Final Results

24 May 2013

KELLAN GROUP ANNOUNCES PRELIMINARY RESULTS FOR THE

12 MONTH PERIOD ENDED 31 DECEMBER 2012

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 2012.

Headline figures

·; Operating loss narrowing from £5.4 million in 2011 to £2.1 million in 2012.

·; Continued streamlining with administrative expenses (including impairment) reducing by 34% year on year from £16.3 million in 2011 to £10.8 million in 2012. Non-cash impairment of goodwill and intangibles reducing from £5.00 million in 2011 to £1.07 million in 2012.

·; Loss of 1.92 p per basic and diluted share (2011 - loss 5.72 p).

·; In September 2012, £0.65 million of loan notes converted to equity, £1.40 million raised through share subscription and £1.26 million facility put in place at interest rates that are more favourable than the existing bank senior debt. The £1.26 million facility is being draw down in line with the repayments of the bank senior debt.

·; Interim £0.6 million unsecured related party loan facility arranged in March 2013 pending Group recapitalisation.

·; Fundraising of £1.5 million, comprising £0.9 million in equity and £0.6 million in unsecured convertible debt is at an advanced stage of discussion with the Company's largest shareholder.

Enquiries:

Kellan Group Plc

Tony Reeves, Executive Chairman 0207 268 6200

Rakesh Kirpalani, Group Finance Director

Sanlam Securities UK Limited

David Worlidge 0207 628 2200

Virginia Bull

Chairman's Statement

2012 was a year in which the recruitment market continued to be affected by the slow-moving UK economy. The opportunity for growth during 2012 has been a particular challenge and the Group has demonstrated strong resilience in poor market conditions. With the diverse nature of the Kellan Group as a business, we have displayed intelligence in difficult trading conditions, focusing our core efforts on increasing market share in the sectors in which we operate.

The Group's operating loss for 2012 narrowed to £2.17 million compared to £5.45 million in 2011. Continued focus on streamlining administrative expenses (including impairment) resulted in a year on year saving of 34% from £16.3 million in 2011 to £10.8 million in 2012.

With Ross Eades stepping down from Chief Executive Officer to Non-executive Director in March 2013, I have assumed the role of Executive Chairman, meaning that I am fulfilling the role of strategic leader for the Kellan Group. This confirms my commitment to the business is absolute, as is the Group's Board. Together with Rakesh Kirpalani and Mark Darby, who has taken on a wider operational leadership role within the Group, we have adopted a very open and frank means of communication and are extremely confident of future prospects. This is evident by the continued financial support and investment in Kellan, combined with the recognition and implementation of necessary changes within the Group.

We have proactively controlled our cost base by consolidating locations and renegotiating with suppliers where appropriate resulting in the Group being streamlined for expansion. We are now in a position to focus on areas of the business where we have expertise and are able to create critical mass to achieve attainable growth.

The Group has realigned the Leadership & Management team to ensure we have the right people in the right roles, creating a robust operational infrastructure to provide support to everyone across our business.

The Kellan Group has a number of strong niche brands with strong sector focus and expertise, driven by strong and passionate leadership. We have added a cohesive, supportive and proactive highly visible Group influence to that mix and created an exciting and successful future for all those involved in the Kellan Group.

Fundraising of £1.5 million, comprising a proposed £0.9 million in equity and £0.6 million in unsecured convertible debt, which will replace the £0.6 million interim related party loan facility arranged on 21 March 2013, is at an advanced stage of discussion with the Company's largest shareholder. This fundraising along with the recent steps to restructure the operational structure of the Group, which will yield an annualised saving of circa £0.59 million per annum, puts the Group in a good position to deliver improved results.

John Bowmer and James McHugh stepped down from Non-executive Director roles in Q4 2012 to pursue their overseas business interests and I would like to thank them both for their contributions to the Group.

