26th Jun 2007 08:05
Debt Free Direct Group PLC26 June 2007 The following replaces the Preliminary Results announcement released today at07:01 under RNS number 0070Z. Figures relating to PBT in the "Highlights" bullet points have been amended. The full amended text appears below. 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 thelatest developments in best practice with regard to UITF 40. The net impact ofthese changes is to increase adjusted PBT in the current year by approximately£1.0m (2006: decrease by £400k). - Adjusted PBT under old accounting Up 65% to £8.4m (£5.1m 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 toan agreement for the exclusive generation of leads over the next 2 years. Thiswas entirely funded by debt of £1.7m. Mike Blackburn, Chairman, said: "I am pleased to report a further year of substantial progress, with adjustedpre-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 timefor all companies operating in the IVA market, as highlighted by the demise of anumber of Debt Free Direct's competitors. I will not be surprised if furtherfall out occurs. Our own trading in the second half of the financial year hasbeen impacted by increased competition, creditor reluctance to accept IVAs, andconsumer unease caused by alarmist press coverage. Debt Free Direct entered the new financial year trading at run rates in linewith those achieved in the latter half of the previous financial year. However,with our advertising "share of voice" now improving and, with signs of renewedunderstanding within the creditor community, we are well positioned to build ourvolumes once more. Whilst fee levels have not, as yet, been impacted bycreditor pressure, it is clear that their long term intention is to ensure theirreduction. 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, wellplaced to cope with the changes ahead. In view of potential changes to fee structures and continued uncertaintysurrounding advertising costs, it is too early to provide detailed guidance onthe current financial year. Nevertheless, I remain confident that we are stillon track to achieve our vision of becoming the most respected provider of adviceand solutions to over-indebted consumers and that this achievement will maximiseshareholder value." Enquiries: Debt Free Direct Group plcAndrew Redmond, Chief Executive Officer 0845 2960100Paul Latham, Finance Director 0845 2960200 Numis SecuritiesIain McDonald 020 72601000Lee Aston 020 72601000 Financial DynamicsEd Gascoigne-Pees 020 72697132Nick Henderson 020 72697114 Notes Debt Free Direct helps individuals find the best solution to their debtproblems, 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 asolution suitable for that individual's particular financial circumstances. Thesolutions offered range from basic advice, such as simply destroying creditcards 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 December2002, is unique in the marketplace in that, unlike most of its competitors whosell specific products, Debt Free Direct looks to provide the best advice to theconsumer and recommends them the most appropriate service CHAIRMAN'S STATEMENT Introduction This has been an eventful year for your company, with much focus in recentmonths being on the industry-wide debate with creditors over the way in whichIVA providers are remunerated. The outcome of that debate looks set to result in IVA providers beingremunerated on a "percentage of realisations" basis. This has, in turn, led todiscussions with our auditors with regard to the most appropriate revenuerecognition policy. The outcome is that IVA services (including nominee and supervisory fees) areconsidered to be a single service provision and should be "linked" or "bundled"for accounting purposes by virtue of the contractual definition of the IVAproposal. Once the legally binding arrangement is in place, revenue should be recognisedin line with the provision of the service (adjusted for failure rates, bad debtrisk, and the likely total fee to be received during the IVA) the group performunder the contract. As a consequence, prior year adjustments are appropriate in respect of thechange of accounting policy required to reflect the contractual nature of theIVA and to adopt the very latest developments in best practice with regard toUITF 40. The net impact of these changes is to increase PBT in the current yearby approximately £1.1m (2006 : decrease by £400k), whilst reducing net assets byapproximately £460k (2006 : £1.2m). With the above in mind, I am pleased to be able to report a further year ofprogress, with pre-tax profits (adjusted for goodwill amortisation of £312k inboth 2007 and 2006), doubling to £9.4m (2006 : £4.7m). Had the previousaccounting policy been adopted, the profit before taxation would have beenapproximately £8m and £4.8m on a comparative basis. The company is pleased torecommend a final dividend of 3p per share (2006 : 1.5p), making an aggregate of6p for the full year (2006 : 3p), to be proposed at the Group's forthcomingAnnual General Meeting. The Directors have previously stated that the company will grow the