Announcement of Preliminary Results

3rd Apr 2009 07:00



Embargoed until 7.00am on Friday, 3rd April, 2009

KELLAN GROUP ANNOUNCES PRELIMINARY RESULTS

FOR THE 12 MONTH PERIOD ENDED 31ST DECEMBER 2008

Kellan Group PLC (AIM: KLN.L) (the "Company" and together with its subsidiaries the "Group" or "Kellan"), a leading IT, accountancy, hospitality, leisure and professional services recruitment group, announces its preliminary results for the group for the 12 month period ended 31st December 2008.

Operational and Financial Highlights

2008 was a year of two distinct halves. H1 saw revenue & profits substantially up on the previous year. In H2 we were hit by the global economic downturn. Full year results are significantly ahead of prior year but well down on our expectations.

At year end a non-cash goodwill impairment charge of £5,049,000 has been made against two of the business units acquired to reflect the current economic conditions of the markets in which the businesses are operating.

Loss for the period of £4,456,000 (2007: Loss £1,762,000) with an Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation adjusted to add back onerous lease provisions, restructuring costs, share based payments charges and goodwill impairment) of £2,643,000 (2007: £402,000).

Adjusted cost base to more challenging trading environment. Q1 2009 ends with a reduced headcount from December 2008 of 20%. 

Following the move into the new head office in March 2009 all the remaining synergies promised following the acquisition of Quantica plc have been delivered.

The company has undertaken a significant office consolidation exercise in London, Leeds, Manchester and Altrincham resulting in 19 operational offices, a reduction of 5 in the past year. 

Basic loss per share is 5.1p (2007: Loss 5.4p). Adjusted Earnings per share (after adding back the impairment of goodwill), both basic and diluted, at 0.7p is a significant increase over the prior year (Loss 5.4p).

Operating cash inflow of £3,452,000 (2007: outflow £3,454,000) driven significantly through focused credit control activity. Year end Days Sales Outstanding (DSO) of 39 (2007: 48).

John Bowmer and Tony Reeves, Co-Chairmen of Kellan, commenting on these results said, 

"The 2008 reporting period has been extremely challenging and our strategy has been to focus on our strengths, core business and cost control. Our balance sheet remains strong as a result, and we are well positioned to continue to operate effectively in these challenging market conditions. It's a time of great uncertainty, however we will continue to keep focused and ensure costs are in line with trading during the down turn so we are well positioned to take advantage of new opportunities that will emerge from these difficult times.

"We remain committed to our strategy to grow the Group both organically and by acquisition and we fully expect these challenging market conditions to reveal some exciting opportunities".

Trading Outlook

"The UK recruitment market, as a result of the current very tough economic environment, will be far more challenging than in 2008. While this will put pressure on underlying sales, margins and profits it may also present us with opportunities to develop the Group further. We are ready to pursue the opportunities which may arise.

We are very well positioned for when the market improves and we remain positive about the long term prospects for Kellan." 

Enquiries:

Kellan Group Plc
Anthony Reeves, Co Chairman	020 7268 6200
Will Coker, Chief Financial Officer
Strand Partners
Simon Raggett	020 7409 3494
Angela Peace
Brunswick Group LLP
Anita Scott	020 7404 5959
Helen Barnes

  Co-Chairmen's statement

The past year was a roller coaster ride for Kellan. The first half went extremely well and we posted revenues and profits substantially up on the previous year. We comfortably exceeded both our own and market expectations, but the world economic turmoil that had started in late 2007 with the well documented problems in the financial system, hit employment and the staffing market abruptly in October. We went from being significantly ahead to well below last year in revenues and profits, breaking even in the second half before accounting for one-off onerous lease and restructuring charges and making losses in the last two months of the year. The full year results were way ahead of the previous year but well down on our expectations. 

Operationally Kellan continues to make excellent progress. Synergies promised at the time of the Quantica merger have been delivered. All acquisitions are now integrated and we realised significant cost savings through this process. Back office functions are well on the way to consolidation and the property portfolio, a significant expense for us, has been rationalised so we are paying less rent today than we did in the companies that have been merged to form Kellan. Most importantly, we have signed a new lease on office space in the West End of London that will house several of the brands and the corporate office that will support a much bigger group than the one we have today. At year end a non-cash goodwill impairment charge has been made against two of the business units acquired to reflect the current economic conditions of the markets in which the businesses are operating.

We maintain our strategy to grow our existing brands faster than the market, to gain market share and to enter niche, high margin segments of the staffing market in such sectors as technology, retail, finance and accounting, legal, niche manufacturing and supply chain. Our acquisition programme was thwarted throughout last year by a combination of sellers expecting very high prices and our low share price caused by the, now fulfilled, expectation in the stock market that employment would be hit by the crisis and our sector would see much poorer trading conditions. We will continue to review acquisition opportunities and targets and we are optimistic that we will see lower prices in the coming months, as some companies with good basic businesses and brands come under pressure through poor operations or cash management. Recessionary times are ideal for building foundations of future growth, and we intend to fully capitalize on this opportunity. 

We are particularly focused on the management of cash. Our balance sheet is strong. We paid back £1.8m of our loan and working capital facility during the year and ended with a net debt position of £2.2m with £4.7m headroom on our existing debt facilities. Our credit management is also very effective and at the end of 2008 our days' sales outstanding was an impressively low 39 days. In this credit driven recession we believe that those companies that manage their cash well will be the winners and best able to take advantage of the good times when they return. Whilst this approach has served us well to date, as the market declines we retain close relationships with our bank in monitoring compliance with our borrowing covenants. 

