RNS Number:0070Z
Debt Free Direct Group PLC
26 June 2007
26 June 2007
DEBT FREE DIRECT GROUP PLC
PRELIMINARY RESULTS FOR THE YEAD ENDED 30 APRIL 2007
Debt Free Direct Group (DFD), the leading debt advice and solutions company,
announces its results for the year ended 30 April 2007.
Highlights for the year include:
* Strong financial growth
- Turnover Up 77% to #28m (#15.8m in 2006)
- Gross profit Up 84% to #21.9m (#11.9m in 2006)
- Adjusted PBT Up 100% to #9.4m (#4.7m in 2006)
(Profit Before Tax adjusted for
goodwill Amortisation of #312k)
- EPS - basic Up 119% to 17.39p (7.93p in 2006)
* Balance sheet continues to strengthen
- Net assets #21.4m (#16.4m in 2006)
* Significant cash generated from trading
- Cash inflows from trading * #1.2m (#0.6m in 2006)
* Increased advertising cost per new IVA
- Average cost per new IVA #981 (#807 in 2006)
* Increased operational efficiency
- Annual adjusted PBT 34% (30% in 2006)
as a percentage of turnover
* Significant growth in new IVA run-rate
- New IVA case run-rate Up 32% to 459 pm (347pm in 2006)
- Counting joint cases = 2 (642 pm) (471pm in 2006)
(uplift of 136%)
* Significant growth in IVA cases under
supervision
- IVA cases under supervision Up 80% to 9.9k (5.5k in 2006)
* Revenues from non-core activities
- Turnover from activities excluding Up 144% to #4.4m (#1.8m in 2006)
core IVAs
* Change of accounting policies
- Required to reflect the contractual nature of the IVA and to adopt the latest developments in best
practice with regard to UITF 40. The net impact of these changes is to increase PBT in the current
year by approximately #1.1m (2006: decrease by #400k).
- Adjusted PBT under old accounting Up 66% to #8m (#4.8m in 2006) policy
* Cash inflows from trading represents cash outflow from operating activities
(#0.5m) adjusted to exclude a prepayment of #1.7m (2006 : #Nil) with regard to
an agreement for the exclusive generation of leads over the next 2 years. This
was entirely funded by debt of #1.7m.
Mike Blackburn, Chairman, said:
"I am pleased to report a further year of substantial progress, with adjusted
pre-tax profits increasing to #9.4m."
Andrew Redmond, Chief Executive Officer, said:
"The latter half of the financial year under review has been a turbulent time
for all companies operating in the IVA market, as highlighted by the demise of a
number of Debt Free Direct's competitors. I will not be surprised if further
fall out occurs. Our own trading in the second half of the financial year has
been impacted by increased competition, creditor reluctance to accept IVAs, and
consumer unease caused by alarmist press coverage.
Debt Free Direct entered the new financial year trading at run rates in line
with those achieved in the latter half of the previous financial year. However,
with our advertising "share of voice" now improving and, with signs of renewed
understanding within the creditor community, we are well positioned to build our
volumes once more. Whilst fee levels have not, as yet, been impacted by
creditor pressure, it is clear that their long term intention is to ensure their
reduction. Debt Free Direct does, however, have the largest "bank" of IVAs,
which will not be impacted by any change in fee levels and is, therefore, well
placed to cope with the changes ahead.
In view of potential changes to fee structures and continued uncertainty
surrounding advertising costs, it is too early to provide detailed guidance on
the current financial year. Nevertheless, I remain confident that we are still
on track to achieve our vision of becoming the most respected provider of advice
and solutions to over-indebted consumers and that this achievement will maximise
shareholder value."
Enquiries:
Debt Free Direct Group plc
Andrew Redmond, Chief Executive Officer 0845 2960100
Paul Latham, Finance Director 0845 2960200
Numis Securities
Iain McDonald 020 72601000
Lee Aston 020 72601000
Financial Dynamics
Ed Gascoigne-Pees 020 72697132
Nick Henderson 020 72697114
Notes
Debt Free Direct helps individuals find the best solution to their debt
problems, based upon an analysis of their particular financial circumstances.
Financial information on an individual is processed through a computer model
(the Best Advice Model) developed by Debt Free Direct in order to recommend a
solution suitable for that individual's particular financial circumstances. The
solutions offered range from basic advice, such as simply destroying credit
cards and curbing unnecessary expenditure, to the following solutions:
* consolidation loan
* re-mortgage
* informal arrangement
* individual voluntary arrangement (IVA)
* bankruptcy
Debt Free Direct, based in Chorley, Lancashire and admitted to AIM in December
2002, is unique in the marketplace in that, unlike most of its competitors who
sell specific products, Debt Free Direct looks to provide the best advice to the
consumer and recommends them the most appropriate service
CHAIRMAN'S STATEMENT
Introduction
This has been an eventful year for your company, with much focus in recent
months being on the industry-wide debate with creditors over the way in which
IVA providers are remunerated.
The outcome of that debate looks set to result in IVA providers being
remunerated on a "percentage of realisations" basis. This has, in turn, led to
discussions with our auditors with regard to the most appropriate revenue
recognition policy.
The outcome is that IVA services (including nominee and supervisory fees) are
considered to be a single service provision and should be "linked" or "bundled"
for accounting purposes by virtue of the contractual definition of the IVA
proposal.
