easyhome Ltd.
TSX : EH

easyhome Ltd.

March 09, 2010 21:34 ET

easyhome Ltd. Reports 2009 Fourth Quarter and Annual Results

MISSISSAUGA, ONTARIO--(Marketwire - March 9, 2010) - easyhome Ltd. (TSX:EH), Canada's largest merchandise leasing company, today announced its unaudited results for the fourth quarter and full year ended December 31, 2009.

For the fourth quarter of the year, revenue was $43.9 million, virtually unchanged from the fourth quarter of 2008. Net income for the quarter was $1.4 million or $0.14 per share compared with $1.8 million or $0.17 per share for the same period last year. Excluding before tax restructuring charges of $0.7 million recorded in the fourth quarter of 2009, earnings per share were $0.18 per share, an improvement of $0.01 per share over the same period last year. Revenue for the 12-month period was $173.7 million compared with $162.5 million in 2008, an increase of 6.9%. Net income for the 12 months was $5.8 million or $0.55 per share compared with $9.0 million or $0.85 per share one year ago. Excluding before tax restructuring charges of $1.9 million recorded in the third and fourth quarters of 2009, earnings per share were $0.67 per share.

After several years of significant growth, the Company had to respond to a negative economic environment and ensure that its operational focus and practices were appropriate. "2009 was a difficult but important year for easyhome. The steps we took in the third quarter to increase operational effectiveness and control costs led to measurable performance improvements in the fourth quarter of the year," said David Ingram, President and Chief Executive Officer of easyhome. "Despite the challenging operating environment, easyhome increased the number of customers and lease agreements during the quarter, and improved collections to achieve meaningful reductions in accounts receivable and charge-offs. We improved every key metric during the quarter, and approximately doubled the number of new customer agreements obtained compared with the fourth quarter of 2008." We expect that these operational changes, combined with the benefits associated with the business restructuring announced at the end of the third quarter, will enable easyhome to deliver improved results in the subsequent periods.

In spite of the disappointing earnings achieved during 2009, easyhome was able to generate strong cash flow in 2009. Cash flow provided by operating activities was $15.5 million after investing $6.2 million to increase easyfinancial's loan portfolio. The Company reduced debt by a total of $6.0 million during the year. In addition, easyhome repurchased 86,700 shares for $0.8 million under a normal course issuer bid and distributed $3.6 million in total dividend payments during 2009.

Fourth Quarter Results

For the three months ended December 31, easyhome recorded revenue of $43.9 million compared with $44.1 million in the fourth quarter of 2008. Same store revenue declined 1.1% during the quarter as the growth of easyfinancial was offset by revenue declines in our leasing business. "Although leasing revenues continue to be affected by lower consumer demand as a result of the economic slowdown, revenues in our easyfinancial business are showing strong growth," Mr. Ingram said. "easyfinancial increased revenues 132.7% from $0.7 million to $1.6 million during the quarter. In addition, easyfinancial opened 10 new kiosks during the quarter."

Operating expenses before amortization increased to $26.7 million in the fourth quarter of 2009 compared with $25.5 million for the same period last year. The increase is a result of a number of factors, primarily driven by the $0.7 million in restructuring costs.

The restructuring costs are part of a previously announced initiative to reorganize the Company's operational and administrative functions to achieve greater efficiency. The restructuring began in the third quarter of 2009 and is expected to be completed by the second quarter of 2010 at a total cost of $2.6 million.

Operating income was $2.3 million for the fourth quarter of 2009, down 31.1% compared with $3.4 million for the same period last year. Excluding restructuring costs, operating income was $3.0 million, a decrease of 10.2%.

During the fourth quarter of 2009, the current and future income tax provisions were adjusted to reflect reductions in income tax rates and the finalization of income tax estimates. As a result, the income tax rate declined to 26.1% for the fourth quarter of 2009 compared to 41.3% for the fourth quarter of 2008.

Net income was $1.4 million for the quarter compared with $1.8 million in the fourth quarter of 2008. On a per share basis, earnings were $0.14 compared with $0.17. Excluding restructuring charges, earnings were $0.18 per share.

Annual Results

Revenue for the year ended December 31, 2009 was $173.7 million, an increase of $11.2 million or 6.9% over 2008 with same store revenue increasing by 2.3% in 2009 compared to an increase of 9.1% in 2008. Revenue from the Canadian leasing business increased by $4.7 million, largely due to the Insta-rent acquisition which was completed on September 25, 2008. The U.S. leasing business and easyfinancial grew by $4.1 million and $2.5 million respectively both due to the additional stores and kiosks opened in 2008 and 2009 and due to the continuing strong growth of the existing lease and loan portfolios.

Operating income for the twelve month period was $10.4 million compared with $15.9 million for the same period last year. The decrease is attributable to higher operating expenses, including before tax restructuring charges of $1.9 million. Excluding restructuring costs, operating income for the year was $12.3 million, a decrease of 22.7%. Net income for 2009 was $5.8 million, or $0.55 per share, compared with $9.0 million, or $0.85 per share. Excluding restructuring costs, earnings per share were $0.67.

Outlook

"From any perspective, fiscal 2009 was a challenging year, and our annual results reflect that," said Mr. Ingram. "We have, however, made substantial progress in managing our costs, re-focusing our leasing efforts, and improving our collections procedures. I believe that the changes we have made will continue to gather momentum through the first quarter of 2010 and beyond. Although we do not expect consumer demand to recover significantly during the next twelve months, the restructuring of our operations and the consolidation of administrative functions are expected to result in improved bottom line performance."

