31st Mar 2010 07:00
KELLAN GROUP PLC
RESULTS FOR THE 12 MONTH PERIOD ENDED 31 DECEMBER 2009
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 results for the Group for the 12 month period ended 31 December 2009.
Operational and Financial Highlights
·; Loss for the period of £4,423,000 (2008: Loss £4,456,000) with an Adjusted EBITDA (Earnings before interest, tax, depreciation and amortisation adjusted to add back onerous lease provisions, restructuring costs, share based payments charges and goodwill impairment) of Loss £1,767,000 (2008: Profit £2,643,000)
·; Continued focus on cost reduction in line with income levels; Headcount reduction from over 350 in 2008 to 180 today
·; Further office space consolidation in London, Leeds, Manchester and Birmingham resulting in 17 operational offices including the move to a single Head Office in London in March
·; Significantly improved second half with an Adjusted EBITDA loss of £355,000 compared to an Adjusted EBITDA loss of £1,412,000 in the first half of the year
·; Basic loss per share constant at 5.1p (2008: loss 5.1p). Adjusted loss per share (after adding back the impairment of goodwill), both basic and diluted, at 5.1p (2008: Profit 0.7p)
·; £1 million raised subsequent to the year end through the issue of convertible loan notes to shareholders and cash position continues to be monitored carefully
·; Appointment of new CEO bringing significant multi-sector and acquisition experience to the Group
·; Investment in our people through the launch of a group wide SAYE scheme
·; Industry award nominations for Quantica and Berkeley Scott
·; Refocusing of our search business strategy through the appointment of a single Group MD for the Quantica and the RK search and selection divisions and the re-establishment of isis executive search within Berkeley Scott
·; Positively received rebrands of the RK Accountancy and RK Supply Chain businesses
John Bowmer and Tony Reeves, Co-Chairmen of Kellan, commenting on these results said,
"With the sector facing the worst trading conditions in over three decades, 2009 has undoubtedly been a challenging year for the Group. In response to the substantial drop off in revenues we were required to make some difficult decisions and significantly reduce our cost base during the course of the year. However these corrective actions, whilst painful, together with a slight improvement in trading have resulted in a much improved performance in the second half of the year.
2010 has started with a much stronger performance than 2009 and we are optimistic that with our focus on increasing market share in each of our brands, we will benefit from an improvement in revenues and will be well positioned for the upturn.
We remain committed to our strategy to grow the Group both organically and by acquisition and we fully expect the continuing market conditions to reveal some potential opportunities in the latter part of the year."
Trading Outlook
Despite a continuing lack of visibility in demand the difficult market conditions that the Group has experienced over the last 12 months are beginning to ease slightly and the Group has started 2010 with a much stronger performance than 2009. The forthcoming year will, however, continue to challenge the wider recruitment sector and cash liquidity remains a key issue for the business. During 2010 the focus will remain on organic growth and increasing market share in each of the Group's brands whilst continuing to enforce rigid controls over costs.
Whilst the immediate focus for the Group remains on achieving organic growth in the business in the short to medium term the Group continues to monitor and evaluate relevant acquisition opportunities and prospects and will take full advantage of any suitable opportunities that arise.
We are confident that with our multi-brand approach we are very well positioned for when the market improves and we remain positive about the long term prospects for Kellan.
Enquiries:
Kellan Group Plc
Ross Eades, Chief Executive Officer 020 7268 6200
Will Coker, Chief Financial Officer
Strand Hanson Limited
Simon Raggett 020 7409 3494
Angela Peace
Co-Chairmen's statement
In common with many other industrial sectors the staffing industry had its worst year in over three decades in 2009. For Kellan this meant that revenues were down by almost half compared to 2008. Whilst we began corrective action to stabilise Kellan in the last quarter of 2008, nobody could have predicted what became such a well-documented, deep and rapid decline into recession. Consequently we had to continue to cut expenses dramatically through most of the year. Not unexpectedly, despite these reductions, we made a substantial loss in the first half of 2009. However, as a result of a slight upturn in revenues and further cost reductions our losses reduced significantly in the second half of the year.