Once the legally binding arrangement is in place, revenue should be recognised
in line with the provision of the service (adjusted for failure rates, bad debt
risk, and the likely total fee to be received during the IVA) the group perform
under the contract.
As a consequence, prior year adjustments are appropriate in respect of the
change of accounting policy required to reflect the contractual nature of the
IVA and to adopt the very latest developments in best practice with regard to
UITF 40. The net impact of these changes is to increase PBT in the current year
by approximately #1.1m (2006 : decrease by #400k), whilst reducing net assets by
approximately #460k (2006 : #1.2m).
With the above in mind, I am pleased to be able to report a further year of
progress, with pre-tax profits (adjusted for goodwill amortisation of #312k in
both 2007 and 2006), doubling to #9.4m (2006 : #4.7m). Had the previous
accounting policy been adopted, the profit before taxation would have been
approximately #8m and #4.8m on a comparative basis. The company is pleased to
recommend a final dividend of 3p per share (2006 : 1.5p), making an aggregate of
6p for the full year (2006 : 3p), to be proposed at the Group's forthcoming
Annual General Meeting.
The Directors have previously stated that the company will grow the dividend
payment progressively in proportion with the Company's future growth. The
Directors believe that this dividend reflects their confidence in the outlook
for the company and note that it reflects their expectations earlier in the year
for greater profitability for the year ended 30 April 2007 than has been
delivered. The Directors therefore reiterate that their intention is for
dividend levels, in future years, to be grown progressively, reflecting actual
growth and performance of the business.
Overview
Our philosophy
In the long run, businesses only prosper if they treat their various
stakeholders fairly. That is why, at Debt Free Direct, we have always been at
the forefront of calling for greater industry regulation. We have firmly
established our fundamental philosophy with regard to the three principal
stakeholders in the debt advice process. Those principles are well worth
repeating. At Debt Free Direct we strongly believe that :
* The consumer has an obligation to make their best sustainable
offer to repay their debts (without causing undue hardship to themselves or
their family).
* The debt advisor has an obligation to appropriately verify the
financial facts and provide the most appropriate (and least drastic) advice to
the debtor based upon those facts.
* The creditor has an obligation to "treat their customers
fairly", assuming that the consumer and the debt advisor have both acted in
accord with their stated obligations. Essentially, creditors should accept
proposals from debtors that are built on these fundamental principles.
At Debt Free Direct we have been calling for industry regulation to cover the
whole area of debt advice, not just that covering IVAs. Such regulation would
ensure that debtors are treated fairly, whilst creditors achieve the best
possible returns from all the potential debt options available.
By following this approach, we ensure the long-term sustainability of the
business. For our shareholders this means that they can be confident in us
achieving our aim to grow the value of the business year on year and maintain a
progressive dividend policy. For the community in which we operate, we provide
employment for a greater number of staff than we did last year and give them the
opportunity to participate in the success of the business through widespread
share option arrangements, whilst working in a modern environment.
Our industry sector
Much has been written during the last year about the business practices of debt
advice companies, particularly in the IVA market, and much has been critical.
We agree with a lot of that criticism about some of our competitors, which is
why we have consistently called for tighter regulation, particularly insofar as
advertising and financial verification is concerned. Our systems and procedures
are open to view by creditors and we are confident that we are "Regulation
Ready".
We have participated fully in the Working Parties established by The British
Bankers' Association (BBA) in the wake of concerns expressed by lenders.
Recognising those concerns, we are changing our fee structures to better align
them with the amounts we realise from debtors. The effect will be predominantly
one of cash flow.
Notwithstanding the emergence of new competition during the year, we have
maintained our market-leading position. The sector will likely further
consolidate in the near term, as pricing pressures force out the less efficient
or those with inadequate critical mass; we expect to take suitable opportunities
as they arise.
Corporate Governance
Whilst governance and reporting requirements associated with a listing on the
Alternative Investment Market are less demanding than on the main market, we
have adopted most of the Combined Code during the year. This document reflects
those enhanced procedures and reports, hence its greater length and detail.
There have been no changes to the composition of the Board this year but the
senior management team has been further strengthened to underpin the executive
directors, whose workload has grown significantly over the period.
Strategy and Outlook
Our strategy is reviewed on a regular basis - not just annually - but at its
core is a continuing desire to lead the field ethically, operationally and
financially. We are well positioned to achieve all three. The Chief Executive
Officer's Business Review covers these, and other areas in which progress has
been made, in greater detail.
The board is confident of further progress being made this year.
CHIEF EXECUTIVE OFFICER'S REVIEW
Financial performance
The past year has been one of significant growth in all aspects of our financial
performance :
* Turnover has grown by 77% to #28m
* Gross profit has grown by 84% to #21.9m
* PBT (before goodwill amortisation of #312k) has grown by 100% to #9.4m
* PAT has grown to #6.5m, compared to #2.9m last year
* Shareholders' funds have grown to #21.4m from #16.4m last year
The trading results for the year and the Group's financial position at the year
end are detailed in the financial statements which follow this review.
