Interim Results

Claims Direct PLC 20 November 2001 CLAIMS DIRECT PLC INTERIM RESULTS for six months ended 30 September 2001 Highlights * Underlying Operating Loss* of £8.5m (2000: £13.8m profit) * Exceptional costs of £3.6m (2000: £3.5m) * Cash balances of £16m (2000: £43.2m) of which £3.1m is available for general working capital purposes * Number of accepted cases: 9,337 (2000: 30,388) * Number of cases in progress: 69,077 * New management team now focused on business re-engineering and returning the business to profitability * before exceptional costs, amortisation of goodwill and interest Commenting on the results, Ronnie Henderson, Chief Executive said: 'Looking ahead, I believe that the modifications and improvements being made to our business model should provide the platform from which Claims Direct can re-establish itself as the market leader and return to profitability. The new business model will allow the Company to break even with significantly fewer cases per month and this together with increased internal efficiency gives us cause for greater optimism.' For further information, please contact: Claims Direct plc 01952 284800 Ronnie Henderson, Chief Executive www.claimsdirect.com Golin/Harris Ludgate 020 7324 8888 Reg Hoare/Trish Featherstone Photographs available at www.newscast.co.uk CLAIMS DIRECT PLC INTERIM RESULTS for six months ended 30 September 2001 Overview As has been widely reported, the last six months of trading have been severely weakened by external influences, which has resulted in a poor performance by the Company during the period. As you will be aware, the Company endured a hostile take-over bid by Barker Securities Limited, whose principal shareholders were Claims Direct's two founders and former Executive Directors. The bid was eventually successful, but a subsequent agreement with SWL Holdings Limited, a company owned by Simon Ware-Lane, led this company to acquire just under 30% of Claims Direct's issued share capital, with options over the remaining 42% held by Barker Securities Limited. The bid process lasted for three months and this period of uncertainty restricted the developments and modifications to our organisation that were under consideration at that time. I am pleased to report that a number of the initiatives planned, are now complete, whilst others continue to be developed. I will address these later in this report. In short, however, our immediate aim is to restore both the Company's reputation and profitability. Uncertainties affecting the business In my review below I outline various uncertainties relating to the quantum of recoverability by successful litigants of the 'after the event' ('ATE') insurance premium. The litigants' recovery of the premium in turn allows him to repay a loan which the Company is guaranteeing. Whilst the principle of recoverability has been established the quantum has not been agreed with the insurance industry or the courts. The eventual resolution of this matter is dependent on either the outcome of legal test cases or negotiated settlement. These accounts include full provision for the estimated costs of future loan shortfalls on existing business and an estimate as to the amount recoverable of £1.3 million. Total debtors of £16.2 million include amounts of £10.4 million that are overdue. We are actively pursuing recovery of all amounts now due, and initial discussions with a significant proportion of our debtors have encouraged us to believe that these debts will be recovered within appropriate timescales at the amounts they are carried in these interim results. Provisions have been made as appropriate where doubts do exist as to recoverability. The effects of these uncertainties are, first, it is not possible to estimate the exact amounts which will be recoverable, and, secondly any adverse impact this may have on our cash flow. In addition the Company is currently negotiating additional funding, to be secured on current asset investments, in order to finance working capital requirements and the recent exit package offered to franchisees. The directors are confident of a successful outcome to the current negotiations. Finally, I speak later of the move to a new business model. Our ability to effect the changes necessary to implement this model is vital to the future long-term prospects and profitability of the business. The directors have prepared these interim financial statements on the going concern basis after having carefully assessed the various uncertainties referred to above. The independent review performed by PricewaterhouseCoopers also refers to these uncertainties. Financial results In the six months to September 2001, Claims Direct reported an underlying operating loss of £8.5 million. Delays in the anticipated development programme culminated in reduced turnover and exceptional costs of £3.6 million. Cash balances as at 30 September 2001 stood at £16 million, with £12.9 million held in restricted accounts, leaving a free cash balance of £3.1 million. No interim dividend is proposed (2000: 0.5p). Operating review Delays to the business re-engineering process and continued media comment in relation to premium recoverability have hindered the operational performance for the first