Final Results

Claims Direct PLC 26 June 2001 For Immediate Release 26 June 2001 Claims Direct plc Preliminary Results for the Year Ending 31 March 2001 Claims Direct plc ('Claims Direct'), the premier UK personal injury compensation company, announces its preliminary results for the year ended 31 March 2001. Summary - Turnover up 65% at £65.9m (2000: £40.0m) - Underlying operating profit* £6.8m (2000: £11.7m) - Loss before tax £20.2m (2000: profit £10.1m) - Adjusted earnings per share*: 1.8p (2000: 5.1p) - Total dividend of 0.5p for the year - no final dividend - Year-end cash balances £23.2m of which £11.6m is available for general working capital purposes (2000: £5.1m) - Number of accepted cases up 58% to 48,914 (2000: 30,981) - Cases in progress at 31 March 2001 70,589 (2000: 36,310) * Before exceptional items, amortisation of goodwill and interest - ends - An analyst meeting will be held today at 9.30 a.m. at Golin/Harris Ludgate, 111 Charterhouse Street, London, EC1M 6AW. For further information please contact: Claims Direct plc (on 26th June) 0207 324 8888 Paul Doona, Managing Director thereafter 01952 284839 David Gravell, Chief Operating Officer Web Site www.claimsdirect.com Golin/Harris Ludgate Tel: 0207 324 8888 Reg Hoare/Robin Hepburn Statement from the Board Following a year of significant growth in 1999/2000 and after announcing excellent results for the six months to 30 September 2000, these overall results for 2000/2001 are very disappointing. As indicated in our year-end trading statement of 28th March 2001, the results show a pre-tax loss of £20.2m after the charging of exceptional items and amortisation of goodwill, compared with a profit last year of £10.1m. Whilst the underlying operating profit for the year was £6.8m (2000 £11.7m) the second half saw an underlying operating loss of £6.9m. As is explained more fully in the Managing Director's review and financial report, significant and challenging action will continue to be taken. Dividend The company paid an interim dividend to shareholders in January but having regard to the results for the year as a whole, your board considers that the payment of a final dividend is not appropriate. Strategy As the company entered its last financial year the strategy was to strengthen its market position and prepare for flotation in July 2000. Staff levels and the number of claims managers and solicitors on our legal panel were built up to meet increasing consumer demand. The company was successfully floated and client demand continued to grow. In support of its mission to provide access to justice to as many people as possible, a programme of training and accreditation was rolled out to all claims managers and panel solicitors. In this way the company set out to establish an industry standard. The other prime concern was to make improvements to the business model. In particular, enhancements to the insurance product, Claims Direct Protect, were sought in order to ensure that successful clients always received a minimum level of compensation. Unfortunately, the adverse and largely ill-informed media comment in relation to the recoverability of insurance premiums, held up the launch of this initiative until towards the end of the financial year. As stated in the Operational Review, the principle of recoverability now appears to have been established, leaving open the question of the 'reasonableness' of the premium. A successful outcome to this process remains a key issue. Adverse media comment The company and the claims management industry, in general, has suffered considerably from adverse media comment. The attention the company received was largely inaccurate and sensationalised but caused severe damage to its reputation, and, as a consequence, the level of its case load. We have learnt to our cost that once misinformation enters the public domain it is very difficult to counter its effects. It has always been our purpose to protect those who have suffered genuine injury rather than promote a compensation culture. For this reason we set aside significant funds in order to make ex gratia payments to clients who took out policies before 1 April 2000, when it became clear that their premiums would not be recovered. So much has occurred in recent months that it is easy to forget that as recently as December 2000, Claims Direct received the CBI/Real Business Award as the Company of the Year. Board changes During the year there were several changes to our main board. In December 2000, the Chairman relinquished his executive duties and became Non-Executive Chairman. In February and March respectively, Paul Rew, Legal Director and Company Secretary, and Roger Plantier, Marketing Director departed. Both have gone on to new challenges after assisting us through the company's flotation and subsequent period. Following the year-end, Paul Doona was appointed Managing Director whilst continuing to exercise his existing duties as