Final Results

Embargoed until 7.00am on 12 April 2011

KELLAN GROUP ANNOUNCES PRELIMINARY RESULTS FOR THE

12 MONTH PERIOD ENDED 31 DECEMBER 2010

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 2010.

Headline figures

·; Revenue of £29.83 million represented an increase of 1.2% from £29.46 million for 2009.

·; Net Fee Income (NFI) of £12.39 million represented a decrease of 3.7% from £12.86 million for 2009, with H2-2010 NFI of £6.56 million representing a sequential improvement of 12.6% on H1-2010 and 8.7% improvement on H2-2009.

·; Continued focus on administrative expenses (excluding impairment, amortisation, shared based payments, onerous leases and restructuring costs) reducing by 14.9% year on year from £14.43 million in 2009 to £12.28 million in 2010.

·; Adjusted EBITDA profit for the year of £0.10 million against a loss of £1.56 million for 2009 (note 2).

·; Operating loss, excluding the impairment of goodwill and intangibles for the year, of £0.85 million for the year (2009 Operating loss of £4.24 million).

·; Impairment charge (non cash) against goodwill of £9.5 million (2009 - nil).

·; Net Loss of £9.74 million or 11.1p per basic and diluted share, compared with net loss of £4.22 million or 4.8p per basic and diluted share for 2009.

·; Cash inflow from operating activities of £0.23 million. Significantly ahead of the cash outflow of £1.80 million in 2009.

·; £1.35 million raised subsequent to the year end through the issue of shares and convertible loan stock to fund the growth in the number of fee earners with aim of executing management's growth strategy.

Enquiries:

Kellan Group Plc

Ross Eades, Chief Executive Officer 0207 268 6200

John Melbourne, Chief Financial Officer

Merchant Securities Limited

Bidhi Bhoma 0207 628 2200

Virginia Bull

Co-Chairmen's statement

2010 was a year in which we saw gradual recovery of the recruitment markets in which we operate following a tough 2009. The second half of the year showed signs of improvement in a number of the Group's key markets, which together, with tight cost control, enabled the Group to break even at Adjusted EBITDA level in the last 6 months of 2010, which was the first time since the first half of 2008.

In February 2011 the Group secured an additional £1.35 million of funding together with a deferral of quarterly loan repayments throughout 2011 totalling £0.84 million. This, in addition to renegotiated bank covenants, puts the business in a very much stronger financial position going forward.

The management team continues to focus attention on net fee income growth, cost control and working capital management. The additional funding will be used to recruit fee earners to grow the business by expanding market share in existing markets and developing new geographical markets from the Group's network further strengthening the positioning of the Group's specialist brands.

Underlying operational costs have been reduced by 14.9% year on year to £12.28 million. Through 2010, head count remained static at approximately 185, yet we were able to achieve increased productivity per fee earner by 10.8%. We are continuing to focus on aligning the property portfolio to future plans and medium term staffing levels. The Group took the opportunity to exit three properties during the year and we hope to exit a further three over the next 18 months. We intend to ensure that we are in the right locations with suitable room for expansion but keeping excess space to a minimum

Control of cash remains a priority. We continue to work with the Group's clients and suppliers alike to ensure that we maximise working capital. Pleasingly, the Group's day sales outstanding fell by six days to thirty eight from December 2009 to December 2010.

We continue to invest wisely in technology. Projects in 2010 resulted in the consolidation of the group data centre together with improved robustness in the IT infrastructure that will provide a strong platform to cater for an increase in the size of the business.

The success of any business is based on the hard work, dedication and the passion of its people. Management must set the tone to create the right environment in which people can excel and meet their full potential. We would like to thank the Group's staff for their hard work throughout the year as they continue to focus on providing our customers with exemplary service.

We would also like to thank the Company's shareholders for their continued support of the business; with the recent investment we are looking forward to the business growing in 2011 and delivering consistent profits in the future.