dividendpayment progressively in proportion with the Company's future growth. TheDirectors believe that this dividend reflects their confidence in the outlookfor the company and note that it reflects their expectations earlier in the yearfor greater profitability for the year ended 30 April 2007 than has beendelivered. The Directors therefore reiterate that their intention is fordividend levels, in future years, to be grown progressively, reflecting actualgrowth and performance of the business. Overview Our philosophy In the long run, businesses only prosper if they treat their variousstakeholders fairly. That is why, at Debt Free Direct, we have always been atthe forefront of calling for greater industry regulation. We have firmlyestablished our fundamental philosophy with regard to the three principalstakeholders in the debt advice process. Those principles are well worthrepeating. At Debt Free Direct we strongly believe that : • The consumer has an obligation to make their best sustainableoffer to repay their debts (without causing undue hardship to themselves ortheir family). • The debt advisor has an obligation to appropriately verify thefinancial facts and provide the most appropriate (and least drastic) advice tothe debtor based upon those facts. • The creditor has an obligation to "treat their customersfairly", assuming that the consumer and the debt advisor have both acted inaccord with their stated obligations. Essentially, creditors should acceptproposals from debtors that are built on these fundamental principles. At Debt Free Direct we have been calling for industry regulation to cover thewhole area of debt advice, not just that covering IVAs. Such regulation wouldensure that debtors are treated fairly, whilst creditors achieve the bestpossible returns from all the potential debt options available. By following this approach, we ensure the long-term sustainability of thebusiness. For our shareholders this means that they can be confident in usachieving our aim to grow the value of the business year on year and maintain aprogressive dividend policy. For the community in which we operate, we provideemployment for a greater number of staff than we did last year and give them theopportunity to participate in the success of the business through widespreadshare option arrangements, whilst working in a modern environment. Our industry sector Much has been written during the last year about the business practices of debtadvice 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 iswhy we have consistently called for tighter regulation, particularly insofar asadvertising and financial verification is concerned. Our systems and proceduresare 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 BritishBankers' Association (BBA) in the wake of concerns expressed by lenders.Recognising those concerns, we are changing our fee structures to better alignthem with the amounts we realise from debtors. The effect will be predominantlyone of cash flow. Notwithstanding the emergence of new competition during the year, we havemaintained our market-leading position. The sector will likely furtherconsolidate in the near term, as pricing pressures force out the less efficientor those with inadequate critical mass; we expect to take suitable opportunitiesas they arise. Corporate Governance Whilst governance and reporting requirements associated with a listing on theAlternative Investment Market are less demanding than on the main market, wehave adopted most of the Combined Code during the year. This document reflectsthose enhanced procedures and reports, hence its greater length and detail. There have been no changes to the composition of the Board this year but thesenior management team has been further strengthened to underpin the executivedirectors, whose workload has grown significantly over the period. Strategy and Outlook Our strategy is reviewed on a regular basis - not just annually - but at itscore is a continuing desire to lead the field ethically, operationally andfinancially. We are well positioned to achieve all three. The Chief ExecutiveOfficer's Business Review covers these, and other areas in which progress hasbeen 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 financialperformance : • 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 yearend 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 allfronts : • 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 IVArun-rate and supervisory fee income generated from live cases. My Business Review below highlights the impact that factors such as increasedcompetition and creditor voting patterns have had upon the debt advice businessenvironment. Consequently, the year on year growth in new IVA run-rate isparticularly commendable in that context. However, as I have commented previously, whilst the market has historicallyfocused on the growth in new IVA cases, it is the growth in the "bank" ofsupervisory 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 ofparticular relevance in the months ahead as IVA fee structures change inresponse to the market. The increase in mortgage and