2. To Our Shareholders:
The theme for this
year is Believe It to
Achieve It. And as you
should be able to tell,
WE BELIEVE IT!
Fiscal Year 2006
has been an amazing
journey for Liberty Tax
Service. It is hard to
find words to describe
the abundance of
Photo above: CEO Founder John
great events that have
Hewitt received Entrepreneur of the Year
taken place over the
recognition by the International
last twelve months.
Franchise Association.
Our pace of growth
and expansion has
been nothing short
of remarkable. All
of us at Liberty feel
blessed to be a part of
a phenomenon that
continues to rapidly
expand throughout
the United States
and Canada. We are
working hard to use
this unprecedented
expansion and
attention that we have
received to do good for
others and continue
to expand our core
business.
We remain an
unconventional
company. We are
committed to serving
our customers with the
“Show me a good and gracious loser, and I’ll show you a
best experience inside
failure.”
and outside our brick Knute Rockne
and mortar locations.
We have expanded
our presence on the
internet to include
several interactive programs. This year 2005 return during tax season. marketplace most concepts will fail. Our
we launched our on-line filing program We are managing Liberty Tax strategic advantage is our franchisees. It is
that allows customers to complete and Service with long term focus. We are our belief that franchisees will out hustle
file their tax return on-line. We also convinced that this is the only way to and outperform a company employee any
introduced a casualty loss calculator that run our Company. We have watched day of the week. Our competition has
allowed people affected by Hurricane our competition stumble and fall as a mostly employees running their locations.
Katrina to compute the casualty loss result of not keeping their eye on the The point is that in order to maintain
benefits they might qualify for by ball. We remain focused on the tax our strategic advantage and continue
amending last year’s tax return. By doing preparation industry and developing to grow Liberty Tax Service we need to
this, Katrina victims were able to receive “happy, successful franchisees.” Great make sure that our franchisees are happy
the amount of the casualty loss benefit franchise concepts are plentiful, but and successful. The bottom line must
sooner than if they had to wait to file a without a strategic advantage in the equal profit. The individual franchise
3. owner’s unit economics drive the system.
Our business philosophy involves the
measurement and sharing of key business
metrics and best practices in a way that
leads to healthy internal competition and
growth within the system. Here are a
few examples of how we accomplish
this task.
· Top Performance Rankings
Our intranet (Zee Net) provides daily
reporting of individual office and
franchisee performance. We provide up
to the minute reports of performance in
many areas such as Top 50 offices, Top
10 new offices, most improved offices,
highest gross dollar volume for offices
and Franchise entities and many more.
Franchisees can see how they stack up in
these key areas and discern whether they
are in the top, bottom or middle of the
system. These reports spur competition,
friendly wagering and, most importantly,
the drive and desire for each franchisee
to grow their business and ultimately the
company.
· Conference Calls During tax
season I am on a Conference Call over
fifty times. These Conference Calls are
a way for us to share with all of our
franchisees the best practices that are
taking place across the country. We invite
our best performing franchisees to share
their activities and experiences in real
time. This way these best practices can
be implemented almost immediately by
other franchisees.
· Individual Performance
Metrics Each time a franchisee logs on
to our intranet they see a performance
grid that is specific to their operation.
This grid allows the franchisee to see in
a “snapshot” where they stand in terms
of number of tax returns, fees, discounts
and other key metrics that are vital to the
operation of their business. By providing
this information in a quick view format
we are allowing the franchisees to see
where they are excelling and what areas
may need attention.
· Daily Communications Each
morning our franchisees receive an e-mail
that details upcoming events, material
changes in software, new marketing ideas
and important operational information.
This communication was developed
as a means to deliver “breaking news”
in an encapsulated format. Since our
business is extremely seasonal, sometimes
hours can make a difference. This Daily
Communication is just another example
of how we strive to deliver critical
information to our Happy Successful
Franchisees.