In a business like Kellan, where staff expenses at the start of 2009 were 70% of our total costs it was painful and very difficult to reduce our staff from over 350 in 2008 to 180 today. This was unfortunately necessary to survive. Whilst this meant releasing some very good people, we have been very careful to hold staff cuts to a bare minimum not only to try to keep as many of our excellent people as possible in the business but also to maintain a company that can expand rapidly when better times return.
The second largest component of our costs after people is leased property. We have reduced these costs and liabilities substantially in the last year. We have closed some offices that we believe are not viable in the long term and have consolidated space across the various brands. The property market was hit hard in 2009 and this created some difficulties in finding prospective tenants. Nevertheless, in the first half of 2010 we are proactively looking to sublet several properties and thus reduce the cash drain from those premises.
We continue our careful cash management, monitoring cash regularly and our days' sales outstanding at the end of the year is a satisfactory 44 days.
We were extremely encouraged by the volume of applications received from some very strong and highly respected individuals for the vacant CEO position. In April 2009 we appointed Ross Eades. Ross brings to Kellan significant experience in multi-sector recruitment organisations, firstly in a previous role with MPS Group and latterly with Interquest PLC. On joining Ross went through a baptism of fire but he quickly got to grips with the tough situation and brought about some immediate changes to the organisation to rationalise our cost base. We are very pleased with the tremendous job that he has done in stabilising the Company.
We have started 2010 with a much stronger performance than 2009 and we are optimistic that our revenues will continue to grow. We have always been of a mind that it is vital to capture market share during difficult times. With a focus on this during 2009, we are confident that we are poised for growth. We maintain our strategy to grow organically all existing brands faster than the market. We also intend to gain competitive advantage by entering niche, high margin segments of the staffing market. Our acquisition programme paused last year mainly because sellers of good companies continued to expect very high prices and sellers of distressed companies often gave what we considered unrealistic timescales to complete a transaction. We will continue to monitor and evaluate relevant buying opportunities and prospects and we remain convinced that we will see reduced prices later in the year. We intend to take full advantage of any suitable opportunity.
In February 2010 we issued a Convertible Loan Note to raise £1m. This has strengthened the Company's balance sheet and has enabled us to continue to meet our repayment obligations on outstanding long term debt, whilst also maintaining sufficient working capital for our day to day requirements.
Finally, we thank all of our people for their fortitude and hard work during this demanding year. It has not been easy to maintain strong morale in difficult markets, but everyone has worked tirelessly together to serve our customers well. The advantages of this will be reflected in the months ahead, when we anticipate that we will see a positive impact on income.
We also thank you, our shareholders, for your continuing support throughout a challenging year. We are convinced that the future, based on a powerful business model, will provide us with success.
John Bowmer Tony Reeves
Co-Chairman Co-Chairman
30 March 2010 30 March 2010
Business Review
Chief Executive Officer's report
Introduction
It gives me great pleasure to write my first review as Chief Executive Officer since joining the Company in April 2009.
I am sure that it comes as no surprise that 2009 was a particularly challenging year for recruitment businesses generally and the impact on the Group has necessarily led to a delay in the realisation of some of our future plans and ambitions. However, despite these challenges we remain an acquisitive, ambitious and multi-functional recruitment business with a clear growth strategy for the future.
At the beginning of the year, in light of the continuing difficult economic conditions, it was clear that immediate and rigorous action was required and to this end we set about reducing the overall cost base of the business, whilst working to secure the individual brands and maximise all revenue streams. The measures taken resulted in a reduction in overall heads within the business from over 350 to 180 at year end and contributed towards the Group achieving an Adjusted EBITDA loss of £0.4 million during the second half of 2009; a significant improvement on the £1.4 million loss achieved in the first half of the year. Also instrumental to this improvement was a combination of determined work by all our people, strict application of economies of scale, strong leadership and powerful brands.
Although the business objectives for 2009 became more short-term than we had anticipated and difficult choices and decisions had to be made, we were still successful in putting a number of key initiatives into place. We continued to invest in our organic development through the revival of isis executive search, to support the Berkeley Scott brand expansion. We have also refocused our Search & Selection businesses under one group managing director. I am confident that greater synergies can be derived and mutual benefits achieved from having someone acting as a pivotal point leading our Search & Selection businesses which are crucial to our short and long term success. We have also developed our overall group marketing strategies so that they have become more commercially astute, resulting in an increase in preferred supplier business.
