processing tax returnsor decrease the number of tax returns filed or the size of the refunds;

 

•                  government legislation and regulation of ourindustry and products and services, including refund anticipation loans;

 

•                  our exposure to litigation;

 

•                  our ability to protect our customers’personal information;

 

•                  the success of our franchised offices;

 

•                  our responsibility to third parties for theacts of our franchisees;

 

•                  disruptions in our relationships with ourfranchisees;

 

•                  changes in our relationships with financialproduct providers that could affect our ability to facilitate the sale offinancial products;

 

•                  changes in our relationships with retailersthat could affect our growth and profitability;

 

•                  seasonality of our business and its effect onour stock price;

 

•                  our ability to sustain or negotiate servicescurrently provided by Cendant Corporation at reasonable costs;

 

•                  competition from tax return preparationservice providers;

 

•                  our ability to offer innovative new productsand services;

 

•                  our reliance on electronic communications;

 

•                  our reliance on cash flow from subsidiaries;

 

•                  our compliance with debt and revolving creditfacility covenants;

 

•                  our exposure to increases in prevailingmarket interest rates;

 

•                  the effect of market conditions, generalconditions in the tax return preparation industry or general economicconditions; and

 

•                  changes in accounting policies or practices.

 

Other factors and assumptions not identified above were also involvedin the derivation of these forward-looking statements, and the failure of suchother assumptions to be realized as well as other factors may also cause actualresults to differ materially from those projected. Most of these factors aredifficult to predict accurately and are generally beyond our control.  As a result of these factors, no assurancecan be given as to our future results and achievements.  Accordingly, a forward-looking statement isneither a prediction nor a guarantee of future events or circumstances, andthose future events or circumstances may not occur.  You should not place undue reliance on theforward-looking statements, which speak only as of the date of thisreport.  We are under no obligation, andwe expressly disclaim any obligation, to update or alter any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

18

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**OVERVIEW**

 

We manage and evaluate theoperating results of our business in two segments:

 

•                  Franchise operations: This segment consistsof the operations of our franchise business, including royalty and marketingand advertising revenues, financial product fees, other financial productrevenues and other revenues.

 

•                  Company-owned office operations: This segmentconsists of the operations of our company-owned offices for which we recognizeservice revenues for the preparation of tax returns and related services.

 

We are the second largestpaid tax return preparer in the United States of America, based on the numberof tax returns filed by paid preparers, with a nationwide network comprised of4,826 franchised offices and 621 company-owned offices as of January 31,2005.   We have grown rapidly, more thandoubling both the number of offices in our network since 1998 and the annualvolume of tax returns prepared by our network since 1999. During the threemonths ended January 31, 2005 our network filed 1.1 million tax returns, anincrease of 11% as compared to the same period last year.  Our revenues are dependent on the successfuloperations of our franchise system and our company-owned offices.

 

**Separation from Cendant Corporationand Related Party Transactions**

 

***ContinuingBusiness Arrangements with Cendant Upon Separation***

 

On June 25, 2004, CendantCorporation (“Cendant”) completed an initial public offering (“IPO”), for thesale of 100% of its ownership interest in us. Upon completion of the IPO, we entered into a transitional agreementwith Cendant to provide for an orderly transition to being an independentcompany and to govern the continuing arrangements between us and Cendant. Wealso entered into a sublease agreement for our corporate headquarters in Parsippany,New Jersey and a sublease assignment and assumption agreement for ourtechnology facility in Sarasota, Florida. Under the transitional agreement,Cendant agreed to provide us with various services, including services relatingto facilities, human resources and employee benefits, payroll, financialsystems management, treasury and cash management, accounts payable services,tax support, event marketing, franchise field audit services,telecommunications services, information technology services, call supportservices and public and regulatory affairs. The transitional agreement alsocontains agreements relating to indemnification, tax sharing and taxindemnification, access to information and non-solicitation of employees.

 

***Periods CoveredUnder Transitional Agreement and Other Related Agreements***

 

The majority of the servicescovered in the transitional agreement will expire by December 31, 2005, withthe exception of information technology services and telecommunicationsservices, which will expire in June 2006 and June 2007, respectively.Additionally, all of the services provided under the transitional agreement maybe terminated by us, without penalty, upon not less than 30 days prior writtennotice to Cendant, except for information technology services which willrequire a termination payment to Cendant in an amount equal to the unamortizedlease costs of computer hardware specific to our mainframe environment, as wellas for any unpaid actual costs incurred by Cendant with respect to these services.For almost all services provided, Cendant does not have the ability toterminate the provision of the services prior to the expiration date, with theexception of telecommunications services, franchise field audit services andcall support services, which Cendant may terminate upon prior written notice tous of 180 days, 120 days, and 120 days, respectively.  Cendant may terminate the sublease for ourParsippany, New Jersey corporate headquarters prior to the expiration date upon120 days prior written notice, but Cendant is required to relocate us, atCendant's cost, to mutually acceptable office space. As of January 31,2005, we have not received any such notice from Cendant.

*** ***

***Cost ofTransitional Agreement***

 

Under the transitionalagreement, the cost of each transitional service generally reflects the samepayment terms and is calculated using the same cost allocation methodologiesfor the particular service as those associated with the costs in our historicalconsolidated financial statements. The transitional agreement was negotiated inthe context of a parent-subsidiary relationship. The provisions of many of theservices were transitioned at similar costs to those allocated by Cendanthistorically. After the expiration of the transitional agreement, we may not beable to replace these services in a timely manner or on terms and conditions,including cost, as favorable as those we have received from Cendant.

 

19

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***Status ofTransition***

 

We completedmost transition agreements with Cendant during the third quarter of fiscal 2005and are now predominantly operational on our own financial systems andinfrastructure.  We have completed theimplementation of our own back office systems including human resources andemployee benefits, payroll, financial systems management, treasury and cashmanagement, accounts payable and tax support. Remaining relationships, for which we rely on Cendant and which we arecontinuing to evaluate, include the sublease of our corporate headquarters inParssippany, New Jersey, as well as data center management capabilities andongoing telecommunication services, which we expect to address by the end offiscal 2006.

 

***Prior Fiscal YearFinancial Statements***

 

Our unaudited consolidatedstatements of operations for the three and nine months ended January 31, 2004and unaudited consolidated statements of cash flows for the nine months endedJanuary 31, 2004 reflect the historical results of operations and cash flows ofour business divested by Cendant in the IPO. As a result, the accompanying consolidated financial statements may notnecessarily reflect our results of operations and cash flows in the future orwhat our results of operations and cash flows would have been had we been a stand-alonepublic company during these periods.

 

***Key Trends andUncertainties Affecting Our Results***

 

The following is a summaryof the key trends and uncertainties that affected our financial results upthrough the period ended January 31, 2005. Please also see “Forward-Looking Statements” for a discussion ofuncertainties facing our business.

 

Our revenues have grownsignificantly over the past three fiscal years achieved, in part, throughrapidly establishing offices in areas with large markets for our services.  The following are the key factors currentlyaffecting our results:

 

•                  *Seasonality of Revenues andResults of Operations*—Given the seasonal nature of the tax preparation business, we have historicallygenerated and expect to generate substantially all of our revenues during thetax season period from January through April of each year, which overlaps ourthird and fourth fiscal quarters. During fiscal 2004, we generatedapproximately 91% of our revenues during this four-month period. We historicallyoperate at a loss through the first eight months of each fiscal year, duringwhich we incur costs primarily associated with preparing for the upcoming taxseason.