"In 2010 we will build on the improving metrics of the fourth quarter in our leasing business," Mr. Ingram continued, "as we continue to focus on improving operational performance. We will also direct our energies to expanding our U.S. franchise platforms and our easyfinancial network of kiosks." We anticipate opening 5 to 10 corporate stores, 20 to 30 franchise stores and 20 to 30 easyfinancial kiosks in 2010. We expect that the strong cash flows generated by our operating activities will enable us to continue with the expansion of our store network, replenish our leased assets and fund the growth of our easyfinancial loan portfolio while still meeting our term loan repayment obligations and operating within our existing operating lines.

Donald K. Johnson, Chairman of the Board, commented, "This was a difficult year for many Canadian retailers. We are pleased with the decisive leadership that easyhome's management has demonstrated in restructuring for greater efficiency. We are confident that easyhome is now successfully positioned to manage within this economic environment and pursue growth."

The Board of Directors has approved a dividend payment of $0.085 per share payable on April 9, 2010 to the holders of common shares of record as at the close of business on March 31, 2010.

About easyhome

As at December 31, 2009, easyhome Ltd. had 240 stores, including 206 Canadian corporate stores, 12 U.S. corporate stores, 15 U.S. franchised stores, 6 Canadian franchised stores and 1 licensed Canadian store. The Company also operates 29 easyfinancial kiosks within existing easyhome stores.

easyhome Ltd. is Canada's largest merchandise leasing company and the third largest in North America, offering top quality, brand-name household furnishings, appliances and home electronic products to consumers under weekly or monthly leasing agreements. easyhome Ltd. is listed on the TSX under the symbol 'EH'.

The above analysis refers to certain financial measures that are not determined in accordance with generally accepted accounting principles ("GAAP") in Canada. These measures do not have standardized meanings and may not be comparable to similar measures presented by other companies. Although measures such as operating income and same store revenue growth do not have standardized meanings prescribed by GAAP, these measures are defined in the table included at the end of this new release or can be determined by reference to our financial statements. We discuss these measures because we believe that they facilitate the understanding of the results of our operations and financial position.

Forward-Looking Statements

This news release includes forward-looking information about easyhome including its business operations, strategy. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as 'expects', anticipates', 'intends', 'plans', 'believes' or negative versions thereof and similar expressions. In addition, any statements that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects about future events is also a forward-looking statement. Forward-looking statements are based on certain factors and assumptions, including expected growth, results of operations and business prospects and are inherently subject to among other things, risks, uncertainties and assumptions about our operations economic factors and the industry generally. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements, due to, but not limited to important factors such as our ability to enter into new lease and/or financing agreements, collect on existing lease and/or financing agreements, open new locations on favourable terms, secure new franchised locations, purchase products which appeal to our customers at a competitive rate, cope with changes in legislation, raise capital under favourable terms, manage the impact of litigation, control costs at all levels of the organization and maintain and enhance our system of internal controls. We caution that the forgoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on easyhome's forward-looking statements. Management of easyhome is under no obligation (and expressly disclaim any such obligation) to update or alter the forward-looking statements whether as a result of new information, future events or otherwise, unless otherwise required by law.

Tables Follow:

- Table 1 - Unaudited Financial Statements

- Table 2 - Key Performance Indicators and Non-GAAP Measures

Table 1 - Unaudited Financial Statements

Notice Of No Auditor Review Of Interim Financial Statements

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



CONSOLIDATED BALANCE SHEETS
(Continued under the laws of Ontario) (unaudited)

As at: December 31, December 31,
2009 2008
----------------------------------------------------------------------------
(in 000's) $ $
----------------------------------------------------------------------------

ASSETS (note 6)

Cash equivalents 291 252
Amounts receivable (note 4) 5,284 5,169
Income taxes recoverable 2,886 1,117
Consumer loans receivable (note 5) 10,222 4,064
Prepaid expenses 1,592 2,538
Lease assets 74,686 82,443
Property and equipment 15,637 15,879
Future tax assets (note 8) 4,655 6,609
Intangible assets (note 2) 3,183 2,790
Goodwill 17,325 17,325
----------------------------------------------------------------------------
135,761 138,186
----------------------------------------------------------------------------
----------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
Bank revolving credit facility (note 6) 23,764 26,139
Trade accounts payable 7,411 6,248
Accrued liabilities 3,234 2,768
Accrued employee costs 2,882 2,478
Dividends payable (note 7) 884 884
Deferred lease inducements 2,303 2,540
Unearned revenue 748 734
Term loan (note 6) 6,120 9,750
----------------------------------------------------------------------------
47,346 51,541
----------------------------------------------------------------------------

Shareholders' equity
Common shares (note 7) 48,880 49,285
Contributed surplus 2,996 2,665
Retained earnings (note 2) 36,539 34,695
----------------------------------------------------------------------------
88,415 86,645
----------------------------------------------------------------------------
135,761 138,186
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Continued under the laws of Ontario) (unaudited)
Three months Twelve months
ended ended
December 31, December 31,
(in 000's, except earnings per share) 2009 2008 2009 2008
----------------------------------------------------------------------------
$ $ $ $
----------------------------------------------------------------------------

REVENUE
Lease 33,453 35,342 135,005 130,603
Other 10,491 8,710 38,723 31,890
----------------------------------------------------------------------------
43,944 44,052 173,728 162,493
----------------------------------------------------------------------------

