easyhome Ltd.
TSX : EH

easyhome Ltd.

November 15, 2010 21:05 ET

easyhome Ltd. Reports 2010 Third Quarter Results and Provides Update Regarding easyfinancial Services

MISSISSAUGA, ONTARIO--(Marketwire - Nov. 15, 2010) - easyhome Ltd. (TSX:EH), Canada's largest merchandise leasing company, today announced its results for the third quarter and nine months ended September 30, 2010 and provided an update regarding the employee fraud at an easyfinancial services kiosk that was disclosed by the Company in mid-October.

President & CEO, David Ingram stated, "We are very disappointed by the employee fraud that was discovered following the end of the third quarter. The Audit Committee, with the assistance of independent advisors, has conducted an investigation and concluded that the estimated amount of the fraud was approximately $3.7 million. Management, the Audit Committee and its advisors are working to implement remedial measures to address control weaknesses identified as part of the investigation with a view to preventing a recurrence of similar fraudulent activity." Mr. Ingram also stated, "At the same time, we are pleased to report another quarter of strong, comparable earnings growth. As reflected in our quarterly filings, the year-over-year improvements in revenue were driven by growth in our U.S. leasing business and easyfinancial. Earnings growth came from our Canadian leasing business, which benefitted from our cost containment efforts that were communicated in November, 2009."

All comparable 2009 results presented in this release have been restated to reflect the impact of adjustments relating to the employee fraud, as discussed below under "Update on easyfinancial Services and Restatement Due to Employee Fraud".

Third Quarter Results

Total revenues for the quarter increased 5.5% to $44.6 million, when compared to the third quarter of 2009 (restated). Same store revenue growth for the quarter was 4.9% compared with 1.5% for the same period last year (restated). Consolidated operating income was $2.7 million compared with $41,000 in the prior year quarter (restated). Net income was $1.7 million ($0.16 per share) compared to a loss of -$0.2 million (-$0.02 per share) for the prior year quarter (restated).

Reported net income and earnings per share in the quarter were impacted most significantly by:

- write-offs and bad debt charges of $0.4 million associated with the employee fraud, decreasing earnings per share by $(0.03),

- revenue of $0.6 million related to fictitious loans created by the employee in connection with the fraud not being included in the results for the quarter, impacting earnings per share by $(0.04), and

- an increase of $0.9 million to the consumer loans receivable provision resulting from refinement of the methodology used for estimating the provision, decreasing earnings per share by $(0.06).

Year-to-Date Results

For the nine months ended September 30, 2010, revenues increased 3.2% to $133.5 million, when compared to the same period of 2009 (restated).

Consolidated operating income for the year-to-date increased 36.9% to $9.9 million compared with $7.2 million for the same period last year (restated). Excluding write-offs and provisions associated with the employee fraud, and restructuring charges for the 2009 results, operating income was $11.4 million for the nine months ended September 30, 2010 compared with $8.8 million for the same period last year (restated).

Net income for the period increased 66.2% to $6.2 million or $0.59 per share compared with $3.7 million or $0.35 per share for the same period a year ago (restated). Adjusted for unusual items, earnings were $7.3 million or $0.69 per share compared with $4.9 million or $0.46 per share for the first nine months of 2009 (restated).

The Company continues to generate strong cash flows. Cash flow provided by operating activities for the nine months ended September 30, 2010 was $6.6 million compared with $11.9 million for the nine months ended September 30, 2009 (restated). Excluding the net investment of $9.6 million to increase the easyfinancial loan portfolio, cash flow was $16.2 million for the first 9 months of 2010. For the 2009 period, cash flow, excluding the net investment in the easyfinancial loan portfolio of $2.2 million, was $14.1 million.

Update on easyfinancial Services and Restatement Due to Employee Fraud

As previously announced, subsequent to September 30, 2010 the Company discovered a material fraud perpetrated by an employee at one of its easyfinancial kiosks. Following the discovery of the fraud, the Audit Committee of the Board of Directors assumed responsibility for the investigation of the fraud and related matters and engaged independent legal counsel who, among other things, engaged a large, national accounting and audit firm to provide expert assistance in a forensic review. The Audit Committee's investigation indicated that the manager of the easyfinancial kiosk engaged in activities that, among other things, overstated the consumer loans receivable balance and reduced the amount of consumer loans that were not current or were otherwise in default and that certain individuals responsible for oversight of the employee and kiosk did not follow the Company's standard operating policies and procedures which, if followed, may have detected the fraud earlier. The employee and those individuals have been terminated.

To eliminate the fraudulent loans associated with the employee fraud from the Company's consumer loans receivable portfolio and provide for other financial impacts of the fraud as at September 30, 2010, the gross consumer loans receivable (consumer loans receivable before provisions) was reduced by $2.8 million, and the related provision was increased by $0.9 million, with the offsetting $3.7 million impact to earnings being allocated to the current and prior six quarters.

