Final Results

21 September 2012

KELLAN GROUP ANNOUNCES PRELIMINARY RESULTS FOR THE

12 MONTH PERIOD ENDED 31 DECEMBER 2011

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 31 December 2011.

Headline figures

·; 54.5% increase in adjusted EBITDA profit to £0.17 million (2010: £0.11 million) (note 2).

·; Continued streamline improvements with administrative expenses (excluding impairment, amortisation, depreciation, shared based payments and restructuring costs) reducing by 13% year on year from £12.2 million in 2010 to £11 million in 2011.

·; Improved operating loss (before impairment charge) position of £0.44 million for the year (2010: £0.85 million).

·; Non-cash goodwill & Intangibles impairment charge of £5 million (2010: £9.5 million).

·; (5.72) p per basic and diluted share, compared with (11.1) p per basic and diluted share for 2010.

·; £1.40 million raised subsequent to the year end through share subscription and £1.26 million facility in place to draw down against repayment of bank senior debt (at favourable interest rates), conditions only on the final issuance and admission of subscription shares to AIM. Conclusive financing package to fund the growth in fee earners with the aim to execute management's growth strategy.

·; £0.65 million of loan notes converted to equity to reduce financing costs and improve leverage ratio for the Group.

Enquiries:

Kellan Group Plc

Ross Eades, Chief Executive Officer 0207 268 6200

Rakesh Kirpalani, Group Finance Director

Merchant Securities Limited

David Worlidge 0207 628 2200

Virginia Bull

Chairman's Statement

The market upturn of late 2010 proved short-lived and as a consequence 2011 was another challenging year for Kellan Group, but one in which adjusted EBITDA profit for the year of £0.17 million showed a 54.5% increase against 2010 and costs were reduced by a further 13% through tight control.

In February 2011 the Group secured an additional £1.35 million of funding. At that time the markets still looked promising and we were able to move our growth strategy forwards, bringing on board a number of industry-leading recruitment professionals who share our vision for the Group. They set about the task of restructuring parts of the Group and improving each brand's position in our key markets. These new fee earners were in place just at the time the recruitment market dipped again and the expected Net Fee Income growth was therefore not realised. Aligning our overall business with the market, we reduced our workforce to 162 (2010:185).

We also continued the ongoing restructuring of our property portfolio, exiting a further two properties and sub-letting one property in 2011.

We initially approached 2012 with a high degree of caution due to the volatile nature of the economic environment, with the management team maintaining its focus on Net Fee Income growth, cost control and working capital management. Our outlook has changed for the better, however, with the announcement today of a placing to raise £1.40 million from existing investors, which will be available for investment in fee earners and projects to stimulate growth and £1.26 million as a drawdown facility that can be drawn down in line with the scheduled repayments of the existing bank term loan. Also £0.65 million loan notes converted to equity to reduce financing costs and to improve the leverage ratio of the group.

We welcome Rakesh Kirpalani to the Board following 18 months as the Finance Director. Guiding the Group through the past year has taken considerable skill, patience and diplomacy and we are delighted to have him with us.

John Bowmer's California base has dictated that he steps down as co-Chairman. I am extremely grateful for his expertise and support as my Co-Chair and I am sure that his vast experience and insight will continue to be readily available to us in his role as non executive director.

Our people have demonstrated consummate professionalism, resilience and good humour during the past year supported by a creative and dedicated team of managers - we would like to thank them all for their dedication and sterling efforts on behalf of our customers.

We would also like to thank the unwavering support of the Group's shareholders whom we join in looking forward to improved market conditions and the realisation of the tremendous potential in the Group.

Tony Reeves

Chairman

20 September 2012

Chief Executive Officer's Report

Business Review

After a slow start to 2011 there were short lived signs of an upturn before renewed concerns around the Euro zone and sovereign debt hit business confidence and forced a further retraction of the recruitment market. The Group has used this time to reshape a number of its key brands in readiness for the delayed but inevitable upturn as well as successfully controlling and further reducing costs. With additional funding now secured, the Group is out of survival mode and can now look forward with real purpose, determination and optimism.