loan related commissions follows our announcementin November 2006 that we had been granted FSA approval to take our broking andremortgage broking business in-house. This in-house broking business becamefully operational in January 2007 and significantly enhanced our existingremortgage business and meant that we were able to cement our position as aconsumer champion. We ensured that our customers continued to receiveappropriate advice, whilst we maximised our income from those leads where an IVAwould 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 thatPayplan were now our chosen business partner for certain cases considered to beappropriate for a (creditor funded) debt management solution. This meant thatDFD would, henceforth, enjoy a significant new income stream, whilst maintainingthe strong ethical position we have built since our inception. During the year,turnover from this new source amounted to £207k and is set to increasesignificantly in the years ahead. Finally, Debt Free Direct Australia has continued to make good progress since weannounced its launch in June 2006. In recent months it was one of the firstdebt advice company in Australia to receive Insolvency and Trust ServiceAustralia (ITSA) authorisation in anticipation of the law reforms due on 1 July2007. Significant progress has been made with regard to developing the currentinfrastructure 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 economicconditions. Low interest rates and full employment, combined with readilyavailable credit and a buoyant housing market, resulted in consumer spendingrunning well ahead of wage inflation. The increased spending was fuelled bydebt. 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 mattersworse for the over-indebted consumer. Both the Government and the Monetary Policy Committee are at one in wishing tosee inflation rates cut back. Unfortunately for the consumer, this inevitablymeans that interest rates will continue to increase. I can only conclude thatthere is no let up in sight for the over-indebted consumer. Other things beingequal, IVA numbers will continue to grow as the lending and borrowing excessesof the past reach their inevitable conclusion. However, against that economic backdrop, there have been a number of otherfactors impacting the business environment. Increased competition Our advertising performance in the first half of the financial year was in linewith our forecasts and with the prior year performance. Towards the end ofcalendar year 2006 we began to see early signs of reduced advertising responserates which continued to deteriorate into the New Year. An analysis of ourshare of advertising voice on key media indicated that a dramatic increase incompetitor advertising was partly responsible for that erosion. Towards the end of the financial year we were encouraged by the AdvertisingStandards Authority (ASA) response to our highlighting of misleading anduntruthful IVA adverts. As a consequence, now that the more outrageous anduntruthful claims of some advertisers have been banned, we anticipate that thedebt advice and IVA advertising market will not remain as crowded as it has beenin recent months. And, whilst "one swallow doesn't make a summer", the Mayshare of voice is encouraging. Creditor voting patterns It is clear that creditor comment, beginning in the latter half of calendar year2006, has impacted on confidence in the valuation of debt advice/IVA stocks. Itis difficult to measure to what extent this has led to a consequent loss inconsumer confidence in the IVA solution. What is certain is that changing creditor voting patterns have resulted in anincreased incidence of IVA case failure. IVA pass rates at Meetings ofCreditors during the year have fallen from 93% to as low as 86%. Moreover, we have also seen an increased incidence of case adjournments fromcreditors as they (certain creditors have been noticeably more aggressive thanothers) have sought to slow down the growth rate of new IVAs. Clearly, there has been a growing requirement to build trust between creditorsand 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 ourbeing "Regulation Ready". We have long campaigned for Government regulationthat would ideally enshrine the principle of providing the consumer withappropriate, or "best", advice. Notwithstanding the above, we have also always been strongly in favour of betterregulation to protect creditors. An IVA allows the debtor to make a proposal to their creditors, whereby theymake a monthly contribution, representing the maximum that they can sustainablyafford to pay. The Insolvency Practitioner on the case is there to protect thebest interests of both the debtor and the lender. However, at Debt Free Direct we have consistently called for regulation of thewhole area of debt advice, not just that covering IVAs and bankruptcies. Suchregulation should include advice on entering a debt management plan (DMP) and,critically, it must address those companies that market consolidation loans as adebt solution. Debt advisors should be required to provide accurate details of how they arriveat