John Bowmer Tony Reeves

Co-Chairman Co-Chairman

11 April 2011 11 April 2011

Chief Executive Officer's Report

Business Review

After a challenging 2009, 2010 started with markets continuing to present difficult trading conditions, however as the year progressed we saw a steady recovery in trading in a number of key areas and we are optimistic about the outlook for our key markets over the coming year.

Although Net Fee Income ("NFI") reduced year on year, sequential improvement from H2-2009 together with a continued focus on the Group's cost base meant that losses significantly reduced in 2010 (at Adjusted EBITA, loss of £0.2 million in 2010 against a loss of £2.00 million in 2009), with the business reaching break even at Adjusted EBITDA level in the second half of the year. This signalled the successful conclusion of Phase 1 of management's growth strategy.

Phase 2 has begun by securing £1.35 million additional funding to support the organic growth of the Group's established brands. Here, management continue to pursue a strategy of growing our temporary and contract business at a quicker rate than permanent business. With a better balance of income streams, this ensures the group is more resilient to adverse changes in the macro economic climate.

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

2011 has seen a slow start with indications that trading, although improving, will continue to be tempered by economic uncertainty across the recruitment sector. This requires the Board to balance the speed of investment in new opportunities with the overall business performance whilst continuing to control costs and cash.

Berkeley Scott is a market leader in the hospitality and leisure markets. NFI in 2010 grew year on year, which together with improved productivity, led to significant improvement in operating leverage. The Berkeley Scott brand holds an enviable position with both candidates and clients, when combined with strong business execution; this provides a great platform to further grow the business in 2011. 

Quantica Technology, the Group's IT specialist, continues to be focused in the North West and Yorkshire markets. Early investments in London are starting to pay off, with plans to build on this initial investment in the first half of 2011 as the Group expands its speciality practice areas.

RK Accountancy, the Group's accounting and finance business; saw a slight reduction in NFI year on year as both the North West and Yorkshire (representing 81% of NFI) showed a slower recovery than markets in London and the South East. In January 2011 the Group opened its first RK Accountancy office in London with early positive indications on trading. The board is also focusing more on servicing and growing the qualified end of the market, diversifying RK's offering.

The Kellan Search and Selection markets (RK Supply Chain, Quantica Search & Selection and RK Search) continue to suffer with both manufacturing and retail businesses cutting down on recruitment spend which together with the high dependency on permanent recruitment, has meant NFI fell year on year.

Returning the business to breakeven has been challenging and I would like to thank our staff, our increasingly loyal customer base and our shareholders for their invaluable support throughout 2010. I am also extremely grateful to John Melbourne for answering my call a year ago and for his sensitive and skilled handling of the Group's finances since then; I thank him for identifying his successor, Rakesh Kirpalani, and wish him well in his future career. Rakesh is a highly commercial finance professional who has held a number of senior financial roles within the recruitment sector latterly at Adecco and MPS Inc where he worked closely with the Managing Directors in the various brands to help grow the businesses and improve profitability. He has a great knowledge of the professional recruitment markets and we are looking forward to him working closely with the operational team.

Financial Review

The Group's revenue for the 12 months ended 31 December 2010 was £29.83 million representing an increase of 1.2% on December 2009 (£29.46 million). This produced NFI of £12.39 million for the 12 months to 31 December 2010, a decline of 3.7% on December 2009 (£12.86 million).

Administrative expenses have increased to £22.71 million in the 12 months to 31 December 2010, from £17.10 million in 2009. Adjusting the cost base for the impairment, amortisation, share based payments, onerous leases and restructuring, like for like costs have reduced by 14.9% year on year. 

Sequential growth in NFI combined with continued cost control translated to a significantly reduced operating loss excluding impairment of goodwill and intangibles for the year to £0.8 million (2009: £4.2 million) with the group reaching a break even position at an Adjusted EBITDA level in the second half of the year.

Impairment of Intangibles

The impairment review undertaken in 2010 resulted in an impairment of goodwill of £7.74 million (2009: £Nil) and impairment of other intangible assets of £1.74 million (2009: £Nil).