Although the revenue of £26.9 million (2010: £29.8 million) represents a year on year reduction of 9.8%, the benefits of our 2010 cost reduction strategy combined with further efficiency savings during 2011 led to a significant reduction in operating losses for the year before non-cash goodwill & intangibles impairment charge to £0.44 million. (2010: £0.85 million operating loss). Sequentially, the Group made a H2 2011 profit of £0.26 million at adjusted EBITDA level (2010: £0.17 million adjusted EBITDA profit) compared with a H1 2011 loss of £0.09 million (2010: £0.24 million adjusted EBITDA loss)

Phase 2 of our growth strategy was implemented following the securing of £1.35 million additional funding in February 2011 to support the organic growth of the Group's established brands. We maintained our plan to grow our temporary and contract business at a quicker rate than permanent business to ensure the Group is more resilient to adverse changes in the macro economic climate. During the year it became apparent that further changes were necessary within some of the brands and our strategy was revised accordingly to accommodate this.

Phase 3, the strengthening of the Group's brands through tuck-in acquisitions, is planned to commence once sustained profitability is achieved.

Berkeley Scott maintained its position as market leader in the hospitality and leisure markets. In a very difficult climate the company showed creditable flexibility in being able to adapt its business to deliver a performance very similar to that of 2010. The senior appointment and general management businesses remain consistent and our chef specialism continues to be a real focus in the corporate client and independent hotel and leisure markets. We are also seeing increased competition from in-house recruitment teams and smaller niche businesses. Overall 2012 remains difficult to predict with significant opportunities presented by the Olympics tempered by continued pressure on temporary margin and permanent fees.

Quantica Technology, the Group's IT specialist, continued to build its London and regional UK operations and has now established robust trading links across mainland Europe. The company defended its position in a very challenging environment to deliver a performance largely in line with 2010. Most encouraging was the growth of the contract business in line with our Group strategy. 2012 has started well for Quantica Technology and we believe that they will benefit from the predicted leadership of IT in any recovery.

Following a leadership change for our RK and search brands at the beginning of H2, we confirmed our focus on developing the qualified end of the market through the launch of Robinson Keane Finance Professionals. This frees RK Accountancy to concentrate on the non-qualified and clerical side of the market where its strength has traditionally resided. Both businesses are in an excellent position to make the most of any market improvements.

The Group has been considerably strengthened by the launch in January 2012 of Robinson Keane HR Professionals by two of the HR industry's top recruiters. This is a resilient part of the professional recruitment market and naturally has tangential benefits to all the other brands in the Group.

I would also like to thank our increasingly loyal customer base and our shareholders for their invaluable support throughout 2011. 2012 started in the same vein as the end of 2011 - fleeting signs of improvement in a nervous and volatile trading environment. We have been carefully managing costs and cash whilst maximising opportunities to take market share in a taciturn economic climate. During this challenging time, the Group's staff has worked with tireless enthusiasm, flexibility and spirit to protect, develop and enhance our service offerings and I would like to thank them for their patience, commitment and loyalty.

I would particularly like to thank our Finance Director, Rakesh Kirpalani, for his invaluable, unwavering and expert support. He has played a significant role in rationalising the Group's cost base by driving efficiencies where possible and I welcome him warmly to the Board.

The newly secured funds will allow us to robustly support these excellent people who have helped us through this difficult period. We will invest in making sure they are fully equipped to exploit our growth opportunities and to place the Group at the forefront of our specialist markets. There are very exciting and positive times ahead for everyone associated with Kellan Group.

Financial Review

Continued cost control translated to a significantly reduced operating loss before impairment to £0.44 million (2010: £0.85 million) with the group reaching a break even position at an Adjusted EBITDA level in the second half of the year.

Administrative expenses have decreased to £16.3 million in the year to 31 December 2011, from £22.71 million in 2010. Adjusting the cost base for the impairment, amortisation, depreciation, share based payments and restructuring, like for like costs have reduced from £12.2 million for the year to 31 December 2010 to £11 million for the year to 31 December 2011 which represents a reduction of 13% year on year.

The Group's revenue for the year ended 31 December 2011 was £26.9 million representing a decrease of 9.8% (2010: £29.83 million). This produced Net Fee Income ("NFI") of £10.85 million for the year ended 31 December 2011, a decline of 12.4% (2010: £12.39 million).

Impairment of Intangibles

The impairment review undertaken in 2011 resulted in a non-cash goodwill & intangibles impairment charge of £5 million (2010: £9.48 million).

The non-cash impairment of goodwill and intangibles reflects a conservative view to the future growth prospects based on the macro-economic conditions currently in place. Whilst the business aspires to grow at a much faster rate, management deemed it appropriate to impair the intangibles to ensure a fair valuation based on current market conditions.