 

•                  *Franchise Business Model*— A majority of our revenues are derived fromour franchise system, which has increased significantly over the past threefiscal years.  Our franchise businessmodel enables us to grow more quickly with less capital investment and loweroperating expenses than if we directly operated all of the offices in ournetwork.  The franchise business modelhas an inherently higher profit margin than our company-owned offices, as ourexisting infrastructure permits additional franchise growth without significantadditional fixed cost investment.

 

•                  *Other Financial ProductRevenues*—  Other financial product revenues represent aportion of the revenues we earn from the facilitation of refund anticipationloans.  Santa Barbara Bank & Trust (“SBB&T”)approximately provided 80% of the refund anticipation loans facilitated by theCompany during the third quarter of fiscal 2005.  On May 5, 2004, we renegotiated our agreementwith SBB&T which became effective with refund anticipation loansfacilitated during the current tax season. In lieu of earning revenues based upon the amount of finance fees anduncollected loans, the new agreement with SBB&T provides for the following:

 

•                  a fixed fee of $16.00 for each refundanticipation loan facilitated by our network;

•                  the greater of an additional fee of $2.00 foreach refund anticipation loan facilitated by our network in calendar 2005 or aportion of refund anticipation loans collected during calendar 2005 that wereoriginated during or prior to last year’s tax season.  Beginning in calendar 2006 this additionalfee of $2.00 will be subject to a threshold by which net finance fees receivedby SBB&T must exceed uncollected loans by an amount ranging from 0.5% to0.6% of the aggregate principal amount of refund anticipation loans facilitatedby our network; and

•                  A variable fee equal to 50% of the amount bywhich the net amount of finance fees received by SBB&T exceeds uncollectedloans by a threshold amount of at least 1.0% of the aggregate principal amountof refund anticipation loans facilitated by our network.

 

Additionally,if the amount of uncollected loans exceeds the net finance fees received bySBB&T, we have agreed to reimburse SBB&T in an amount equal to 50% ofsuch difference.  Based upon ourhistorical experience, we do not currently expect that this potentialreimbursement obligation will have a material impact on our business.

 

Althoughwe do not expect a reimbursement obligation to SBB&T, we have deferredrevenue recognition of the $16.00 fixed fee for each refund anticipation loanfacilitated by our network during the third quarter of fiscal 2005 until suchreimbursement obligation amount is determinable.  As of January 31, 2005, we deferred $7.2million of such revenues which we expect to recognize as revenues in the fourthquarter of fiscal 2005.

 

On March 14, 2005, weamended our agreement with SBB&T that, among other things, included achange for the current tax season whereby we will receive an additional fee ofup to $5.00 for each refund anticipation loan facilitated.  The amount ofthe additional fee applies to refund anticipation loan balances that exceed$2,500.00.  We expect to recognize such revenues in the fourth quarter offiscal 2005 in conjunction with the recognition of the $16.00 fixed fee.  We expect this additional fee to represent anaverage increase of approximately $2.60 for each refund anticipation loanfacilitated with SBB&T in the current tax season.

 

Wewill continue to receive a portion of the collections with respect to refundanticipation loans facilitated by SBB&T in prior years as well as refundanticipation loans facilitated by Household Tax Masters Inc., although weexpect such amounts from prior year loans facilitated by SBB&T to diminish.

 

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***Costs Associatedwith Being an Independent Public Company***

 

Since becoming anindependent public company effective June 25, 2004, we have incurred $3.6million in costs which are incremental to our historical costs and consist of:(i) $1.6 million related to directors and officers and errors and omissionsinsurance coverage and (ii) $2.0 million primarily related to stock-basedcompensation.

 

In addition, we incurred astock-based compensation charge during the first quarter of fiscal 2005 of $4.5million in conjunction with the IPO related to the issuance to employees ofvested stock options and common stock in exchange for Cendant stock options andunvested restricted stock units that were held by such employees prior to theIPO.

 

**RESULTS OF OPERATIONS**

 

**Consolidated**

 

Our consolidated results of operations are set forthbelow and are followed by a more detailed discussion of each of our businesssegments, as well as a detailed discussion of certain corporate and otherexpenses.

 

**Consolidated Results ofOperations**

 
| ** **                                             | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(in thousands)**                                     | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                           |       |                                     |       |                                    |       |   |   |   |   |
| Franchise operations revenues:                         |       |                                     |       |                                    |       |   |   |   |   |
| Royalty                                                |       | $                                        | 20,197     |                                    | $          | 16,546 |   | $ | 21,186 |   | $ | 17,288 |   |
| Marketing and advertising                              |       | 9,414                                    |       | 7,829                                   |       | 9,869 |   | 8,182 |   |
| Financial product fees                                 |       | 13,673                                   |       | 10,345                                  |       | 16,863 |   | 11,624 |   |
| Other financial product revenues                       |       | 2,277                                    |       | 1,300                                   |       | 8,117 |   | 6,678 |   |
| Other                                                  |       | 3,663                                    |       | 3,811                                   |       | 8,324 |   | 8,077 |   |
| Service revenues from company-owned office  operations |       | 24,013                                   |       | 19,695                                  |       | 25,076 |   | 20,995 |   |
| Total revenues                                         |       | 73,237                                   |       | 59,526                                  |       | 89,435 |   | 72,844 |   |
|                                                   |       |                                     |       |                                    |       |   |   |   |   |
| **Expenses**                                           |       |                                     |       |                                    |       |   |   |   |   |
| Cost of franchise operations                           |       | 6,577                                    |       | 6,079                                   |       | 19,875 |   | 17,927 |   |
| Marketing and advertising                              |       | 14,977                                   |       | 13,563                                  |       | 20,175 |   | 18,334 |   |
| Cost of company-owned office operations                |       | 12,107                                   |       | 12,462                                  |       | 21,646 |   | 20,984 |   |
| Selling, general and administrative                    |       | 6,209                                    |       | 5,667                                   |       | 22,896 |   | 22,660 |   |
| Depreciation and amortization                          |       | 2,850                                    |       | 2,987                                   |       | 8,647 |   | 8,941 |   |
| Total expenses                                         |       | 42,720                                   |       | 40,758                                  |       | 93,239 |   | 88,846 |   |
|                                                   |       |                                     |       |                                    |       |   |   |   |   |
| **Income (loss) from operations**                      |       | 30,517                                   |       | 18,768                                  |       | (3,804 | ) | (16,002 | ) |
| Other income/(expense):                                |       |                                     |       |                                    |       |   |   |   |   |
| Interest income                                        |       | 355                                      |       | 247                                     |       | 739 |   | 549 |   |
| Interest expense                                       |       | (2,022                                   | )          | (111                                    | )          | (4,539 | ) | (262 | ) |
| Income (loss) before income taxes                      |       | 28,850                                   |       | 18,904                                  |       | (7,604 | ) | (15,715 | ) |
| Provision for (benefit from) income taxes              |       | 11,304                                   |       | 7,510                                   |       | (2,980 | ) | (6,244 | ) |
| Net income (loss)                                      |       | $                                        | 17,546     |                                    | $          | 11,394 |   | $ | (4,624 | ) | $ | (9,471 | ) |