their advice, as well as statistics to identify the advice given between thesolutions available. Such a level of transparency would provide an industrybenchmark against which all advisors can be judged. Furthermore, advisors should also be required to provide relevant information tocreditors and to consumers regarding the financial outcome of the adviceprovided, for example the amount and timing of prospective returns to creditors. However, we have long been aware that not all debt advisors share Debt FreeDirect's views and see themselves as acting primarily for the debtor or, evenworse, providing advice skewed towards their own financial interest. Ideally, we would have liked to see Government regulation in the debt advicearena by now. However, it has been clear that necessary change would require tobe industry led. In November 2006 Debt Free Direct hosted a creditor focusedconference, which identified many common industry practices which we consideredto be unacceptable and our suggestions for how the debt advice and creditindustry could move together to deliver best practice. In particular, wehighlighted : - unacceptable advertising practices, including misleading and untruthfulIVA adverts; - the absence of robust financial verification to ensure that debtors arepaying 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 promptedDebt Free Direct to first propose the concept of independent "audit andaccreditation" 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 consistentbasis; - 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 ismaintained. Since the DFD conference in late 2006 the market has seen a number ofinitiatives. Particularly worthy of note are : - the ASA initiative to remove the more outrageous and untruthful claimsof 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 particulartowards higher debt advice industry standards, particularly in the areas ofadvertising and financial verification. We do remain concerned that the DRFallows membership of its organisation without a pre-requisite of membershipbeing required to undertake an independent audit of business processes todemonstrate best practice. Nevertheless, we remain supportive of their broadconcepts. Moving into the new financial year, I am more confident than ever that peacefuland sustainable working relationships with creditors will develop quickly overthe coming months. The difference between the genuine debt advisors and theless ethical sales orientated companies is already becoming increasinglyapparent to creditors and I remain confident that ethical advisors like DebtFree Direct will prosper. 2. Our strategy Our vision has always been to become the most respected provider of advice andsolutions to over-indebted consumers. To achieve this vision we need to be both market leader and thought leader. Weneed to be respected by both consumers and creditors. And finally, we needfinancial strength both in terms of profits and cash flow. Since coming to market in December 2002, the group has developed rapidly in thedirection of achieving its vision. As always, there is still more to be doneand I will set out below our objectives for the coming year, which I believewill 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 solutionsbusiness. 2. To win the "hearts and minds" of the creditor community. 3. To continue to broaden our range of solutions and deliver themin-house where cost effective to do so. 4. To make acquisitions that complement these objectives and, at thesame time, are earnings accretive. How we will implement our strategy 1. Profitable organic growth of the core debt advice and solutionsbusiness. • Debt Free Direct has been the largest and most ethical advertiser inthis sector. We will continue to analyse carefully the forms of advertisingthat best attract consumers who need our services. • We will continue to focus on process improvement so as to continuallyimprove our conversion rates and productivity. • We will develop non-advertising routes to market so as to increase ourpenetration into the market for over-indebted consumers beyond that achievableby advertising alone. 2. To win the "hearts and minds" of the creditor community • We will seek always to understand and address the legitimate concerns ofthe creditor community. • We will continue to put forward ground breaking proposals to enhance theoutcomes for creditors when consumers become over-indebted. • We will direct more resource towards building and managing ourrelationships with the major creditors. 3. To continue to broaden our range of solutions and deliver themin-house where cost effective to do so. • We will continue to innovate and develop new solutions to aid both theover-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 sametime, are earnings accretive. • We will continue to look for acquisition opportunities that will assistus 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 havedeveloped sophisticated reporting systems that are fully integrated into ouroperating systems. Our reports are distributed on a relevance basis so that allour managers have the information they need to manage their area ofresponsibility without being overloaded with information. Our plc board has access to all our internal reporting and their attention isdrawn to areas of variance. There are a number of key performance indicatorsthat are used to track our progress in implementing our objectives and achievingour 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. 