Finance Director. Colin Poole, former Chief Executive became Non-Executive Deputy Chairman. David Gravell Chief Operating Officer joined us from Zurich Insurance in November 2000. Appreciation The board is grateful for the very hard work put in by our staff during both the period of business growth that characterised the first half of the year and the difficult trading conditions we faced in the second half. We also wish to thank the solicitors on our legal panel, our claims managers and other business partners for their hard work and fortitude in difficult times. Current Trading and Prospects The number of accepted cases has continued to decline since the year-end resulting in operating losses being sustained in the new financial year. It is not yet possible to ascertain at what level the number of accepted cases will stabilise. Accordingly, we are continuing the process of aligning the operational base and overhead structure to lower volumes of business. Inevitably, this year has taught us lessons. The setbacks that we have experienced have forced us to assess and tackle our weaknesses, reconsider our operations and make appropriate changes. The Managing Director's Review and the Operational Review that follow explain the results of these deliberations and the plans we have laid for the future. The changes and innovations that we are implementing are necessary steps which we need to make in order to restore our reputation and rebuild our market strength, as we seek to return the company to profitability in due course. Managing Director's Review and Financial Report A year ago we were preparing for the flotation of the company and faced the challenge of rapidly rising demand for our product. Our strategy was a relatively narrow one driven by the need to meet the phenomenal growth in demand while trying to ensure that any competition had little or no chance of catching up. Subsequently, as the Board reports, we were dogged by adverse publicity. And while a number of competitor companies have fallen foul of the same bad publicity, we do now face serious competition and our market share has reduced. Our current challenge is to regain lost ground by emphasising the quality of our service and product. In this review I will focus on matters that underpin our strategy and then present my financial report. David Gravell, Chief Operating Officer then provides a review of operations. Appropriate change My determination and that of all our staff is to rebuild our leadership in the market and to demonstrate that Claims Direct stands for quality, integrity, efficient service and, above all, delivery of the best deal in terms of compensation to our clients. In order to do this, we have re-engineered the core of our business operations, and are addressing the very important aspect of branding and reputation. We intend to develop new products outside the realm of personal injury compensation, and are also focusing attention on the relationship with our business partners to strengthen co-operation in taking the business forward. These changes, and the changes that have been made to the main board, reflect the evolution of the existing business and emphasise our increased focus on operational issues. They also provide a platform upon which to consider future strategic opportunities. Strengthening image and reputation With hindsight it is clear that while we were extremely successful in marketing the Claims Direct brand name, primarily through television advertising, the brand itself meant little to our target audience over and above a way of accessing compensation. We did not build the brand and develop a more rounded notion of what Claims Direct stood for in the process. As the events of the second half of the year showed, brand name recognition is not enough. We have always had a good story to tell concerning the ultimate aim of our business, which is to provide access to justice for as many people as possible. Each refinement we have made to our business model was geared to this end but we are aware that we did not maximise the opportunities to promote these developments and successes through a co-ordinated marketing programme. Looking forward We are continuing to pursue improvements in our business model to seek to ensure that clients receive the best possible deal. We also intend to introduce other, highly innovative products related to legal services but no longer exclusively concerning personal injury. Our vision is to provide consumers in both domestic and business markets with a range of products which empower individuals to find solutions to various legal and financial problems. These products are likely to be developed as joint ventures. I wish to reiterate the Board's appreciation for all the hard work put in by Claims Direct staff at every level during the last year, and by our business partners throughout the UK. Despite set backs which have affected us all, I remain determined to