4. We have devoted
extraordinary resources to
finding the most creative
and innovative people
and give them the tools
they need to change the
complexion of this industry.
Liberty Tax people know
that they are expected to
invest time and energy on
bring to the organization a bird’s eye view
of what is needed from a franchisee’s
perspective. It is strategies like these that
help our system grow and flourish. From
my experience, I feel that most franchise
companies do not value the franchisee’s
input. I, on the other hand, view input
cutting edge projects that create new
as an asset and consider it critical to
opportunities to serve our customers
achieving our goals.
better and build market share. Another
The Mission Statement remains
unique strategy we use is to hire, on a
fundamental to our culture. We believe
short term basis in most cases, some
more than ever before that setting the
of our franchisees who have exhibited
standard, improving each day and having
unique skills in the areas of marketing,
some fun will make the world a better
operations, technology, tax research and
place. We are changing people’s lives
software development. These individuals
and it is beyond gratifying for all of us to
work for us during the off–season to help
experience.
develop and enhance our programs and
“Becoming number one is easier than remaining number
one.” Bill Bradley
Photos left: Liberty received a tremendous amount of free advertising and accolades in
006. Above: Lady Liberty makes special appearances at events throughout the country.
Revenue
(in $ millions)
$66.1
$51.0
$42.2
$28.5
$17.9
$10.7
RANKED
#10 OVE
RALL
2006
2001 2004 2005
2002 2003
5. Finally, I would like to address the reporter. Liberty Tax Service came out on
phenomenal year we have experienced top. Again we were recognized as one of
from our public relations efforts. This has the three branded tax companies by the
been by far the best year for publicity we national media.
· Entrepreneur magazine ranked
have ever had. Of course my expectations
are even greater for the future, but here is Liberty Tax Service in the top 10 of the
a short list of the highlights for 2006. best 500 U.S. franchises. I am the only
· I was named Entrepreneur of the
person to have founded two of the top
Year by the International Franchise ten opportunities on the list.
· Our media exposure count
Association. Needless to say I was
honored to receive this award from such nationwide culminated in over 1,700 hits
an influential and prestigious organization. in newspaper, radio and television - over
I was also humbled, realizing that I did 40% more than last year.
not get here alone. I continue to thank After seeing this all in writing I am
my family, the franchisees, employees and thrilled at what we have accomplished
stockholders of Liberty Tax Service for and excited by everything that is left
joining me on this fantastic journey. to do. The trust that you, our investors,
· In conjunction with winning
have placed in us is something we take
the award, I appeared on the cover of extremely seriously. I thank you yet again
for your continued support as we head
Franchising World Magazine, published
by the IFA. (It’s not Rolling Stone, but we towards our tenth anniversary. It should
were happy with the results!) be some kind of celebration.
· Liberty Tax Service was featured on
the front page of the Wall Street Journal Sincerely,
on April 17th with a full column story and
a four color picture, touting our guerrilla
marketing tactics. I would venture to say
that none of our competition has ever John T. Hewitt
garnered that much ink on the front page Founder, Chairman of the Board
of theWSJ, especially for a non-financial and President.
related story.
· CNN made mention of Liberty Tax
Service on the morning news April 17th.
One anchor told the other, “You need to
invest in that guy” (meaning me!).
· ABC News sent a camera crew to
Virginia Beach to interview me, as the tax
preparation industry spokesman, about
tax preparer competency. I appeared on
World News Tonight.
· NBC News sent hidden cameras into
offices of Jackson Hewitt, HR Block and
Liberty Tax. Each company was given the
same tax scenario. In both cases Block
and Jackson Hewitt were caught on tape
(National News) giving bad advice to the
Photos above and left: New fran-
chisees are trained in proper
guerrilla marketing tactics. All
dress in Liberty costumes and
hit the streets to get a feel for
the job. Next page above right:
Liberty marketers hand out free
giveaways, like these fireworks
glasses, at sporting events to get
our name out.