 

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The table below presents selected keyoperating statistics for our franchise and company-owned office operations.

 
| ** **                                                | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Offices:                                                  |       |                                 |       |                                |       |   |   |   |   |
| Franchise operations                                      |       | 4,826                                |       | 4,295                               |       | 4,826 |   | 4,295 |   |
| Company-owned office operations                           |       | 621                                  |       | 642                                 |       | 621 |   | 642 |   |
| Total offices - system                                    |       | 5,447                                |       | 4,937                               |       | 5,447 |   | 4,937 |   |
|                                                      |       |                                 |       |                                |       |   |   |   |   |
| Tax returns prepared (in thousands):                      |       |                                 |       |                                |       |   |   |   |   |
| Franchise operations                                      |       | 988                                  |       | 887                                 |       | 1,038 |   | 944 |   |
| Company-owned office operations                           |       | 140                                  |       | 131                                 |       | 145 |   | 135 |   |
| Total tax returns - system                                |       | 1,128                                |       | 1,018                               |       | 1,183 |   | 1,079 |   |
|                                                      |       |                                 |       |                                |       |   |   |   |   |
| Average revenues per tax return prepared:                 |       |                                 |       |                                |       |   |   |   |   |
| Franchise operations (1)                                  |       | $                                    | 158.61     |                                | $          | 147.11 |   | $ | 158.27 |   | $ | 144.44 |   |
| Company-owned office operations (2)                       |       | $                                    | 171.70     |                                | $          | 150.74 |   | $ | 172.74 |   | $ | 155.36 |   |
| Average revenues per tax return prepared -  system        |       | $                                    | 160.24     |                                | $          | 147.58 |   | $ | 160.05 |   | $ | 145.80 |   |
|                                                      |       |                                 |       |                                |       |   |   |   |   |
| Financial products (in thousands)                         |       | 999                                  |       | 847                                 |       | 1,030 |   | 860 |   |
| Average financial product fees per  financial product (3) |       | $                                    | 13.69      |                                | $          | 12.21 |   | $ | 16.37 |   | $ | 13.52 |   |

 

----

(1) Calculated as total revenues earned by our franchisees, which does notrepresent revenues earned by us, divided by the number of tax returns preparedby our franchisees.  We earn royalty andmarketing and advertising revenues, which represent a percentage of therevenues received by our franchisees.

 

(2) Calculated as tax preparation revenues and related fees received bycompany-owned offices divided by the number of tax returns prepared bycompany-owned offices.

 

(3) Calculated as revenues earned fromfinancial product fees (as reflected in the Consolidated Statements ofOperations) divided by the number of financial products facilitated.

 

**Calculation of average revenuesper tax return in Franchise Operations:**

 
| **(dollars in thousands, except per tax return data)**                        | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total revenues earned by our franchisees  (A)                                 |       | $                                    | 156,750    |                                | $          | 130,487 |   | $ | 164,238 |   | $ | 136,349 |   |
|                                                                          |       |                                 |       |                                |       |   |   |   |   |
| Average royalty rate (B)                                                      |       | 12.88                                | %          | 12.68                               | %          | 12.90 | % | 12.68 | % |
| Marketing and advertising rate (C)                                            |       | 6.00                                 | %          | 6.00                                | %          | 6.00 | % | 6.00 | % |
| Combined royalty and marketing and  advertising rate (B plus C)               |       | 18.88                                | %          | 18.68                               | %          | 18.90 | % | 18.68 | % |
|                                                                          |       |                                 |       |                                |       |   |   |   |   |
| Royalty revenues (A times B)                                                  |       | $                                    | 20,197     |                                | $          | 16,546 |   | $ | 21,186 |   | $ | 17,288 |   |
| Marketing and advertising revenues (A times  C)                               |       | 9,414                                |       | 7,829                               |       | 9,869 |   | 8,182 |   |
| Total royalty and marketing and advertising  revenues                         |       | $                                    | 29,611     |                                | $          | 24,375 |   | $ | 31,055 |   | $ | 25,470 |   |
|                                                                          |       |                                 |       |                                |       |   |   |   |   |
| Number of tax returns prepared by our  franchisees (D)                        |       | 988                                  |       | 887                                 |       | 1,038 |   | 944 |   |
|                                                                          |       |                                 |       |                                |       |   |   |   |   |
| Average revenues per tax return prepared by  our franchisees (A divided by D) |       | $                                    | 158.61     |                                | $          | 147.11 |   | $ | 158.27 |   | $ | 144.44 |   |

 

----

Amounts may not recalculate precisely due torounding differences.

 

22

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***Three MonthsEnded January 31, 2005 as Compared to Three Months Ended January 31, 2004***

 

The number of tax returns prepared within our network,including franchise and company-owned operations, for the third quarter offiscal 2005 increased 11% as compared to the same period last year.  When the number of tax returns prepared isadjusted to exclude the impact of an additional weekday at the end of Januaryin the current year as compared to last year, the number of tax returnsprepared would have actually declined. We believe that this decline is due primarily to a slower start to thetax return filing season, as compared to last year, as evidenced by the laterreceipt by our customers this year of their Form W-2’s distributed by theirrespective employers. We believe our view of this tax season’s slower start isconsistent with the lower number of tax returns filed with the Internal RevenueService through the end of January.   Wealso believe that the decline in tax return filings through the end of Januarymay have resulted in increased demand for services over a shorter period oftime during the month of February and created capacity constraints in certainoffices and markets resulting in our network preparing fewer than expected taxreturns through the end of February.  Average revenues per tax returnprepared increased primarily as a result of annual price increases, increasedfinancial product penetration and increased complexity of tax returnsprepared.  We also benefited from aslight increase in the average royalty rate we earn from our franchise segment,which was 12.9% as compared to 12.7%.

 

Inconjunction with the increase in the number of tax returns prepared andfinancial products facilitated, total revenues for the third quarter of fiscal2005 of $73.2 million increased $13.7 million, or 23%, as compared to $59.5million for the same period last year. Other financial product revenues for the third quarter of fiscal 2005 included$0.8 million related to our prior agreement with SBB&T.  In addition, we earned additional fees of$2.00 for each refund anticipation loan facilitated by our network in January2005 which contributed to $0.9 million of other financial product revenues.  Although we do not expect a reimbursementobligation to SBB&T, we have deferred recognition of the $16.00 fixed feefor each refund anticipation loan facilitated by our network in January 2005until such reimbursement obligation amount is determinable.  As of January 31, 2005, we deferred $7.2million of such revenues which we expect to recognize as revenues in the fourthquarter of fiscal 2005.