rebuild our market share, leadership and good name in the UK. In time, I believe that innovative products will add to improving fortunes. Financial Report Results Group turnover for the year to 31 March 2001 was £65.9m, representing an increase of 65% on the previous year (£40.0m). Underlying operating profit, the definition of which is explained below, was £6.8m. This compares with £11.7m in the previous year. The loss before tax for the year was £20.2m (2000 profit, £10.1m). Underlying Operating Profit The table below provides shareholders with a measure of underlying profit or loss after adjusting for exceptional items: Six months to Six months to Year to Year to 30 Sep 2000 31 Mar 2001 31 Mar 2001 31 Mar 2000 Profit/(loss) before tax 10,309 (30,519) (20,210) 10,107 Interest (receivable)/ payable (689) (1,096) (1,785) 297 Goodwill 612 3,049 3,661 968 Exceptional costs: Employee costs 1,611 (458) 1,153 350 New insurance arrangements - 16,584 16,584 - Ex-gratia payments 937 3,351 4,288 - Payments to potential litigants 976 972 1,948 - Closure of Claims Direct Retail - 1,196 1,196 - -------- -------- -------- -------- Underlying operating profit/(loss) 13,756 (6,921) 6,835 11,722 ===== ===== ===== ===== Exceptional costs Further details of the exceptional costs are as follows: * Employee costs totalling £1.1m relate to flotation bonuses paid to directors and staff following the company's listing of £0.5m and national insurance paid by the company on share options exercised by company staff of £0.6m. * Additional premiums of £16.6m payable on existing business under revised insurance arrangements. * Ex gratia payments in respect of clients who had taken out Claims Direct Protect policies before 1 April 2000 totalled £4.3m. * Payments made to potential litigants totalled £1.9m. * Closure of the Claims Direct Retail operation at a cost of £1.2m Interest Net interest received in the year was £1.8m. This compares with net interest payable in the year to 31 March 2000 of £0.3m and results from the net cash position which the group has enjoyed since its flotation in July 2000, as well as the interest receivable from client loans which the group has funded. Corporation Tax The effective tax rate on the group loss before tax is 15%. This is lower than the basic rate due, primarily, to the disallowance for tax of the amortisation of goodwill and unrelieved losses that will be carried forward for set off against future trading profits. As a consequence of the company's results, the profit and loss account contains a taxation credit. Corporation tax paid on account in respect of 2000/2001 (£2.9m) was recovered subsequent to the year-end. Cash Despite the level of losses in the second half of the year, the company ended the year with cash balances of £23.2m, of which £11.6m is held in a restricted account, leaving free funds of £11.6m. Shareholders' Funds Shareholders' funds increased to £33.9m from £3.4m. Before the flotation in July 2000 the number of ordinary shares in issue in the company was 159.7 million. The number of ordinary shares in issue now amounts to 193.9 million. Flotation In July 2000, the Claims Direct Group was listed on the London Stock Exchange, placing a total of 27.8 million new shares, largely with institutional shareholders. The group raised £48.5 million from the proceeds of the flotation, thus strengthening the balance sheet. The detailed cash flow statement shows the application of these funds in the year to 31 March 2001. Significant expenditure included the acquisition of the claims vetting operation of Poole & Company, which has now been absorbed into the business. Flotation proceeds also enabled the company to provide loans directly to clients, facilitating the transfer from Investec Bank, the initial funder of client loans, to First National Bank. New insurance arrangements Following a period of intensive negotiation we were delighted to announce, in March 2001, that we had completed a three-year, long-term insurance agreement with existing and new insurance underwriters at Lloyd's. This agreement is subject to regular review but provides the company with additional certainty for the continuation of the business along with enhanced protection and security for its clients. Following the launch of the new agreement the margin on accepted cases which had been significantly reduced in the second half of the year, was substantially restored. Litigation In our half-year statement we reported progress on the issue of litigation with a number of former franchisees. This has been substantially dealt with in a way which will have modest net cost to the company. Arbitration proceedings have commenced in respect of a further 25 franchisees. The amounts claimed totalled £16.6m but will be vigorously defended. The legal advice given to the board is such that the board believe these claims to be substantially exaggerated. Accordingly the board do not believe it is possible to