Since the discovery of the fraud, the Company has taken a number of remedial steps that include the planned future recruitment of a Vice President of Risk Management; increased monitoring of additional key performance indicators; modifications to the easyfinancial services transaction software; and continuing to develop a new electronic automated loan decision making and identity verification tool that will be implemented shortly. The Audit Committee is continuing to work to ensure that sufficient and timely remediation is made to address control weaknesses identified as part of its investigation.

As a result of the adjustments to the Company's financial statements resulting from the employee fraud, the previously filed consolidated financial statements of the Company for each of the quarterly periods from March 31, 2009 through to June 30, 2010 and the annual consolidated financial statements for the year ended December 31, 2009 and the associated management's discussion and analysis for the applicable periods should no longer be relied upon. The Company is in the process of preparing full restated consolidated financial statements for each of these periods and the associated MD&A disclosures, which will be completed and filed on SEDAR as soon as possible.

A more detailed discussion of the Company's consolidated financial results for the three and nine-month periods ended September 30, 2010 and the employee fraud is contained in management's discussion and analysis, and the unaudited interim consolidated financial statements and notes thereto, which are available through the internet on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval (SEDAR) and can be accessed at www.sedar.com.

Outlook

David Ingram commented, "We believe that our core business and new businesses are well positioned to benefit from the ongoing, albeit slow, recovery in consumer demand. Assuming that recovery continues, our strategy contemplates continued growth through the disciplined and strategic opening of new corporate and franchise easyhome stores and easyfinancial kiosks and incremental same store growth."

easyhome has established the following targets for 2011: easyhome leasing to open 5-7 new corporate stores, the opening of 10-15 new franchise stores, and the opening of 2025 new easyfinancial kiosks. Based on these assumptions, we are targeting total revenue growth of 11-13%.The achievement of these targets by the Company are predicated on a number of factors, including the availability of sufficient capital.

Donald K. Johnson, Chairman of the Board, commented, "The Board is satisfied with the results to date of the review of the operations of easyfinancial Services. Those results illustrate that the material fraudulent activity was limited to an individual employee at a single location. We are confident about the future of easyhome, including the easyfinancial business, and in management's ability and are committed to further strengthen its risk management activities."

The Board of Directors has approved a dividend payment of $0.085 per share payable on January 5, 2011 to the holders of common shares of record as at the close of business on December 1, 2010.

The Company will hold a conference call to discuss the financial results with shareholders, analysts and portfolio managers on Tuesday, November 16, 2010 at 11:00am EST.

Date: Tuesday, November 16, 2010

Time: 11:00am EST

Dial-in # 416-695-7806 / 888-789-9572

Passcode: 7720077

Media are invited to listen to the call by telephone. For questions, media may contact David Ingram, President and CEO and Steve Goertz, CFO at 905-272-2788.

About easyhome

As at September 30, 2010, easyhome Ltd. had 248 stores, including 30 franchised/licensed locations. The Company also operated 58 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 through both corporate and franchise stores. In addition, the Company offers a variety of financial services, including loans, prepaid credit cards and cheque cashing through its easyfinancial services business. 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 herein 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 statements about easyhome Ltd. including its business operations, strategy and expected financial performance and condition. 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 statement that may be made concerning future financial performance (including revenue, 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 made by us, 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, react to uncertainties related to regulatory action, raise capital under favourable terms, manage the impact of litigation (including shareholder litigation), control costs at all levels of the organization and maintain and enhance our system of internal controls. We caution that the foregoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on forward-looking statements, which may not be appropriate for other purposes. We are 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.



easyhome Ltd.
INTERIM CONSOLIDATED BALANCE SHEETS
(Continued under the laws of Ontario)
(unaudited)

As at As at As at
September 30, December 31, September 30,
($ in 000's) 2010 2009 2009
----------------------------------------------------------------------------
Restated Restated
(note 2) (note 2)

ASSETS (note 6)

Cash 533 291 298
Amounts receivable (note 4) 6,078 5,284 5,167
Income taxes recoverable 3,451 2,987 2,653
Consumer loans receivable (note 5
and 14) 18,518 8,941 6,269
Prepaid expenses 1,303 1,592 2,035
Lease assets 70,204 74,686 77,825
Property and equipment 17,269 15,637 16,328
Future tax assets (note 9) 3,583 4,929 5,014
Intangible assets 3,149 3,183 2,932
Goodwill 17,325 17,325 17,325
----------------------------------------------------------------------------
141,413 134,855 135,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
Bank revolving credit facility
(note 6 and 14) 27,812 23,764 23,994
Accounts payable and accrued
liabilities 11,465 10,645 9,932
Accrued employee costs 3,645 2,882 3,257
Dividends payable (note 8) 891 884 891
Deferred lease inducements 2,507 2,303 2,363
Unearned revenue 577 748 626
Term loan (note 6 and 14) 3,474 6,120 6,997
----------------------------------------------------------------------------
50,371 47,346 48,060
----------------------------------------------------------------------------

Shareholders' equity
Common shares (note 8) 49,166 48,880 49,024
Contributed surplus 2,716 2,996 3,016
Retained earnings 39,160 35,633 35,746
----------------------------------------------------------------------------
91,042 87,509 87,786
----------------------------------------------------------------------------
141,413 134,855 135,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


easyhome Ltd.