 

Financialproduct fees increased $3.3 million, or 32%, for the third quarter of fiscal2005 as compared to the same period last year due to an 18% increase in thenumber of financial products facilitated by our network and due to the increasein the number of Gold Guarantee® products sold last tax season as compared tothe prior tax season.  Gold Guaranteeproducts are primarily sold during tax season, with the associated revenuesearned ratably over the product’s 36-month life.  The number of refund-based financial productsfacilitated increased by 19% to approximately 832,000, which included anincrease of 18% to approximately 566,000 in the number of refund anticipationloans facilitated.  The number of GoldGuarantee products sold increased 11% to approximately 167,000.  Also, average financial product fees perfinancial product increased 12% primarily due to the increase in the number of GoldGuarantee products sold last tax season as compared to the prior tax season.  Other revenues of $3.7 million decreasedslightly as compared to the same period last year and included the revenuesrelated to the sale of 62 new territories to franchisees.

 

Total expenses were $42.7million for the third quarter of fiscal 2005 as compared to $40.8 million forthe same period last year, an increase of $2.0 million, or 5%.  Marketing and advertising expenses increased$1.4 million, or 10%, as we increased our marketing at the beginning of the taxseason and continued to increase awareness of our brand to drive new customergrowth.  Included in total expenses wereselling, general and administrative of $1.4 million related to being anindependent public company, such as additional insurance expenses andstock-based compensation.  There werealso increased costs of $0.5 million, or 8%, in our franchise operationssegment due to the increase in the number of Gold Guarantee products sold lasttax season as compared to the prior tax season. Gold Guarantee products are primarily sold during tax season, with theassociated costs amortized ratably over the product’s 36-month life.  Offsetting these increases, included in lastyear's total expenses were additional expenses of $0.9 million relating toa litigation settlement charge.In addition, there was a $0.4 million decreasein costs in our company-owned office operations segment due to operatingefficiencies associated with closing unprofitable locations.

 

Interest expense increased$1.9 million in the third quarter of fiscal 2005 as compared to the same periodlast year primarily as a result of the issuance in June 2004 of $175.0 millionof five-year floating rate senior unsecured notes (the “Notes”) in connectionwith the IPO.

 

***Nine Months EndedJanuary 31, 2005 as Compared to Nine Months Ended January 31, 2004***

 

Thenumber of tax returns prepared within our network for the nine months endedJanuary 31, 2005 increased 10% as compared to the same period last year and theaverage revenues per tax return prepared increased 10%.  The number of tax returns preparedincreased primarily due to the inclusion of an additional weekday at the end ofJanuary this year as compared to such day being included in the fourth fiscalquarter last year.  Average revenues pertax return prepared increased primarily as a result of annual price increases,increased financial productpenetration and increased complexity of tax returns prepared.  Inaddition we also benefited from a slight increase in the average royalty ratewe earn from our franchise segment, which was 12.9% as compared to 12.7%.

 

Inconjunction with the increase in tax returns prepared and financial productsfacilitated, total revenues for the nine months ended January 31, 2005 of $89.4million increased $16.6 million, or 23%, as compared to $72.8 million for thesame period last year.  Other financialproduct revenues for the nine months ended January 31, 2005 included $5.5million related to our prior agreement with SBB&T.  In addition, we earned additional fees of$2.00 for each refund anticipation loan facilitated by our network in January2005 which contributed to $0.9 million of other financial product revenues.

 

Financialproduct fees increased $5.2 million, or 45%, for the nine months ended January31, 2005 as compared to the same period last year due to a 20% increase in thenumber of financial products facilitated by our network and due to the increasein the number of Gold Guarantee products sold last tax season as compared tothe prior tax season.  The number of refund-basedfinancial products facilitated increased 23% to approximately 864,000, whichincluded an increase of 19% to approximately 567,000 in the number of refundanticipation loans facilitated.  Thenumber of Gold Guarantee products sold increased 6% to approximately167,000.  Also, average financial productfees per financial product

 

23

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increased21% primarily due to the increase in the number of Gold Guarantee products soldlast tax season as compared to the prior tax season.  Other revenues of $8.3 million increasedslightly as compared to the same period last year and included the revenuesrelated to the sale of 202 new territories to franchisees.

 

Total expenses were $93.2million for the nine months ended January 31, 2005 as compared to $88.8 millionfor the same period last year, an increase of $4.4 million, or 5%.  Included in total expenses was an additionalstock-based compensation charge of $4.5 million related to the issuance toemployees of 903,935 vested stock options and 100,880 shares of common stock inexchange for Cendant stock options and unvested restricted stock units thatwere held by such employees prior to the IPO. Also included in total expenses were selling, general and administrativeof $3.6 million related to being an independent public company, such asadditional insurance costs and stock-based compensation.  Included in last year’s total expenses wereadditional expenses of $6.9 million included in selling, general andadministrative consisting of an $8.9 million litigation settlement chargepartially offset by a $2.0 million reduction in bad debt reserves as a resultof improved collection performance. These additional expenses alone resulted in a net increase in totalexpenses of $1.2 million.

 

In addition, there was anincrease in costs in our franchise operations segment of $1.9 million, or 11%,and an increase in marketing and advertising expenses of $1.8 million, or 10%,both due to the same factors noted above in the third quarter fiscal yearcomparison.  Costs in our company-ownedoffices operations segment increased $0.7 million, or 3%, due to higher off-seasoncosts related to facility and labor costs associated with the increased numberof company-owned offices.  Theseincreases were partially offset by decreases of $0.2 million in othermiscellaneous expenses and $0.7 million in legal expenses each of which areincluded in selling, general and administrative and a $0.3 million decrease indepreciation and amortization.

 

Interest expense increasedby $4.3 million for the nine months ended January 31, 2005 as compared to thesame period lastyear asa result of the $175.0 million Notes issuance in June 2004.

 

**Segment Results and Corporate andOther**

 

**Franchise Operations**

 

At the core of our businessstrategy is the growth and development of our franchise system. We derive asignificant portion of our revenues during our third and fourth fiscal quartersfrom royalty and marketing and advertising fees, which are also our fastestgrowing sources of revenues. We earn royalty fees based on our franchisees’revenues. We provide our franchisees with services designed to increase theirrevenues, including training, administrative support, access to our proprietaryProFiler® tax return preparation software and financial products,product development and quality assurance. Marketing and advertising fees arebased on our franchisees’ revenues and are used to support national advertisingprograms, brand development, website development and our franchisees’ regionaland local advertising.

 

**Franchise Results of Operations**

 
| ** **                          | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(in thousands):**                 | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                        |       |                                     |       |                                    |       |   |   |   |   |
| Royalty                             |       | $                                        | 20,197     |                                    | $          | 16,546 |   | $ | 21,186 |   | $ | 17,288 |   |
| Marketing and advertising           |       | 9,414                                    |       | 7,829                                   |       | 9,869 |   | 8,182 |   |
| Financial product fees              |       | 13,673                                   |       | 10,345                                  |       | 16,863 |   | 11,624 |   |
| Other financial product revenues    |       | 2,277                                    |       | 1,300                                   |       | 8,117 |   | 6,678 |   |
| Other                               |       | 3,663                                    |       | 3,811                                   |       | 8,324 |   | 8,077 |   |
| Total revenues                      |       | 49,224                                   |       | 39,831                                  |       | 64,359 |   | 51,849 |   |
|                                |       |                                     |       |                                    |       |   |   |   |   |
| **Expenses**                        |       |                                     |       |                                    |       |   |   |   |   |
| Cost of franchise operations        |       | 6,577                                    |       | 6,079                                   |       | 19,875 |   | 17,927 |   |
| Marketing and advertising           |       | 13,239                                   |       | 10,888                                  |       | 17,877 |   | 15,074 |   |
| Selling, general and administrative |       | 1,412                                    |       | 895                                     |       | 3,360 |   | 3,265 |   |
| Depreciation and amortization       |       | 1,896                                    |       | 1,899                                   |       | 5,647 |   | 5,709 |   |
| Total expenses                      |       | 23,124                                   |       | 19,761                                  |       | 46,759 |   | 41,975 |   |
|                                |       |                                     |       |                                    |       |   |   |   |   |
| **Income from operations**          |       | 26,100                                   |       | 20,070                                  |       | 17,600 |   | 9,874 |   |
| Other income/(expense):             |       |                                     |       |                                    |       |   |   |   |   |
| Interest income                     |       | 343                                      |       | 247                                     |       | 714 |   | 549 |   |
| Income before income taxes          |       | $                                        | 26,443     |                                    | $          | 20,317 |   | $ | 18,314 |   | $ | 10,423 |   |