EXPENSES
Salaries and benefits (note 7) 12,100 12,835 50,092 47,659
Selling, general and administrative 6,123 5,096 21,642 16,262
Occupancy 6,093 5,818 24,492 22,316
Automotive and travel 1,646 1,783 6,898 7,014
Other charges (note 9) 709 - 1,931 -
----------------------------------------------------------------------------
26,671 25,532 105,055 93,251
----------------------------------------------------------------------------
Amortization
Amortization of lease assets 13,366 14,001 53,320 49,395
Amortization of property, equipment
and intangible assets 1,573 1,131 4,960 3,910
----------------------------------------------------------------------------
14,939 15,132 58,280 53,305
----------------------------------------------------------------------------
Total operating expenses 41,610 40,664 163,335 146,556
----------------------------------------------------------------------------

Operating income 2,334 3,388 10,393 15,937
Interest expense 402 369 1,138 1,088
----------------------------------------------------------------------------
Income before income taxes 1,932 3,019 9,255 14,849
----------------------------------------------------------------------------

Income taxes (note 8)
Current 329 (164) 1,536 4,014
Future 176 1,412 1,954 1,863
----------------------------------------------------------------------------
505 1,248 3,490 5,877
----------------------------------------------------------------------------
Net income and comprehensive income
for the period 1,427 1,771 5,765 8,972
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share (note 10)
Basic 0.14 0.17 0.55 0.86
Diluted 0.14 0.17 0.55 0.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements


CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Continued under the laws of Ontario) (unaudited)

Three months Twelve months
ended ended
December 31, December 31,
(in 000's) 2009 2008 2009 2008
----------------------------------------------------------------------------
$ $ $ $
----------------------------------------------------------------------------
Retained earnings, beginning of period
as previously stated 36,356 33,941 34,825 29,441
Transitional adjustment on the
adoption of new accounting policies
(note 2) - (133) (130) (146)
----------------------------------------------------------------------------
Retained earnings, beginning of period
as restated 36,356 33,808 34,695 29,295
Purchase and cancellation of shares in
excess of average cost (360) - (360) -
Net income for the period as restated
(note 2) 1,427 1,771 5,765 8,972
Common share dividends (note 7) (884) (884) (3,561) (3,572)
----------------------------------------------------------------------------
Retained earnings, end of period 36,539 34,695 36,539 34,695
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued under the laws of Ontario) (unaudited)
Three months Twelve months
ended ended
December 31, December 31,
(in 000's) 2009 2008 2009 2008
----------------------------------------------------------------------------
$ $ $ $
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)

OPERATING ACTIVITIES
Net income for the period 1,427 1,771 5,765 8,972
Add (deduct) items not affecting
cash:
Recognition of stock based
compensation (note 7) (19) 312 331 1,059
Amortization of lease assets 13,366 14,001 53,320 49,395
Amortization of property and
equipment and intangible assets 1,573 1,131 4,960 3,910
Future income taxes 176 1,412 1,954 1,863
Net change in non-cash operating
items
Lease assets (10,227) (13,973) (45,563) (48,263)
Net change in consumer loans
receivable (3,091) (601) (6,158) (2,145)
Other (note 11) 424 (6,170) 872 (16,043)
----------------------------------------------------------------------------
3,629 (2,117) 15,481 (1,252)
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property and equipment (994) 46 (4,949) (6,785)
Purchase of intangible assets (201) (109) (525) (962)
Business acquisition (net of cash
acquired) - (903) - (10,100)
Proceeds on disposition of property
and equipment 62 196 363 119
----------------------------------------------------------------------------
(1,133) (770) (5,111) (17,728)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Advances (repayments) of bank
revolving credit facility (80) 2,950 (2,375) 12,369
Advances (repayments) of term loan (877) 953 (3,630) 9,750
Issuance of common shares on
exercise of options - - 1 454
Shares purchased for cancellation (505) (6) (766) (69)
Common share dividend payments (891) (893) (3,561) (3,414)
----------------------------------------------------------------------------
(2,353) 3,004 (10,331) 19,090
----------------------------------------------------------------------------

Increase in cash 143 117 39 110
Cash, beginning of period 148 135 252 142
----------------------------------------------------------------------------
Cash, end of period 291 252 291 252
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements

easyhome Ltd.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

December 31, 2009 and 2008


1. Significant accounting policies

These unaudited interim consolidated financial statements should be read in conjunction with the December 31, 2008 annual consolidated financial statements. These interim consolidated financial statements do not include all disclosures required for annual financial statements required under Canadian generally accepted accounting principles. The same accounting policies and methods are used as in the 2008 consolidated financial statements except for the new accounting policies relating to goodwill and intangible assets (note 2). In management's opinion, the interim consolidated financial statements include all adjustments necessary to present fairly such interim financial statements.

2. Adoption of new accounting standards

The following is an overview of accounting standard changes that the Company has adopted during the current year:

(a) Goodwill and Intangible Assets

On January 1, 2009, the Company adopted a new accounting standard issued by the Canadian Institute of Chartered Accountants ("CICA") CICA Section 3064, "Goodwill and Intangible Assets" which supersedes CICA Section 3062, "Goodwill and Other Intangible Assets" and CICA Section 3450, "Research and Development Costs". CICA Section 3064 provides additional guidance on when expenditures qualify for recognition as intangible assets and requires that costs can be deferred only when relating to an item meeting the definition of an asset.

Prior to the adoption of CICA Section 3064, the Company deferred and amortized incorporation costs on a straight-line basis over five years. The impact of adopting this section, on a retrospective basis, is a decrease of $16,200 in amortization of property and equipment and intangible assets for the twelve-month period ended December 31, 2008, with a 1% increase in the reported basic and diluted earnings per share, and a decrease of $146,000 in shareholders' equity at January 1, 2008.