reliably quantify the likely financial effect of these actions, and are unable to make a realistic assessment as to the likely impact on the group's future costs. Corporate Governance The company has fully embraced the objectives of good corporate governance and has taken steps to ensure that it complies in full with the recommendations of the Turnbull committee. Your board believes in maintaining high standards of corporate governance and intends to ensure that the company always conducts business in accordance with best practice. Paul Doona Managing Director Operational Review Since joining the company, I have assumed responsibilities for the day-to-day liaison with panel solicitors and the franchise network, for overseeing the re-engineering of core business operations, and for leading discussions with the insurance industry and the legal profession concerning the recoverability of insurance premiums. Improved core products During the last financial year, all these operational areas hinged on the effectiveness of the company's core post-accident insurance policy, Claims Direct Protect, and on the business model that made it work. Progress with developing the core business product and in making refinements to the business model were slowed considerably during the year, primarily as a result of the factors outlined in the Managing Director's Review. Nevertheless, by the end of the financial year we had developed and launched an improved version of the Claims Direct Protect insurance policy. Our upgraded version of Claims Direct Protect ring-fences the first £1,000 of the damages awarded, ensuring that at least this much is restored to clients who win compensation. The product is of course subject to the normal limitations in insurance policies, and interest may still be required to be paid by the client. This product is a significant improvement on its predecessor and I believe that it offers one of the best possible deal to claimants. As with the previous policy claims are vetted thoroughly before they become accepted, thereafter, a claimant loses nothing if his or her case is unsuccessful in achieving compensation. Establishing recoverability We are playing a full role in the initiatives that are taking place following the Court of Appeal decision in Callery v Gray to resolve the issue of premium recoverability. Indications are that the principle of recoverability is being accepted within the insurance industry. Nevertheless, we have prepared a number of test cases, which we will pursue through the courts if necessary, in order to confirm the principle of the recoverability and protect our clients' position. Re-engineering business operations The re-engineering to which we have referred involves the creation of five new multi-disciplinary teams based at our headquarters in Telford. Each team handles claims associated with a specific region of the UK which are progressed by claims managers and solicitors within this region. Previously, we had a number of departments, each with a separate function and all of them handling claims on a nationwide basis. We also had a system in which a client and his solicitor were often located far apart. Within the new system the teams are made up of staff from the former departments working closely together to ensure complete and focused attention on the progress of claims. For the first time we have a means of comparing team performance and monitoring progress. This new structure has also improved customer care, through closer communication between all parties involved in the process of the claim. The franchise network During the year, as levels of business reduced in the face of competition and adverse publicity, we have had to trim our sails, in particular reducing expenditure on marketing. It also became clear that the business could not support the number of franchises, which reached a level of approximately 370. We therefore put together an exit package for franchisees. To date, approximately 90 franchisees have taken the package or agreed to take it. By the end of the current financial year there will be significantly fewer claims managers than at present, and the revised network will represent a core of those intent on building their businesses. The retail sector By the end of December 2000 we had established 17 Claims Direct retail outlets as a pilot programme, and had been monitoring their subsequent performance. The factors impacting on our core business, mentioned above, also affected these outlets and there was some concern among franchisees that the shops represented unwanted local competition. The outlets were also limited in their level of activity because they offered only one product. As a result, we took the decision to close them and by this action we reduced our headcount by 49. The principal of developing a retail presence is not totally discounted but the board does not consider the market to be right at present, at least