The move to a centralised office in the West End of London has also ensured that the support service functions are based in one location for the first time and this gives us the ability to scale up operations quickly and efficiently. The last part of the Quantica Group integration into Kellan Group was finalised in 2009, with IT systems now being managed centrally within Kellan, as opposed to at regional level.
We continue to value our people, initiating the company's first ever Save As You Earn scheme. Our investment in people has been further underlined by achieving success in a number of industry related awards.
Berkeley Scott
2009 saw Berkeley Scott celebrate 25 years of trading. It was an opportune time to remind ourselves and our clients of the longevity of the brand and its success in weathering previous economic storms.
Hospitality is widely reported as being one of the most, if not the most, affected sectors within recruitment during 2009. Whilst financial performance has been below that predicted at the beginning of the year, comparative to the sector, Berkeley Scott remains strong.
Our consultant numbers reduced to reflect the decrease in business being transacted throughout the sector. As a result, it was vital to retain critical mass within certain geographies, and so we co-ordinated this with a managed rationalisation of operations to benefit from economies of scale. Our South East operations in Godalming and Southampton were combined into a single regional centre in Guildford and our Northern operation in Leeds has been moved into the Manchester location. We have also been able to leverage off the combined group's strength. Our London permanent team has relocated to the corporate head office and our Birmingham operation now shares accommodation with another group company.
The strength of Berkeley Scott has always been its people, and despite tough trading there have been a number of staff promotions as well as the recruitment of several extremely talented individuals into the various teams, when the need has arisen in order to maintain this position. We have been encouraged by the success in being placed onto an increased number of preferred supplier lists ("PSLs") and exclusive partnerships. Front office and support functions work closely together to add value to our clients and we have implemented a fresh approach to marketing. We have added value to the industry through our support of Springboard and have received praise from the British Hospitality Association.
One key success in 2009 was the re-establishment of isis. Isis is an executive and board-level search practice that deals solely with senior appointments within the hospitality and leisure industries. At present, we have recruited three talented individuals into the brand and it is already returning high levels of fees.
The outlook for the business in 2010 remains difficult to predict particularly with temporary margin and average permanent fees continuing to be under pressure, but Net Fee Income per head is up, indicating improved efficiency in our billing. There are conflicting messages within the hotel sector, as some groups are creating roles whilst others are still finding trading difficult. The chef's market remains good for both temporary and permanent business and continues to be a real focus for us along with the contract catering sector. We hope to benefit from the retention of strong consultants, weakness amongst competitors and the increased business being seen from the 2012 Olympics. Nevertheless we are optimistic - the volume of jobs being registered has improved and there is an increase in business, especially in London on both the temporary and permanent side.
At the time of writing Berkeley Scott is the only hospitality recruiter to have received a nomination for the 'Recruiter Awards for Excellence' for the 2009 period.
Quantica Search & Selection
During 2009 Quantica Search and Selection refined its strategy to clearly focus on its core market sectors, namely manufacturing and retail, in particular growing its manufacturing brand in successful niche markets such as Food & Beverages and Biotechnology & Medical Devices; whilst expanding the retail brand across Europe.
The Kellan Group move to a London head office has allowed Quantica Search and Selection to benefit from a central base from which they can now meet candidates and have immediate access to their heavily focused London and South East client base.
The Retail brand continues to trade well benefiting from better trading conditions across Europe compared to the UK. We have become strategic recruitment partners for several leading retail brands currently expanding on the continent such as Claire's and Guess.
The manufacturing arm has had mixed fortunes, reflecting the difficult UK trading conditions, and has stabilised around a team of long serving consultants and established client relationships. Positively we have run a number of high profile advertising campaigns for Burtons Foods, Heinz and PepsiCo as well as continuing to deliver exclusive and retained search assignments across a loyal client base. There are early signs of growth in 2010 and the London base will aid the expansion of the business.
In November Quantica Search and Selection was declared a 'Top Finalist' in Jobsite's 2009 RecruitRank Awards. Recognising best practice and quality customer service in recruitment agencies, the RecruitRank Awards are the only accolades in the industry where finalists and winners are chosen by the feedback from candidates and not a panel of industry judges.