10 months 3 months 2004 2005 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 key to our profitability.cost per call 4 months to 2004 2005 2006 April 2007 £ £ £ £ 66 36 43 90 Revenue generating This key measure reflects our success in a number of our objectives. Improving oursolutions sold per conversions, increasing our solutions portfolio and bringing solutions in house arecall % 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 communityCreditors % 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 performancemeasures, we will continue to update shareholders on our progress in each ofthese key statistics. 4. Principal risks and uncertainties In this section I describe some of the principal risks that the Directorsbelieve could materially affect our business, revenues, operating income, netincome, net assets, liquidity or capital resources. The nature of risk is suchthat no list can be comprehensive and it is quite possible that other risks mayarise, or that risks not currently considered material may become so in thefuture. Sound risk management is an essential discipline for running the businessefficiently and pursuing our strategy successfully. Debt Free Direct has abusiness-wide risk management process, monitored by the Board, to ensure aconsistent and coherent approach. I have previously highlighted a number of current factors impacting the debtadvice business environment. In that context I believe it is worthwhileseparating those risks and uncertainties which are relevant to all businessesand 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 personnelacross our business. The Group focuses on attracting and retaining the bestpersonnel and ensuring that key deficiencies do not arise through employeetraining and development programmes, remuneration strategies and successionplanning. However, the sudden unanticipated loss of particular teams ofexpertise may, in the short term, impact certain areas of Debt Free Direct'sbusiness. Employment costs We are a significant employer of labour. Any increased costs of employmentcould significantly impact operating costs and consequently reduceprofitability. Debt Free Direct seek to control this risk by ensuring thatemployment 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 natureand performance. At Debt Free Direct we address this risk by a policy ofcontinual analysis and ensuring we adopt a highly blended approach to marketingspend. IT systems The implementation of bespoke software to improve the efficiency andeffectiveness of various business processes is an important contributor to theGroup's ongoing operational and growth strategy. The Group continues to invest in IT, most notably the ongoing upgrades of ourInformation Management Systems (IMS) and Best Advice Model (BAM). Theseextensive change programmes are continually subject to implementation risks andrequire the application of strong project management. Failure to implement suchchanges effectively could result in unplanned costs or inefficiencies whichcould adversely affect the results of our operations and, ultimately, businessprofitability. Financial factors Business forecasts identifying, in particular, the liquidity requirements forthe Group are produced frequently. These are reviewed regularly by the Board toensure that sufficient headroom exists for at least the forthcoming 12 monthperiod. Risks and uncertainties of particular relevance to the debt advice market Reputational damage The past year has seen creditors and many industry commentators casting doubtupon the ethics of debt advice companies. In many cases they were right to doso. Indeed, Debt Free Direct has consistently highlighted poor practice in suchareas as inappropriate advertising of debt solutions and consumers beingmis-sold IVAs. Unfortunately, neither creditors nor industry commentators have beenconsistently able to separate "the good" from "the bad" from "the ugly". As aconsequence, we have had to fight against unfair reputational damage, given thatDebt 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 andsignificantly reduce the risk of reputational damage to DFD, both in terms ofcreditor relationships and in the wider market context. IVA fees The past year has seen creditors and many industry commentators closelyexamining the IVA fees charged by debt advice companies. Ultimately, we believe that IVA fees are likely to move towards being based upona 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 bestavailable return for creditors, we anticipate that such an initiative will onlyserve to further strengthen our position in the debt advice market relative toour weaker competitors. Moreover, as the largest and longest established IVA provider in the