Market conditions have not improved since the end of 2008 and we, along with many others, anticipate an upturn later in 2009. However while we hope for the best, we are planning for the worst. We have embarked on a major cost cutting exercise that has unfortunately involved the reduction of headcount of close to 20% of the existing staff. Redundancies are always unpleasant but in our business over 70% of our costs are personnel expenses so there is no alternative. We will be careful not to cut too deeply and impair our ability to grow when markets improve. As in many businesses, those staffing companies that handle the recession well will gain market share in the downturn and rebound quicker in the upturn. We are a service business and the talent, motivation and sheer hard work of our people is the key to being best of breed. There will always be room for excellent performers at Kellan. 

Our CEO John Rose left us at the end of February 2009 and Tony Reeves is currently Interim CEO. A search, both internally and externally, for his successor is well advanced. It has been very gratifying to receive nearly a dozen unsolicited applications after the announcement of John's departure. We believe a good number of the best people in the industry share our vision and want to be part of Kellan. We thank John for his hard work over the last two years and his contribution to the Group.

We thank all of our people for their dedication and hard work in the last trying year. In poor markets, the rewards are often more difficult to achieve. However we know that hard work now will bear significant fruit in the future. Satisfied existing customers and tenaciously won new customers will eventually reward those that serve them well today. We also thank you our shareholders for your forbearance this year. We believe in the future.

John Bowmer		Tony Reeves
Co-Chairman		Co-Chairman
2 April 2009		2 April 2009

Business Review

In 2008 we continued to execute our stated strategy to build a market leading group of recruitment companies. During the year we saw strong progress in the turnaround and positioning of Berkeley Scott, expansion of the RK Accountancy office network for the first time in five years, an aggressive strategy for growth in RK Supply Chain, expansion of service offerings in our Search and Selection brands, and the continued integration of our support areas and head office following the acquisition of Quantica Plc in 2007. 

However, as the year progressed, and particularly during the final quarter, the rapidly deteriorating economic environment resulted in market conditions becoming noticeably more challenging for the recruitment sector in general and for us at Kellan. Permanent recruitment activity in particular dropped significantly, following the increasingly cautious behaviour of both clients and candidates. This rapidly reduced both our productivity and income and earnings visibility. Temporary placements have on the whole been more resilient but they have not been wholly immune from the downturn.

Despite the significant weakening of the economy, the integration of Quantica and RK enabled the group to show strong growth in Revenue, Net Fee Income (revenue less the cost of wages and fees paid to temporary workers and contractors: "NFI") and EBITA (earnings before interest, tax and amortisation adjusted to add back onerous lease provisions, restructuring costs, share based payments charges and goodwill impairment) for the year and a significant reduction in costs through the delivery of previously promised synergies. Although the business in 2009 faces continuing economic challenges and competitive pressures, we are well positioned to pursue the opportunities that arise in each of our markets, while continually reviewing our cost base. We are confident that the longer term trends which drive growth in professional recruitment will benefit Kellan in the future. The experience and talent of our board and management team, our excellent brands and the strength of our balance sheet, all position us well to deal with the poor economic environment.

Operating Review by Business Unit 

Berkeley Scott

Our change strategy, which began in 2007, produced excellent results for the first half of 2008 until extremely challenging market conditions in the Hospitality market took over and growth slowed considerably. We made strategic decisions to pull out of unprofitable and/or low value business which resulted in us closing our temporary recruitment operations businesses in Birmingham and Leeds. 

As a result of the severe market downturn, our consultant numbers have been reduced from a peak of 110 down to 65 in Q1 2009. We have acted quickly to reduce our cost base in line with trading conditions and we are confident we are staffed appropriately for the year to come. We continue the focus on emphasising the quality of the brand to avoid being seen as a commodity. The brand is 25 years old in 2009, is extremely strong in its market and our continued strategic focus will ensure market share is gained both now and as the economy picks up.

We have started 2009 with a relatively stable average permanent placement fee. We have witnessed a significant reduction in the number of jobs registered and a 1.5% average decline in temporary margin. We recognise this will be a tough year and have already pulled out of the temporary business in Glasgow and we will continue to monitor and reduce the cost base. However we are now well positioned to deliver temporary placements to London, Bristol and Manchester where we are set up and able to deliver efficiently. We are pleased to report that our permanent senior appointments division is performing well. Close customer relationships, excellent customer service and the value of our brand means we are well positioned to effectively deliver to our clients, whatever the market conditions. 

RK Accountancy

RK Accountancy began the year on a high with its first office opening for five years in Warrington. Later on in the year we opened Sheffield and we have further expansion planned for 2009 in which we hope to open at least one new office. 

Financially, the first half of 2008 was a record six months for Net Fee Income but as the second half of the year progressed and the market declined, trading became more difficult. The business ended 2008 with a Net Fee Income up year on year by 4.4% on a like for like basis. Whilst permanent recruitment business was significantly down in the latter part of the year, temporary recruitment was more resilient with a near record number of working temps and an increase of the temporary Net Fee Income from 36% to 41% of the overall business.

2008 saw a substantial investment in technology. The offices were networked for the first time and the role out of a new recruitment system has enabled the business to be run more effectively through more accurate monitoring of KPI performance. A focus on corporate sales meant we gained preferred status with a number of key corporate clients. Staff turnover remained low and the longevity of service of the existing staff members means we are well placed for the future. 

For RK Accountancy 2008 was a year of building foundations and preparing for the growth and the national roll out of the brand in future years. It has a huge potential for expansion and whilst we aim to grow the business nationally, we fully intend to retain a personal service, small flexible teams and a business that can react to ever changing market conditions. 

RK Supply Chain

For RK Supply Chain this was a year of significant change and of new strategic direction for the business. We invested in new staff and in July 2008 we recruited Miles McLeod, an experienced MD into the business. Two further offices were opened in Manchester and Leeds and our North American operations experienced significant growth. In October we launched an interim product and hired two of the market's top interim consultants to lead it. 

A new marketing strategy, launching in April 2009 will re-enforce these changes to the business.