until new products have been successfully launched. Consolidating strengths I am confident that product enhancements, further refinements to the business model and the re-engineering of headquarters operations will strengthen our existing business. David Gravell Chief Operating Officer Consolidated Profit and Loss Account for the year ended 31 March 2001 2001 2001 2001 2000 2000 2000 Before Before Except- Except- Except- Except- ional ional ional ional Items Items Total Items Items Total Notes £'000 £'000 £'000 £'000 £'000 £'000 Turnover - Continuing operations 64,466 - 64,466 39,964 - 39,964 - Acquisition 1,388 - 1,388 - - - -------- ---- ------ ----- ------ ------ - Total 1 65,854 - 65,854 39,964 - 39,964 Cost of sales 2 (48,185) (22,820) (71,005) (22,215) - (22,215) ----- ----- ----- ----- ----- -------- Gross profit/(loss) 17,669 (22,820) (5,151) 17,749 - 17,749 Administrative expenses (12,023) (4,821) (16,844) (6,995) (350) (7,345) ------ ------ ------ ----- ------- ------- Operating profit before amortisation of goodwill 6,835 (25,169) (18,334) 11,722 (350) 11,372 Amortisation of goodwill (1,189) (2,472) (3,661) (968) - (968) ------ ------ ------ ------- ------ ------- Operating profit/(loss) - Continuing operations 4,752 (27,641) (22,889) 10,754 (350) 10,404 - Acquisition 894 - 894 - - - ----- ------ ------ ----- ------- ------- Total 5,646 (27,641) (21,995) 10,754 (350) 10,404 ------ ------ ------- ----- ------ Net Interest receivable/ (payable) 1,785 (297) ----- ------ (Loss)/profit on ordinary activities before taxation (20,210) 10,107 Tax on (loss)/profit on ordinary activities 3,027 (3,457) ------- ------ (Loss)/profit on ordinary activities after taxation (17,183) 6,650 Equity dividends 3 (963) (2,858) ------ ------- Retained (loss)/profit for the year (18,146) (3,792) ======= ======= (Loss)/earnings per ordinary share - Basic 4 (9.4)p 4.2p - Diluted 4 (9.4)p 4.2p - Adjusted 4 1.8p 5.1p Dividend per ordinary share 0.5p 47.8p Consolidated Balance Sheet as at 31 March 2001 2001 2000 £'000 £'000 Fixed assets Intangible assets 9,800 3,472 Tangible assets 958 466 Investments 43 - ---------- --------- 10,801 3,938 --------- --------- Current assets Debtors 32,671 19,103 Investments 10,804 - Cash at bank and in hand 23,240 5,059 ---------- ---------- 66,715 24,162 Creditors : amounts falling due within one year 10 (33,925) (17,450) Net current assets 32,790 6,712 --------- --------- Total assets less current liabilities 43,591 10,650 Provisions for liabilities and charges (9,828) (7,296) ---------- ---------- Net assets 33,763 3,354 ====== ====== Capital and Reserves Called up share capital 1,926 94 Share premium 48,223 - Merger reserve 265 401 Profit and loss account (16,651) 2,859 ---------- ---------- Equity shareholders' funds 33,763 3,354 ====== ====== Consolidated Cash Flow Statement for the year ended 31 March 2001 2001 2000 Notes £'000 £'000 £'000 £'000 Net Cash (outflow)/inflow from operating Activities 5 (4,907) 4,813 Returns on investments & servicing of finance Interest received 1,693 44 Interest paid (755) (341) -------- -------- Net cash inflow/(outflow) from returns on investments and servicing of finance 938 (297) Taxation (2,875) (76) Capital expenditure Purchase of tangible fixed assets (1,442) (426) Acquisitions and disposals Poole & Company vetting operations (9,789) - Deferred consideration in relation to acquisition in previous period (2,028) - Equity dividends paid (1,734) (1,605) -------- -------- Net cash (outflow)/inflow before use of liquid resources and financing (21,837) 2,409 Management of liquid resources Increase in short term debt (7,378) (4,259) Current asset investments (10,804) - ---------- -------- Net cash outflow from management of liquid resources 6 (18,182) (4,259) Financing Issue of ordinary shares (net of costs) 48,552 - Decrease in bank loans (8) (8) Capital element of finance lease payments (6) (9) Increase in invoice discounting facility 2,358 3,144 Net cash inflow from financing - 50,896 - 3,127 -------- -------- -------- ------ Increase in cash 6 10,877 1,277 -------- -------- 1 Turnover Turnover, which excludes value added tax, principally represents the amounts invoiced upon acceptance of each individual claimant's case by a member of the panel of solicitors and, where applicable, completion of a satisfactory proposal form in connection with an after the event insurance policy to provide insurance to the claimant in respect of the costs of the claim. All other turnover is recognised as it is earned and is, in general, taken to accrue evenly over the expected life of each case. 2 Cost of sales Cost of sales comprises the fees payable to franchisees and other infrastructure costs, including marketing. 