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS)
(unaudited)

Three months ended Nine months ended
($ in 000's, except earnings (loss) September 30, September 30,
per share) 2010 2009 2010 2009
----------------------------------------------------------------------------
Restated Restated
(note 2) (note 2)

REVENUE
Lease 31,994 32,678 98,568 101,552
Interest revenue and other income 12,635 9,609 34,965 27,796
----------------------------------------------------------------------------
44,629 42,287 133,533 129,348
----------------------------------------------------------------------------

OPERATING EXPENSES
Salaries and benefits (note 8) 13,119 12,756 39,679 38,042
Selling, general and administrative 6,938 5,402 17,878 15,895
Occupancy 6,180 6,308 18,380 18,399
Automotive and travel 1,652 1,848 4,735 5,252
Restructuring charges (note 10) - 1,222 641 1,222
----------------------------------------------------------------------------
27,889 27,536 81,313 78,810
----------------------------------------------------------------------------
Amortization
Amortization of lease assets 12,776 13,552 38,762 39,954
Amortization of property and
equipment and intangible assets 1,277 1,158 3,603 3,387
----------------------------------------------------------------------------
14,053 14,710 42,365 43,341
----------------------------------------------------------------------------
Total operating expenses 41,942 42,246 123,678 122,151
----------------------------------------------------------------------------

Operating income 2,687 41 9,855 7,197
Interest expense 304 278 853 736
----------------------------------------------------------------------------
Income (loss) before income taxes 2,383 (237) 9,002 6,461
----------------------------------------------------------------------------

Income taxes (recoveries) (note 9)
Current 1,004 (839) 1,460 1,138
Future (295) 770 1,346 1,595
----------------------------------------------------------------------------
709 (69) 2,806 2,733
----------------------------------------------------------------------------
Net income (loss) and comprehensive
income (loss) for the period 1,674 (168) 6,196 3,728
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per share (note 11)
Basic 0.16 (0.02) 0.59 0.35
Diluted 0.16 (0.02) 0.59 0.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


easyhome Ltd.
INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)

Three months ended Nine months ended
September 30, September 30,
($ in 000's) 2010 2009 2010 2009
----------------------------------------------------------------------------
Restated Restated
(note 2) (note 2)

Retained earnings, beginning of
period 38,378 36,805 35,633 34,695
Net income (loss) for the period 1,674 (168) 6,196 3,728
Common share dividends (note 8) (892) (891) (2,669) (2,677)
----------------------------------------------------------------------------
Retained earnings, end of period 39,160 35,746 39,160 35,746
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


easyhome Ltd.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Three months ended Nine months ended
September 30, September 30,
($ in 000's) 2010 2009 2010 2009
----------------------------------------------------------------------------
Restated Restated
(note 2) (note 2)

CASH PROVIDED BY (USED IN)

OPERATING ACTIVITIES
Net income (loss) for the period 1,674 (168) 6,196 3,728
Add (deduct) items not affecting
cash:
Stock based compensation (note 8) (536) (139) (148) 350
Amortization of lease assets 12,776 13,552 38,762 39,954
Amortization of property and
equipment and intangible assets 1,277 1,158 3,603 3,387
Future income taxes (295) 770 1,346 1,595
Gain on sale of property and
equipment 25 - (383) -
Net change in operating assets and
liabilities:
Lease assets (11,736) (12,376) (33,899) (35,336)
Consumer loans receivable (1,823) (1,104) (9,577) (2,205)
Other (note 12) (3,632) 2,439 655 388
----------------------------------------------------------------------------
Cash flows (used in) provided by
operating activities (2,270) 4,132 6,555 11,861
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of property and equipment (2,095) (2,142) (6,234) (3,573)
Purchase of intangible assets (77) (101) (224) (705)
Proceeds on sale of property and
equipment 1,032 184 1,257 301
----------------------------------------------------------------------------
Cash flows used in investing
activities (1,140) (2,059) (5,201) (3,977)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Advances (repayments) of bank
revolving credit facility 5,600 46 4,048 (2,145)
Repayments of term loan (890) (928) (2,646) (2,753)
Issuance of common shares on
exercise of options 14 1 154 1
Shares purchased for cancellation - (262) - (262)
Common share dividend payments (891) (893) (2,668) (2,679)
----------------------------------------------------------------------------
Cash flows provided by (used in)
financing activities 3,833 (2,036) (1,112) (7,838)
----------------------------------------------------------------------------
Net increase in cash during the
period 423 37 242 46
Cash, beginning of period 110 261 291 252
----------------------------------------------------------------------------
Cash, end of period 533 298 533 298
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


Contact Information

  • easyhome Ltd.
    David Ingram
    President & Chief Executive Officer
    (905) 272-2788
    or
    easyhome Ltd.
    Steve Goertz
    CFO
    (905) 272-2788