Business review

With the UK recruitment market being very inconsistent with some specialist sectors doing significantly better than others, the Group has proactively taken the opportunity to ensure it is in the strongest position possible. We have implemented a positive restructure into the business to make certain that the businesses within the Group are in the best position to maximise market share as and when the opportunity arises, while maintaining a clear focus on controlling and further reducing our cost base. Our clear strategy is to invest in growth markets and niche sectors ensuring the most productive return on investment. The diverse brands within the Group de-risk the overall impact of an inconsistent market, and we saw some strong performances from our hospitality and technology brands, while the professional services brands have faced numerous challenges in the last year. 

Berkeley Scott continues to be a market leader in the hospitality and leisure markets. The brand has shown great strength especially in the senior appointment and general management market with the new finance division generating some strong market traction. The temporary divisions enjoyed new business and increased revenue due to high profile events such as the Olympics, Paralympics and Queen's Jubilee, and the northern division has successfully expanded into the Warrington market place winning vital new business. The main challenges that Berkeley Scott now face is the competition from direct hires and smaller specialist agencies and the pressure on reduced margins due to such a competitive marketplace.

Quantica Technology, the Group's specialist IT Division, has continued to build it's presence in London & regional UK operations with increased revenue streams from mainland Europe, in particular Germany & Switzerland. Continued growth in all niche areas has given the business increased confidence in what is an extremely competitive market. 2013 has started very well for Quantica Technology with increased fees coupled with costs being managed effectively helping to ensure that the brand will continue to grow in carefully identified markets.

The RK and search brands had a difficult second half in 2012 but are showing promise under new leadership with a clear focus on the specialist markets they work in. RK Accountancy and RK Finance are gaining a valuable reputation with the key message of local finance specialists in the North of England. RKHR Professionals has enabled strong cross selling opportunities for the Group. Quantica Search and Selection is winning new business and maintaining its reputation as a food manufacturing recruitment specialist in the northern regions, an area of targeted growth and investment for our business.

I would also like to thank our increasingly loyal customer base and our shareholders for their invaluable support throughout 2012. 2013 has begun in a similar fashion as the end of 2012 - with market conditions still displaying a hesitant and unpredictable trading environment. We have been vigilant at managing costs and cash whilst being acute to increase market share in our respective markets. During this challenging time, I would like to thank the Group's staff for their unwavering passion, flexibility and willingness to develop and enhance our core businesses. I would also like to thank them for their undeniable patience, commitment and loyalty to the Group.

Tony Reeves

Executive Chairman

23 May 2013

Group Finance Director's Report

Financial Review

Administrative expenses have decreased to £10.8 million in the year ended 31 December 2012, from £16.3 million in 2011. Adjusting the cost base for the impairment, amortisation, depreciation, share based payments and restructuring, like-for-like costs have reduced from £10.7 million for the year ended 31 December 2011 to £9.1 million for the year ended 31 December 2012 which represents a reduction of 15% year on year. 

The Group's revenue for the year ended 31 December 2012 was £24.2 million representing a decrease of 10% (2011: £26.9 million). This produced Net Fee Income ("NFI") of £8.6 million for the year ended 31 December 2012, a decline of 20.7% (2011:£10.9 million).

Impairment of Intangibles

The impairment review undertaken in 2012 resulted in a non-cash goodwill & intangibles impairment charge of £1.08 million (2011: £5.0 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 based on current market conditions with modest forecast growth.

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:

Year ended Year ended

31 December 2012 31 December 2011

Revenue £24,196,000 £26,902,000

Net Fee Income £8,602,000 £10,853,000

Adjusted EBITDA (£524,000) £166,000

Adjusted EBITDA as a % of Net Fee Income (6.09%) 1. 5%

Days sales outstanding (DSO) 40 38

Headroom on CID facility £136,000 £466,000

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.

In September 2012, £0.65 million of loan notes were converted to equity, £1.40 million was raised through a share subscription and a £1.26 million facility was put in place at interest rates that are more favourable than the existing bank senior debt. The £1.26 million facility is being draw down in line with the repayments of the bank senior debt and is due for repayment in September 2017.

On 21 March 2013 the Group obtained an interim working capital facility amounting to £0.6 million. The facility is unsecured and is accruing interest at a rate of 4% per annum.