Financially, Q4 saw a major reduction in permanent and temporary requirements with many clients and candidates holding back in light of the economic uncertainty. Whilst we did not see significant NFI growth year on year in 2008 and despite the economic outlook for 2009, we remain optimistic. We are confident in the management team and its ability to capitalise on the platform for growth we have spent the last year building. Supply Chain, Procurement and Logistics remain a key functional area for many businesses regardless of economic conditions and we are confident that we have the best people and a strong offering to deliver on our brand promise. 

RK Search

RK Search is a collection of specialist niche practices recruiting at a senior level. In 2008 we extended our reach by building capability in two new markets, Financial Directors into Venture Capital backed or AIM listed companies and senior operational managers into contact centres. These business units are led by Consultants who are sector experts.

We generated business wins in new areas with companies that trade in major telecommunications and we continued our success as the market leading supplier for particular roles with many of the leading technology outsourcers. We also gained momentum in mainland European markets with our first placements in Spain, Belgium and Sweden, making appointments with clients such as Fujitsu Services.

Results in the first three quarters were good and we met internal expectations. However all markets suffered a slow down in Q4 which negatively impacted full year results. Over the full year, the quantity of our permanent appointments was slightly down by 4% on the prior year but average fee rates were up 4 % on the prior year. 

In 2009 we have taken actions to reduce the cost base but remain committed to seek opportunities for growth when market conditions allow. To this end we have employed a consultant to provide a dedicated focus into mainland Europe, capitalising on gaps in the market and helping provide an international balance to our revenue stream. Early results in 2009 show a modest improvement compared with the final quarter of 2008.

Robinson Keane

Robinson Keane is a small board level, headhunting business based in our Altrincham offices which successfully services the North West of England. 2008 was the first year in a four year growth strategy for the business, which will see it increase in size and extend its offering to companies both nationally and internationally.

The success of the business is based on recruiting senior level consultants, all of whom have operated at CEO level themselves. The budget provides for additional heads in 2009 and we are confident we will attract and hire excellent people. In addition, the quality of the research is fundamental to this business and is delivered through a strong internal dedicated research capability. We will continue to invest in this team as the business grows. 

2008 was a successful year for Robinson Keane. It enjoyed a number of significant assignment wins including a wide variety of board level private sector appointments as well as a number of appointments in the public and health sectors. Its conversion rates continue to improve year on year and the business ended the year having more than doubled its NFI on the prior year. We enter 2009 with a strong pipeline of activity and we are confident that our spread of business will make us relatively resilient to the current economic downturn. 

Quantica Search & Selection

Quantica Search and Selection started 2008 in a very strong position with a positive set of results for the first half of the year and a 13.1% increase at NFI level year on year. However, with the second half of the year came the rapid decline in the manufacturing and retail sectors and it has been a difficult trading period for this division. 

We talked last year about extending our retail offering into Europe and we have continued that focus this year. We have made good progress and are pleased to have made a number of appointments at a senior level including flagship store management recruitment in France and Belgium, Merchandisers and Buyers in Holland and a Head of E-commerce in Germany.

In 2007 we made an investment into the business with new office openings in both Manchester and Leeds. We have now established a solid market presence in both locations through the recruitment of a number of high calibre individuals. 

Historically, we have had a legal practice that has serviced the city market. With the decline in the economy and the lack of a requirement in city businesses, at the end of the year we made the decision to pull out of this market and focus purely on our core businesses, retail and manufacturing which has resulted in the closure of our Cardiff and Colchester offices. 

In late 2007 we moved into the contract arena, a strategy that would take us away from a traditional permanent recruitment business model. We are pleased to report that we have made significant progress in this area with an NFI growth that has more than doubled year on year. 

Whilst trading conditions remain difficult we have had a strong start to Q1 2009 on the back of our long established client relationships. We are confident that as more generalist recruitment businesses fail in the present economic climate, our sector specialism places us in a strong position to grow our market share.  

Quantica Technology

Of all of the Kellan brands, Quantica Technology saw the impact of the 'credit crunch' earlier than most with one major client, based in Halifax closing down. Having taken action early through reduced headcount and the consolidation of its offices, the business delivered a respectable contribution and saw an increase in productivity per fee earner of 11.6% year on year.

Whilst we recognise that this will be a tough 2009 across the IT sector, we have a strong experienced team that has been through difficult times before, more recently in late 2000 when the technology bubble burst. We are now well positioned as a business for when the market bounces back. 

The Group strategy has not changed. We remain on a journey to build a significant presence in IT recruitment and this is still firmly on the agenda for 2009. 

Integration of Quantica and further development of Kellan head office functions

We are delighted with the progress we have made in 2008 with the integration of Quantica and the consolidation of the back office. We now have increased capability in our support functions through the hiring of a Head of Marketing, Head of HR & Recruitment and a Group Financial Controller, all bringing with them a wealth of knowledge and experience. Following the move into the Head Office in London we are able to finalise the transition of a geographically dispersed finance function into a head office based group finance department, achieving associated rationalisation cost savings of £150k in the process.

Property consolidation was high on our agenda in 2008. We moved our Godalming operational staff to a new office in Guildford whilst consolidating 5 offices in Leeds down to 2. Manchester saw 3 offices become 2 whilst our Cardiff and Colchester offices closed. In summary we started 2008 with 24 operational offices and subject to our ability to get out of leases, and with the opening of 3 offices in Guildford, Sheffield and Warrington, we will end Quarter 1 2009 with 19 operational offices.

Our IT strategy for 2008 continued with force. Working across two separate networks, with a view of merging them into one, last year was a year of raising the level of capability across both these networks. The RK Accountancy business was networked and a new front office operational system was implemented. In addition, the roll out of a company wide HR system and expenses system enables us to monitor and manage our workforce more effectively. 