Monitoring, risk and KPIs

Risk management is an important part of the management process throughout the Group. The composition of the 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 KPIs used in monitoring the business are as follows:

The principal risks faced by the Group in the current economic climate are considered to be financial, market and people related:

• Financial - The main financial risks arising from the Group's activities are liquidity risk and credit risk. These are monitored by the Board and are disclosed further in notes 1 and 16 of the financial statements.

The Group reset the financial covenants contained in its borrowing agreement with its lender during 2011 and remain within agreed levels at 31 December 2011.

In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. The Group also entered into an amendment letter to restructure its debt with respect to its existing facilities agreement with its lender. Under the amendment letter, the Group's lender had agreed to a repayment holiday to be applied to all principal amounts outstanding under the facility during 2011. The Group had previously been repaying £210,000 of capital per quarter and as at 31 December 2011 an aggregate principal amount of £1.68 million (2010: £1.68 million) remained outstanding under the facility. These quarterly payments were subject to a one year repayment holiday and repayments of the principal amount outstanding under the facility recommenced on 31 March 2012, with repayments remaining at £210,000 of capital per quarter.

In September 2012 the Group raised £2.66 million of funding through a combination of new equity of £1.40 million and a drawdown facility of £1.26 million that can be drawn down in line with the scheduled repayments of the existing bank term loan. The Group also entered into an amendment letter to restructure its debt with respect to its existing facilities agreement with its lender with repayments of the principal amount outstanding under the facility to continue as planned, with repayments remaining at £210,000 of capital per quarter. Also, £0.65 million loan notes converted to equity to reduce financing costs and improve leverage ratio for the group.

Based on the Group's latest cash flow forecasts and current trading performance it is not expected that any further funding will be required for the foreseeable future. The directors' consideration of the appropriateness of the going concern basis in preparing the financial statements is set out in note 1 to the financial statements.

• 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, throughout most of 2011 the economic downturn significantly affected the recruitment sector. The depth and length of the downturn, combined with the Group's predominance of permanent recruitment fees, generated mostly in the UK, represent a risk.

• People - In a people intensive business, the resignation of key individuals (both billing consultants and influential management) and the potential for them to exit the business taking clients, candidates and other employees to their new employers is a risk. Kellan mitigates this risk through a number of methods including the application of competitive pay structures and share plans to incentivise retention. In addition the Group's employment contracts contain restrictive covenants that reduce a leaver's ability to approach Kellan clients, candidates and employees for certain periods following the end of their employment with the Group.

Cashflow

Net cash outflow at operating level was £0.64 million for the year ended 31 December 2011 (2010: £0.23 million inflow). Investing activities comprised of capital expenditure of £270,000 (2010: £111,000). Net cash inflow from financing activities amounted to £964,000 (2010: £411,000 outflow) comprising the net proceeds of convertible loan notes and the repayment of invoice discounting facility balances as well as the servicing of loan interest. The net increase in cash and cash equivalents in the period was £60, 000 (2010: £291,000 decrease).

Ross Eades

Chief Executive Officer

20 September 2012

Consolidated statement of comprehensive income

for the year ended 31 December 2011

Consolidated statement of financial position

as at 31 December 2011

Consolidated statement of changes in equity

for the year ended 31 December 2011

Consolidated statement of cash flows

for the year ended 31 December 2011

1 Accounting policies

Basis of preparation

This announcement and the financial information were approved by the Board on 20 September 2012. The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2011 and 31 December 2010. Statutory accounts for the years ended 31 December 2011 and 31 December 2010 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for 2010 was unqualified and did not contain a statement under 237(2) or 237(3) of the Companies Act 1985. The audit report for the year ended 31 December 2010 included an emphasis of matter in respect of a material uncertainty regarding the continued availability of its facilities which may have cast doubt over the Group's ability to continue as a going concern. The Independent Auditors' Report on the Annual Report and Financial Statements for 2011 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2010 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2011 will be delivered to the Registrar in due course.

Going concern

The financial statements have been prepared on a going concern basis.

During 2011, the Group reset the financial covenants contained in its borrowing agreement with its lender and remained within agreed levels as at 31 December 2011.

In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. This, in addition to an amendment letter enabling the Group to restructure its debt with respect to its existing facilities agreement with its lender, provided the group with additional working capital. Under the amendment letter, the Group's lender agreed to a repayment holiday to be applied to all principal amounts outstanding under the term loan facility during 2011. At the year ended December 2011, an aggregate principal amount of £1.68 million remained outstanding under the term loan facility.