six months of the year. The number of cases accepted during the period totalled 9,337 (2000: 30,388), of which 6,142 were covered by the Claims Direct Protect policy. As at 30 September 2001 there were 69,077 cases in progress. As referred to previously, another consequence of the uncertainty in the market has been the extended time taken for the settlement of cases, which has resulted in the slowing down of receivables. Your board is actively pursuing this matter to mitigate the impact on future cashflow. One particularly pleasing area to report on is marketing activity, which has shown efficiency improvements of 28%, compared to the six months to March 2001, and which continues to attract the same level of customer calls, despite the reduced marketing expenditure of £5.5 million. This confirms the strength and awareness of the Claims Direct brand. However, in relation to premium recoverability, a great deal of effort is still being focused on dealing with this issue, as a resolution is not only fundamental to Claims Direct, but also the personal injury market as a whole. I would consider two aspects of this in a little more detail: Premium Recoverability - Callery v Gray Your Company was asked to provide evidence in a personal injury test case, Callery v Gray, in order to assist the Court of Appeal in a major review of the 'after the event' insurance market and to provide certainty within the industry moving forward. However, in practice, the findings were predominantly limited to the circumstances of the case in question, which found that a basic policy of £350 plus a success fee of 20% was not unreasonable. The policy itself was limited and excluded additional areas of cover provided by Claims Direct, although the outcome of the test case was seen as a positive result from the point of view of ATE insurers, as it reiterated the principle of recoverability enshrined in the Access to Justice Act. However, the downside was that both Claims Managers' costs and those associated with ring-fencing client damages were deemed irrecoverable. The business model has been amended accordingly. In conclusion, a number of issues relating to recoverability still remain uncertain and a resolution of these is being pursued both by way of a series of test cases and also by direct negotiation with the insurance industry. Premium Recoverability - Test Cases We are currently running a basket of test cases for consideration by the Supreme Court Costs Office. We selected a variety of cases, including both those where our premium could be considered to be either inexpensive or dear, thus recognising that our 'one size fits all' policy will inevitably be expensive in some cases and excellent value in others. Following the directions hearing considered on 1 November, we anticipate that our test cases will be fast-tracked through to the Court of Appeal. Already one of the test cases has been withdrawn, the insurers having decided to pay solicitors' fees and the premium in its entirety. The insurance premium in this instance was £1,250, illustrating, when compared with the £350 awarded in Callery v Gray, the range of potential outcomes which could arise. In summary, the issue of premium recoverability is denying access to justice for thousands of our customers and other claimants up and down the country. Through our test cases we realistically hope to have a final answer to Claims Direct's position by early 2002. In the meantime, your Company continues to promote discussions with the liability insurers with regard to the backlog of cases where they are preventing recovery. Call centre Earlier this month your company entered into discussions to acquire its own call centre, thus allowing us to take control of the front-end, customer facing facility. However, following the breakdown of talks, it was decided to set-up and develop our own in-house call centre which is expected to be profit and cash positive by the second quarter of 2002. Claimline We are continuing in our discussions regarding the acquisition of Claimline plc. Claimline will bring a powerful, distinct and unique brand which we believe has great marketing potential. Claimline has exceptional relationships with its panel solicitors and underwriters and has earned an excellent reputation with liability insurers. Claimline has recently negotiated major new sources of referrals, which should further bolster case volumes. Together with additional management expertise, experienced and professional business partners and bespoke marketing techniques, this potential acquisition should further enhance the future prospects of Claims Direct. DTI Your company was the subject of an information gathering exercise by the Department of Trade & Industry earlier in the year. We can confirm that no recent communications have been received, although the Directors remain committed to co-operating fully in any further enquiries which might arise. Litigation As previously reported, your company was in arbitration proceedings with a number of ex-franchisees. I am pleased to report that during the current period successful negotiations have resulted in a resolution to this matter in 21 of the 26 cases notified to the company since flotation, at a level of settlement