Employees

Our ability to deliver a quality service and to gain market share in these turbulent economic conditions depends on the excellence and resilience of our employees, and their ability to respond to our clients and candidates consequential requirements. During recent months, everyone has worked diligently and as a team, in order to adapt the business in line with these changes. We hugely appreciate the motivation, flexibility and effort shown by our employees which is key to the ongoing growth and success of Kellan.

Chief Financial Officer's report

This review presents key elements of Kellan's financial performance and expands upon key features of the financial statements. 

Onerous lease and restructuring costs

The Group recorded onerous lease and restructuring costs of £600,000 (2007: £891,000) during the period.

£185,000 of this relates to onerous lease costs, principally in respect of the decision to exit the historical head office of the Group in Godalming and move into a new head office in London. The move was completed in March 2009 and most of the charge is an accrual for the rent on the exited office from April 2009 to the end of the lease term in November 2009. We felt the longer term benefits in moving Berkeley Scott into new premises in Guildford, Kellan support staff into London and timing the move with other "end of lease" property consolidation opportunities in London outweighed the cost and distraction of finding a new tenant for Godalming.

£415,000 was booked in respect of staffing restructure and redundancy costs, principally consequential to the decision in moving the Head Office to London and being able to finally realise the last tranche of synergies identified following the acquisition of Quantica.

Impairment of Goodwill

The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires an estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Details of the assumptions used are contained in note 8. This year we increased the discount rate to 14.8% from 12.0% to reflect the increased risk of equity investors into recruitment shares. This increase in the discount rate and reductions to projected cash flows due to the current economic environment resulted in goodwill impairment of £5,049,000 (2007: £Nil) in respect of Quantica Technology and Quantica Search and Selection. Carrying values for goodwill held in respect of the RK Group and historic Berkeley Scott branch network investments were not impaired.

Synergies from acquiring Quantica

Last year we stated that integration of Quantica would realise in excess of £1.3m in synergy savings. Most of these, approximately £1m, were realised in the quarter following acquisition in 2007 through the elimination of duplicated Board costs and the delisting of Quantica plc from AIM. By the middle of 2008 we had identified and initiated savings of a further £0.1m around insurances, advisor fees and group training. The final component of our plan was always dependant upon the centralisation of the back office into a single Head office. With the move to our new London premises in March 2009 we are now able to realise a further annualised £200,000 per year saving. All impacted staff have now either left or are completing a handover with colleagues in London. Whilst redundancies are never pleasant, we are pleased to report that most of the staff in Elland and Godalming were able to find alternative roles locally. 

International Financial Reporting Standards ("IFRS")

In 2007, the consolidated accounts were presented under IFRS as adopted by the EU for the first time. In 2008 we adopted 2 additional standards;

IFRS7 "financial instruments and disclosures" which expands the disclosures provided in these financial statements regarding the Group's financial instruments and management of capital. 

IFRS 8 "Operating segments" which we have adopted earlier than required to give more disclosure in the financial statements regarding the Group's operating segments.

There was no effect on the results, cash flows or financial position of the Group through the adoption of either standard.

The accounts of the holding Company, Kellan Group plc continue to be reported under UK GAAP. 

Monitoring, risk and KPIs

Risk management is an important part of the management process throughout the Group. The composition of the Kellan Group plc Board is structured to give balance and expertise when considering governance, financial and operational recruitment issues. Meetings incorporate, amongst other agenda items, a review of monthly management accounts, operational and financial KPIs and major issues and risks facing the business. 

The most important KPI's used in monitoring the business are as follows:

	12 months ended	15 months ended
	31 December 2008	31 December 2007
Revenue	£ 46,720,000	£30,275,000
Net Fee Income (gross profit)	£ 22,812,000	£ 14,981,000
EBITA as a % of Net Fee Income	9.7%	(0.0%)
Days sales outstanding (DSO)	39	48
Headroom on working capital facilities	£ 4,700,000	£ 3,300,000

The principal risks faced by the Group in the current economic climate are considered to be:

• Market - the Group operates in a dynamic market place, and constantly seeks to ensure the solutions it offers to customers are completive. By operating in various diverse sectors, the Group is, to some degree, protected from a deteriorating market. Nevertheless in the final quarter of 2008 the economic downturn started to significantly affect the recruitment sector. The speed and depth of the downturn, combined with the Group's predominance of permanent recruitment fees, generated mostly in the UK, represent a risk. 

• Financial - The main financial risks arising from the Company's activities are credit risk, interest rate risk and liquidity risk. These are monitored by the board of directors.

The Company's policies in respect of credit risk require appropriate credit checks on potential customers before sales are made, the appropriate limiting of credit to each customer and the close monitoring of KPI trending such as Days Sales Outstanding and debtor ageing. 

The Group's policy in respect of liquidity risk is to maintain a mixture of long term and short term debt finance, including an invoice discounting facility, to ensure the Company has sufficient funds for operations. Although a significant proportion of its senior debt is protected against interest rate movements through an interest rate collar instrument, some debt is maintained at bank variable rates which inherently bring interest rate risk. Ironically in these unprecedented times, recent falls in interest rates have benefited the Group's payments on the unhedged component of its debt profile. The Company maintains detailed cash flow forecasts enabling it to factor, amongst other things, incremental changes in interest rates into its risk profile and liquidity and react accordingly.

As outlined in note 1, our lending facilities; a term loan used to acquire Quantica and an invoice discounting facility used for working capital are governed by financial covenants tested quarterly using data covering the preceding 12 months to the date of test. As a consequence of the recent decline in the UK recruitment market a breach of the Group's covenants is likely in the forthcoming year and the Group has therefore proactively entered discussions with the relevant lender. If the Group is unable to agree amended terms the lenders could request early repayment of all outstanding borrowings. These discussions around future banking terms are ongoing; however the Group has received a letter from its bank indicating they expect a positive outcome and the directors are not aware of any issues which would prevent the required amendments from being agreed. 