Further analysis of financial performance
Moving into the detail, impressive growth continues to be demonstrated on all
fronts :
* IVA related turnover has grown by 74% to #25.8m
* Mortgage and loan related commissions have grown by 95% to #2m
The increase in IVA related turnover results from growth in both the new IVA
run-rate and supervisory fee income generated from live cases.
My Business Review below highlights the impact that factors such as increased
competition and creditor voting patterns have had upon the debt advice business
environment. Consequently, the year on year growth in new IVA run-rate is
particularly commendable in that context.
However, as I have commented previously, whilst the market has historically
focused on the growth in new IVA cases, it is the growth in the "bank" of
supervisory cases which is of greatest long term significance. Last year that "
bank" grew to approximately 10,000 live cases. This "bank" of cases will be of
particular relevance in the months ahead as IVA fee structures change in
response to the market.
The increase in mortgage and loan related commissions follows our announcement
in November 2006 that we had been granted FSA approval to take our broking and
remortgage broking business in-house. This in-house broking business became
fully operational in January 2007 and significantly enhanced our existing
remortgage business and meant that we were able to cement our position as a
consumer champion. We ensured that our customers continued to receive
appropriate advice, whilst we maximised our income from those leads where an IVA
would not be the appropriate solution, either for the consumer or the lender.
In a similar vein, we were also delighted to announce in January 2007 that
Payplan were now our chosen business partner for certain cases considered to be
appropriate for a (creditor funded) debt management solution. This meant that
DFD would, henceforth, enjoy a significant new income stream, whilst maintaining
the strong ethical position we have built since our inception. During the year,
turnover from this new source amounted to #207k and is set to increase
significantly in the years ahead.
Finally, Debt Free Direct Australia has continued to make good progress since we
announced its launch in June 2006. In recent months it was one of the first
debt advice company in Australia to receive Insolvency and Trust Service
Australia (ITSA) authorisation in anticipation of the law reforms due on 1 July
2007. Significant progress has been made with regard to developing the current
infrastructure of the business. Consequently, it is well placed to build on the
#104k turnover generated during the current year.
Business Review
1. The debt advice business environment
Macro-economic forces
Last year I confidently predicted continued organic growth in the year ahead.
The debt advice market originally emerged against a backdrop of benign economic
conditions. Low interest rates and full employment, combined with readily
available credit and a buoyant housing market, resulted in consumer spending
running well ahead of wage inflation. The increased spending was fuelled by
debt.
Today the bubble in property prices still hasn't burst and, as a consequence,
the bubble in consumer debt keeps growing.
Rising interest rates and growing inflation have both conspired to make matters
worse for the over-indebted consumer.
Both the Government and the Monetary Policy Committee are at one in wishing to
see inflation rates cut back. Unfortunately for the consumer, this inevitably
means that interest rates will continue to increase. I can only conclude that
there is no let up in sight for the over-indebted consumer. Other things being
equal, IVA numbers will continue to grow as the lending and borrowing excesses
of the past reach their inevitable conclusion.
However, against that economic backdrop, there have been a number of other
factors impacting the business environment.
Increased competition
Our advertising performance in the first half of the financial year was in line
with our forecasts and with the prior year performance. Towards the end of
calendar year 2006 we began to see early signs of reduced advertising response
rates which continued to deteriorate into the New Year. An analysis of our
share of advertising voice on key media indicated that a dramatic increase in
competitor advertising was partly responsible for that erosion.
Towards the end of the financial year we were encouraged by the Advertising
Standards Authority (ASA) response to our highlighting of misleading and
untruthful IVA adverts. As a consequence, now that the more outrageous and
untruthful claims of some advertisers have been banned, we anticipate that the
debt advice and IVA advertising market will not remain as crowded as it has been
in recent months. And, whilst "one swallow doesn't make a summer", the May
share of voice is encouraging.
Creditor voting patterns
It is clear that creditor comment, beginning in the latter half of calendar year
2006, has impacted on confidence in the valuation of debt advice/IVA stocks. It
is difficult to measure to what extent this has led to a consequent loss in
consumer confidence in the IVA solution.
What is certain is that changing creditor voting patterns have resulted in an
increased incidence of IVA case failure. IVA pass rates at Meetings of
Creditors during the year have fallen from 93% to as low as 86%.
Moreover, we have also seen an increased incidence of case adjournments from
creditors as they (certain creditors have been noticeably more aggressive than
others) have sought to slow down the growth rate of new IVAs.
Clearly, there has been a growing requirement to build trust between creditors
and debt advisors. I cover this area in detail in the following section.
Regulation
At Debt Free Direct we have, since inception, stressed the importance of our
being "Regulation Ready". We have long campaigned for Government regulation
that would ideally enshrine the principle of providing the consumer with
appropriate, or "best", advice.
Notwithstanding the above, we have also always been strongly in favour of better
regulation to protect creditors.
An IVA allows the debtor to make a proposal to their creditors, whereby they
make a monthly contribution, representing the maximum that they can sustainably
afford to pay. The Insolvency Practitioner on the case is there to protect the
best interests of both the debtor and the lender.
However, at Debt Free Direct we have consistently called for regulation of the
whole area of debt advice, not just that covering IVAs and bankruptcies. Such
regulation should include advice on entering a debt management plan (DMP) and,
critically, it must address those companies that market consolidation loans as a
debt solution.