Additionally, as required by the adoption of CICA Section 3064, the Company has retroactively reclassified computer software assets from property and equipment to intangible assets. There is no impact on previously reported net earnings. As a result of adopting this standard, the Company reclassified $ 1.1 million (December 31, 2008 - $1.0 million) of net software costs from property and equipment to intangible assets.

(b) Financial instruments - disclosures

In June 2009, the CICA issued amendments to CICA Section 3862, "Financial Instruments - Disclosures," which requires enhanced disclosures on liquidity risk of financial instruments and new disclosures on fair value measurements of financial instruments. These amendments require a three level hierarchy that reflects the significance of the inputs used in making fair value measurements. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Assets and liabilities in Level 3 include valuations using inputs that are not based on observable market data. The Company has adopted the new accounting standard and the amendments to Section 3862 did not have a material impact on its results, financial position or cash flow.

3. Recently issued accounting pronouncements:

(a) International financial reporting standards (IFRS)

In February 2008, the Canadian Accounting Standards Board confirmed that Canadian public reporting enterprises will be required to adopt International Financial Reporting Standards (IFRS) effective for years beginning on or after January 1, 2011. As a result, the Company will be required to change over to IFRS for its fiscal 2011 interim and annual financial statements with comparative information for fiscal 2010. The Company is in the process of completing the diagnostic phase of its transition plan to identify the major differences which will have a significant impact on the Company. The financial impact of these differences is yet to be determined.

(b) Business combinations

In January 2009, the CICA issued CICA Section 1582, "Business Combinations" which requires that all assets and liabilities of an acquired business be recorded at fair value at acquisition. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs be expensed as incurred and that restructuring charges be expensed in the periods after the acquisition date. The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after January 1, 2011. Earlier adoption is permitted. The Company will consider the impact of adopting this standard on its financial statements if there is a new business combination.

(c) Consolidated financial statements

In January 2009, the CICA issued CICA Section 1601, "Consolidated Financial Statements" and CICA Section 1602, "Non-controlling Interests," which replaces existing standards. CICA Section 1601 establishes standards for the preparation of consolidated financial statements. CICA Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted. The Company is currently assessing the impact of the new standard on its financial statements.



4. Amounts receivable

($ in 000's ) December 31, 2009 December 31, 2008
----------------------------------------------------------------------------
Vendor rebates receivable 1,377 1,923
Due from licensee 95 215
Due from a former related party 1,686 1,309
Other 2,126 1,722
----------------------------------------------------------------------------
5,284 5,169
----------------------------------------------------------------------------


In 2008, a former officer of the Company acquired two stores in exchange for a $1.1 million loan. This loan is subject to annual renewals and as of the latest renewal, bears interest at prime plus 3% and expires on March 1, 2011. The transaction occurred at the carrying values of the stores' related assets and liabilities due to the related party nature of the transaction. The individual has pledged all of the assets of the two stores as collateral for the loan.

Concurrent with the acquisition of the stores, the individual entered into a franchise agreement for each of the two stores. The franchise stores purchase items for lease from the Company in the normal course of operations under standard commercial terms. The franchise agreement has an original term of 10 years with a five year renewal option. After February 1, 2013, the individual has the right to sell the franchise stores at fair market value. The Company has first right of refusal with respect to any proposed sale.

Due from licensee is repayable on demand and bears interest at prime plus 2.5%. The loan is principally collateralized by the underlying assets of the licensed location.

5. Consumer loans

At December 31, 2009, the Company's consumer loan portfolio was $10.2 million, (December 31, 2008 - $4.1 million), with approximately $180,000 (December 31, 2008 - $104,000) of this portfolio being more than 30 days past due.

Consumer loans represent amounts advanced to customers of easyfinancial, a wholly owned subsidiary of easyhome. Given that the easyfinancial customers are expected to have a higher risk profile than that of conventional lenders' customers, and easyfinancial has limited lending history, interest revenue is recorded as received.

The Company believes an indicator of impairment exists when loan payments become 45 days past due and records a provision of 50% of the loan principal at that time. It records a further provision of 50% once loan payments become 90 days past due. The Company's policies related to loan revenue and impairment recognition will be monitored and may be changed in the future to reflect the Company's actual experience on its loan portfolio.

6. Bank indebtedness

The Company's bank indebtedness relates to credit facilities of $40,200,000 which consist of a $30,200,000 revolving, renewable credit facility and a $10,000,000 three year term loan which the Company arranged during the third quarter of 2008 to fund the acquisition of Insta-Rent Inc. At December 31, 2009 an amount of $6.1 million (December 31, 2008 - $9.8 million) was outstanding on the term loan and $23.8 million (December 31, 2008 - $26.1 million) was drawn under the revolving credit facility. Amounts borrowed under these credit facilities bear interest at bank prime rate plus 1% or banker's acceptance rate plus 2.25%. Repayment of the term loan commenced March 31, 2009, and requires the Company to make quarterly principal repayments of $0.9 million.

The credit facilities are collateralized by substantially all of easyhome's assets, including easyhome's accounts receivable, lease assets, property and equipment. The facilities maturity date has been extended to June 30, 2010.

At December 31, 2009 the Company was not in compliance with the fixed charge ratio financial covenant as defined and required under its lending agreements. The Company's lender has agreed to not demand repayment of the bank revolving credit facility and the term loan, to waive the fixed charge ratio financial covenant for the three months ended December 31, 2009 and to amend the fixed charge ratio financial covenant until the annual renewal date in June 2010, at which time the covenants will be reviewed. The Company expects to be in compliance with the all of its covenants under its lending agreement at the renewal date and as at December 31, 2010 and, as such, has not amended the schedule of its debt repayments over the period to maturity of the term loan.