market, webelieve that we are the most able to withstand any future industry change withregard to IVA fee structure. Our "bank" of existing supervisory cases, whichwould not be impacted by any such changes, provides a substantial cushion, bothin 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 strongposition and will certainly be less impacted by the changing face of theindustry 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 theregulatory regime. Many of our competitors will face increased costs andreduced conversions and income streams as they seek to come to terms with thechanging face of debt advice. We do not believe that any of the above willadversely impact Debt Free Direct. Furthermore, any proposed legal regulatorychange, such as the Simple IVA or SIVA, are only moving in our direction. Competition I have previously highlighted the impact of increased competition, particularlywith regard to the deterioration of advertising response rates. Competition is a fact of business life and is to be welcomed. Unfaircompetition, in the form of untruthful and misleading advertising claims, hasbeen highlighted by Debt Free Direct and is being acted upon by the ASA. Ibelieve 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 foranyone involved in IVAs. We have already seen casualties and I will not besurprised if further fall out occurs. Our own trading in the second half of thefinancial year has been impacted by increased competition, creditor reluctanceto accept IVAs, and consumer unease caused by alarmist press coverage. We entered the new financial year trading at run rates in line with thoseachieved in the latter half of last year. However, with our advertising shareof voice now improving and, with signs of peace breaking out with the creditorcommunity, we are well positioned to build our volumes once more. Whilst feelevels have not as yet been impacted by creditor pressure, it is clear that theyintend 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 anychange in fee levels and is, therefore, again well placed to cope with thechanges ahead. I remain confident that we are still on track to achieve our vision of becomingthe most respected provider of advice and solutions to over-indebted consumersand that this achievement will maximise shareholder value. CONSOLIDATED PROFIT AND LOSS ACCOUNTYEAR ENDED 30 APRIL 2007 Year Year ended ended 30 April 2007 30 April 2006 As restated Note £ £ TURNOVER 2 27,994,900 15,828,133Cost of sales (6,041,314) (3,937,504) ------------ ------------GROSS PROFIT 21,953,586 11,890,629Administrative expenses Goodwill amortisation (311,734) (311,737) Other administrative expenses (12,663,812) (7,474,714) ------------ ------------ 12,975,546 (7,786,451) ------------ ------------ 8,978,040 4,104,178 OPERATING PROFIT 3 Interest receivable 165,627 288,796Interest payable and similar charges 6 (21,754) (15,769) ------------ ------------ 9,121,913 4,377,205 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Tax on profit on ordinary activities 7 (2,611,576) (1,432,650) ------------ ------------ 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 7.93pEarnings 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 30 Year ended 30 April 2007 April 2006 As restated £ £ Profit for the year 6,510,337 2,944,555Currency 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 1,464,507Change 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 5,279,126financial statements _____________ CONSOLIDATED BALANCE SHEET 30 APRIL 2007 2007 2006 As restated Note £ £FIXED ASSETSIntangible assets 11 1,648,604 1,942,193Tangible assets 12 2,899,897 927,837 ------------ ------------ 4,548,501 2,870,030CURRENT ASSETSDebtors (including £3,299,945 due after more than one 14 20,995,202 10,222,116year (2006: £1,389,647))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 RESERVESCalled-up share capital 20 375,995 373,294Share premium account 21 13,777,240 13,576,979Profit 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 thedirectors 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 FINANCEInterest received 165,627 288,796Interest paid (16,699) (575)Interest element of finance lease rental payments (5,055) (10,896) ------------ ----------NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND SERVICINGOF FINANCE 143,873 277,325 TAXATION (2,156,033) (1,201,778) CAPITAL EXPENDITUREPayments 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) FINANCINGNew bank loan taken up 1,700,000 -Issue of ordinary share capital 202,962 124,627Capital 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 4,104,178Amortisation 314,043 312,476Depreciation 486,469 288,785Loss on disposal of fixed assets 133,228 1,483Increase in debtors (10,773,086) (4,903,667)Increase in creditors and other provisions 288,066 721,679Foreign 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 69,295Cash 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 thecompany's statutory accounts for the year ended 30 April 2007 or 2006, but isderived from those accounts. Statutory accounts for 2006 have been delivered tothe Registrar of Companies and those