 

24

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***Three Months EndedJanuary 31, 2005 as Compared to Three Months Ended January 31, 2004***

 

Thenumber of tax returns prepared increased 11% and the average revenues per tax returnprepared increased 8%.  The number of taxreturns prepared increased primarily due to the inclusion of an additionalweekday at the end of January this year as compared to such day being includedin the fourth fiscal quarter last year. Average revenues per tax return prepared increased primarily as a resultof annual price increases, increased financial product penetration andincreased complexity of tax returns prepared. We also benefited from a slight increase in the average royalty rate weearn, which was 12.9% as compared to 12.7%.

 

Inconjunction with the increase in the number of tax returns prepared andfinancial products facilitated, total franchise operations revenues increased$9.4 million, or 24%, for the third quarter of fiscal 2005 as compared to thesame period last year.  Other financialproduct revenues for the third quarter of fiscal 2005 included $0.8 millionrelated to our prior agreement with SBB&T. In addition we earned additional fees of $2.00 for each refundanticipation loan facilitated by our network in January 2005 which contributedto $0.9 million of other financial product revenues.

 

Financialproduct fees increased $3.3 million, or 32%, for the third quarter of fiscal2005 as compared to the same period last year due to an 18% increase in thenumber of financial products facilitated and due to the increase in the number ofGold Guarantee products sold last tax season as compared to the prior taxseason.  The number of refund-basedfinancial products facilitated increased by 19% to 832,000, which included anincrease of 18% in the number of refund anticipation loans facilitated toapproximately 566,000.  The number of GoldGuarantee products sold increased 11% to approximately 167,000.  Also, average financial product feesincreased 12% primarily due to the increase in the number of Gold Guaranteeproducts sold last tax season as compared to the prior tax season.  Other revenues of $3.7 million decreasedslightly as compared to the same period last year and included the revenuesrelated to the sale of 62 new territories.

 

Total expenses increased$3.4 million, or 17%, for the third quarter of fiscal 2005 as compared to thesame period last year.  Marketing andadvertising expenses increased $2.4 million, or 22%, as we increased ourmarketing at the beginning of the tax season and continued to increaseawareness of our brand to drive new customer growth.    Also, there was an increase of $0.5million, or 58%, of miscellaneous expenses included in selling, general andadministrative.  In addition, there wasan increase of $0.5 million, or 8%, in the segment’s cost of operations due tothe increase in the number of Gold Guarantee products sold last tax season ascompared to the prior tax season and increased labor costs to supportfranchisees.

 

***Nine Months EndedJanuary 31, 2005 as Compared to Nine Months Ended January 31, 2004***

 

Thenumber of tax returns prepared during the nine months ended January 31, 2005increased 10% as compared to the same period last year and the average revenuesper tax return prepared increased 10%.  Thenumber of tax returns prepared increased primarily due to the inclusion of anadditional weekday at the end of January this year as compared to such daybeing included in the fourth fiscal quarter last year.  Average revenues per tax return preparedincreased primarily as a result of annual price increases, increased financialproduct penetration and increased complexity of tax returns prepared.  We also benefited from a slight increase inthe average royalty rate we earn from our franchise segment.

 

Inconjunction with the increase in the number of tax returns prepared andfinancial products facilitated, total franchise operations revenues increased$12.5 million, or 24%, for the nine months ended January 31, 2005 as comparedto the same period last year.  Otherfinancial product revenues for the nine months ended January 31, 2005 included$5.5 million related to our prior agreement with SBB&T.  In addition, we earned additional fees of$2.00 for each refund anticipation loan facilitated by our network in January2005 which contributed to $0.9 million of other financial product revenues.

 

Financial product feesincreased $5.2 million, or 45%, for the nine months ended January 31, 2005 ascompared to the same period last year due to a 20% increase in the number offinancial products facilitated and due to the increase in the number of GoldGuarantee products sold last tax season as compared to the prior taxseason.  The number of refund-basedfinancial products facilitated increased 23% to approximately 864,000, whichincluded an increase of 19% to approximately 567,000 in the number of refundanticipation loans facilitated.  Thenumber of Gold Guarantee products sold increased 6% to approximately167,000.  Also, average financial productfees per financial product facilitated increased 21% primarily due to the increasein the number of Gold Guarantee products sold last tax season as compared tothe prior tax season.  Other revenues of$8.3 million increased slightly as compared to the same period last year andincluded the revenues related to the sale of 202 new territories.

 

25

----

 

Total expenses increased$4.8 million, or 11%, for the nine months ended January 31, 2005 as compared tothe same period last year.  Marketing andadvertising expenses increased $2.8 million, or 19%, as we increased ourmarketing at the beginning of the tax season and continued to increaseawareness of our brand to drive new customer growth. Also, there were increasedcosts of $1.9 million, or 11%, in the segment’s cost of operations attributableto the increase in the number of Gold Guarantee products sold last tax seasonas compared to the prior tax season and increased labor costs to support ourfranchisees.

 

**Company-OwnedOffice Operations**

 

Complementing our franchisesystem are our company-owned offices.

 

**Company-Owned Office Results ofOperations**

 
| ** **                          | ** ** | **Three Months  Ended January 31,** | ** ** | **Nine Months  Ended January 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(in thousands):**                 | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                        |       |                                     |       |                                    |       |   |   |   |   |
| Service revenues from operations    |       | $                                        | 24,013     |                                    | $          | 19,695 |   | $ | 25,076 |   | $ | 20,995 |   |
|                                |       |                                     |       |                                    |       |   |   |   |   |
| **Expenses**                        |       |                                     |       |                                    |       |   |   |   |   |
| Cost of operations                  |       | 12,107                                   |       | 12,462                                  |       | 21,646 |   | 20,984 |   |
| Marketing and advertising           |       | 1,738                                    |       | 2,675                                   |       | 2,298 |   | 3,260 |   |
| Selling, general and administrative |       | 800                                      |       | 873                                     |       | 2,559 |   | 2,324 |   |
| Depreciation and amortization       |       | 954                                      |       | 1,088                                   |       | 3,000 |   | 3,232 |   |
| Total expenses                      |       | 15,599                                   |       | 17,098                                  |       | 29,503 |   | 29,800 |   |
|                                |       |                                     |       |                                    |       |   |   |   |   |
| **Income (loss) from operations**   |       | 8,414                                    |       | 2,597                                   |       | (4,427 | ) | (8,805 | ) |
| Other income/(expense):             |       |                                     |       |                                    |       |   |   |   |   |
| Interest income                     |       | 12                                       |       | —                                  |       | 25 |   | — |   |
| Income (loss) before income taxes   |       | $                                        | 8,426      |                                    | $          | 2,597 |   | $ | (4,402 | ) | $ | (8,805 | ) |