In September 2012, the Group raised funding of £2.66 million before costs through a combination of new equity and a new debt facility. Investors are committed to subscribing for shares of £1.40m and all conditions relating to their subscription have been met, subject only to the issue of the actual shares on AIM which is in process. The subscription funds are held either by the company or in a broker's account for the sole benefit of the company. The equity injection will be used for investment in fee earners and projects to stimulate growth.

A further facility has been signed with Paul Bell for £1.26m and this facility will become available for drawdown as amounts become due under the Barclays term loan facility. This facility effectively underwrites the bank's term loan although there are limitations should the Barclay's term loan become immediately repayable, as in this event the facility can still only be drawn in line with the agreed repayment schedule under the Barclay's facility. The directors have considered the prospect of an immediate payment being required in this situation and although they acknowledge it as an uncertainty consider it to be remote.

As part of the fundraising, £0.65 million loan notes were also converted to equity to reduce financing costs and improve leverage ratio for the group.

The group breached covenants on the Barclay's term loan and ID facility at 31 March 2012 and 30 June 2012, however Barclays have granted a waiver of the breaches at 31 March 2012 and 30 June 2012 and a covenant test waiver for 30 September 2012. As at 20 September 2012 the Group has an aggregate principal amount of £1.26 million remaining outstanding under the facility. Due to the financial restructuring the covenants require rebasing. This has yet to be completed but Barclays have provided written assurances to the directors that they will agree and reset the covenants before the next test date and that these covenants will include an appropriate level of tolerance.

Based on the Group's latest cash flow forecasts which cover the period to 31 December 2013 and current trading performance, together with the financial restructuring and undertaking by Barclays to rebase the covenants, the directors do not consider there to be any reasonable prospect that any further funding will be required for the foreseeable future and they consider that the group will be able to operate within the level of its current facility.

Having considered the above, the Directors are of the opinion that there is a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future and that there are no material uncertainties that would give cast significant doubt over the group's ability to continue as a going concern.

It is on this basis that the Directors consider it appropriate to prepare the Group's financial statements on a going concern basis

Measurement convention

The financial statements are prepared on the historical cost basis except for derivative financial instruments that are stated at fair value.

Basis of consolidation

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In

assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The annual rates used are generally:

• motor vehicles and computer equipment 25%

• office equipment 10% - 33%

• short leasehold premises over the duration of the lease

Goodwill

Goodwill represents amounts arising on the acquisition of subsidiaries. Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. In respect of business acquisitions that have occurred since 1 October 2005, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment.

IFRS 1 grants certain exemptions from the full requirements of Adopted IFRS in the transition period. The Group and Company elected not to restate business combinations that took place prior to 1 October 2005. In respect of acquisitions prior to 1 October 2005, goodwill is included at 1 October 2005 on the basis of its deemed cost, which represents the carrying value recorded under UK GAAP which was broadly comparable save that no intangibles were recognised and goodwill was amortised.

Externally acquired intangible assets

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements on page 20).

Amortisation is recognised in profit and loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use.

The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows:

Intangible asset Useful economic life Valuation method

Brand name 10 years Relief from royalty method

Customer relations 10 years Means extended excess method

Cash and cash equivalents

Cash and cash equivalents comprise cash balances on current accounts, cash balances on invoice discounting facilities and call deposits.

Impairment

The carrying values of assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated. Where the asset does not generate cash flows which are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is estimated.

The recoverable amount of a non-financial asset is the higher of its fair value less costs to sell, and its value-in-use. Value-in-use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit calculated using a suitable discount factor.

An impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. Any impairment recognised on goodwill is not reversed.

The impairment review is assessed by reference to value in use, using internal forecasts and estimated growth rates to forecast future cash flows, and a suitable discount rate based on the Group's weighted average cost of capital. Any impairment is recognised immediately in the income statement and is not subsequently reversed. 

Provisions

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax risk-free rate.

Employee benefits

Defined contribution plans

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.

Share-based payment transactions

The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except where forfeiture is due only to share prices not achieving market vesting conditions.

The Group and Company took advantage of the option available in IFRS 1 to apply IFRS 2 only to equity instruments that were granted after 7 November 2002 and that had not vested by 1 October 2005.

Revenue and income recognition

Revenue, which excludes value added tax ("VAT"), constitutes the value of services undertaken by the Group as its principal activities, which are recruitment consultancy and other ancillary services. These consist of:

• revenue from temporary placements, which represents amounts billed for the services of temporary staff including the salary cost of these staff. This is recognised when the service has been provided;

• revenue for permanent placements, which is based on a percentage of the candidate's remuneration package, is recognised at the date at which a candidate commences employment. Provision is made for the expected cost of meeting obligations where employees do not work for the specified contractual period.