The treasury function is not a profit centre and all activities are undertaken primarily to support the underlying exposures faced by the operating companies. The Group does not enter into speculative treasury arrangements and there are no significant balances or exposures denominated in foreign currencies.

Cash flow and financing

Net cash inflow from operating activities was £3,452,000 (2007: £3,454,000 outflow). A significant element of this was due to the efforts of the credit control function in reducing aged debt acquired in the Quantica acquisition resulting in DSO at year end of 39 (2007: 48) 

Investing activities comprised £77,000 of earned interest (2007: £56,000) and capital expenditure of £599,000 (2007: £261,000). Capital was spent mainly on improvements to the new Leeds and Altrincham offices as well as the new network and operating system for RK Accountancy. 

Financing activity amounted to a £2,170,000 outflow (2007: £12,454,000 inflow) after we repaid the balance on the invoice discounting facility, paid interest on servicing the debt and made all scheduled loan repayments. 

The net increase in cash in the period was £760,000 (2007: £1,208,000).

As a result of the refinancing initiatives the Group has improved its gearing profile (face value of loans and borrowings, £3,360,000 (2007: £5,253,000) as a percentage of total equity, £24,179,000 (2007: £28,515,000)) to 13.9% from 18.4%.

Financial income and expenses

The financial expenses for the period of £510,000 (2007: £538,000) comprise interest and amortised loan costs in respect of bank loans and confidential invoice discounting facilities and a charge for the fair value of the interest rate collar instrument. Charges are partially offset by financial income (interest) of £77,000 (2006: £56,000).

Tax

The Group's underlying tax charge was £18,000 (2007: £32,000 credit) relating to £145,000 (2007: £Nil) in respect of corporation tax on current year's earnings and a release of £127,000 (2007: £32,000) in respect of deferred tax on the intangible amortisation. It is anticipated that the Group's ongoing rate will be broadly in line with the standard rate of corporation tax, subject to its ability to utilise tax losses brought forward and temporary timing differences.

Loss per share

Loss per share (basic and diluted) improved marginally to 5.1p (2007: Loss 5.4p)

On an adjusted basis, after adding back the impairment of goodwill, earnings per share (Basic and diluted) increased to 0.7p (2007: Loss 5.4p).

Options held in respect of the ordinary shares of the Company do not have a dilutive effect on the earnings / loss per share calculation.

Business Review: Outlook

In 2009, the UK recruitment market, as a result of the current very tough economic environment, will be far more challenging than 2008. While this will put pressure on underlying sales, margins and profits it may also present us with opportunities to develop the Group further. We are ready to pursue the opportunities which may arise in any of our markets, or indeed new markets.

We will continue to reduce operating costs in line with trading. However we believe, even in this market that a number of our brands have the opportunity to increase market share and we are confident there will be new office openings in 2009. We will complete the consolidation of the back office support functions which began when we acquired Quantica in September 2007, and we will ensure that we offer a robust, scaleable and cost effective service to the business. Our continued investment in people, IT and operational best practice will ensure we have the people and the capability to make the most of the growth opportunities, as and when they arise.

Kellan would not be what it is today without its people and we would like to thank them all for their hard work and continued commitment through these difficult times. Delivering excellent service will pay off. We remain committed to building a group of companies in which people can develop and grow as individuals, through out their careers. 

Our business objectives are clear and remain unchanged. We aim to have a professional recruitment business with strong brands in niche sectors, scalable businesses and high margins. In 2009 we will maintain the visibility of these brands whilst managing our cost base to reflect the current trading environment. We are very well positioned for when the market improves and we remain positive about the long term prospects for Kellan.

Tony Reeves		Will Coker
Interim Chief Executive Officer		Chief Financial Officer
2nd April 2009		2nd April 2009

Consolidated Income Statement

for the year ended 31 December 2008

	Note	12 months 31 Dec 2008	15 months ended 31 Dec 2007
		£000	£000
Revenue		46,720	30,275
Cost of sales		(23,908)	(15,294)
Gross profit / net fee income		22,812	14,981
Administrative expenses		(21,768)	(16,293)
Operating profit / (loss) before impairment charge		1,044	(1,312)
Impairment of goodwill		(5,049)	-
Operating (loss) / profit	2	(4,005)	(1,312)
Financial income	5	77	56
Financial expenses	5	(510)	(538)
Loss before tax	3	(4,438)	(1,794)
Tax (charge)/credit	6	(18)	32
Loss  for the period		(4,456)	(1,762)
Attributable to:
Equity holders of the parent		(4,456)	(1,762)
Loss per share in pence
(basic and diluted)	7	(5.1)	(5.4)

The above results relate to continuing operations.

.

  

Consolidated Balance Sheet

at 31 December 2008

	Note	31 Dec 2008	31 Dec 2007
			Restated
		£000	£000
Non-current assets
Property, plant and equipment		970	833
Intangible assets	8	23,644	29,407
		24,614	30,240
Current assets
Trade and other receivables	10	7,096	10,572
Cash and cash equivalents	11	1,379	619
		8,475	11,191
Total assets		33,089	41,431
Current liabilities
Other loans and borrowings	12	767	1,692
Trade and other payables	13	3,986	6,186
Other financial liabilities		135	37
Corporation tax payable		207	378
Provisions	14	326	45
		5,421	8,338
Non-current liabilities
Other loans and borrowings	12	2,320	3,141
Provisions	14	59	200
Deferred tax liabilities	9	1,110	1,237
		3,489	4,578
Total liabilities		8,910	12,916
Net assets		24,179	28,515
Equity attributable to equity holders of the parent
Share capital	15	1,742	1,742
Share premium		13,728	13,740
Merger reserve		16,081	16,081
Capital redemption reserve		2	2
Retained earnings		(7,374)	(3,050)
Total equity		24,179	28,515