The £1.26 million facility and £0.6 million interim working capital facility have been provided by Paul Bell, who is a major shareholder, owning 41.77% of the issued share capital of the Company.

Fundraising of £1.5 million comprising a proposed £0.9 million in equity and £0.6 million in unsecured convertible debt which is proposed to replace the £0.6 million working capital facility, is at advanced stage of discussions with the Company's largest shareholder.

Based on the Group's latest cash flow forecasts, current trading performance and a timely and successful conclusion of the proposed funding of £1.5 million, 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 2012 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 an operating level was £1.16 million for the year ended 31 December 2012 (2011: £0.64 million). Investing activities comprised of capital expenditure of £29,000 (2011: £270,000). Net cash inflow from financing activities amounted to £854,000 (2011: £965,000) comprising the proceeds from issue of share capital, movement on the invoice discounting facility balances and repayment of term loan as well as the servicing of loan interest. The net decrease in cash and cash equivalents in the period was £339,000 (2011: increase of £60,000).

Rakesh Kirpalani

Group Finance Director

23 May 2013

Consolidated statement of comprehensive income

for the year ended 31 December 2012

Consolidated statement of financial position

as at 31 December 2012

Consolidated statement of changes in equity

for the year ended 31 December 2012

Consolidated statement of cash flows

for the year ended 31 December 2012

1 Accounting policies

Basis of preparation

This announcement and the financial information were approved by the Board on 23 May 2013. The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2012 and 31 December 2011. Statutory accounts for the years ended 31 December 2012 and 31 December 2011 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for 2012 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 2012 included an emphasis of matter in respect of a material uncertainty in respect of the successful and timely completion of the £1.5 million fundraising 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 2011 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2012 will be delivered to the Registrar in due course.

Going concern

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

Based on the Group's latest trading expectations and associated cash flow forecasts, the directors have considered the cash requirements of the Company and subject to the completion of the on-going fundraising of £1.5 million, which as disclosed in the Executive Chairman's and Group Finance Director's statement is expected to be concluded in the near future, the Group will be able to operate within its existing facilities for the next twelve months following approval of these financial statements. These facilities comprise an invoice discounting facility of up to £4 million dependant on trading levels, a related party loan of up to £1.26 million repayable in September 2017, a bank loan of £690,000 due to be repaid by the end of August 2013 and an interim related party working capital facility of £600,000 which will be replaced as part of the £1.5 million fundraising. The related party loan is being drawn down to meet bank loan repayments as they fall due and is on more favourable terms with no financial covenants attached. The Directors intend to fully utilise the related party loan to repay the bank loan.

The Directors recognise that there are material uncertainties around the successful and timely completion of the fundraising and a general sensitivity to the wider macro-economic environment which may necessitate a requirement for additional funding. These uncertainties may cast significant doubt over the Group's ability to continue as a going concern. However, based on the position of the fundraising, the current market outlook and management's trading expectations; the Directors are confident that the Group will be able to meet its liabilities as they fall due for the foreseeable future. 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.

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 and deferred 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. 

(h) Permanent placement provision

A provision is made for the expected cost of meeting obligations where employees do not work for the specified contractual period.

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 (2011: 2).

The total amount payable to the highest paid director in respect of emoluments was £240,917 (2011: £237, 779). Company pension contributions of £22,500 (2011: £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

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 2012 was based on the loss attributable to ordinary shareholders of £2,583,000 (2011: loss of £5,910,000) and a weighted average number of ordinary shares outstanding of 134,418,922 (2011: 103,328,470) 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 ("Executive Chairman") 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 Executive Chairman. 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.

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 Executive Chairman 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 2012 resulted in a charge of £1,077,000 (2011: £5,001,000) 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% (2011: 14%) has been applied to the CGUs listed above. Discount rates are based on management's assessment of specific risks related to the CGUs, which approximates to the Group's pre-tax weighted average cost of capital. An increase in the discount rate of 1% would result in an additional impairment of £160,000.