• revenue from amounts billed to clients for expenses incurred on their behalf (principally advertisements) is recognised when the expense is incurred.

Expenses

Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

Taxation

Tax on the profit or loss for the period comprises current tax charge.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for

financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Financial assets

Financial assets are classified into the following specified categories: "financial assets at fair value through profit or loss (FVTPL)", and "loans and receivables". The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Group does not hold any "held-to-maturity" investments or "available-for-sale" financial assets. The Group's accounting policy for each category is as follows:

Financial assets at FVTPL

This category comprises only in-the-money interest rate derivatives (see financial liabilities section for out-of-the-money derivatives). They are carried in the balance sheet at fair value with changes in fair value recognised in the consolidated income statement in the finance income or expense line. The Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss.

Loans and receivables

Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. They are initially measured at fair value and subsequently at amortised cost less any provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. This provision represents the difference between the asset's carrying amount and the present value of estimated future cash flows. The amount of the provision is recognised in the income statement.

Cash and cash equivalents include cash in hand, deposits at call with banks and bank overdrafts. Bank overdrafts where there is no right of set-off are shown within borrowings in current liabilities on the balance sheet.

Financial liabilities and equity instruments

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. Financial liabilities are classified as either "financial liabilities at fair value through profit or loss (FVTPL)" or "other financial liabilities".

When the company issues multiple instruments in a single transaction the proceeds are allocated to each separate instrument in accordance with their respective fair values. Where convertible debt is issued the company determines the allocation of the proceeds to the debt and equity components by first of all determining the fair value of debt and then subtracting the amount of the debt from the proceeds of the instrument as a whole to determine the equity component.

Where a restructuring of debt arises the terms are reviewed to consider whether there has been a substantial modification and if so that there is an extinguishment of the existing debt and the recognition of a new financial liability based on the amended terms.

Financial liabilities at FVTPL

This category comprises only out-of-the-money interest rate derivatives. They are carried in the balance sheet at fair value with subsequent movements in fair value taken to the income statement in the finance income or expense line. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss.

Other financial liabilities

Trade and other payables are recognised on the trade date of the related transactions. Trade payables are not interest bearing and are stated at the amount payable which is fair value on initial recognition.

Interest bearing loans are recognised initially at fair value, net of direct issue costs incurred, and are subsequently carried at amortised cost using the effective interest method.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Adoption of new and revised standards

Standards and interpretations in issue not yet adopted

The International Accounting Standards Board and the International Financial Reporting Interpretations Committee have issued the following standards and amendments to standards to be applied to financial statements with periods commencing on or after the following dates:

* These standards and interpretations are not endorsed by the EU at present.

The directors do not anticipate that the adoption of these standards will have a material impact on the Group's financial statements in the period of initial application.

Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included below:

(a) Impairment of intangibles

The Group is required to test, on an annual basis, whether goodwill has suffered any impairment and other assets where there has been an indication of impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Actual outcomes may vary particularly in light of the current volatility of the recruitment sector to changes in the wider macro-economic environment. More information including carrying values is included in note 10.

(b) Useful lives of intangible assets and property, plant and equipment

Intangible assets and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the consolidated income statement in specific periods. More details including carrying values are included in notes 9 and 10.

(c) Share-based payments

Employee services received are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black Scholes valuation model on the date of grant based on certain assumptions. Those assumptions are described in note 17. The charge also depends on estimates of the number of options that will ultimately vest based on the satisfaction of non-market and service vesting conditions.

(d) Determination of fair values of intangible assets acquired in business combinations

The fair value of brand names is based on the discounted estimated royalty payments that would have been avoided as a result of the brand name being used. The fair value of customer relations is based on the discounted mean extended excess future cash flows from existing customers. These methods require the estimation of future cash flows, the choice of a suitable royalty and discount rates in order to calculate the fair values.

(e) Derivative instruments

The fair value of the Group's interest rate swap derivatives are determined using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realised immediately.

(f) Onerous leases and dilapidations

Inherent uncertainties in estimates of rents that will be received in the future on vacant property when determining the onerous lease obligation and estimating the cost of returning the properties to their original state at the end of the lease.

(g) Convertible loan notes and warrants

The fair value of warrants is estimated by using the Black Scholes valuation model on the date of grant based on certain assumptions. Those assumptions are described in note 20. In determining the fair value of the convertible option, estimates are made of the market rate of interest for similar company debt issues when discounting cash flows relating to the debt component.