significantly below the amounts claimed. Board changes and appointment of sponsors Since my appointment to the Board of Claims Direct on 6 September 2001, I have spent a considerable amount of time on the recruitment of both Executive and Non-Executive Directors whom I believe would add true value and bring with them professionalism, integrity and a vision for the future prosperity of your Company. I am particularly conscious that we are currently operating outside the remit of the Combined Code, but appointments should be announced soon. I am also in discussions to replace Investec Henderson Crosthwaite as the Company's broker following their resignation at the conclusion of the negotiations between Barker Securities Limited and SWL Holdings Limited. New developments A complete overhaul of the Claims Direct business model is underway. The importance of this initiative is fundamental to the future well-being of the organisation. The re-engineering encompasses all aspects of our business and has been ongoing since October. We are pleased to announce that we are nearing the conclusion of securing new insurance and underwriting arrangements, to provide both the capacity and flexibility that the Company requires. As previously mentioned, following the Callery v Gray ruling, the Company had to act to review the current arrangements with its franchisees. A revised exit programme was offered to all franchisees on 26th October 2001 and over one half have already accepted this offer. The initial net cash outlay under this programme could total £3.3 million. It is envisaged that once the company has re-engineered its operations, some current franchisees will be offered the opportunity to apply to rejoin the Company on amended terms, as the services of Claims Managers will continue to be required. Further opportunities will exist for others to act as referral agents to the company. Underpinning all of the changes stated above, we intend to introduce a range of conditional fee arrangement products in place of our 'one size fits all' policy. This decision has been arrived at following a great deal of analysis, but ultimately the Callery v Gray judgment made amendments to the Claims Direct product necessary. Finally, we are developing a sophisticated Customer Relationship Management system, which will provide an improved, more pro-active service to our customers. It is envisaged that the new business model will go live in the first quarter of 2002. Outlook Full year performance will be materially impacted by the inactivity as a result of the lengthy bid process. Looking ahead to the second half of the year, I believe that the modifications and improvements being made to our business model, together with the inherent level of enthusiasm, skill and commitment amongst all our staff, should provide the platform from which Claims Direct can re-establish itself as the market leader and return to profitability. The new business model should allow your Company to break-even with significantly fewer cases per month and this together with increased internal efficiency gives us cause for greater optimism. Ronnie Henderson Chief Executive 20 November 2001 Interim results for the six months ended 30 September 2001 Consolidated profit and loss account Unaudited Unaudited Audited 6 months 6 months 12 months to to to 30 Sept 30 Sept 31 March 2001 2000 2001 Note £'000 £'000 £'000 Turnover 9,039 42,710 65,854 ---------- ---------- ---------- Cost of sales - before exceptional costs (11,861) (24,249) (48,185) - exceptional costs 1 (2,485) (1,913) (22,820) ---------- ---------- ---------- (14,346) (26,162) (71,005) ---------- ---------- ---------- Gross (loss) / profit (5,307) 16,548 (5,151) Administration expenses - before amortisation of goodwill (5,639) (4,705) (10,834) and exceptional costs - amortisation of goodwill (313) (612) (1,189) - exceptional amortisation of 1 - - (2,472) goodwill - exceptional costs 1 (1,140) (1,611) (2,349) ---------- ---------- ---------- Total administration expenses (7,092) (6,928) (16,844) ---------- ---------- ---------- Operating (loss) / profit (12,399) 9,620 (21,995) Net interest receivable 873 689 1,785 ---------- ---------- ---------- (Loss) / profit on ordinary activities before taxation (11,526) 10,309 (20,210) Tax on (loss)/profit on ordinary - (3,435) 3,027 activities ---------- ---------- ---------- (Loss) / profit on ordinary activities after taxation (11,526) 6,874 (17,183) Dividends - (963) (963) ---------- ---------- ---------- (Loss)/profit for the period (11,526) 5,911 (18,146) ---------- ---------- ---------- (Loss)/earnings per ordinary share - basic 2 (6.0)p 3.9p (9.3)p - diluted 2 (6.0)p 3.8p (9.3)p - adjusted 2 (4.4)p 5.3p 1.7p Dividend per ordinary share - 0.5p 0.5p Interim results for the six months ended 30 September 2001 Consolidated balance sheet Unaudited Unaudited Audited at at at 30 Sept 30 Sept 31 March 2001 2001 2000 Note £'000 £'000 £'000 Fixed assets Intangible assets 9,487 12,610 9,800 Tangible assets 816 1,180 958 Investments 43 623 43 ---------- ---------- ---------- Total fixed assets 10,346 14,413 10,801 ---------- ---------- ---------- Current assets Debtors 24,148 30,311 32,150 Investments 3 9,549 10,535 10,804 Cash at bank and in hand - restricted 12,908 8,262 11,637 3,100 34,948 11,603 - other ---------- ---------- ---------- Total current assets 49,705 84,056 66,194 ---------- ---------- ---------- Creditors: amounts falling due within one year (27,589) (33,784) (33,404) ---------- ---------- ---------- Net current assets 22,116 50,272 32,790 ---------- ---------- ---------- Total assets less current liabilities 32,462 64,685 43,591 Provisions for liabilities and charges (10,211) (6,868) (9,828) ---------- ---------- ---------- Net assets 22,251 57,817 33,763 ---------- ---------- ---------- Capital and reserves Called up share capital 1,940 1,926 1,926 Share premium account 48,223 48,222 48,223 Merger reserve 197 333 265 Profit and loss account (28,109) 7,336 (16,651) ---------- ---------- ---------- Equity shareholders' funds 22,251 57,817 33,763 ---------- ---------- ---------- The interim financial statements were approved by the Board of Directors on 20 November 2001. Interim results for the six months ended 30 September 2001 Consolidated cash flow statement Unaudited Unaudited Audited 6 months to 6 months to 12 months to 30 Sept 30 Sept 31 March 2001 2000 2001 £'000 £'000 £'000 Net cash (outflow)/inflow from operating activities (6,683) 6,160 (4,907) ---------- ---------- ---------- Returns on investments and servicing of finance Interest received 1,161 764 1,693 Interest paid (288) (341) (755) Net cash inflow from returns on investments and servicing of finance 873 423 938 ---------- ---------- ---------- Taxation - (2,074) (2,875) Capital expenditure Purchase of tangible fixed assets (110) (903) (1,442) Purchase of fixed asset investments - (623) - Acquisition Deferred consideration in relation to acquisition in previous period (1,923) (1,000) (2,028) Poole & Company vetting operation - (9,750) (9,789) Equity dividend paid - (590) (1,734) ---------- ---------- ---------- Net cash outflow before use of liquid resources and financing (7,843) (8,357) (21,837) Management of liquid resources Increase in restricted deposits with (1,271) (4,003) (7,378) banks Current asset investments 1,255 (10,535) (10,804) ---------- ---------- ---------- Net cash outflow from management of liquid resources (16) (14,538) (18,182) Financing Issue of ordinary share capital 14 50,052 50,052 Expenses of share issue - (1,500) (1,500) Decrease in bank loans - (5) (8) Capital element of finance lease payments - (3) (6) (Decrease)/increase in invoice (658) 8,573 2,358 discounting facility ---------- ---------- ---------- Net cash (outflow)/inflow from (644) 57,117 50,896 financing ---------- ---------- ---------- (Decrease)/increase in cash (8,503) 34,222 10,877 ---------- ---------- ---------- Reconciliation to net cash Opening net cash 27,846 1,131 1,131 (Decrease)/increase in net cash (8,503) 34,222 10,877 Movement in liquid resources 16 14,538 18,182 Movement in borrowings 658 (8,565) (2,344) ---------- ---------- ---------- Closing net cash 20,017 41,326 27,846 ---------- ---------- ---------- Interim results for the six months ended 30 September 2001 Reconciliation of operating profit to Unaudited Unaudited Audited operating cashflow 6 months 6 months 12 months to to to 30 Sept 30 Sept 31 March 2001 2000 2001 £'000 £'000 £'000 Operating (loss)/profit (12,399) 9,620 (21,995) Depreciation charge 209 189 946 Loss on sale of fixed assets 43 - 3 Exceptional goodwill impairment - - 2,472 Amortisation of goodwill 313 612 1,189 Decrease/(increase) in debtors 8,002 (10,942) (9,690) (Decrease)/increase in creditors (5,157) 6,109 17,803 Increase in provisions 2,306 572 4,365 ---------- ---------- ---------- Net cash (outflow)/inflow from operating activities (6,683) 6,160 (4,907) ---------- ---------- ---------- Reconciliation of movement in net At 1 April 2001 At 30 Sept debt Cash flow 2001 Net cash - Cash at bank and in hand 11,603 (8,503) 3,100 Borrowings - Debt due within one year (6,198) 658 (5,540) Liquid resources - restricted cash balances 11,637 1,271 12,908 - current asset investments 10,804 (1,255) 9,549 ---------- ---------- ---------- 22,441 16 22,457 ---------- ---------- ---------- 27,846 (7,829) 20,017 ---------- ---------- ---------- Reconciliation of movements in shareholders' funds Unaudited Unaudited Audited 6 months to 6 months to 12 months to 30 Sept 2001 30 Sept 31 March 2000 2001 £'000 £'000 £'000 (Loss) / profit attributable to (11,526) 6,874 (17,183) shareholders Dividends - (963) (963) New share capital (net of costs) 14 48,552 48,555 ---------- ---------- ---------- Net (decrease)/increase to shareholders' (11,512) 54,463 30,409 funds Opening shareholders' funds 33,763 3,354 3,354 ---------- ---------- ---------- Closing shareholders' funds 22,251 57,817 33,763 ---------- ---------- ---------- Notes to the accounts 1 Exceptional costs Unaudited Unaudited Audited 6 months 6 months 12 months to to to 30-Sep 30-Sep 31-Mar 2001 2000 2001 £'000 £'000 £'000 (a) Included in cost of sales - ex gratia payments and provisions 667 937 4,288 - costs associated with re-negotiations in relation to franchisee relationships 1,818 976 1,948 - additional insurance premiums - - 16,584 2,485 1,913 22,820 (b) Included in administrative expenses - compromise agreements with former 325 - - employees - cost of hostile take-over