  Consolidated Statement of Changes in Equity

for the year ended 31 December 2008

	Note	Share capital	Share premium	Merger reserve	Capital redemption reserve	Retained earnings	Total equity
		£000	£000	£000	£000	£000	£000
Balance at 1 October 2006		170	3,572	-	2	(1,589)	2,155
Loss and total recognised income and expense for the period		-	-	-	-	(1,762)	(1,762)
Issue of ordinary shares		1,549	11,302	16,081	-	-	28,932
Exercise of warrants		23	178	-	-	-	201
Share issue costs		-	(1,312)	-	-	-	(1,312)
Share based payment charge		-	-	-	-	301	301
Balance at 31 December 2007		1,742	13,740	16,081	2	(3,050)	28,515
Loss and total recognised income and expense for the period		-	-	-	-	(4,456)	(4,456)
Share issue costs		-	(12)	-	-	-	(12)
Share based payment charge		-	-	-	-	132	132
Balance at 31 December 2008		1,742	13,728	16,081	2	(7,374)	24,179

Consolidated Cash Flow Statement

for the year ended 31 December 2008

	Note	12 months ended 31 Dec 2008	15 months ended 31 Dec 2007
		£000	£000
Cash flows from operating activities
Loss for the period		(4,456)	(1,762)
Adjustments for:
Depreciation and amortisation		867	522
Financial income		(77)	(56)
Financial expense		339	538
Amortisation of loan costs		73	-
Net loss on measurement of interest rate swap to fair value		98	-
Loss on sale of property, plant and equipment		37	63
Impairment of goodwill		5,049	-
Equity settled share-based payment expenses		132	301
Taxation		18	(32)
		2,080	(426)
Decrease / (increase) in trade and other receivables		3,349	(256)
Decrease in trade and other payables		(2,200)	(2,681)
Adjustment to goodwill for pre-acquisition accruals not required		272	-
Increase in provisions		140	245
		3,641	(3,118)
Tax paid		(189)	(336)
Net cash inflow / (outflow) from operating activities		3,452	(3,454)
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		-	5
Interest received		77	56
Acquisition of subsidiary, net of cash acquired		-	(7,592)
Acquisition of property, plant and equipment		(599)	(261)
Net cash outflow from investing activities		(522)	(7,792)
Cash flows from financing activities
Proceeds from the issue of share capital, net of issue costs		(12)	10,956
Proceeds from new loan		-	4,200
Repayment of invoice discounting facility balances		(979)	(1,512)
Interest paid and loan costs		(339)	(847)
Repayment of term loan borrowings		(840)	(316)
Payment of the capital element of finance lease liabilities		-	(26)
Payment of the interest element of finance lease liabilities		-	(1)
Net cash (outflow) / inflow from financing activities		(2,170)	12,454
Net increase in cash and cash equivalents		760	1,208
Cash and cash equivalents at the beginning of the period		619	(589)
Cash and cash equivalents at the end of the period	11	1,379	619

  Notes

1 Basis of Preparation and accounting policies

The preliminary announcement was approved by the Board of Directors on 2 April 2008.

The financial information set out in this announcement does not constitute the Group's financial statements as defined by s240 of the Companies Act 1985 for the year ended 31 December 2008 or the 15 month period ended 31 December 2007. The results for the periods ended 31 December 2008 and 31 December 2007 are extracted from the audited accounts of The Kellan Group plc, on which the auditors have issued unqualified audit reports which did not contain a statement under s237(2) or (3) Companies Act 1985. The audit report for the period ended 31December 2007 did not include any references to any matters to which the auditors drew attention by way of emphasis without qualifying their report. The audit report for the year ended 31 December 2008 included an emphasis of matter in respect of the material uncertainty set out below which may cast significant doubt about the Group's ability to continue as a going concern. 

The audited financial statements for the period ended 31 December 2007 have been delivered to the Registrar of Companies. The Annual Report for the period ended 31 December 2008 will be mailed to shareholders in April 2009 and will be delivered to the Registrar of Companies following the Annual General Meeting which will be held on Thursday 21st May 2009 at the Company's office at 4th Floor, 27 Mortimer Street, London, W1T 3BL.

Copies will be available to the public from the Company's registered office at 4th Floor, 27 Mortimer Street, London, W1T 3BL.

Going concern

The financial information has been prepared on a going concern basis.

The Group is in full compliance with the financial covenants at 31 December 2008 contained in its borrowing agreement with its lender, which comprise a term loan taken out to acquire Quantica plc in September 2007 and an invoice discounting facility used for working capital. At 31 December 2008 the headroom on its working capital facility was £4.7m.

Covenants on these borrowings are tested quarterly using the 12 month period to the date of the respective test. As a consequence of the recent decline in the UK recruitment market a breach of the Group's covenants is likely in the forthcoming year and the Group has therefore proactively entered discussions with the relevant lender. 

These discussions around future banking terms are ongoing; however the Group have received a letter from its lender indicating they expect a positive outcome and the directors are not aware of any issues which would prevent the required amendments from being agreed. In the unlikely scenario of amended terms not being agreed, the Directors are confident that alternative sources of funding could be obtained although this can not be guaranteed. 

Accordingly the directors continue to adopt the going concern basis in preparing the financial statements. 