2 Reconciliation of operating loss to Adjusted EBITDA and EBITA

3 Expenses and auditors' remuneration

Included in loss before tax is the following:

Auditors' remuneration:

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

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:

The aggregate payroll costs of these persons were as follows:

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.

There were 2 directors in defined contribution pension schemes during the period (2010: 3).

The total amount payable to the highest paid director in respect of emoluments was £237,779 (2010: £238,756). Company pension contributions of £22,500 (2010: £22,500) were made to a money purchase scheme on his behalf.

No options were exercised by directors during the current or prior periods.

5 Finance income and expense

6 Taxation

Recognised in the income statement

Reconciliation of effective tax rate

7 Earnings per share

Basic and diluted earnings per share

The calculation of basic earnings per share for the year ended 31 December 2011 was based on the loss attributable to ordinary shareholders of £5,910,000 (2010: loss of £9,736,000) and a weighted average number of ordinary shares outstanding of 102,889,074 (2010: 87,400,190) calculated as follows:

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

8 Operating segments

Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CEO") in deciding how to allocate resources and in assessing performance.

The Group identifies its reportable operating segments by divisions, each of which is run by a divisional managing director. Each identifiable business division operates in a different market of recruitment, has its own brand, engages in business activities from which it may earn revenues and incur expenses, discrete financial information is readily available and its operating results are regularly reviewed by the CEO. Operating segment results are reviewed to controllable contribution level which is gross profit less employee costs and marketing costs directly controlled by the managing director of that division. All other costs are controlled at Group level and are disclosed as Kellan central costs, which for the purposes of internal reporting in 2011 was a non-profit making centralised Group cost function.

Each division derives its revenues from supplying one or more of contingent permanent, contract, temporary and retained search recruitment services. The RK Search and Robinson Keane divisions have been aggregated as they individually fall under the threshold for separate disclosure and have similar economic characteristics.

Transactions with the Group's largest customer do not account for more than 10% of the Group's revenues and the Group's revenues attributed to foreign countries are immaterial for the purpose of segmental reporting.

Assets and liabilities are reviewed at a Group level and are not reviewed by the CEO on a segmental basis.

The total of the reportable segments' Adjusted EBITDA for the year agrees to the reconciliation to Group operating loss (see note 2).

9 Property, plant and equipment

10 Intangible assets

Goodwill

The impairment review undertaken in 2011 resulted in a charge of £5,001,000 (2010: £9,475,000) and the reason for impairment are further explained in the business review. The key assumptions used in the impairment testing were the discount rates and cash flows.

A discount rate of 14.0% (2010: 14.0%) reflects management's current estimate of the pre-tax cost of capital of the group and this rate is applied to the CGUs listed above. An increase in the discount rate of 1% would result in an additional impairment of £555,000.

Cash flows for 2012 to 2016 are based on the forecast figures of each CGU for 2012 to 2016 based on a conservative approach whilst considering the anticipated economic conditions, corporate strategy and the related risk, market intelligence/sentiment and specific knowledge of the individual CGUs. Growth has been restricted to 3% for cash flows extending beyond five years. An adjustment to reduce the forecast cash flows by 5% would result in an additional impairment of £2,854,000.

11 Deferred tax assets and liabilities

Recognised deferred tax liabilities

Recognised deferred tax liabilities are attributable to intangible assets. The movement on the accounts is as follows:

A deferred tax asset has not been recognised as there is insufficient evidence that future taxable profits will be available against which the asset can be utilised.

12 Trade and other receivables

An analysis of the allowance against accounts receivable and details of trade receivables past due and not impaired is included in note 16.

13 Cash and cash equivalents

14 Other interest-bearing loans and borrowings

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

Terms and debt repayment schedule

The 5 year term loan of £1,680,000 (2010: £1,680,000) and invoice discounting facility balance utilised of £2,308, 000 (2010: £2,354,000) 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 4% margin and an upper threshold of 6.50% plus 4% margin. The invoice discounting facility has an interest rate of 3% above Barclay's base rate.

The loan notes comprise £1,011,000 issued in February 2011 repayable at par in February 2016 and £1,000,000 issued in February 2010 repayable at par in February 2015.Interest is payable on the loan notes at a rate of 10% per annum on the par value. The loan notes are redeemable before the maturity date at the option of the company at a premium of 10% of par value and can also be converted at the option of the note holders into ordinary share capital at any point up to the date of maturity. The loan notes are secured on the assets of the Group but subordinated to the bank loans and overdraft under the terms of an inter-creditor deed. The equity element of the convertible loan notes has been separately classified within equity and issue costs allocated to the debt and equity components.