Debt advisors should be required to provide accurate details of how they arrive
at their advice, as well as statistics to identify the advice given between the
solutions available. Such a level of transparency would provide an industry
benchmark against which all advisors can be judged.
Furthermore, advisors should also be required to provide relevant information to
creditors and to consumers regarding the financial outcome of the advice
provided, for example the amount and timing of prospective returns to creditors.
However, we have long been aware that not all debt advisors share Debt Free
Direct's views and see themselves as acting primarily for the debtor or, even
worse, providing advice skewed towards their own financial interest.
Ideally, we would have liked to see Government regulation in the debt advice
arena by now. However, it has been clear that necessary change would require to
be industry led. In November 2006 Debt Free Direct hosted a creditor focused
conference, which identified many common industry practices which we considered
to be unacceptable and our suggestions for how the debt advice and credit
industry could move together to deliver best practice. In particular, we
highlighted :
- unacceptable advertising practices, including misleading and untruthful
IVA adverts;
- the absence of robust financial verification to ensure that debtors are
paying their creditors the most they can afford;
- the lack of systematic and consistent advice delivery;
- the resulting lack of trust between debt advisors and creditors.
It was the important point with regard to building creditor trust that prompted
Debt Free Direct to first propose the concept of independent "audit and
accreditation" of debt advice companies.
This would provide creditors with reassurance that :
- unacceptable advertising practices are not employed;
- appropriate advice is always provided on a systematic and consistent basis;
- debtor offers of repayment are always the best available;
- debt advice is robustly tested in the light of the financial facts;
- a fair balance between the interests of consumers and creditors is maintained.
Since the DFD conference in late 2006 the market has seen a number of
initiatives. Particularly worthy of note are :
- the ASA initiative to remove the more outrageous and untruthful claims
of certain advertisers;
- the British Bankers' Association (BBA) and The Insolvency Service (IS)
initiatives to bring together the debt advice and credit industry;
- the formation of the Debt Resolution Forum (DRF).
These initiatives have led to significant progress being made, in particular
towards higher debt advice industry standards, particularly in the areas of
advertising and financial verification. We do remain concerned that the DRF
allows membership of its organisation without a pre-requisite of membership
being required to undertake an independent audit of business processes to
demonstrate best practice. Nevertheless, we remain supportive of their broad
concepts.
Moving into the new financial year, I am more confident than ever that peaceful
and sustainable working relationships with creditors will develop quickly over
the coming months. The difference between the genuine debt advisors and the
less ethical sales orientated companies is already becoming increasingly
apparent to creditors and I remain confident that ethical advisors like Debt
Free Direct will prosper.
2. Our strategy
Our vision has always been to become the most respected provider of advice and
solutions to over-indebted consumers.
To achieve this vision we need to be both market leader and thought leader. We
need to be respected by both consumers and creditors. And finally, we need
financial strength both in terms of profits and cash flow.
Since coming to market in December 2002, the group has developed rapidly in the
direction of achieving its vision. As always, there is still more to be done
and I will set out below our objectives for the coming year, which I believe
will progress us ever closer to achieving that vision.
Our main objectives for the new financial year are :
1. Profitable organic growth of the core debt advice and solutions business.
2. To win the "hearts and minds" of the creditor community.
3. To continue to broaden our range of solutions and deliver them in-house where
cost effective to do so.
4. To make acquisitions that complement these objectives and, at the same time,
are earnings accretive.
How we will implement our strategy
1. Profitable organic growth of the core debt advice and solutions
business.
* Debt Free Direct has been the largest and most ethical advertiser in
this sector. We will continue to analyse carefully the forms of advertising
that best attract consumers who need our services.
* We will continue to focus on process improvement so as to continually
improve our conversion rates and productivity.
* We will develop non-advertising routes to market so as to increase our
penetration into the market for over-indebted consumers beyond that achievable
by advertising alone.
2. To win the "hearts and minds" of the creditor community
* We will seek always to understand and address the legitimate concerns of
the creditor community.
* We will continue to put forward ground breaking proposals to enhance the
outcomes for creditors when consumers become over-indebted.
* We will direct more resource towards building and managing our
relationships with the major creditors.
3. To continue to broaden our range of solutions and deliver them
in-house where cost effective to do so.
* We will continue to innovate and develop new solutions to aid both the
over-indebted consumer and the creditor community.
* Where critical mass allows, we will deliver these solutions in house.
Where this is not cost effective, we will seek "best of breed" partnerships.
4. To make acquisitions that complement these objectives and, at the
same time, are earnings accretive.
* We will continue to look for acquisition opportunities that will assist
us in fulfilling our objectives and that are earnings accretive.
3. Key measures to track progress
Our board are strong believers of "what you measure you can manage". We have
developed sophisticated reporting systems that are fully integrated into our
operating systems. Our reports are distributed on a relevance basis so that all
our managers have the information they need to manage their area of
responsibility without being overloaded with information.
Our plc board has access to all our internal reporting and their attention is
drawn to areas of variance. There are a number of key performance indicators
that are used to track our progress in implementing our objectives and achieving
our vision.
Market share Competitor information is not available to reliably measure our share of the debt
advice market. We can, however, accurately measure our share of the IVA market and
we believe this to be a useful proxy for market share.
