THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, December 16, 1995 TAG: 9512160244
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DAVE MAYFIELD, STAFF WRITER
LENGTH: Medium: 83 lines
Jackson Hewitt Inc., trying to claw back after a tumultuous tax season that left its finances tattered, is searching for a new executive to run its day-to-day operations.
The Virginia Beach-based company, the nation's second-largest tax service after H&R Block, made the disclosure Friday in its fiscal second-quarter financial report.
Company founder John Hewitt said in an interview that he will give up many of his current duties to focus on long-term strategy and franchise relations. Hewitt said he plans to move to the newly created position of chairman of Jackson Hewitt's board after the new president and chief executive joins the company, effective May 1.
Jackson Hewitt was battered last tax season after franchisees didn't repay more than $2.5 million owed on loans or for services provided. A major change in the way the Internal Revenue Service handled returns last tax season cut into the franchisees' business. As a result, many skipped payments to Jackson Hewitt.
That put the tax service in a cash-flow squeeze and threw it into default last August on working-capital and mortgage agreements with its chief lender, NationsBank.
In October, NationsBank extended Jackson Hewitt an additional $3 million in credit to help it get through the next tax season, during which the tax service plans a significant expansion.
Jackson Hewitt negotiated loan terms that are somewhat less stringent than it had indicated previously. But the final terms are still steep. NationsBank was issued warrants that can be converted into at least 5 percent of Jackson Hewitt's common stock. And if the tax service doesn't meet its repayment schedule, the stake could increase to up to 19.9 percent.
Hewitt said the company has taken several major steps that should improve its financial condition. He said he is ``cautiously optimistic'' that the business climate for tax preparers in the upcoming tax season also will be better.
For one thing, he said, the IRS has changed how it will issue some refunds in a way that should make it less risky for tax services and their bank partners to issue so-called refund-anticipation loans. The number of such loans, which have been highly profitable for tax services, plummeted last tax season after the IRS tightened procedures and made it tougher for lenders to commit.
Hewitt also said the IRS isn't as likely to hold up nearly as many tax returns this time to verify names, birth dates and Social Security numbers. The agency made an especially thorough check of such information last tax season.
Yet in spite of the changes, Hewitt conceded that the climate for preparers will still be tougher than they had been before the IRS crackdown on potential fraud.
He said Jackson Hewitt was persuaded by its lenders to rebuild its finances to survive IRS actions that someday may be even more adverse.
Among other things, the tax service all but stopped lending to franchisees, tightened procedures for ad spending, reorganized field-service operations, and froze or cut pay for nearly all its 200 employees. Hewitt said he took a 50 percent salary cut.
If Jackson Hewitt hits its profit targets next tax season, employees will get bonuses, he said.
The tax service also set up payment schedules for delinquent franchisees and required all their revenues during the upcoming tax season to be funneled through its accounts first.
Hewitt said Jackson Hewitt's long-term outlook is promising. He said the tax service will expand to as many as 1,500 locations, all but 90 of them franchise-owned, in the upcoming season. It had 1,222 at the end of last season.
Jackson Hewitt's largest growth will be inside Wal-Mart stores. There the company expects as many as 250 locations in the upcoming season. Many of the Wal-Mart locations will stay open year-round offering copying, packaging and shipping services, Hewitt said.
The cost of the upcoming expansion partly explains why Jackson Hewitt's operating loss for the second quarter of the fiscal year widened to $2.5 million from $2.3 million the year before. The tax service has traditionally lost money in the first nine months of its fiscal year, then more than covered that with a profit in the last quarter, during which tax season falls. by CNB