15 Trade and other payables

Trade payables are non-interest bearing and are normally settled within 45 day terms.

16 Financial instruments

Financial risk management

The Group is exposed through its operations to the following financial risks:

• liquidity risk;

• interest rate risk;

• credit risk; and

• foreign currency risk.

Liquidity risk

Liquidity risk is managed centrally on a Group basis. 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 Group has sufficient funds for operations for the foreseeable future. Budgets and forecasts are agreed and set by the Board in advance to enable the Group's cash requirements to be anticipated.

Interest rate risk

Debt is maintained at bank variable rates which inherently bring interest rate risk and the Group makes use of interest rate collar swaps to achieve the desired interest rate profile. The Group maintains detailed cash flow

forecasts enabling it to factor incremental changes in interest rates into its risk profile and liquidity and react accordingly.

Credit risk

The Group's principal financial assets are bank balances and cash and trade and other receivables. The Group's credit risk is primarily attributable to its trade receivables.

The Group's policy in respect of trade receivables credit risk requires 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 records impairment losses on its trade receivables separately from the gross receivable and calculates the allowance based on evidence of its likely recovery. At the balance sheet date there were no significant concentrations of credit risk.

The Group's credit risk on liquid funds is limited due to the Group's policy of monitoring counter party exposures and only transacting with high credit-quality financial institutions.

Foreign currency risk

The Group's foreign currency denominated activity is not significant and the impact of foreign exchange movements on reported profits, net assets and gearing are not significant. The day-to-day transactions of overseas branches are carried out in local currency and Group exposure to currency risk at a transactional level is minimal.

The Group does not enter into speculative treasury arrangements and there are no significant balances or exposures denominated in foreign currencies.

Capital risk management

The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern whilst maximising optimising the debt and equity balance.

In managing its capital, the Group's primary objective is to ensure its ability to provide a return for its equity shareholders through capital growth. In order to achieve this objective, the Group seeks to maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, the Group considers not only its short-term position but also its long-term operational and strategic objectives. The Group's gearing profile, being the face value of loans and borrowings £5,999,000 (2010: £5,034,000) as a percentage of total equity £4,025,000 (2010: £9,517,000) increased to 149.0% from 52.9% during the year.

Trade receivables impairment

Movement on trade receivables impairment provision:

The trade receivables past due and not impaired at the balance sheet date amounted to £2,099,000 (2010: £1,526,000) and comprised £1,755,000 (2010: £1,354,000) overdue by up to 30 days, £271,000 (2010: £288,000) overdue by 30-60 days and £73,000 (2010: £42,000) overdue by more than 60 days.

The directors consider that all other receivables are fully recoverable.

Categories of financial instruments

Financial assets

The financial assets of the Group comprised:

Financial liabilities

The financial liabilities of the Group comprised:

Bank loans and invoice discounting balances amounting to £3,933,000 (2010: £3,906,000) are secured by cross guarantees and mortgage debentures on certain Group companies. The convertible loan notes of £1,919,000 (2010: £927,000) are secured on the assets of the Group but subordinated to the bank loans and overdraft under the terms of an inter-creditor deed.

In addition to the above financial liabilities measured at amortised cost the carrying value of derivatives which are classified as fair value through profit and loss is £42,000 (2010: £57,000). The directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost in the financial statements approximate their fair values.

Effective interest rates and repricing analysis - Group

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature or, if earlier, are repriced.

The above table is based on the balances at the balance sheet date. The effect of future interest cash flows and sensitivities applied thereon can be determined from the above effective interest rates.

17 Employee benefits

Defined contribution plans

The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current period was £136,000 (2010: £117,000). No pension contributions were outstanding at the period end (2010: £7,000).

Share-based payments

Approved and unapproved share schemes

The Group has 4 share option schemes with options remaining unexercised at 31 December 2011:

1999 Unapproved Scheme - Nil options remain unexercised at 31 December 2011

The scheme is no longer used to grant new options and all residual options in existence have vested.

2004 Approved EMI Scheme - 11,000,000 options remain unexercised at 31 December 2011

The ability of a company to utilise EMI options is governed by conditions, including those of size, that are prescribed by the HMRC. A reduction in headcount and net assets since 2009 has resulted in the group becoming eligible to grant new EMI options during the year.