2004 2005 10 months 3 months
% % to Oct. 2006 to April 2007
% %
DFD 14.6 18.2 16.4 14.75
Source: DTI statistics, TIX and DFD analysis
Marketing - Minimising the cost of generating a call or enquiry into our advice centre is clearly
cost per call key to our profitability.
2004 2005 2006 4 months to
# # # April 2007
#
66 36 43 90
Revenue generating This key measure reflects our success in a number of our objectives. Improving our
solutions sold per conversions, increasing our solutions portfolio and bringing solutions in house are
call % all reflected in an improvement of this key measure. Over the course of the last 12
months this has increased to 16.75%.
Pass rate at This is a good proxy (especially when compared with the levels achieved by our competitors)
Meeting of for how well we are perceived by the creditor community
Creditors %
Creditor dividend This is a key measure (again, when compared with our competitors' performance). Maintaining
(p) this at industry leading levels will clearly help us to win the "hearts and minds" of
creditors.
DFD March proposals 42.8p
Industry March proposals 38.8p
Source: TIX
Having set out our historic performance in each of these key performance
measures, we will continue to update shareholders on our progress in each of
these key statistics.
4. Principal risks and uncertainties
In this section I describe some of the principal risks that the Directors
believe could materially affect our business, revenues, operating income, net
income, net assets, liquidity or capital resources. The nature of risk is such
that no list can be comprehensive and it is quite possible that other risks may
arise, or that risks not currently considered material may become so in the
future.
Sound risk management is an essential discipline for running the business
efficiently and pursuing our strategy successfully. Debt Free Direct has a
business-wide risk management process, monitored by the Board, to ensure a
consistent and coherent approach.
I have previously highlighted a number of current factors impacting the debt
advice business environment. In that context I believe it is worthwhile
separating those risks and uncertainties which are relevant to all businesses
and those which are more debt advice industry specific.
Risks and uncertainties relevant to all businesses
People resources
Implementing our strategy depends on attracting and retaining key personnel
across our business. The Group focuses on attracting and retaining the best
personnel and ensuring that key deficiencies do not arise through employee
training and development programmes, remuneration strategies and succession
planning. However, the sudden unanticipated loss of particular teams of
expertise may, in the short term, impact certain areas of Debt Free Direct's
business.
Employment costs
We are a significant employer of labour. Any increased costs of employment
could significantly impact operating costs and consequently reduce
profitability. Debt Free Direct seek to control this risk by ensuring that
employment costs are strongly linked to appropriate performance criteria.
Marketing
We depend on advertising for a very significant proportion of our revenue.
Advertising and other related marketing spend tends to be variable in its nature
and performance. At Debt Free Direct we address this risk by a policy of
continual analysis and ensuring we adopt a highly blended approach to marketing
spend.
IT systems
The implementation of bespoke software to improve the efficiency and
effectiveness of various business processes is an important contributor to the
Group's ongoing operational and growth strategy.
The Group continues to invest in IT, most notably the ongoing upgrades of our
Information Management Systems (IMS) and Best Advice Model (BAM). These
extensive change programmes are continually subject to implementation risks and
require the application of strong project management. Failure to implement such
changes effectively could result in unplanned costs or inefficiencies which
could adversely affect the results of our operations and, ultimately, business
profitability.
Financial factors
Business forecasts identifying, in particular, the liquidity requirements for
the Group are produced frequently. These are reviewed regularly by the Board to
ensure that sufficient headroom exists for at least the forthcoming 12 month
period.
Risks and uncertainties of particular relevance to the debt advice market
Reputational damage
The past year has seen creditors and many industry commentators casting doubt
upon the ethics of debt advice companies. In many cases they were right to do
so. Indeed, Debt Free Direct has consistently highlighted poor practice in such
areas as inappropriate advertising of debt solutions and consumers being
mis-sold IVAs.
Unfortunately, neither creditors nor industry commentators have been
consistently able to separate "the good" from "the bad" from "the ugly". As a
consequence, we have had to fight against unfair reputational damage, given that
Debt Free Direct has always stood for the highest standards in the industry.
I strongly believe that the instigation of independent "audit and accreditation"
(as previously outlined) will publicly demonstrate our standards and
significantly reduce the risk of reputational damage to DFD, both in terms of
creditor relationships and in the wider market context.
IVA fees
The past year has seen creditors and many industry commentators closely
examining the IVA fees charged by debt advice companies.
Ultimately, we believe that IVA fees are likely to move towards being based upon
a percentage of realisations, rather than being charged upon a fixed fee basis,
as is currently the case. Given that Debt Free Direct has, for some time,
considered itself to be the market leader in terms of achieving the best
available return for creditors, we anticipate that such an initiative will only
serve to further strengthen our position in the debt advice market relative to
our weaker competitors.
Moreover, as the largest and longest established IVA provider in the market, we
believe that we are the most able to withstand any future industry change with
regard to IVA fee structure. Our "bank" of existing supervisory cases, which
would not be impacted by any such changes, provides a substantial cushion, both
in terms of cash generation and highly visible future income and profits.
In overview, I remain very confident that Debt Free Direct is in a very strong
position and will certainly be less impacted by the changing face of the
industry than some of our weaker competition. Furthermore, such changes will,
in the longer term, heighten the barriers to entry.