3 Dividends An interim dividend of 0.5p was paid. The directors recommend that no final dividend is paid. 4 (Loss)/earnings per ordinary share Basic and diluted earnings per share, the latter which allows for the exercise of outstanding share options are calculated by dividing the loss attributable to ordinary shareholders of £17,183,000 (2000:profit of £6,650,000) by the weighted average number of ordinary shares. In the case of basic earnings per share, the weighted number of ordinary shares, excluding the shares held by the long-term share incentive scheme which are held by the company, totals 183,160,856 (2000:159,706,993) and for diluted earnings per share, totals 183,160,856 (2000: 160,069,997). Adjusted earnings per ordinary share before amortisation of goodwill, interest and exceptional items is calculated by adjusting the (loss)/profit attributable to ordinary shareholders by the after-tax effect of those items (£20,388,600) (2000: £1,420,900) and then dividing the adjusted earnings by the weighted average number of ordinary shares (183,160,856) (2000: 159,706,993). 5 Reconciliation of operating (loss)/profit to net cash (outflow)/inflow from operating activities 2001 2000 £'000 £'000 Operating (loss)/profit (21,995) 10,404 Depreciation charge 946 89 Loss on sale of fixed assets 3 15 Amortisation of goodwill 3,661 968 (Increase) in debtors (9,690) (15,197) Increase in creditors 17,803 6,756 Increase in provisions 4,365 1,523 UTIF 17 charge - 255 -------- ------- Net cash (outflow)/inflow from operating activities (4,907) 4,813 ===== ===== 6 Reconciliation of increase in net cash flow in net cash / (debt) At 1 April At 31 March 2000 Cashflow 2001 £'000 £'000 £'000 Cash at bank and in hand 800 10,803 11,603 Overdrafts (74) 74 - -------- -------- -------- 726 10,877 11,603 -------- -------- -------- Debt due within one year (3,848) (2,350) (6,198) Finance leases (6) 6 - -------- -------- -------- (3,854) (2,344) (6,198) -------- -------- -------- Liquid resources 4,259 18,182 22,441 -------- -------- -------- 1,131 26,715 27,846 ===== ==== ===== 7 Statement of total recognised gains and losses For the year ended 31 March 2001 2000 (Loss)/profit for the financial year (17,076) 6,650 Prior year adjustments - (1,939) ---------- --------- Total gains and losses recognised in the period (17,076) 4,711 ====== ====== 8 Exceptional items Full details of the exceptional costs can be found on pages 6 and 7 of the financial report. 9 Merger accounting The combination with Medical Legal Support Services Limited has been accounted for as a merger and accordingly the financial information for the current year has been presented as if Medical Legal Support Services has been a subsidiary of the company throughout. 10 Litigation Note for inclusion in provisions note to the accounts At 31 March 2001 a subsidiary company, Claims Incorporated Plc, had received notification from approximately 10 franchisees of their intention to issue proceedings for breach of contract and misrepresentation. Whilst full particulars of claim have yet to be detailed to the company the total claimed is approximately £5.7m. These actions should they proceed will be vigorously defended. The directors believe based on legal advice and in line with the company's experience of concluding claims of this type, that they may be concluded at amounts substantially below those claimed. Note for inclusion in contingent liabilities note to the accounts Arbitration proceedings have been commenced in respect of a further 25 franchisees. The majority of these claims, which total £16,574,425 were notified to the company prior to the year end. The actions will be vigorously defended. Following advice from the company's legal advisers, the Directors believe that it is not possible to reliably quantify the likely financial effort of these actions in current circumstances, and on this basis, are unable to make a realistic assessment as to the likely impact on the group's future costs. 11 Post Balance Sheet Events Certain past and present executive directors of the company have received notice before action from three shareholders in respect of their intention to pursue an action against the directors under Section 459 of the Companies Act 1985. Should the claim proceed and be successful, the costs of such action would be borne by the company. The board does not consider, however, that such costs are likely to have a significant impact on the Group's financial position. 12 Financial information The preliminary results for the year ended 31 March 2001 are unaudited. The financial information set out in the announcement does not constitute the group's statutory accounts for the years ended 31 March 2001 or 31 March 2000. The financial information for the year ended 31 March 2000 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either Section 237 (2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 March 2001 will be finalised on the basis of financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies in due course. The company's report and accounts will be posted to shareholders by 31 July 2001.

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