for the year ended 30 April 2007 will bedelivered to the Registrar of Companies shortly. The auditors have reported onthose accounts; their reports were unqualified and did not contain statementsunder the Companies Act 1985 (S.237(2) or (3)). This financial information has been prepared on the basis of the accountingpolicies set out in the most recently published set of annual financialstatements, 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 IVAbusiness. As a consequence of this review, and to reflect the current consensusview on best practice application of UITF 40, the group has revised its Turnoveraccounting policies. The group will recognise revenue from IVA fees once approval for an IVA has beenobtained at the meeting of creditors, rather than on issue of a finalised IVAproposal to the debtor, with a provision for those cases that may not beapproved at the meeting of creditors. This adjustment, treated as a prior yearadjustment, increases Turnover and retained profit in 2007 by £29,178 and£41,811 respectively (2006 decrease of £1,144,295 and £801,006) and decreasesAccrued Income by £3,177,724 (2006 : £3,206,902) and decreases Net Assets withinthe Balance Sheet by £2,203,272 (2006 : £2,244,832) at 30 April 2007. As aresult, 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 IVAarrangement, the group has revised its accounting policy to recognise revenueduring the life of the IVA based upon the fair value of the service providedrather than on invoicing. Fair value for this purpose is based upon thatproportion of the anticipated revenue on a case which is represented by thevalue 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 in2007 by £1,022,602 (2006 : £742,244) and increases Accrued Income and Net Assetswithin 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 thecorporation tax liability of £746,133 (2006 : £439,352). The first prior year adjustment also serves to decrease the balance on theprofit and loss reserve at 1 May 2005 by £1,443,825. The second prior yearadjustment increases the profit and loss reserve at 1 May 2005 by £505,584 togive 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 14,745,664Accrued 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 17,578,522Accrued 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 21,883,8282007Accrued income (3,177,724) 2,487,109 (690,615)Accruals 30,192 - 30,192Corporation 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) 3,266,219Change in revenue recognition - pointof recognition (1,144,295) (1,144,295) 343,289 (801,006)Change in revenue recognition - basedupon fair value 742,244 742,244 (222,674) 519,570Equity 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 ofthese adjustments is £757,380. Share based payments The Group has applied the requirements of FRS20, Share based payments. Inaccordance with the transitional provisions, FRS20 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested at 1 May2006. For year ended 2006 the change of policy has resulted in a net decreasein the profit for the year of £40,228 and for year ended 2007 the net decreasein the profit was £44,245. The share based expense has been included inadministrative expenses in the profit and loss account with the credit entry toequity. 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 period at 30% 2,534,876 1,401,930Deferred taxation charge - origination and reversal of timing differences 76,700 30,720 ------------ ------------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 islower/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 1,313,162Expenses not deductible for tax purposes 211,004 77,370Differences 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) 47,054Share 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 ofordinary shares in issue during the year of 37,438,505 (2006: 37,143,181). Thecalculation 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 ofordinary shares of 39,005,067 (2006: 38,185,719). The calculations of earnings per share are based on the profit for the financialyear 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 37,143,181Potential 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 theforthcoming AGM on 3rd August 2007. 5. RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS 2007 2006 (As restated) £ £ 6,510,337 2,944,555 Profit for financial yearDividends (1,683,324) (557,988)Equity based share payments 44,246 40,228Exchange rate differences (11,534) -New equity share capital subscribed 2,701 3,802Net premium on new share capital subscribed 200,261 120,825 ----------- ----------- 5,062,687 2,551,422Opening shareholders' equity funds 16,358,845 13,807,423 (originally £17,578,522 before deducting prior year adjustment of£1,219,677) ----------- -----------Closing shareholders' equity funds 21,421,532 16,358,845 ---------- ----------- To view the full text of this press release including graphs, paste thefollowing link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/0070z_-2007-6-26.pdf END This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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