See Note 15 for the fair value of these financial liabilities.



7. Share capital
Twelve months Twelve months
ended ended
Common shares issued and outstanding December 31, 2009 December 31, 2008
Shares Amount Shares Amount
(in 000's ) # $ # $
----------------------------------------------------------------------------
Balance, beginning of the period 10,506 49,285 10,378 48,521
Issued for cash for exercised stock
options - 2 116 609
Issued for exercised restricted share
units - - 16 224
Repurchase of shares (87) (407) (4) (69)
----------------------------------------------------------------------------
Balance, end of the period 10,419 48,880 10,506 49,285
----------------------------------------------------------------------------


Dividends on common shares

The Company declared a dividend of $0.085 per share to shareholders of record on December 1, 2009, payable on January 5, 2010. The dividend paid on January 5, 2010 was $884,000.

Stock-based compensation

The Company uses the fair value method of accounting for stock options granted to employees and directors. During the twelve months ended December 31, 2009, the Company granted 90,100 options (2008 - 267,000 options).

The estimated fair value of these options was determined using the Black-Scholes option pricing model with the following assumptions, resulting in a weighted-average fair value of $1.64 per option.



Twelve months ended
December 31,
2009
----------------------------------------------------------------------------
Risk-free interest rate (%) 2.08
Expected hold period to exercise (years) 3.60
Volatility in the price of the corporation's shares (%) 37.27
Dividend yield (%) 3.68
----------------------------------------------------------------------------


A stock-based compensation expense with respect to stock options of $411,000 has been recognized for the twelve months ended December 31, 2009 (2008- $436,000) in salaries and benefits expense, with a corresponding increase in contributed surplus.

Restricted Share Unit Plan

During the first twelve months of 2009, 29,000 restricted share units were granted to senior executives of the Company under its restricted share unit plan (2008 - 37,000). Each unit entitles the employee to receive one common share of the Company. The units vest over a five-year period from the date of the grant provided certain performance criteria are met. Compensation expense and dividends are recognized over the vesting period with corresponding increases in contributed surplus. For the twelve months ended December 31, 2009, a credit of $306,000 (2008 - $387,000 expense) was recorded as an offset to compensation expense under the plan in salaries and benefits expense. For the twelve months ended December 31, 2009 an additional 4,839 units (2008 - 2,407) were granted for dividends as a result of dividends payable.

Deferred Share Unit Plan

On May 10, 2005, the Board of Directors approved a Deferred Share Unit Plan as an alternative to compensate Canadian board members. The related compensation expense and dividends are recognized as earned with a corresponding increase in contributed surplus. During the first twelve months of 2009, 23,168 deferred share units (2008 - 17,867) were granted and an additional 1,757 units (2008 - 537) were granted as a result of dividends payable. For the twelve months ended December 31, 2009, $227,000 (2008 - $236,000) was recorded as compensation expense under the Plan in salaries and benefits expense.



8. Income taxes

The Company's tax provision is determined as follows:

Twelve months ended Twelve months ended
($ in 000's) December 31, 2009 December 31, 2008
----------------------------------------------------------------------------

Combined basic federal and
provincial income tax rate 30.3% 30.7%

Expected income tax expense 2,800 4,557
Impact of changes in rates on
future tax assets 449 402
Non-deductible expense 137 281
U.S. losses not tax benefited 518 689
Other (414) (52)
----------------------------------------------------------------------------
3,490 5,877
----------------------------------------------------------------------------


The significant components of the Company's future tax assets are as
follows:

($ in 000's) December 31, 2009 December 31, 2008
----------------------------------------------------------------------------
Loss carry-forwards 1,346 1,179
Tax cost of lease assets and property
and equipment in excess of net book
value 4,712 5,999
Amounts receivable 270 577
Other 631 317
----------------------------------------------------------------------------
6,959 8,072
Less valuation allowance (2,304) (1,463)
----------------------------------------------------------------------------
4,655 6,609
----------------------------------------------------------------------------


The tax loss carry forwards of $0.5 million in 2009, $1.9 million in 2008 and $1.0 million in 2007 include losses from the Company's U.S. operations, which may be used to reduce taxable income in the future and which expire in 2026, 2027 and 2028 respectively. The benefit of the U.S operational losses of $0.2 million, $0.7 million and $0.4 million for years 2009, 2008 and 2007 respectively and the U.S future tax asset resulting from differences between the financial reporting and tax bases of assets and liabilities have been offset by a valuation allowance of $2.3 million due to the uncertainty of the realization of the benefit of the U.S. operational losses and the reversal of the differences between the financial reporting and tax bases of the assets and liabilities in the foreseeable future.