6
6. 62% of the 134,000,000 individual returns
processed by the Internal Revenue
The Game Plan Service were completed by a paid
Growth and Expansion preparer compared to 60% in 2004. This
year our network of offices completed
Liberty Tax Service continues to be
approximately 1.2 million tax returns
the fastest growing retail tax preparation
in the US and Canada. In 2006, Liberty
company EVER. In Fiscal Year 2006
Tax Service has over 1,300 franchisees
the Company operated 1,946 offices
operating, on average, 1.48 locations each.
in the United States and Canada. For
It is our goal to cap the total number of
next tax season we anticipate operating
franchisees at about 1,600 and increase
approximately 2,500 offices. The tax
the average number of locations operated
industry also continues to grow. This year,
by each to approximately 5-7. These
“When you win, nothing hurts.”
Joe namath
Number of Offices
1946
1735
1409
919
611
551
2001 2004
2002 2003 2005 2006
7. The Offensive Line
Technology and Development
A most exciting project is the
development of our state of the art tax
preparation software “Libtax”. In 2004
we purchased a Microsoft platform from
a tax software company in Washington
state with the intent of using the basis to
develop our own software. We expect
metrics will allow us to reach our goal support for the franchisees.
of being the biggest tax preparation Each Area Developer has
company in the world. It is also a key purchased the rights to develop
strategy that is vital to the successful a large geographical area and
support of our franchisees which will to share in the profits. These
allow them to develop and maintain a individuals are responsible for
healthy bottom line. the unit sales and development
Another key metric of our growth is of these areas. As a result, the
the average net fee. This year we grew AD has a vested interest in the
our average net fee in the U.S. to $155 success and profitability of
which is a 20% increase from last year. the unit franchisee. They are
This is an important statistic to monitor therefore motivated to ensure
because a healthy net fee increase helps that each franchisee under
grow our company-wide bottom line in their tutelage is achieving their
an economically sound fashion. Also, as goals.
the system matures, the need for deep Secondly, the Area
discounting starts to dissipate and allows Developer provides a more
Liberty franchisees to collect fees that are immediate and intimate
commensurate with the superior level of connection to the franchisee.
service they provide. Currently the program includes
In FY 2006 we added 341 new 85 Area Developers and
franchisees to our system and awarded covers better than 75% of the
the rights to 491 territories. Same store geography of the United States.
sales increased over 25% from 2005 and We plan to expand the program
second year offices grew by 54%. It took to Canada next year.
22% more returns for a franchisee to make
it on to the List of Top 50 offices, which is Here we grow again!
a highly coveted place to be.
A major factor in the growth and
expansion of the Liberty system is the
Photos above and left: Liberty
Area Development (AD) program. This
joined forces with Cell Phones
concept has been in place since 2003. It
for Soldiers again in 006. Our
has been an overwhelming success in a
customers are thrilled to drop
number of ways. First and foremost an
off their old cell phones and
Area Developer adds an extra layer of
help our troops overseas. Next
page above right: Cell Phones
for Soldiers founders Brit-
tany and Robbie Bergquist met
with Defense Secretary Donald
Rumsfeld during a visit to
Washington DC.
9. fondly referred to as “Libby” was deployed on optimizing our public web site to
to over 300 offices last year. More are make search engine marketing more
on the way for 2007 as our franchisees effective for our customers. We continue
clamor to generate even bigger and better to explore ways to use the internet to
publicity hits. increase brand awareness and promote
In keeping with our commitment to our products and services economically
social responsibility Liberty Tax Service through pay per click advertising.
remains involved with the Cell Phones
for Soldiers campaign. It has been a
cornerstone for our public service pledge.
In FY 2006 our franchises collected
over 50,000 retired cell phones which
translated into over 500,000 minutes of
telephone time given via phone cards to
soldiers serving overseas. Our franchisees
use every public relations opportunity
they have to help promote this cause. It
is an excellent way of doing good.