If the Group is unable to agree amended terms the lender could request early repayment of all outstanding borrowings and consequently there exists a material uncertainty which may cast significant doubt about the ability of the Group to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

2 Reconciliation of Operating Loss to Adjusted EBITDA and EBITA

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Operating loss as per accounts	(4,005)	(1,312)
Add back
Impairment of goodwill	5,049	-
Amortisation of intangible assets	442	113
Share based payments charge	132	301
Onerous leases	185	245
Restructuring costs	415	646
	________	________
Adjusted EBITA	2,218	(7)
Depreciation	425	409
	________	________
Adjusted EBITDA	2,643	402
	________	________

3 Expenses and auditors' remuneration

Included in profit/loss are the following:

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Pension contributions	168	134
Depreciation of owned property, plant and equipment	425	407
Depreciation of assets held under finance leases	-	2
Impairment of goodwill	5,049	-
Amortisation of intangible assets (charged to admin expenses)	442	113
Operating leases rentals - hire of plant & machinery	122	97
Operating leases rentals - hire of other assets	1,339	762
Loss on sale of property plant and equipment	37	63

Auditors' remuneration:

Amounts payable to BDO Stoy Hayward LLP in respect of both audit and non audit services are set out below:

	12 month period  ended 31 Dec  2008	15 month period  ended 31 Dec  2007
	£000	£000
Fees payable to the auditors for the audit of the Company's annual accounts	20		18
Fees payable to the auditors for other services:
The audit of the Company's subsidiaries	82		57
Other services relating to taxation	42		41
Services relating to corporate finance transactions	-		273
Other non-audit services	3		27
	127		398

4 Staff numbers and costs

The weighted average number of persons employed by the Group (including directors) during the period, analysed by category, was as follows:

	Number of employees
	2008	2007
Recruitment	281	202
Administrative staff	81	50
Temporary workers (whose costs are included in cost of sales and services charged  within revenue)	958	1,177
	1,320	1,429

The aggregate payroll costs of these persons were as follows:

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Wages and salaries	18,889	18,583
Social security costs	1,758	1,593
Other pension costs	168	134
	20,815	20,310
Share based payments	132	301
	20,947	20,611

Directors' and key management personnel remuneration:

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. During the period these were considered to be the directors of the company.

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Emoluments	427	385
Compensation for loss of office	-	175
Company contributions to money purchase pension schemes	31	29
Fees paid to non-executive directors	-	14
Share based payments	97	296
	555	899

There were 2 directors in defined contribution pension schemes during the period (2007: 3).

The total amount payable to the highest paid director in respect of emoluments was £219,460 (2007: £220,713). Company pension contributions of £19,000 (2007: £4,248) were made to a money purchase scheme on his behalf. 

The directors made no gains on options and warrants exercised during the current or prior periods.

5 Finance income and expense

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Interest income on financial assets	77	56
Financial income	77	56
Interest expense on financial liabilities	339	360
Amortisation of loan costs	73	140
Finance leases and hire purchase contracts	-	1
Net loss on measurement of interest rate swap to fair value	98	37
Financial expenses	510	538

6 Taxation

Recognised in the income statement

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Current tax expense
Current period	145	-
Adjustments for prior periods	-	-
	145	-
Deferred tax expense
Origination and reversal of temporary differences	(127)	(32)
	(127)	(32)
Total tax in income statement	18	(32)

Reconciliation of effective tax rate

	12 month period ended 31 Dec 2008	15 month period ended 31 Dec 2007
	£000	£000
Loss before tax for the period	(4,438)	(1,794)
Total tax credit	(18)	32
Loss after tax	(4,456)	(1,762)
Tax using the UK corporation tax rate of 28.5% (2007: 30%)	(1,265)	(538)
Non-deductible expenses including impairment	1,723	149
Losses carried forward	(190)	481
Movement on other deferred tax assets not recognised	(250)	(124)
Total tax charge / (credit)	18	(32)

7 Earnings per share

Basic and diluted earnings per share

The calculation of basic earnings per share at 31 December 2008 was based on the loss attributable to ordinary shareholders of £4,456,000 (2007: loss of £1,762,000) and a weighted average number of ordinary shares outstanding of 87,086,336 (2007: 32,612,008), calculated as follows:

Weighted average number of shares

	2008	2007
Issued ordinary shares at 1 January	87,086,336	8,518,615
Effect of share options exercised	-	5
Effect of warrants exercised	-	124,750
Effect of shares issued	-	23,968,638
Weighted average number of shares at end of period	87,086,336	32,612,008
Loss for the year	(4,456,000)	(1,762,000)
Basic and diluted loss per share in pence	(5.1)	(5.4)
Adjusted Basic and diluted earnings / (loss) per share in pence (1)	0.7	(5.4)

There was no dilution in the current and prior period due to the loss in the period.

(1) Adjusted earnings per share is after eliminating the impairment of goodwill in the year of £5,049,000. There is no dilution of the adjusted earnings per share as the weighted average share price during the year is less than the options' exercise prices.

8 Intangible assets 

	Goodwill	Brand name	Customer relations	Total
	£000	£000	£000	£000
Cost
Balance at 1 October 2006	2,518	-	-	2,518
Acquisitions through business combinations	22,471	922	3,609	27,002
Balance at 31 December 2007	24,989	922	3,609	29,520
Adjustment to fair value (1)	(272)	-	-	(272)
Balance at 31 December 2008	24,717	922	3,609	29,248
Amortisation and impairment
Balance at 1 October 2006	-	-	-	-
Amortisation	-	23	90	113
Balance at 31 December 2007 and 1 January 2008	-	23	90	113
Impairment of goodwill (2)	5,049	-	-	5,049
Amortisation	-	90	352	442
Balance at 31 December 2008	5,049	113	442	5,604
Net book value
At 1 October 2006	2,518	-	-	2,518
At at 31 December 2007 and 1 January 2008	24,989	899	3,519	29,407
At 31 December 2008	19,668	809	3,167	23,644

(1) £272,000 of accruals in the balance sheet of Quantica Plc at the date of its acquisition were subsequently not required.