9. Other charges

During the third quarter of 2009, the Company initiated a reorganization of its administrative facilities and certain functions. This restructuring will consolidate all administrative functions into one central location and will promote more efficient and effective activities. For the twelve months ended December 31, 2009, $1.9 million (2008 - $nil) was recorded as other charges within operating income. The total expected cost of this restructuring is $2.6 million and it is expected to be completed by the second quarter of 2010. Liabilities related to the restructuring are as follows:



Redundant
Employee Assets
termination and
($ in 000's) costs Property Other Total
----------------------------------------------------------------------------
Accrual at January 1, 2009 - - - -
Expensed - Q3 627 - 595 1,222
Payments - - (461) (461)
----------------------------------------------------------------------------

Accrual at September 30, 2009 627 - 134 761
Expensed - Q4 7 594 108 709
Payments (218) (397) (232) (847)
----------------------------------------------------------------------------
Accrual at December 31, 2009 416 197 10 623
----------------------------------------------------------------------------


10. Earnings per share

Earnings per share is determined based on the following data:

Three months Twelve months
ended ended
December 31, December 31,
($ in 000's except earnings per share) 2009 2008 2009 2008
----------------------------------------------------------------------------
Net income for the period 1,427 1,771 5,765 8,972
----------------------------------------------------------------------------
Weighted average number
of shares outstanding - basic 10,448 10,504 10,489 10,486
- diluted 10,525 10,562 10,567 10,614
----------------------------------------------------------------------------
Shares outstanding, end of the period 10,419 10,506 10,419 10,506
----------------------------------------------------------------------------

Earnings per share
Basic 0.14 0.17 0.55 0.86
Diluted 0.14 0.17 0.55 0.85
----------------------------------------------------------------------------


11. Net change in non-cash operating items

The net change in non-cash operating items, excluding lease assets and consumer loans receivable, is determined as follows:



Three months Twelve months
ended ended
As at: December 31, December 31,
($ in 000's) 2009 2008 2009 2008
----------------------------------------------------------------------------
Amounts receivable (117) (525) (115) (882)
Income taxes recoverable (302) (238) (1,769) (2,741)
Prepaid expenses 443 111 946 (769)
Trade accounts payable 1,527 (7,936) 1,163 (12,594)
Accrued liabilities (814) 2,768 466 1,358
Accrued employee costs (375) (567) 404 (600)
Deferred lease
inducements (60) 2 (237) (51)
Unearned revenue 122 215 14 236
----------------------------------------------------------------------------
424 (6,170) 872 (16,043)
----------------------------------------------------------------------------


12. Capital risk management

The Company manages its capital to maintain its ability to continue as a going concern and to provide adequate returns to shareholders by way of share appreciation and growing dividends. The capital structure of the Company consists of bank debt and equity comprising issued capital, contributed surplus and retained earnings.

The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issues, share repurchases, the payment of dividends, increasing or decreasing bank debt or by undertaking other activities as deemed appropriate under the specific circumstances. The Company's strategy, objectives, measures, definitions and targets have not changed significantly from the prior period.

The Company has externally imposed capital requirements as governed through its financing facilities. These requirements are to ensure the Company continues to operate in the normal course of business and to ensure the Company manages its debt relative to net worth. The capital requirements are congruent with the Company's management of capital.

The Company monitors capital on the basis of its bank covenants which include: i) its funded debt to earnings before interest, income taxes, depreciation and amortization (EBITDA) ratio ii) fixed coverage ratio and iii) total capital expenditures, all as defined by the Company's lender. For the three months ended December 31, 2009 the Company met its funded debt to EBITDA ratio and its total capital expenditures as per the Company's lender. The Company however breached its fixed coverage ratio and as a result a waiver has been obtained from the lender.

13. Financial risk management

Overview

The Company's activities are exposed to a variety of financial risks: credit risk, liquidity risk, market risk, interest rate risk and currency risk. The Company's overall risk management program focuses on the unpredictability of financial and economic markets and seeks to minimize potential adverse effects on the Company's financial performance. The Company's Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Audit Committee of the Board reviews the Company's risk management policies on an annual basis. The Company's financial risk exposure and risk management strategies have not changed significantly from the prior period.

(a) Credit risk

The maximum exposure to credit risk is represented by the carrying amount of the amounts receivable and assets on lease with customers under merchandise lease agreements. The Company leases products and makes consumer loans to thousands of customers and has no concentration of credit risk with any particular individual, company or other entity although the Company is subject to a higher level of credit risk due to the credit constrained nature of many of the Company's customers.

The credit risk related to amounts receivable results from the possibility of default on rebate payments, consumer loans, and amounts due from licensee and former related parties. The Company deals with credible companies, performs ongoing credit evaluations of creditors and consumers and allows for uncollectible amounts where determined to be appropriate.

The credit risk related to assets on lease results from the possibility of customer default of agreed payments. The Company has a standard collection process in place in the event of payment default, which concludes with the recovery of the lease asset if satisfactory payment terms cannot be worked out, as the Company maintains ownership of the lease assets until payment options are exercised. Annual lease asset losses for the 12 months ended December 31, 2009 were 4.4% (2008 -3.0%) of lease revenues.

The credit risk on the Company's consumer loans is impacted by both the credit policies and the lending practices which are overseen by the Company's senior management. At December 31, 2009, the Company's total loan portfolio was $10.2 million (December 31, 2008-$4.1 million), with approximately $180,000 (December 31, 2008-$104,000) of this portfolio being more than 30 days past due.

(b) Liquidity risk

The Company addresses liquidity risk management by maintaining sufficient availability of funding through its reasonably priced committed bank loan facility, the term of which expires on June 30, 2010. The Company is required to make quarterly principal repayments of $0.9 million under the facility until the debt is retired. The Company manages its cash resources based on financial forecasts and anticipated cash flows, which are periodically reviewed with the Company's Board of Directors.

(c) Interest rate risk

Interest rate risk measures the Company's risk of financial loss due to adverse movements in interest rates. The Company is subject to interest rate risk as all bank facilities bear interest at prime plus 1% or banker's acceptance rate plus 2.25%. At December 31, 2009, this rate was 3.25% (2008 - 4.75%). The Company does not hedge interest rates and future changes in interest rates will affect the amount of interest expense payable by the Company.