And the accolades just keep on
coming. In addition to being ranked in
efforts there has been a significant shift the top ten of Entrepreneur magazine’s
in support incidents communicated list of top franchise opportunities,
over the web vs. telephone. Knowledge several other publications recognized
base utilization increased 94% and web Liberty Tax Service. Black Enterprise
support utilization increased from 35% Magazine ranked us as one of the “Top
last year to 61% in 2006. These two 20 Franchises that will make you rich;”
efforts resulted in a 60% decrease in long Hispanic Trends Magazine ranked Liberty
distance phone charges. This is another as a top rated technology based franchise;
example of how Liberty Tax Service Accounting Today ranked Liberty as
employees are challenging each other to one of the top tax and accounting firms
discover creative ways to do things faster, and named John one of the 100 most
cheaper and better. influential people in the accounting
profession for the fifth straight year;
Franchise Times named Liberty to the list
of up and coming franchisors; and John
The Fans was awarded the IFA Entrepreneur of the
Promotion and Publicity Year Award and featured on the cover of
their magazine, Franchising World.
Creative license isn’t just a buzz We also continue to step up our
phrase at Liberty Tax Service. Our commitment to serving the Hispanic
franchisees and employees are community by offering training classes
continuously looking for ingenious ways in cultural and tax related topics to
to promote the brand. Last tax season educate the franchisees on working with
we had over 3000 costumed characters Latinos. A certification program has been
working to bring in new customers. Our developed to give training and guidance
marketing efforts can only be described as to franchisees in an effort to more
OUTRAGEOUS. And it pays. In FY 2006 adequately serve the non-English speaking
our marketing antics generated over 1,700 sector of our business.
media exposures As the
for the company. proliferation
Our front page of the internet
article in the Wall continues to
Street Journal is dominate the
but one example marketing
of how our army arena, Liberty
of Lady Liberty’s Tax Service
is generating has taken
hundreds of major strides
thousands of to increase our
dollars worth of presence on
free advertising for the web. We
us. are currently
Our mascot, working
0
10. Our convention was attended by
over 1,500 people and was held at
the new convention center in Virginia
Beach. The celebration has become so
large that there is not a single hotel that
can accommodate us in the area. The
franchisees were entertained for three
days with parties, meetings, dancers and
a casino night. The theme of this year’s
event was fittingly “Believe It to Achieve
It” which sums up the culmination of
the ninth year of Liberty Tax Service’s
existence. Many people told us we
couldn’t do it. But we did because we
believed.
The world of Liberty Tax Service
continues to grow and flourish. 2007
promises to be bigger and better for the
company. We have many plans in the
Photos both pages: Liberty’s 006
works to increase our exposure and our
convention was the biggest ever! Moti-
brand thereby ultimately propelling us
vational speaker Keith Harrell (oppo-
toward the goal of being the biggest tax
site above left) was a highlight of the
preparer in the universe.
opening ceremonies which included
a special guest (this page above) - no,
that’s actually comedian impersonator
Steve Bridges.
Believe It to achieve it
12. Tax Wars heated The Tampa Bay
up when HR Lightning wins
Block tried to the Stanley Cup
compete with Liberty is ranked # on
Liberty in Entrepreneur’s Franchise
guerrilla 00; # on their list of Top
marketing Low-Cost Franchises and #
on the list of Fastest Growing
Franchise Opportunities
Liberty is ranked #
on Entrepreneur’s
Liberty franchisees and
Franchise 00; #6 on
staff visit New York
their list of Top
City on the day of the
Low-Cost Franchises
reopening of the Statue
and # on the list
of Liberty in August
of Fastest Growing
Franchise
Opportunities
00
00
Tony Stewart wins Nascar’s
Nextel Cup Championship
00
0 War Emblem wins the
Kentucky Derby
Liberty wins a lawsuit against
Liberty makes HR Block, forcing Block to
NBC Today Show debut stop misrepresenting tax loans
appearance as refunds or refund amounts The LA Lakers win the
NBA Championship
for the rd consecu-
tive year
France wins the World Cup
Tiger Woods wins the Masters
Golf Tournament
UR name changes
to Liberty Tax
Service. Pictured-
Liberty officially
the statue in Las
begins operations
Vegas that gave John
in Canada
Hewitt the idea for
the name.