The impairment of goodwill is predominantly in relation to RK Group with the remainder relating to Quantica Search & Selection. RK Group is not expected to return to 2008 trading levels in 3 of its 4 brands as rapidly as was assumed at the end of 2009 (RK Search, Robinson Keane and RK Supply Chain) and the same applies to the Quantica Search & Selection brand. Due to the performance of these businesses in 2010, management made the decision that these brands were no longer areas of strategic focus for the Group and that material investment in consultants would not be made. RK Accountancy remains an area of strategic focus and is still expected to return to 2008 trading levels in the near term.

The impairment of other intangible assets relates to a change in the fair value assigned to customer relations in Quantica Technology. Several key clients at acquisition that significantly reduced their spend with the Group due to the economic downturn, are now not expected to return as their relationship is with former senior members of the business who have set up in competition during 2010. Future growth is expected to be driven by current and new relationships rather than the renewal of these dormant relationships.

Change in accounting policy

Previously, revenue for permanent placements was recognised at the date an offer is accepted by a candidate and where a start date has been determined. The directors reviewed this policy during the current financial year and due to the degree of estimation in determining possible cancellations at placement have changed to a policy of recognising revenue at the date the candidate commences employment on the basis this is more reliable. The effect of this change on the current year is outlined in note 1.

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 Year ended

31 December 2010 31 December 2009 31 December 2008

Restated Restated

Revenue £ 29,827,000 £ 29,463,000 £ 47,825,000

Net Fee Income £ 12,386,000 £ 12,864,000 £ 23,917,000

Adjusted EBITDA £ 106,000 £ (1,563,000) £ 3,683,000

Adjusted EBITA as a % of Net Fee Income (1.9%) (15.6%) 13.6%

Days sales outstanding (DSO) 38 44 39

Headroom on working capital facilities £ 1,303,000 £ 808,000 £ 4,700,000

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.

The Group breached its financial covenants contained in its borrowing agreement with its lender in 2009 and remained in breach at 31 December 2010 therefore amounts have been disclosed as due in less than one year.

In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. In addition the Group 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 has agreed to a repayment holiday to be applied to all principal amounts outstanding under the facility during 2011. The Group has been repaying £210,000 of capital per quarter and as at 31 December 2010 an aggregate principal amount of £1.68 million remained outstanding under the facility. These quarterly payments will be subject to a one year repayment holiday and repayments of the principal amount outstanding under the facility will recommence on 31 March 2012. On recommencement, repayments will remain at £210,000 of capital per quarter and, accordingly, the maturity date has been extended by one year. The amendment letter also resets the debt covenants under the facility.

The additional funding will be used by the Group to provide working capital and to increase its fee earner headcount to drive organic growth. 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.

• 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 2010 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 inflow at operating level was £0.23 million for the 12 months to 31 December 2010 (£1.80 million outflow 2009).

Investing activities comprised of capital expenditure of £111,000 (2009: £372,000). Capital was spent mainly on IT hardware. Net cash outflow from financing activities amounted to £411,000 (2009: inflow of £1,425,000) comprising the net proceeds of convertible loan notes and the repayment of invoice discounting facility balances as well as the servicing of scheduled loan repayments and interest.

The net decrease in cash and cash equivalents in the period was £291,000 (2009: £738,000).

Ross Eades

Chief Executive Officer

11 April 2011

Consolidated Statement of Comprehensive Income

for the period ended at December 31 2010

The above results relate to continuing operations.

There are no other items of comprehensive income for the year or for the comparative year.