Regulatory change
We have previously highlighted that Debt Free Direct has, from its inception,
been "Regulation Ready".
I believe that Debt Free Direct can only gain from a toughening of the
regulatory regime. Many of our competitors will face increased costs and
reduced conversions and income streams as they seek to come to terms with the
changing face of debt advice. We do not believe that any of the above will
adversely impact Debt Free Direct. Furthermore, any proposed legal regulatory
change, such as the Simple IVA or SIVA, are only moving in our direction.
Competition
I have previously highlighted the impact of increased competition, particularly
with regard to the deterioration of advertising response rates.
Competition is a fact of business life and is to be welcomed. Unfair
competition, in the form of untruthful and misleading advertising claims, has
been highlighted by Debt Free Direct and is being acted upon by the ASA. I
believe that we are only now entering an arena where the playing field is level.
At Debt Free Direct we are looking forward to fair competition with relish.
5. Current trading and prospects
The latter half of the financial year under review has been a turbulent time for
anyone involved in IVAs. We have already seen casualties and I will not be
surprised if further fall out occurs. Our own trading in the second half of the
financial year has been impacted by increased competition, creditor reluctance
to accept IVAs, and consumer unease caused by alarmist press coverage.
We entered the new financial year trading at run rates in line with those
achieved in the latter half of last year. However, with our advertising share
of voice now improving and, with signs of peace breaking out with the creditor
community, we are well positioned to build our volumes once more. Whilst fee
levels have not as yet been impacted by creditor pressure, it is clear that they
intend to use their combined might to reduce them. Debt Free Direct does,
however, have the largest "bank" of IVAs, which will not be impacted by any
change in fee levels and is, therefore, again well placed to cope with the
changes ahead.
I remain confident that we are still on track to achieve our vision of becoming
the most respected provider of advice and solutions to over-indebted consumers
and that this achievement will maximise shareholder value.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
YEAR ENDED 30 APRIL 2007
Year Year
ended ended
30 April 2007 30 April 2006
As restated
Note # #
TURNOVER 2 27,994,900 15,828,133
Cost of sales (6,041,314) (3,937,504)
____________ ____________
GROSS PROFIT 21,953,586 11,890,629
Administrative expenses
--------------------------------------------------------------------------------------
Goodwill amortisation (311,734) (311,737)
Other administrative expenses (12,663,812) (7,474,714)
____________ ____________
--------------------------------------------------------------------------------------
12,975,546 (7,786,451)
____________ ____________
OPERATING PROFIT 3 8,978,040 4,104,178
Interest receivable 165,627 288,796
Interest payable and similar 6 (21,754) (15,769)
charges
____________ ____________
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 9,121,913 4,377,205
Tax on profit on ordinary 7 (2,611,576) (1,432,650)
activities
____________ ____________
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 6,510,337 2,944,555
AND PROFIT FOR THE FINANCIAL YEAR ============ ============
Earnings per share - basic 10 17.39p 7.93p
Earnings per share - diluted 10 16.69p 7.71p
All of the activities of the Group are classed as continuing.
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
30 APRIL 2007
Year ended Year ended 30 April
30 April 2007 2006
As restated
# #
Profit for the year 6,510,337 2,944,555
Currency translation on difference on
foreign currency net investments (11,534) -
_____________ _____________
Total recognised gains and losses relating to
the year 6,498,803 2,944,555
_____________ =============
Prior year adjustment as explained in note 1
Change in revenue recognition - IVA revenue
recognition based on fair value 1,464,507
Change in revenue recognition - point of
revenue recognition (3,206,902)
Tax effect of change in revenue recognition 522,718
_____________
Total gains and losses recognised since last
annual report and financial statements 5,279,126
_____________
CONSOLIDATED BALANCE SHEET
30 APRIL 2007
2007 2006
As restated
Note # #
FIXED ASSETS
Intangible assets 11 1,648,604 1,942,193
Tangible assets 12 2,899,897 927,837
__________ __________
4,548,501 2,870,030
CURRENT ASSETS
Debtors (including #3,299,945 due
after more than one year (2006:
#1,389,647)) 14 20,995,202 10,222,116
Cash at bank 372,593 5,366,634
__________ __________
21,367,795 15,588,750
CREDITORS: Amounts falling due
within one year 15 (3,426,074) (2,036,172)
__________ __________
NET CURRENT ASSETS 17,941,721 13,552,578
__________ __________
TOTAL ASSETS LESS CURRENT LIABILITIES 22,490,222 16,422,608
CREDITORS: Amounts falling due after
more than one year 16 (971,429) (25,202)
PROVISIONS FOR LIABILITIES 17 (97,261) (38,561)
__________ __________
21,421,532 16,358,845
========== ==========
CAPITAL AND RESERVES
Called-up share capital 20 375,995 373,294
Share premium account 21 13,777,240 13,576,979
Profit and loss account 21 7,268,297 2,408,572
__________ __________
SHAREHOLDERS' FUNDS 22 21,421,532 16,358,845