Five Liberty offices
open in U.S. in
Columbus, Ohio.
13. Liberty Directors, Officers and Culture Committee
Directors
John Hewitt
Chairman
John Garel Steven Ibbotson
Gary Golding Ross Longfield
George Robson
Officers
John Hewitt
President and Chief Executive Officer
Charles Kirkpatrick
Mark Baumgartner
Chief Information Officer
Chief Financial Officer
Steven Lepkowski
Kathleen Curry
Vice President of Sales and Marketing
Vice President of Legal
Martha O’Gorman
Mark Johnson
Vice President of Marketing
Vice President of Area Development
Rufe Vanderpool
Vice President of Operations
Culture Committee
Oscar Aujero Cory Hughes
Stacey Barnes Dave Miller
Chris Bushey Mike Piper
Danny Hewitt Nathalie Sauvaire
John Hewitt Kelly Wyatt
17. JTH TAX, INC. AND SUBSIDIARIES
(d/b/a Liberty Tax Service)
Notes to Consolidated Financial Statements
April 30, 2006, 2005 and 2004
to the existence of financing provided to purchase the franchise and/or for working capital and
equipment needs.
An entity that will absorb a majority of the VIE’s expected losses or expected residual returns, as
defined in FIN 46R, is considered the primary beneficiary of the VIE. The primary beneficiary
should include the VIE’s assets, liabilities and results of operations in its consolidated financial
statements. During 2006, the Company was deemed to be the primary beneficiary of 16 of its
franchise entities due to the relatively significant financial support provided to these entities. The
Company does not hold an ownership interest in any of these entities. The summarized effect of
these entities in the consolidated balance sheet at April 30, 2006, and the consolidated statement of
income for the year then ended, is as follows:
JTH Tax, Inc. Consolidating
and adjustments
subsidiaries VIEs and eliminations Consolidated
Assets
Current assets $ 64,703,149 343,513 (2,711,879) 62,334,783
Non-current assets 37,069,590 1,577,970 (1,278,127) 37,369,433
Total assets $ 101,772,739 1,921,483 (3,990,006) 99,704,216
Liabilities, Minority Interest
and Stockholders’ Equity
Current liabilities $ 38,124,875 3,258,759 (3,008,486) 38,375,148
Non-current liabilities 18,722,547 1,140,140 (1,140,140) 18,722,547
Total liabilities 56,847,422 4,398,899 (4,148,626) 57,097,695
Minority interest — — 20,452 20,452
Stockholders’ equity (deficit) 44,925,317 (2,477,416) 138,168 42,586,069
Total liabilities, minority
interest and
stockholders’ equity $ 101,772,739 1,921,483 (3,990,006) 99,704,216
Revenue $ 64,281,546 2,773,060 (902,060) 66,152,546
Operating expenses 46,101,962 3,844,685 (1,237,210) 48,709,437
Other, net (457,670) — 52,929 (404,741)
Income (loss) before
income taxes and
cumulative effect of
accounting change 17,721,914 (1,071,625) 388,079 17,038,368
Income tax expense 7,110,966 — — 7,110,966
Income (loss) before
cumulative effect of
accounting change 10,610,948 (1,071,625) 388,079 9,927,402
Cumulative effect of accounting change — — (1,655,702) (1,655,702)
Net income (loss) $ 10,610,948 (1,071,625) (1,267,623) 8,271,700
(Continued)