 

***Three MonthsEnded January 31, 2005 as Compared to Three Months Ended January 31, 2004***

 

Thenumber of tax returns prepared increased 7% for the third quarter of fiscal2005 and average revenues per tax return prepared increased 14% whichcontributed to an increase in revenues of 22% as compared to the same periodlast year.  The increase in the number oftax returns prepared was primarily due to the inclusion of an additionalweekday at the end of January this year as compared to such day being includedin the fourth fiscal quarter last year. Average revenues per tax return prepared increased primarily as a resultof increases in pricing, increased financial product penetration and increasedcomplexity of tax returns prepared.

 

Totalexpenses decreased $1.5 million, or 9%, for the third quarter of fiscal 2005 ascompared to the same period last year primarily due to a decrease in marketingand advertising expenses of $0.9 million and a decrease in cost of operationsof $0.4 million both attributable to improved efficiencies and the closure ofunderperforming offices.

 

***Nine Months EndedJanuary 31, 2005 as Compared to Nine Months Ended January 31, 2004***

 

Thenumber of tax returns prepared increased 7% for the nine months ended January31, 2005 and average revenues per tax return prepared increased 11% whichcontributed to an increase in revenues of 19% as compared to the same periodlast year.  The increase in the number oftax returns prepared was primarily due to the inclusion of an additionalweekday at the end of January this year as compared to such day being includedin the fourth fiscal quarter last year. Average revenues per tax return prepared increased primarily as a resultof increases in pricing, increased financial product penetration and increasedcomplexity of tax returns prepared.

 

Totalexpenses decreased $0.3 million for the nine months ended January 31, 2005 ascompared to the same period last year primarily due to a decrease in marketingand advertising expenses of $1.0 million attributable to improved efficienciesoffset by an increase in cost of operations of $0.7 million primarily due tohigher off-season costs related to facilities and higher labor costs.

 

26

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**Corporate and Other**

 

Corporate and other expensesconsist of unallocated corporate overhead supporting both segments, includinglegal, finance, human resources, real estate facilities and strategicdevelopment activities, as well as interest expense.  Beginning in fiscal 2005, corporate and otherexpenses include incremental costs related to being an independent publiccompany, including additional insurance costs and stock-based compensation.

 

**Corporate and Other: Resultsof Operations**

 
| ** **                                          | ** ** | **Three Months  Ended January 31,** | ** ** | **Nine Months  Ended January 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(in thousands):**                                 | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Expenses (1)**                                    |       |                                     |       |                                    |       |   |   |   |   |
| General and administrative                          |       | $                                        | 3,997      |                                    | $          | 3,044 |   | $ | 12,469 |   | $ | 10,173 |   |
| Stock-based compensation charge related to  the IPO |       | —                                   |       | —                                  |       | 4,508 |   | — |   |
| Litigation settlement charge                        |       | —                                   |       | 855                                     |       | — |   | 8,899 |   |
| Bad debt reserve adjustment                         |       | —                                   |       | —                                  |       | — |   | (2,001 | ) |
| Total expenses                                      |       | 3,997                                    |       | 3,899                                   |       | 16,977 |   | 17,071 |   |
|                                                |       |                                     |       |                                    |       |   |   |   |   |
| Other income/(expense):                             |       |                                     |       |                                    |       |   |   |   |   |
| Interest expense                                    |       | (2,022                                   | )          | (111                                    | )          | (4,539 | ) | (262 | ) |
| Loss before income taxes                            |       | $                                        | (6,019     | )                                       | $          | (4,010 | ) | $ | (21,516 | ) | $ | (17,333 | ) |

 

----

(1)          Included in selling, general andadministrative in the Consolidated Statements of Operations.

 

***Three MonthsEnded January 31, 2005 as Compared to Three Months Ended January 31, 2004***

 

Corporate and other totalexpenses, excluding interest expense, increased $0.1 million in the thirdquarter of fiscal 2005 as compared to the same period last year.  Adjusting for the third quarter of fiscal2004 litigation settlement charge of $0.9 million, the increase was primarilythe result of $1.4 million in incremental costs related to becoming anindependent public company offset by a reduction of $0.4 million inmiscellaneous expenses.  Interest expenseincreased by $1.9 million in the third quarter of fiscal 2005 as compared tothe same period last year as a result of the $175.0 million Notes issuance inJune 2004.

 

***Nine Months EndedJanuary 31, 2005 as Compared to Nine Months Ended January 31, 2004***

 

Corporate and other totalexpenses, excluding interest expense, decreased $0.1 million during the ninemonths ended January 31, 2005 as compared to the same period last year.  After adjusting for the $6.9 million of expensesincurred in the nine months ended January 31, 2004 and the $4.5 million chargeincurred in the nine months ended January 31, 2005, as described in the abovetable, the resulting increase of $2.3 million, or 23%, was primarily due toindependent public company costs of $3.6 million offset by a reduction of $1.3million in miscellaneous expenses. Interest expense increased by $4.3 millionfor the nine months ended January 31, 2005 as compared to the same period lastyear as a result of the $175.0 million Notes issuance in June 2004.

 

**Liquidity and Capital Resources**

 

***HistoricalSources and Uses of Cash from Operations***

 

***Background***

 

Prior to the IPO, funds thatwe generated from our operations were regularly transferred to Cendant.  In addition, Cendant funded expenses on ourbehalf.  As an independent publiccompany, we now maintain our cash and cash equivalents, fund our operations andenter into investing and financing activities independently.

 

With respect to financingactivities, Cendant historically received the benefit of our operating cashflow and funded our operations following the end of the tax season.Consequently, until the completion of the IPO in June 2004, our financingactivities had consisted solely of the settlement of intercompany transactionswith Cendant.

 

***Seasonality of our Cash Flows***

 

Our revenues have been andare expected to continue to be highly seasonal. As a result, we generate mostof our operating funds during the tax season that consists of the period fromJanuary through April.  Certain of ourexpenses are also highly seasonal in nature including our marketing andadvertising expenses as well as the costs to operate our company-owned offices,both of which increase shortly before and continue through the tax filingseason.  During the off-peak season, we requirefunds to cover our operating expenses as well as to reinvest in our businessfor future growth. We expect to fund our operations through our operating cashflow and through our credit facility, as required.

 

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***Increase in Debt and the Establishment of a Credit Facility***

 

InJune 2004, in conjunction with the IPO, we issued $175.0 million of five-yearfloating rate senior unsecured notes through a private placement.  The purpose of the Notes issuance was to fundthe cash portion of the Special Dividend paid to Cendant upon Cendant’sdivestiture of its entire ownership interest in us.  We are required to repay the entire principalamount on June 25, 2009, but have the option to prepay all or a portion of theNotes any time on or after June 25, 2005. In June 2004, we also established a $100.0 million five-year revolvingcredit facility.  Borrowings under thecredit facility are to be used to finance working capital needs, potentialacquisitions and other general corporate purposes.  To the extent we complete any acquisitions,we may require additional debt or equity financing to meet our capital needs.