2008 Unapproved All Employee Scheme -3,526,667 options remain unexercised at 31 December 2011

Options granted to management under this scheme have vesting criteria including length of service, minimum trading performance levels and conditions related to the share price of the Group. There were no exercisable options in this scheme at the year end. All options granted have a contract life of 4 years.

2009 SAYE Scheme - 1,426,915 options remain unexercised at 31 December 2011

The scheme was established in 2009 offering all employees the opportunity to purchase shares. Vesting conditions are purely length of service related with all options vesting and exercisable after 3 years.

2010 SAYE Scheme - 1,350,000 options remain unexercised at 31 December 2011

The scheme was established in 2010 offering all employees the opportunity to purchase shares. Vesting conditions are purely length of service related with all options vesting and exercisable after 3 years.

The number and weighted average exercise prices of share options - are as follows:

The exercise price of options outstanding at the end of the period ranged between £0.03 and £0.99 (2010: £0.03 and £0.99) and their weighted residual contractual life was 7 years (2010:8 years). There were no options exercised during the current or prior period. The weighted average fair value of each option granted during the period was £0.02 (2010: £0.03).

18 Provisions

Onerous contracts and dilapidations predominantly relate to the costs payable on properties which have been vacated and incremental costs that will be incurred on exiting existing properties where a commitment to do so exists at the balance sheet date.

19 Capital

Share capital

On 14 February 2011, the company allotted 16,975,000 ordinary shares of £0.02 each for consideration of £339,500. In addition to this, in February and July 2011, the company issued 724,728 and 1,773,866 ordinary shares of £0.02 each for consideration in settlement of interest of £61,500 on the loan notes issued.

The holders of ordinary shares are entitled to receive dividends when declared and are entitled to 1 vote per share at meetings of the company.

20 Reserves

Share premium

The share premium account represents the excess of the proceeds from the issue of shares over the nominal value of shares issued less related issue costs.

Merger reserve

The merger reserve represents the excess of the fair value of shares issued on acquisition over the nominal value of shares issued where merger relief for the purposes of Companies legislation applies. The balance was transferred to retained earnings during the year following an impairment of the related investment.

Convertible reserve

The convertible reserve represents the equity component of the convertible loan note.

Warrant reserve

On 5 February 2010, 1,000,000 warrants were issued to the convertible loan note holders, with the right to subscribe for ordinary shares until 5 February 2015 at the lower of 6.5p per share or the price of any new issue, but not less than 2.0p per share. There are no other outstanding warrants at 31 December 2011. The warrant reserve reflects the fair value of the warrants issued with the convertible loan note and was measured using the Black Scholes model.

Capital redemption reserve

The capital redemption reserve relates to the cancellation of the Company's own shares.

21 Operating leases

The total future minimum lease payments of non-cancellable operating lease rentals are payable as follows:

During the period £879,000 was recognised as an expense in the income statement in respect of operating leases (2010: £1,133,000), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

On 2 February 2011, the directors J P Bowmer, A H Reeves and J McHugh each subscribed for £150,000 of the convertible loan notes. At 31 December 2011 there were convertible loan notes amounting to £900,000 (2010: £450,000) due to the directors J P Bowmer, A H Reeves and J McHugh of £300,000 each. In addition to this there were convertible loan notes amounting to £150,000 (2010: £150,000) due to R D Eades. The terms attaching to the convertible loan notes and related warrants are set out in note 14 and note 20 respectively.

23 Post balance sheet events

In September 2012 the Group raised £2.66 million of funding through a combination of new equity of £1.40 million and a drawdown facility of £1.26 million that can be drawn down in line with the scheduled repayments of the existing bank term loan, conditions only on the final issuance and admission of subscription shares to AIM. Also £0.65 million loan notes converted to equity to reduce financing costs and improve leverage ratio for the group.

24 Annual general meeting and lifting of suspension of trading on the AIM market

Trading in the Company's shares were suspended with effect from 29 June 2012 pending the publication of the audited accounts for the year ended 31 December 2011. The Annual Report for the year ended 31 December 2011 is expected to be published and sent to shareholders on 21 September 2012. Accordingly, the Directors expect that trading in the Company's ordinary shares will re-commence on 24 September 2012.

The Annual General Meeting of the Company will be held at the Company's office at 27 Mortimer Street, London W1T 3BL, on 17 October 2012 at 2.00pm.

Copies of the report will be available from the Company's office and also from the Company's website www.kellangroup.co.uk.