As at December 31, 2009, all of the Company's $29.9 million drawn bank facilities are subject to movements in floating interest rates. A 1% movement in the prime interest rate would have increased or decreased net income for the quarter by approximately $76,000. All of the Company's assets are pledged as collateral for the bank loans.

(d) Currency risk

Currency risk measures the Company's risk of financial loss due to adverse movements in currency exchange rates.

The Company sources a portion of the furniture it leases in Canada from the U.S. suppliers. As a result, the Company has foreign exchange transaction exposure. These purchases are funded using regular spot rate purchases. Pricing to customers can be adjusted to reflect changes in the Canadian dollar landed cost of imported goods and as such there is not a material foreign currency transaction exposure.

The Company transacts business in 206 corporate stores in Canada and 12 locations in the U.S. As a result, the Company has foreign exchange translation exposure. The Company's U.S. subsidiary is considered to be fully integrated. Accordingly, monetary assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Translation gains and losses are recognized in income in the current period. In translating the Company's U.S. monetary assets and liabilities, a 10% change in the U.S./Canada exchange rate would have increased or decreased net income in the quarter by approximately $110,000.

The earnings of the Company's U.S. subsidiary are translated into Canadian dollars each period. A 10% movement in the Canada/U.S. dollar exchange rate would have increased or decreased consolidated net income in the fourth quarter by approximately $45,000.

14. Related party transactions

The Company has entered into a number of related party transactions with one of its former officers. These transactions are described in note 4.


15. Financial instruments

The carrying value of the Company's financial instruments is classified into the following categories:



Twelve months ended Twelve months ended
($ in 000's) December 31, 2009 December 31, 2008
----------------------------------------------------------------------------

Loans and receivables 15,506 9,233
Other financial liabilities 41,411 45,789
----------------------------------------------------------------------------


Loans and receivables include vendor rebates receivable, amounts due from licensee, consumer loans receivable, and amounts due from a former related party and other receivables. Other financial liabilities include bank revolving credit facility, term loan, trade accounts payable, accrued liabilities and dividends payable.

The estimated fair values of the company's financial instruments approximate their respective carrying values. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. All of the Company's financial instruments are categorized in Level 1 in the fair value hierarchy and are carried at the quoted market price.

16. Segmented reporting

The Company operates in three reportable segments. These segments include the Canadian leasing business, the U.S. leasing business and the consumer loan business, which operates out of kiosks in certain Canadian stores.

Accounting policies for each of these business segments are the same as those disclosed in Notes 1 and 2. General and administrative expenses directly related to the Company's business segments are included as operating expenses for those segments. There are no significant inter-segment revenues and no significant changes in assets and total assets in each segment from the prior period. Segment contribution represents earnings before income taxes for each of the Company's business segments. The Company uses segment earnings before income taxes as a key measure to analyze the financial performance of its business segments.



Three months ended
December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian U.S. Q4
($ in 000's) Leasing Leasing easyfinancial 2009 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues 40,220 2,095 1,629 43,944
Salaries and benefits 10,977 622 501 12,100
Selling, general and
administrative 4,688 722 713 6,123
Occupancy 5,744 321 28 6,093
Automotive and travel 1,540 84 22 1,646
Other charges 709 - - 709
Amortization 14,099 785 55 14,939
----------------------------------------------------------------------------
Total operating expense 37,757 2,534 1,319 41,610

Operating income (loss) 2,463 (439) 310 2,334
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended
December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian U.S. Q4
($ in 000's) Leasing Leasing easyfinancial 2008 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues 41,724 1,627 700 44,052

Salaries and benefits 11,977 605 253 12,835
Selling, general and
administrative 4,154 556 386 5,096
Occupancy 5,506 298 14 5,818
Automotive and travel 1,668 79 37 1,784
Other charges - - - -
Amortization 14,677 430 24 15,131
----------------------------------------------------------------------------
Total operating expense 37,982 1,968 714 40,664

Operating income (loss) 3,742 (341) (13) 3,388
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Twelve months ended
December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian U.S.
($ in 000's) Leasing Leasing easyfinancial 2009 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues 161,237 7,760 4,731 173,728

Salaries and benefits 45,797 2,768 1,527 50.092
Selling, general and
administrative 17,560 1,955 2,127 21,642
Occupancy 23,051 1,370 71 24,492
Automotive and travel 6,480 355 63 6,898
Other charges 1,931 - - 1,931
Amortization 55,150 3,024 106 58,280
----------------------------------------------------------------------------
Total operating expense 149,969 9,472 3,894 163,335

Operating income (loss) 11,268 (1,712) 837 10,393
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Twelve Months ended
December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian U.S.
($ in 000's) Leasing Leasing easyfinancial 2008 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenues 156,545 3,691 2,257 162,493

Salaries and benefits 44,973 1,827 859 47,659
Selling, general and
administrative 13,959 1,231 1,072 16,262
Occupancy 21,534 742 40 22,316
Automotive and travel 6,664 261 89 7,014
Other charges - - - -
Amortization 52,019 1,237 49 53,305
----------------------------------------------------------------------------
Total operating expense 139,149 5,298 2,109 146,556

Operating income (loss) 17,396 (1,607) 148 15,937
----------------------------------------------------------------------------
----------------------------------------------------------------------------


17. Comparative figures

Comparative figures have been reclassified, where necessary, to reflect the current period's presentation.