========== ==========
These financial statements were approved and authorised for issue by the
directors on 25 June 2007 and are signed on their behalf by:
A Redmond P A Latham
Director Director
CONSOLIDATED CASH FLOW STATEMENT
YEAR ENDED 30 APRIL 2007
Year ended Year ended
30 April 2007 30 April 2006
# #
NET CASH (OUTFLOW) / INFLOW FROM
OPERATING ACTIVITIES (540,528) 565,162
RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE
Interest received 165,627 288,796
Interest paid (16,699) (575)
Interest element of finance lease
rental payments (5,055) (10,896)
________ ________
NET CASH INFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE 143,873 277,325
TAXATION (2,156,033) (1,201,778)
CAPITAL EXPENDITURE
Payments to acquire tangible fixed
assets (2,591,757) (481,256)
Payments to acquire intangible fixed
assets (20,454) (4,085)
________ ________
NET CASH OUTFLOW FROM CAPITAL
EXPENDITURE (2,612,211) (485,341)
ACQUISITIONS
Acquisition of DFD Limited
preference shares - (68,462)
DIVIDENDS PAID (1,683,324) (557,988)
________ ________
CASH OUTFLOW BEFORE FINANCING (6,848,223) (1,471,082)
FINANCING
New bank loan taken up 1,700,000 -
Issue of ordinary share capital 202,962 124,627
Capital element of finance lease
rental payments (48,780) (69,295)
________ ________
NET CASH INFLOW FROM FINANCING 1,854,182 55,332
________ ________
DECREASE IN CASH (4,994,041) (1,415,750)
=========== ===========
RECONCILIATION OF OPERATING PROFIT TO NET CASH (OUTFLOW) / INFLOW FROM OPERATING
ACTIVITIES
Year ended Year ended
30 April 2007 30 April 2006
As restated
# #
Operating profit 8,978,040 4,104,178
Amortisation 314,043 312,476
Depreciation 486,469 288,785
Loss on disposal of fixed assets 133,228 1,483
Increase in debtors (10,773,086) (4,903,667)
Increase in creditors and other
provisions 288,066 721,679
Foreign exchange currency
translation (11,534) -
Equity based share payment 44,246 40,228
___________ ___________
Net cash (outflow) / inflow from
operating activities (540,528) 565,162
=========== ===========
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Year ended Year ended
30 April 2007 30 April 2006
# #
Decrease in cash in the period (4,994,041) (1,415,750)
Cash outflow from decrease in lease
financing 48,780 69,295
Cash inflow from increase in bank loans (1,700,000) -
_________ _________
Change in net debt resulting from cash
flows (6,645,261) (1,346,455)
_________ _________
Movement in net debt in the period (6,645,261) (1,346,455)
Net cash at 1 May 2006 5,292,652 6,639,107
_________ _________
Net (debt)/cash at 30 April 2007 (1,352,609) 5,292,652
========== ==========
ANALYSIS OF CHANGES IN NET FUNDS
At 30 April 2006 Cash flow At 30 April 2007
# # #
Cash in hand and
at bank 5,366,634 (4,994,041) 372,593
____________ _________ _________
Bank loan
< 1 year - (728,571) (728,571)
> 1 year - (971,429) (971,429)
____________ _________ _________
- (1,700,000) (1,700,000)
Hire purchase
creditors (73,982) 48,780 (25,202)
____________ _________ _________
5,292,652 (6,645,261) (1,352,609)
========= =========== ===========
NOTES TO THE PRELIMINARY ANNOUNCEMENT
YEAR ENDED 30 APRIL 2007
1. STATUS OF FINANCIAL INFORMATION
The financial information set out in this report does not constitute the
company's statutory accounts for the year ended 30 April 2007 or 2006, but is
derived from those accounts. Statutory accounts for 2006 have been delivered to
the Registrar of Companies and those for the year ended 30 April 2007 will be
delivered to the Registrar of Companies shortly. The auditors have reported on
those accounts; their reports were unqualified and did not contain statements
under the Companies Act 1985 (S.237(2) or (3)).
This financial information has been prepared on the basis of the accounting
policies set out in the most recently published set of annual financial
statements, except where specified below.
Change in Accounting Policies
Revenue recognition
During the financial year the board has reconsidered the application of UITF 40
"Revenue recognition and service contracts" to revenues recognised from IVA
business. As a consequence of this review, and to reflect the current consensus
view on best practice application of UITF 40, the group has revised its Turnover
accounting policies.
The group will recognise revenue from IVA fees once approval for an IVA has been
obtained at the meeting of creditors, rather than on issue of a finalised IVA
proposal to the debtor, with a provision for those cases that may not be
approved at the meeting of creditors. This adjustment, treated as a prior year
adjustment, increases Turnover and retained profit in 2007 by #29,178 and
#41,811 respectively (2006 decrease of #1,144,295 and #801,006) and decreases
Accrued Income by #3,177,724 (2006 : #3,206,902) and decreases Net Assets within
the Balance Sheet by #2,203,272 (2006 : #2,244,832) at 30 April 2007. As a
result, the Corporation Tax liability has decreased by #944,260 (2006 :
#962,070).
Once a right to consideration has been earned by the group during an IVA
arrangement, the group has revised its accounting policy to recognise revenue
during the life of the IVA based upon the fair value of the service provided
rather than on invoicing. Fair value for this purpose is based upon that
proportion of the anticipated revenue on a case which is represented by the
value of work done to date as a function of the total value of anticipated work.