 

For a more detaileddiscussion of our Notes and our credit facility, including a description offinancial covenants which we are required to maintain, please refer to Note 9, “Long-TermDebt and Credit Facility” to our Consolidated Financial Statements included inthis Quarterly Report on Form 10-Q.

 

***Sources and Uses of Cash for the Nine Months Ended January 31, 2005***

 

***Operating activities***:  For the nine months endedJanuary 31, 2005, net cash used in operating activities was $12.8 million ascompared to net cash used in operations of $23.3 million for the same periodlast year. Described below are some of the more significant items thatcontributed to, or partially offset, our net cash used in operating activitiesfor the nine months ended January 31, 2005:

 

**•**                  *Increase in accountsreceivable*—**Included in the January 31, 2005 accountsreceivable are royalty and marketing and advertising revenues earned by us fromour franchisees during the current tax season and financial product fees andother financial product revenues earned by us and due from the financialinstitutions that facilitate our financial products.  Offsetting the increase was the collection ofreceivables related to fiscal 2004 other financial product revenues.

 

•                  *Payments related tolitigation settlements*— Wemade payments of $2.3 million related to the litigation settlement reserve thatwas established in fiscal 2004.

 

**•**                  *Interest p**ayments*— We made interest payments of $2.9 millionon the Notes.

 

•                  *Marketing and advertising payments*– We made marketing andadvertising payments of $17.2 million related to us increasing awareness of ourbrand to drive customer growth.

 

***Investing activities***:  Net cash used in investingactivities was $7.6 million for the nine months ended January 31, 2005 ascompared to $8.2 million for the same period last year.  Included in both of these periods was thefunding of development advances by which we provide funds to independent taxpractices to assist in the conversion of their operations to the Jackson Hewittbrand and/or to further expand an existing franchisee’s business.  We expect to continue to make such fundingsin the future.  Capital expendituresduring the nine months ended January 31, 2005 were primarily related toupgrades on our information technology systems, including a new financialsystems implementation.  Cash paid foracquisitions during the nine months ended January 31, 2005 includedapproximately $0.7 million related to acquisitions completed in fiscal 2005 and$1.0 million primarily related to settlement of accrued purchase priceobligations.

 

***Financing activities:  ***Net cash provided by financing activities was$15.8 million for the nine months ended January 31, 2005 as compared to $38.3million for the same period last year.  Inconnection with the IPO, we issued $175.0 million of Notes and used the entireproceeds to fund the cash portion of the Special Dividend to Cendant.  As of January 31, 2005 we had borrowed $20.0million under our Credit Facility and had repaid $8.0 million.  We have made dividend payments to shareholdersof $5.3 million through January 31, 2005. We also paid fees of $3.3 million to issue the Notes as well as toestablish the $100.0 million Credit Facility. The changes in due from Cendant Corporation during both periodsrepresented the cash settlement of intercompany transactions with Cendant.

 

In addition to the cashportion of the Special Dividend paid to Cendant during the nine months endedJanuary 31, 2005, we settled our remaining intercompany balance with Cendantthrough a non-cash distribution of amounts due from Cendant on the date ofdisposition of $131.9 million.  Thisamount is disclosed as a non-cash transaction in the Supplemental Disclosuresection of the Consolidated Statements of Cash Flows.

 

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**FutureCash Requirements and Sources of Cash**

 

***Future Cash Requirements***

 

Our primary future cashrequirements will be to fund operating activities, debt service, developmentadvances, capital expenditures, acquisitions and quarterly dividends.  For the remainder of fiscal 2005 our primarycash requirements are as follows:

 

•                  *Credit facility repayments*— As of January 31, 2005 we had borrowed$20.0 million under our Credit Facility and had repaid $8.0 million.   As of March 16, 2005 we have no indebtednessunder our Credit Facility as we have repaid all amounts borrowed using cashflows provided by operating activities during the fourth quarter.

 

•                  *Debt service* — In the fourth quarter of fiscal 2005, weexpect to make an interest payment of approximately $1.8 million related to our$175.0 million Notes.

 

•                  *Quarterly dividends* — On April 15, 2005, we will make aquarterly cash dividend payment of $0.07 per share to our common stockholdersof record on March 29, 2005.  Based onour estimates, we anticipate this dividend to be approximately $2.6 million.

 

•                  *Marketing and advertisingexpenses*— Cash outlays formarketing and advertising expenses are seasonal in nature and typicallyincrease in our third and fourth fiscal quarters consistent with the taxseason.  Marketing and advertisingexpenses include national, regional and local campaigns designed to increasebrand awareness and attract both early-season and late-season tax filers.  Cash collections from marketing andadvertising royalties from our franchise operations segment largely fund ourbudget for these types of expenses.

 

•                  *Costs to operatecompany-owned offices* — Ourcompany-owned offices complement our franchise system and are focused primarilyon organic growth through the opening of new company-owned offices withinexisting territories as well as increasing office productivity.  Costs to operate our company-owned officestypically peak in the fourth fiscal quarter primarily due to the labor costsrelated to the seasonal employees who provide tax-filing services to ourcustomers.

 

We may from time to timeprior to June 25, 2009 seek to retire all or a part of our outstanding debtthrough cash payments.  Such prepayments,if any, will depend on prevailing market conditions, our liquidityrequirements, contractual requirements and other factors.  The amounts involved may be material.

 

Inaddition, we may from time to time seek to repurchase shares of our commonstock in open market purchases, privately negotiated transactions orotherwise.  Such repurchases, if any, will depend on the prevailing marketconditions, our liquidity requirements, contractual restrictions and otherfactors.  The amounts involved may be material.

 

***Future Sources of Cash***

 

We expect our primary sourceof cash to be provided by operating activities during the fourth quarter offiscal 2005, primarily from the collection of accounts receivable from ourfranchisees and from the financial institutions that facilitate the sale of ourfinancial products.  During the off-peakseason we typically anticipate the need to borrow against our Credit Facilityto fund operations as evidenced by our borrowings of $20.0 million under ourCredit Facility during the third quarter of fiscal 2005 (of which $8.0 millionwas repaid as of January 31, 2005).   Asof March 16, 2005 we have no indebtedness under our Credit Facility as we haverepaid all amounts borrowed using cash flows from our operating activitiesduring the fourth quarter.  We do notexpect any borrowings against our Credit Facility during the fourth quarter offiscal 2005.

 

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***Critical Accounting Policy***

 

In presenting ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America, we are required to makeestimates and assumptions that affect the amounts reported therein. Events thatare outside of our control cannot be predicted and, as such, they cannot becontemplated in evaluating such estimates and assumptions. If there is asignificant unfavorable change to current conditions, it could result in amaterial adverse impact to our consolidated results of operations, financialposition and liquidity. We believe that the estimates and assumptions we usedwhen preparing our consolidated financial statements were the most appropriateat that time. The following accounting policy may affect reported results whichcould cause variations in our consolidated financial results both on an interimand fiscal year end basis.