defence 815 - - - flotation bonuses - 481 481 - National Insurance paid on share - 654 654 options exercised - closure of Claims Direct Retail - - 1,196 - National Insurance provided on share options not exercised - 476 18 - Impairment of goodwill - 2,472 1,140 1,611 4,821 3,625 3,524 27,641 2 (Loss)/earnings per ordinary share Basic and diluted earnings per ordinary share, the latter of which allows for the impact of the exercise of outstanding share options, are calculated by dividing the loss attributable to ordinary shareholders of £11,526,000 (2000: £6,874,000 profit) by the weighted average number of ordinary shares. In the case of basic earnings per share, the weighted average number of ordinary shares, excluding the shares held by the long term share incentive scheme which are owned by the company, totals 193,589,158 (2000: 175,377,535); and for diluted earnings per share, totals 193,589,158 (2000: 182,850,077). The weighted average number of shares has been adjusted to reflect the bonus element inherent in options exercised in the period. There is no dilution in 2001 due to the losses incurred. Adjusted earnings per ordinary share before amortisation of goodwill, interest and exceptional costs is calculated by adjusting the loss attributable to ordinary shareholders for the after-tax effect of those items (£3,065,000) and then dividing the adjusted earnings by the weighted average number of ordinary shares 193,589,158. 3 Current asset investments Current asset investments comprise loans to claimants and are recoverable on the settlement of cases. 4 Contingent liabilities As disclosed in the annual report for the year ended 31 March 2001, the group has ongoing arbitration proceedings with a number of former franchisees and has become aware of the intentions of a number of current and former franchisees to initiate proceedings against the group. As commented upon in the Chief Executive's statement a resolution to the arbitration proceedings has now been achieved with 21 of the 26 former franchisees. The ten franchisees who notified an intention to start proceeding prior to flotation have yet to notify us of their intentions to withdraw or progress their claim. 5 Events occurring since the balance sheet date As announced on 26th October 2001, the group has made an offer to all franchisees providing them with an opportunity to withdraw from their obligations as franchisees. The offer is subject to the group securing financing for the costs of the packages and remains open until 1st December 2001. To date, over one half of the franchisees have accepted the offer. No account of this has been included within the results for the period, as the group had no legal or constructive obligation at 30th September 2001. 6 Other information (a) The figures for the year ended 31st March 2001 have been extracted from the group accounts for that period. Those financial statements have been delivered to the Registrar of Companies and included an auditors report which was unqualified and did not contain a statement either, under section 237(2) or section 237(3) of the Companies Act 1985. (b) The interim financial statements for the six months ended 30 September 2001, whilst not constituting statutory accounts within the meaning of section 240 of the Companies Act 1985, are prepared in accordance with applicable accounting standards, using the same accounting policies as set out in the group accounts for the year ended 31 March 2001, except for the adoption of Financial Reporting Standard's (FRS's) 17 'Retirement Benefits', 18 ' Accounting Policies', 19 'Deferred Tax'. The adoption of these new standards has not had any material impact on the results as stated. (c) The auditors have carried out a review of the interim financial information and their report is set out below. INDEPENDENT REVIEW REPORT TO CLAIMS DIRECT PLC Introduction We have been instructed by the company to review the financial information set out above and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999 /4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Fundamental uncertainties affecting the business In arriving at our review conclusion, we have considered the adequacy of disclosures made in the financial information concerning fundamental uncertainties relating to the amounts recoverable in respect of loan shortfalls, debtor collection, raising of additional finance and the ability of the company to successfully introduce its new business model The company's ability to continue as a going concern is dependent in large part on its ability to achieve the rate of debtor collection assumed in its cash forecasts, the ability to complete negotiations for additional finance and to successfully implement the new business model.. Details of the circumstances relating to these fundamental uncertainties are described in the section Uncertainties affecting the business contained in the Chief Executive's commentary above. The financial information does not include any adjustments that would result should the above conditions not be met. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2001. PricewaterhouseCoopers Chartered Accountants Birmingham 20th November 2001

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