Cash flows for 2013 to 2017 are based on the forecast figures of each CGU for 2013 to 2017 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 £73,000.

 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 Interest-bearing loans and borrowings

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

Terms and debt repayment schedule

The bank loan of £840,000 (2011: £1,680,000) and invoice discounting facility balance utilised of £2,785,000 (2011: £2,308,000) 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 0.67% plus 4% margin and an upper threshold of 0.90% plus 4% margin. The invoice discounting facility has an interest rate of 3% above Barclay's base rate.

The loan notes comprise £811,000 (2011: £1,011,000) issued in February 2011 repayable at par in February 2016 and £550,000 (2011: £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.

16 Financial instruments continued

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 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 of £5,246,000 (2011: £5,999,000) as a percentage of total equity £3,624,000 (2011: £4,025,000) decreased to 144.8% from 149.0% 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 £2,986,000 (2011: £2,099,000) and comprised £2,001,000 (2011: £1,755,000) overdue by up to 30 days, £614,000 (2011: £271,000) overdue by 30-60 days and £372,000 (2011: £73,000) overdue by more than 60 days.

The directors consider that all these 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 £3,588,000 (2011: £3,933,000) are secured by cross guarantees and mortgage debentures on certain Group companies. The convertible loan notes of £1,288,000 (2011: £1,919,000) 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 £13,000 (2011: £42,000). 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 - 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.

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 £74,000 (2011: £136,000). No pension contributions were outstanding at the period end (2011: Nil).

Share-based payments

Approved and unapproved share schemes

The Group has 4 share option schemes with options remaining unexercised at 31 December 2012:

1999 Unapproved Scheme - Nil options remain unexercised at 31 December 2012

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

2004 Approved EMI Scheme - 22, 500,000 options remain unexercised at 31 December 2012

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 -2,526,667 options remain unexercised at 31 December 2012

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 - 913,225 options remain unexercised at 31 December 2012

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 - 630,000 options remain unexercised at 31 December 2012

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 (2011: £0.03 and £0.99) and their weighted residual contractual life was 8 years (2011:7 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 (2011: £0.02).

The fair value of employee share options is measured using the Black Scholes model. Measurement inputs and assumptions on options granted during the period are as follows:

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options). The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The total charge recognised for the period arising from share-based payments was £86,000 (2011: income £30,000).

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 27 September 2012, the company allotted 70,000,000 ordinary shares of £0.02 each for a total consideration of £1,400,000. In addition to this £650,000 nominal of loan notes were converted into 30,500,000 new Ordinary Shares. In February and October 2012, the company issued 1,797,104 and 1,633,029 ordinary shares of £0.02 each, respectively, for consideration in settlement of interest of £91,000 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.

Convertible debt 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 2012. 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 £601,000 was recognised as an expense in the income statement in respect of operating leases (2011: £879,000), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

On 27 September 2012, the directors, A H Reeves and R D Eades converted £300,000 and £150,000 nominal of loan notes into an aggregate 21,000,000 new Ordinary shares. At 31 December 2012 there were convertible loan notes amounting to £600,000 (2011: £900,000) due to the directors J P Bowmer (resigned 30 November 2012) and J McHugh (resigned 11 December 2012) of £300,000 each. In addition on 27 September 2012, Rakesh Kirpalani, Group finance director of Kellan invested £20,000 through the subscription of 1,000,000 new Ordinary Shares at 2p per share.

On 27 September 2012, a loan facility of £1.26 million was provided to the company by Paul Bell, a major shareholder owning 41.77% of the issued share capital of the Company. As at 31 December 2012, an amount of £260,000 had been drawn down.

23 Post balance sheet events

On 15 March 2013, the Group CEO, R D Eades stepped down to become a Non-executive Director. The Non-Executive Chairman, A H Reeves was appointed as the Executive Chairman on the same date.

On 21 March 2013, the Group obtained an unsecured interim working capital facility of £600,000 from Paul Bell.

24 Annual general meeting

The Annual General Meeting of the Company will be held at the Company's office at 27 Mortimer Street, London W1T 3BL, on 27 June 2013 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.