Table 2 - Key Performance Indicators and Non-GAAP Measures

We measure the success of our strategy using a number of key performance indicators as described in more detail below. Several of these key performance indicators are not measurements in accordance with Canadian GAAP and should not be considered as an alternative to net income or any other measure of performance under Canadian GAAP. Five non-GAAP measures that we use are defined as follows:

Same Store Revenue Growth

Same store revenue growth measures the revenue growth for all stores that have been open for a minimum of 15 months. To calculate annual same store annual revenue growth, the most recent 12 months revenue is compared with revenue for the immediately preceding 12 month period. To calculate quarterly same store revenue growth, the quarterly revenue is compared to the same period in the prior year. Same store revenue growth is influenced by both the Company's product offerings as well as the number of stores which have been open for a 12-36 month time frame as these stores tend to be in the strongest period of growth at this time. The revenue from the acquisition of Insta-rent has been excluded from the same store revenue growth calculation for the first 12 months after acquistion.

Potential Monthly Lease Revenue

Potential monthly lease revenue reflects the revenue that our portfolio of leased merchandise would generate in a month providing we collected all lease payments due in that period. Our growth in potential monthly lease revenue is driven by several factors including an increased number of customers, an increased number of leased assets per customer as well as an increase in the average price of our leased items. We believe that our potential monthly lease revenue is an important indicator of how revenue will grow in ensuing periods.

Adjusted Earnings

We define adjusted earnings as net income over the period adjusted for any unusual items which have occurred in the period. We believe that adjusted earnings are an important measure of the profitability of operations adjusted for the effects of unusual items.

Items which can be used to adjust net income for the year ended December 31, 2009 include the following:



----------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
($ in 000's) 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income as stated 5,765 8,972

Restructuring charge included in operating
expenses (1) 1,931 -
Tax impact of restructuring charge (589) -
----------------------------------------------------------------------------

Net restructuring charge 1,342 -
----------------------------------------------------------------------------

Adjusted earnings 7,107 8,972

1(During the third quarter of 2009, the Company initiated a reorganization
of its administrative facilities and certain functions. This restructuring
will consolidate all administrative functions into one central location
and will promote efficient and effective activities. The expected cost of
this restructuring is $2.6 million with $1.9 million being recognized to
December 31, 2009)


Operating Margin

We define operating margin as income before interest and income taxes divided by revenue. We believe operating margin is an important measure of the profitability of operations which in turn helps us assess our ability to generate cash to pay interest on our debt and to pay dividends.



----------------------------------------------------------------------------
Year ended Year ended Year ended
($ in 000's except Dec. 31, 2009 Dec. 31, 2009 Dec. 31, 2008
percentages) (adjusted) (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income before interest and
income taxes 10,393 10,393 15,937
Restructuring charges - 1,931 -
----------------------------------------------------------------------------
Operating income 10,393 12,324 15,938
Divided by revenue 173,728 173,728 162,493
----------------------------------------------------------------------------

Operating margin 6.0% 7.1% 9.8%
----------------------------------------------------------------------------


Return on Equity

We define return on equity as annualized net income in the period divided by average shareholders' equity for the period. We believe return on equity is an important measure of how shareholders' invested capital is utilized in the business.



----------------------------------------------------------------------------
($ in 000's except Year ended Year ended Year ended
multiples and Dec. 31, 2009 Dec. 31, 2009 Dec. 31, 2008
percentages) (adjusted) (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income for the period
(as stated) 5,765 5,765 8,972
Net restructuring charges - 1,342 -
----------------------------------------------------------------------------
Net income for the period 5,765 7,107 8,972

Divide by: Average
shareholders' equity for
the period 88,736 88,736 85,023
----------------------------------------------------------------------------

Return on equity 6.5% 8.0% 10.6%
----------------------------------------------------------------------------


Summary Financial Results for the Year ended
---------------------------------------------

----------------------------------------------------------------------------

($ in 000's except Year Year Variance Variance
earnings per share, store ended ended $ / # / % %
count data and Dec. 31, Dec. 31, change
percentages) 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 173,728 162,493 11,235 6.9%
Operating expenses before
amortization 105,055 93,251 11,804 12.7%
Amortization expense 58,280 53,305 4,975 9.3%
Operating income 10,393 15,937 (5,544) (34.8%)
Interest expense 1,138 1,088 50 4.6%
Net income for the period 5,765 8,972 (3,207) (35.7%)
Diluted earnings per share 0.55 0.85 (0.30) (35.3%)

----------------------------------------------------------------------------
Key Performance Indicators
Adjusted earnings 7,107 8,972 (1,865) (20.8%)
Diluted EPS (adjusted) 0.67 0.85 (0.18) (21.2%)
Operating margin 7.1% 9.8% (2.7%) (27.6%)
(adjusted)
Return on equity (adjusted) 8.0% 10.6% (2.6%) (24.5%)

----------------------------------------------------------------------------
Key Performance Indicators (Period End)
Potential monthly lease 11,688 12,541 (853) (6.8%)
revenue
Number of stores opened 11 29 (18) (62.1%)
Store count(1) 240 229 11 4.8%
easyfinancial kiosks 29 14 15 107.1%
Same store revenue growth 2.3% 9.1% (6.8%) (74.7%)
1(We currently operate 218 corporate stores, which include 206 Canadian
corporate and 12 U.S corporate stores. In addition, through various
franchise/license arrangements, we also operate 6 Canadian franchise
locations, 15 U.S. franchise locations and 1 Canadian licensed location.)


Contact Information

  • easyhome Ltd.
    David Ingram
    President & Chief Executive Officer
    (905) 272-2788
    or
    easyhome Ltd.
    Donald K. Johnson
    Chairman of the Board
    (416) 359-4119