 

(2) Impairment testing of goodwill: Goodwill acquired through business combinations has been allocated for impairment testing purposes to the Groups of cash generating units (CGUs) listed below. These represent the lowest level within the Group at which goodwill is monitored by management for internal reporting purposes:

Goodwill
	31 Dec 2008	31 Dec 2007
	£000	£000
Regional (Former Gold Helm Roche) branch network	1,920	1,920
London (Former Sherwoods) branch network	569	569
RK Group	10,482	10,582
Quantica Technology	3,202	6,129
Quantica Search and Selection	3,466	5,760
Other	29	29
	19,668	24,989

The recoverable amount of all the CGUs is based on a value in use calculation using cash flow projections based on 2008 actual performance. An appropriate terminal value based on a perpetuity calculation is then generated. The key assumptions used in the impairment testing were contribution, rates of growth and discount rates. 

Contribution 

Contribution is based on the margins achieved remaining at the levels currently being achieved and after allocating shared overheads.

Discount rate

A discount rate of 14.8% (2007: 12%) reflects management's current estimate of the pre-tax cost of capital of the Group and is applied to each of the CGUs listed above. The discount rate has increased from the prior period to reflect an increased equity risk in the recruitment sector.

Rates of growth 

For the purposes of impairment testing only, growth rate assumptions are set at negative 30 per cent for one year, 0 per cent for the second year and a return to 2008 levels for the following three years and two per cent growth thereafter. These are less than published industry estimates. 

Goodwill impairment

As a consequence of the above the Group has impaired the goodwill held in respect of Quantica Technology and Quantica Search and Selection by £2,846,000 and £2,203,000 respectively. An increase in the discount rate of 1% would result in an additional impairment of £779,000.

9 Deferred tax assets and liabilities 

Recognised deferred tax liabilities 

Recognised deferred tax liabilities are at present attributable to unamortised fair value adjustments on business combinations. The movement on the accounts is as follows:

	31 Dec 2008	31 Dec 2007
	£000	£000
Balance at 1 January 2008	1,237	-
Business combinations	-	1,269
Credited to the income statement	(127)	(32)
Balance at 31 December 2008	1,110	1,237

At 31 December 2008 there was an unprovided deferred tax asset as set out below. This asset has not been included in the balance sheet as its recoverability is uncertain.

	31 Dec 2008	31 Dec 2007
	£000	£000
Losses carried forward	405	600
Decelerated capital allowances	114	123
Other temporary and deductible differences	176	304
	695	1,027

10 Trade and other receivables

	31 Dec 2008	31 Dec 2007
	£000	£000
Trade receivables	5,532	8,187
Other receivables	517	267
Prepayments and accrued income	1,047	2,118
	7,096	10,572

11 Cash and cash equivalents/ bank overdrafts

	31 Dec 2008	31 Dec 2007
	£000	£000
Cash	927	619
Invoice discounting facility	452	-
Cash and cash equivalents	1,379	619

12 Other interest-bearing loans and borrowings

The carrying value and face value of loans and borrowings are as follows:

	31 Dec 2008	31 Dec 2007
	£000	£000
Non-current liabilities
Secured bank loans	2,320	3,141
Finance lease liabilities	-	-
	2,320	3,141
Current liabilities
Current portion of secured bank loans	767	712
Current portion of finance lease liabilities	-	1
Invoice discounting facility	-	979
	767	1,692

Terms and debt repayment schedule 

	Currency	Nominal interest rate	Year of  maturity	Face value	Carrying amount	Face value	Carrying amount
				31 Dec 2008	31 Dec 2008	31 Dec 2007	31 Dec 2007
				£000	£000	£000	£000
Bank loan (Barclays)	Sterling	1.5% above LIBOR	2012	3,360	3,087	4,200	3,853

The 5 year term loan of £3,360,000 (2007: £4,200,000) and invoice discounting facility balance utilised of £Nil (2007: £979,000) are secured through deeds of composite guarantees and mortgage debentures on Group companies. The Group makes use of an interest rate collar swap on two thirds of the sum of the term loan. The collar is based on LIBOR and has a lower threshold of 5.51% plus 1.5% margin and an upper threshold of 6.50% plus 1.5% margin.

13 Trade and other payables

	31 Dec 2008	31 Dec 2007
	£000	£000
Trade payables	446	777
Social security and other taxes	1,364	1,715
Other creditors	627	1,261
Accruals and deferred income	1,549	2,433
	3,986	6,186

14 Provisions

			Onerous contracts
			£000
Balance at 1 October 2006			-
Provisions made during the period			245
Provisions used during the period			-
Balance at 31 December 2007 and 1 January 2008			245
Provisions made during the period			185
Provisions used during the period			(45)
Balance at 31 December 2008			385
Non-current at 31 December 2007			200
Current at 31 December 2007			45
			245
Non-current at 31 December 2008			59
Current at 31 December 2008			326
			385

Onerous contracts predominantly relate to the remaining rents and dilapidations payable on properties which have been vacated and incremental costs that will be incurred on vacating existing properties where a commitment to do so exists at the balance sheet date. Inherent uncertainties in measuring the provision are the estimated cost of returning the properties to their original state at the end of the lease and estimates of rents that will be received in the future on vacant property. 

15 Capital 

Share capital

	Ordinary shares
In thousands of shares	31 Dec 2008	31 Dec 2007
In issue at 1 January	87,086	8,519
Issued on acquisition of Quantica Plc	-	39,222
Exercise of warrants	-	1,140
Other issues for cash during the period	-	38,205
In issue at 31 December - fully paid	87,086	87,086
	31 Dec 2008	31 Dec 2007
	£000	£000
Authorised
Ordinary shares of £0.02 each	2,895	2,895
Allotted, called up and fully paid
Ordinary shares of £0.02 each	1,742	1,742

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

ENDFR SSWFUESUSEIL

---

Related Shares:

Kellan Group