This adjustment, treated as a prior year adjustment, increases Turnover in
2007 by #1,022,602 (2006 : #742,244) and increases Accrued Income and Net Assets
within the Balance Sheet at 30 April 2007 by #2,487,109 (2006 : #1,464,507) and
#1,740,976 (2006 : #1,025,155). This has resulted in an increase in the
corporation tax liability of #746,133 (2006 : #439,352).
The first prior year adjustment also serves to decrease the balance on the
profit and loss reserve at 1 May 2005 by #1,443,825. The second prior year
adjustment increases the profit and loss reserve at 1 May 2005 by #505,584 to
give a combined net impact of a #938,241 decrease.
These changes are summarised in the table below.
Net assets
Change in Change in Total
revenue revenue
recognition - recognition -
point of based upon fair
recognition value
# # #
As previously stated at 30 April 2005 14,745,664
Accrued income (2,062,607) 722,263 (1,340,344)
Corporation tax liability 618,782 (216,679) 402,103
_________
As restated at 30 April 2005 13,807,423
==========
As previously stated at 30 April 2006 17,578,522
Accrued income (3,206,902) 1,464,507 (1,742,395)
Corporation tax liability 962,070 (439,352) 522,718
_________
As restated at 30 April 2006 16,358,845
==========
As stated prior to change in accounting policy at 30 April 21,883,828
2007
Accrued income (3,177,724) 2,487,109 (690,615)
Accruals 30,192 - 30,192
Corporation tax liability 944,260 (746,133) 198,127
_________
As restated at 30 April 2007 21,421,532
==========
Turnover Profit before tax Taxation Profit after
taxation
# # # #
As previously stated at 30 April 2006 16,230,184 4,819,484 (1,553,265) 3,266,219
Change in revenue recognition - point
of recognition
(1,144,295) (1,144,295) 343,289 (801,006)
Change in revenue recognition - based
upon fair value
742,244 742,244 (222,674) 519,570
Equity based share payments - (40,228) - (40,228)
__________ __________ __________ __________
As restated at 30 April 2006 15,828,133 4,377,205 (1,432,650) 2,944,555
========= ========= ========= =========
The impact on profit after tax for the year ended 30 April 2007 of
these adjustments is #757,380.
Share based payments
The Group has applied the requirements of FRS20, Share based payments. In
accordance with the transitional provisions, FRS20 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested at 1 May
2006. For year ended 2006 the change of policy has resulted in a net decrease
in the profit for the year of #40,228 and for year ended 2007 the net decrease
in the profit was #44,245. The share based expense has been included in
administrative expenses in the profit and loss account with the credit entry to
equity. All share based payments are equity settled.
2. TAX ON PROFIT ON ORDINARY ACTIVITIES
Year ended Year ended
30 April 2007 30 April 2006
# #
Current tax:
UK Corporation tax based on the results for the 2,534,876 1,401,930
period at 30%
Deferred taxation charge
- origination and reversal of timing 76,700 30,720
differences
____________ ____________
Total tax charge 2,611,576 1,432,650
============ ============
Factors affecting current tax charge
The tax assessed on the profit on ordinary activities for the year is
lower/higher than the standard rate of corporation tax in the UK of 30% (2006:
30%). The differences are reconciled below:
2007 2006
# #
Profit on ordinary activities before tax (as
restated) 9,121,913 4,377,205
=========== ===========
Profit on ordinary activities at 30% (2005: 30%) 2,736,574 1,313,162
Expenses not deductible for tax purposes 211,004 77,370
Differences between capital allowances and
depreciation (76,700) (24,958)
Effect of marginal tax rates (3,298) (4,936)
Utilisation of tax losses and other deductions - (5,762)
Other differences (100,655) 47,054
Share option relief (232,049) -
_________ _________
2,534,876 1,401,930
=========== ===========
3. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the profit of
#6,510,337 (2006 (as restated) : #2,944,555) and a weighted average number of
ordinary shares in issue during the year of 37,438,505 (2006: 37,143,181). The
calculation of diluted earnings per share is based on the profit of #6,510,337
(2006 (as restated) : #2,944,555) and a diluted weighted average number of
ordinary shares of 39,005,067 (2006: 38,185,719).
The calculations of earnings per share are based on the profit for the financial
year and the following numbers of shares:
2007 2006
Number of Number of
shares shares
Weighted average number of shares :
For basic earnings per share 37,438,505 37,143,181
Potential exercise of share options 1,566,562 1,042,538
_________ _________
For diluted earnings per share 39,005,067 38,185,719
=========== ===========
4. DIVIDENDS
A final dividend of 3p per share (2006 : 1.5p) is proposed for approval at the
forthcoming AGM on 3rd August 2007.
5. RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
2007 2006
(As restated)
# #
Profit for financial year 6,510,337 2,944,555
Dividends (1,683,324) (557,988)
Equity based share payments 44,246 40,228
Exchange rate differences (11,534) -
New equity share capital subscribed 2,701 3,802
Net premium on new share capital 200,261
subscribed 120,825
___________ ___________
5,062,687 2,551,422
Opening shareholders' equity funds
(originally #17,578,522 before
deducting prior year adjustment of
#1,219,677) 16,358,845 13,807,423
___________ ___________
Closing shareholders' equity funds 21,421,532 16,358,845
=========== ===========
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END
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