These financial statements were approved by the Board of directors on 11th April 2011 and were signed on its behalf by:

Ross Eades John Melbourne

Director Director

Notes to the financial statements

(forming part of the financial statements)

1 Accounting policies

Basis of preparation

This announcement and the financial information were approved by the Board on 11 April 2011. The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2010, 31 December 2009 or 31 December 2008. Statutory accounts for the years ended 31 December 2010, 31 December 2009 and 31 December 2008 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for 2008 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 2008 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 2009 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 December 2009 also included an emphasis of matter in respect of the material uncertainties set out below which may cast significant doubt about the Group's ability to continue as a going concern. The Independent Auditors' Report on the Annual Report and Financial Statements for 2010 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 December 2010 also included an emphasis of matter in respect of the material uncertainties set out below which may cast significant doubt about the Group's ability to continue as a going concern.

Statutory accounts for the year ended 31 December 2008 and 2009 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2010 will be delivered to the Registrar in due course.

Change in accounting policy

Previously revenue for permanent placements was recognised at the date an offer is accepted by a candidate and where a start date has been determined. The directors reviewed this policy during the current financial year and due to the degree of estimation in determining possible cancellations at placement have changed to a policy of recognising revenue at the date the candidate commences employment on the basis this is more reliable. The effect of this change on the current year is to reduce revenue by £134,000 (2009 - increase revenue by £214,000), increase the loss after tax by £123,000 (2009 - decrease the loss after tax by £204,000) and reduce net assets by £613,000 (2009 - reduce net assets by £490,000).

Going concern

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

At the year ended 31 December 2010, the Group was in breach of certain financial covenants contained in its borrowing agreement with its lender and therefore amounts have been disclosed as due in less than one year.

In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. In addition to this the Group 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 has agreed to a repayment holiday to be applied to all principal amounts outstanding under the facility during 2011. The Group has been repaying £210,000 of capital per quarter and at the year ended December 2010 an aggregate principal amount of £1.68 million remained outstanding under the facility. These quarterly payments will be subject to a one year repayment holiday and repayments of the principal amount outstanding under the facility will recommence on 31 March 2012. On recommencement, repayments will remain at £210,000 of capital per quarter and, accordingly, the maturity date has been extended by one year. The amendment letter also resets the debt covenants under the facility with the first test date on 31 March 2012.

The additional funding will be used by the Group to provide working capital and to increase its fee earner headcount to drive organic growth. 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.

Having assessed the position of the fundraising and debt restructure, the resetting of debt covenants and the trading outlook, the Directors consider 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.

However, the directors recognise that there are material uncertainties that may cast significant doubt about the Group's ability to continue as a going concern and therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business. These material uncertainties comprise of uncertainties in the wider macro economic environment and of the highly sensitive nature of the impact a reduction in trading activity would have on bank covenants resulting in uncertainty over the ongoing availability of existing facilities and the ability of the Group to obtain funding from alternative sources. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

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 28).

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 excluding deferred tax assets

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 and deferred tax.

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, bank overdrafts and unpresented cheques. 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.

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) Revenue recognition

In determining revenue for permanent placements, an adjustment is made for possible cancellations of placements after the commencement of employment applying an estimate based on the Group's experience of such an event occurring.

(h) 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 3 directors in defined contribution pension schemes during the period (2009: 3).

The total amount payable to the highest paid director in respect of emoluments was £238,756 (2009: £170.227). Company pension contributions of £22,500 (2009: £15,469) 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 at 31 December 2010 was based on the loss attributable to ordinary shareholders of £9,736,000 (2009: loss of £4,219,000) and a weighted average number of ordinary shares outstanding of 87,525,739 (2009: 87,086,336), 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 2010 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.

8 Operating segments continued

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 2010 for goodwill resulted in a charge of £7,738,000 (2009: £Nil) and the reasons for the 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% (2009: 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 £1,000,000.

Cash flows for 2011 to 2015 are based on the budgeted figures of each CGU for 2011 with forecasts for 2012 to 2015 based on 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 2% for cash flows extending beyond five years. An adjustment to reduce the forecast cash flows by 10% would result in an additional impairment of £1,076,000.

Customer relations

Due to an indicator of impairment in 2010, the customer relations in respect of Quantica Technology were subject to an impairment review resulting in a charge of £1,737,000 (2009: £Nil). The key assumptions used in the impairment testing were the discount rate and cash flows.