 

**Goodwill**

 

We conducted the requiredannual goodwill impairment review during the fourth quarter of fiscal2004.  In accordance with the provisionsof Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill andOther Intangible Assets,” we compared the carrying value of our reportingunits, which are our franchise operations segment and company-owned officeoperations segment, to their fair values and determined that the carryingamount of our reporting units did not exceed their respective fair values. Whendetermining fair value, we utilized various assumptions, including projectionsof future cash flows. A change in these underlying assumptions will cause achange in the results of the tests and, as such, could cause fair value to beless than the respective carrying amount. In such event, we would then berequired to record a charge, which would impact net income (loss). In thefourth quarter of fiscal 2005 we will review the carrying value of goodwill forimpairment.  An adverse change to ourbusiness will impact our consolidated results and may result in an impairmentof our goodwill. The aggregate carrying value of our goodwill was$392.7 million at January 31, 2005. See Note 4, “Goodwill and Other Intangible Assets, Net” to ourConsolidated Financial Statements for more information on goodwill.

 

***Recent Accounting Pronouncement***

 

In December 2004, theFinancial Accounting Standards Board issued SFAS No. 123R, “Share-BasedPayment,” which eliminates the alternative to measure stock-based compensationawards using the intrinsic value approach permitted by Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” and bySFAS No. 123, “Accounting for Stock-Based Compensation.”. We arerequired to adopt the provisions of SFAS No. 123R on August 1,2005.  On January 1, 2003 we adoptedthe fair value method of accounting for stock-based compensation provisions ofSFAS No. 123 and the transitional provisions ofSFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure.”  As a result, we havebeen recording stock-based compensation expense since January 1, 2003 foremployee stock awards that were granted or modified subsequent toDecember 31, 2002. In addition, our current practice with respect toforfeitures is to recognize the related benefit upon forfeiture of the award.Upon adoption of SFAS No. 123R, we will be required to recognizecompensation expense net of estimated forfeitures upon the issuance of theaward. Although we have not yet completed our assessment of adoptingSFAS No. 123R, we do not believe that such adoption willsignificantly affect our net income (loss), financial position or cash flows.

 

**Item 3****.  *Quantitative and Qualitative Disclosures About MarketRisk***

 

Financial instruments thatpotentially subject us to concentrations of credit risk consist of accountsreceivable and notes receivable.  Wemanage such risk by evaluating the financial position and creditworthiness ofsuch counterparties.  As of January 31,2005, there were no significant concentrations of credit risk with anyindividual counterparty or groups of counterparties.  Concentrations of credit risk associated withreceivables are considered minimal due to our diverse customer base.  We do not normally require collateral or othersecurity to support credit sales.

 

 A 1% change in the interest rate on our Noteswould result in an increase or decrease in interest expense of $1.8 millionannually.

 

**Item 4****.  *Controls and Procedures***

 

(a)  *Disclosure Controls and Procedures. *Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this quarterly report. Based on such evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that, as of the end of such period,our disclosure controls and procedures are effective.

 

(b)  *Internal Controls Over Financial Reporting.*  There have not been any changes in ourinternal controls over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II****— OTHER INFORMATION**

 

**Item 1****.  LegalProceedings**

 

See Note 12, “Commitments and Contingencies,” to ourConsolidated Financial Statements, which is incorporated by reference herein.

 

**Item 2****. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3****. Defaults Upon Senior Securities**

 

None.

 

**Item 4****. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5****. Other Information**

 

OnMarch 14, 2005, we amended our agreement with SBB&T that, among otherthings, included a chage for the current tax season whereby we will receive anadditional fee of up to $5.00 for each refund anticipation loan facilitated.The amount of the additional fee applies to refund anticipation loan balancesthat exceed $2,500.00.

 

On March 10,2005, the Board of Directors adopted the 2005 Annual Voluntary DeferredCompensation Plan (the “Defered Compensation Plan”), under which certainmembers of management may elect to defer a portion of their pre-taxcompensation earned during the fiscal year. The Deferred Compensation Plan is unfunded, and any compensationdeferred under the plan by participating employees represents at all times anunfunded and unsecured contractual obligation of the Company.  Participating employees and theirbeneficiaries will be unsecured creditors of the Company with respect to allobligations owed to any of them under the Deferred Compensation Plan.  Amounts payable under the DeferredCompensation Plan will be satisfied solely out of the general assets of theCompany subject to the claims of its creditors. In fiscal 2005, the Company will match 100% of the first 6% ofcompensation deferred by participating employees under the DeferredCompensation Plan.

 

We makeavailable free of charge, through our investor relations’ website,ir.jacksonhewitt.com, our reports on file with the SEC, including our Form10-K, Form 10-Q and Form 8-K reports and all amendments to those reports assoon as reasonably practicable after such material is electronically filed withor furnished to the Securities and Exchange Commission.

 

**Item 6****.  Exhibits**

 

**Exhibits: **We have filed the following exhibits in connectionwith this report.

 
| 10.21  |   | First  Amendment to Credit Agreement among Jackson Hewitt Inc., as Borrower, the  Lenders named therein and JPMorgan Chase Bank, as Administrative Agent, dated  January 7, 2005.                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                             |
| 10.22  |   | First  Amendment to Note Purchase Agreement relating to the Floating Rate Senior  Notes among Jackson Hewitt Tax Service Inc., Jackson Hewitt Inc. and the  Purchasers named therein, dated January 7, 2005.                                     |
|   |   |                                                                                                                                                                                                                                             |
| 10.23  |   | Letter Agreement between Jackson Hewitt Inc. and Santa Barbara  Bank & Trust, dated March 14, 2005, amending Refund Anticipation Loan  Program Agreement between Jackson Hewitt Inc. and Santa Barbara Bank &  Trust, dated May 5, 2004. |
|   |   |                                                                                                                                                                                                                                             |
| 10.24  |   | 2005 Annual Voluntary Deferred Compensation Plan and Form of  Deferred Compensation Agreement.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                             |
| 31.1   |   | Certification of Chief Executive Officer Pursuant  to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange  Act of 1934, as amended.                                                                                          |
|   |   |                                                                                                                                                                                                                                             |
| 31.2   |   | Certification of Chief Financial Officer Pursuant  to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange  Act of 1934, as amended.                                                                                          |
|   |   |                                                                                                                                                                                                                                             |
| 32.1   |   | Certification of Chief Executive Officer Pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                             |
|   |   |                                                                                                                                                                                                                                             |
| 32.2   |   | Certification of Chief Financial Officer Pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                             |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on the 16th day of March, 2005.

 
| ** ** | **JACKSON HEWITT TAX SERVICE INC.**                             |
|------------|-----------------------------------------------------------------|
|       |                                                            |
|       | By:                                                             |
|       |                                                            |
|       | /s/  MICHAEL D. LISTER                                          |   |
|       | Michael  D. Lister                                              |
|       | President  and Chief Executive Officer                          |
|       | (Principal  Executive Officer)                                  |
|       |                                                            |
|       |                                                            |
|       | /s/  MARK L. HEIMBOUCH                                          |   |
|       | Mark  L. Heimbouch                                              |
|       | Senior  Vice President and Chief Financial Officer              |
|       | (Principal  Financial Officer and Principal Accounting Officer) |

 

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