A discount rate of 14.0 % (2009: 14.0%) reflects management's current estimate of the pre-tax cost of capital of the group. A decrease in the discount rate of 1% would not result in a reduction in the impairment.

Cash flows were based on a review of the customer relations that existed at the date of acquisition and the expected cash flows arising from those relations going forward adjusted for expected customer attrition levels and contributory asset charges. An adjustment to increase the forecast cash flows by 10% would not result in a reduction in the impairment.

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:

At 31 December 2010 the amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised are as follows:

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 (2009: £2,520,000) and invoice discounting facility balance utilised of £2,354,000 (2009: £2,551,000) 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.

On 5 February 2010, the company issued £1,000,000 convertible loan notes. These are repayable at par on 5 February 2015 and interest is payable at a rate of 10% per annum on the par value. The loan notes are redeemable 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 deducted from the carrying value of the debt.

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 £5,034,000 (2009: £5,071,000) as a percentage of total equity £9,517,000 (2009: £19,199,000) increased to 52.9% from 26.4% 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 £1,526,000 (2009: £2,274,000) and comprised £1,354,000 (2009: £1,809,000) overdue by up to 30 days, £288,000 (2009: £320,000) overdue by 30-60 days and £42,000 (2009: £145,000) 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 £3,906,000 (2009: £4,871,000) are secured by cross guarantees and mortgage debentures on certain Group companies. The convertible loan notes of £927,000 (2009: nil) 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 £57,000 (2009: £102,000). 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 re-pricing 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 re-priced.

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 £116,896 (2009: £164,463). Pension contributions totalling £6,960 (2009: £3,700) were outstanding at the period end.

Share-based payments

Approved and unapproved share schemes

The Group has 4 share option schemes with options remaining unexercised at 31 December 2010:

1999 Unapproved Scheme - 525 options remain unexercised at 31 December 2010

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

2008 Unapproved All Employee Scheme - 1,400,005 options remain unexercised at 31 December 2010

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 70,000 exercisable options in this scheme at the year end. However, their strike price was in excess of the Group's share price at that time, deeming them "underwater". All options granted have a contract life of 10 years.

2009 SAYE Scheme - 3,213,290 options remain unexercised at 31 December 2010

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 - 2,900,905 options remain unexercised at 31 December 2010

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 and warrants are as follows:

The exercise price of options outstanding at the end of the period ranged between £0.03 and £0.99 (2009: £0.03 and £0.99) and their weighted residual contractual life was 8 years (2009: 9 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 £0.026 (2009: £0.026).

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 income recognised for the period arising from share-based payments was £20,000 (2009: £67,000).

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 31 July 2010, the company issued 753,250 ordinary shares of £0.02 each for consideration of £21,000 in settlement of interest 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 0.2p per share. There are no other outstanding warrants at 31 December 2010. The warrant reserve reflects the fair value of the warrants issued with the convertible loan note and was measured using the Black Scholes model. The measurement inputs and assumptions were as follows:

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 £1,132,000 was recognised as an expense in the income statement in respect of operating leases (2009: £1,278,000), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

On 15 February 2010, the directors J P Bowmer, A H Reeves, R D Eades and J McHugh each subscribed for £150,000 of the convertible loan notes and each received 150,000 warrants to subscribe for ordinary shares. All of the loan notes and warrants were outstanding at the year end. The terms attaching to the convertible loan notes and warrants are set out in note 14 and note 20 respectively.

23 Post balance sheet events

In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. In addition to this the Group entered into an amendment letter to restructure its debt with respect to its existing facilities agreement with its lender and further details are included in note 1.

24 Annual general meeting

The Annual Report for the year ended 31 December 2010 will be made available shortly. The Annual General Meeting of the Company will be held at the Company's office at 27 Mortimer Street, London W1T 3BL, on 31 May 2011 at 3.00pm.

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