Whilst trading conditions are expected to continue to be challenging throughout 2010, the kudos of the QSS brand and the strength of many longstanding client and candidate relationships will support the gaining of market share as competitors fall away. Investment in a new website will re-establish our online strength and enable us to take advantage of new purchasing patterns by businesses.
Quantica Technology
The contract numbers in Quantica Technology dropped during the first half of 2009 and became relatively flat as we were unable to win new client mandates and relied too heavily on existing clients who retracted their recruitment requirements.
This changed during the third quarter with the adoption of a new management structure within Quantica Technology, which has been successful in engaging more proactively with the Group as a whole and this has allowed us to see increased success through internal recruitment, marketing opportunities and importantly contract wins. We have recruited new sales people to the team who are already delivering and have set about restructuring a core team of vertical market specialists. As a result the business stabilised and hit its revenue and contribution targets during the second half of 2009.
We begin 2010 with a good contract platform and although the contract market is still slow, there seems to be increased activity within the banking sector and NHS. Permanent fee business is looking more positive with numerous opportunities in the fields of .Net development and Retail/e-Commerce. We are currently in good shape to achieve the first quarter forecast. With a much needed new website planned and a range of business development initiatives in place, the major focus for the Technology division in 2010 is to capitalise on its existing client base but crucially to build relationships with major buyers of IT staff in new markets. This will be aided by the building of new consultancy teams in the London and Manchester offices of the Kellan Group.
RK Accountancy
2009 was one of the most challenging periods in RK Accountancy's history with a fall in net fee income for the first time since our launch 11 years ago. During this period we maintained our office infrastructure whilst reducing headcount, mainly through natural attrition, in line with local market demand. Combined with prudent cost control and drawing on group synergy through combining office space, the impact on underlying profitability was reduced.
The structure of the business has been developed to support a national growth strategy with an operational leader accountable for the development of each specific region through a network of local offices. Each office consists of a team of local experts capable of delivering outstanding service levels and long term recruitment solutions for our customers. Our strategy is to both retain and expand our customer base through reputation and recommendation and maximise our local market share.
We invested in a brand refresh to support this strategy which has been rolled out both on and off line to effectively communicate the expertise of our people and their capability to deliver a competitive edge to our customers. We redeveloped our website as an online career portal, designed and built to complement social networking and substantive e-marketing strategies.
Since the launch of the refreshed brand, RKA has been invited to pitch for 40% more opportunities with clients than for the same period in 2008. Candidate applications have increased by 70% and website traffic by 180%. The level of referrals has increased by 30% and results of a recent survey indicate that our brand awareness has risen by 25%.
Within our current infrastructure we are expanding into the interim and senior qualified markets. We have recruited an experienced manager with a good track record for one of the North West regions to lead this expansion. Additionally we have a positive mix of both internal and external solutions to fill other opportunities at this level. This will allow RK Accountancy to deliver a total solution to our clients increasing our ability to create long term customer loyalty.
With the sector beginning to see increased activity, we are confident that the positive effects of the rebrand and the expertise within our business will ensure a return to net fee income growth. Further expansion in 2010 will be achieved through plans to open other office locations within the existing office infrastructure of the Group.
RK Supply Chain
RK Supply Chain rebranded in the early part of 2009. The solution rested on evolving the brand, creating and delivering a clear and relevant proposition to both clients and candidates.
The new brand identity, bold in status and relevant in statement, represents the three areas of the supply chain recruitment process that RKSC specialises in namely, Supply Chain, Logistics and Procurement. Terry Brain, illustrator behind Ricky Gervaise's Flanimals and Trap Door was commissioned to help craft the visual aspects and the website was then also redeveloped as a job-search tool.
Despite the economic downturn, brand tracking has shown an increase in awareness of the RKSC brand by around 40%. Candidate applications have increased by 60% and new client engagements by 20%. The perception in the market is that the size of the RKSC team, its experience, and breadth of clients means it is now one of the largest specialist supply chain recruitment teams in the UK and North America.
As a business, 2009 had been seen as a real opportunity for growth. Unfortunately the economic recession hit purchasing and procurement departments hard, having an almost overnight effect. This forced us to look at our cost base and importantly the upfront investment into the brand. We temporarily withdrew from the Leeds and Manchester offices and moved our London operation to the new corporate head office, reducing the number of staff significantly.
At the end of the year, we appointed the Managing Director of Quantica Search and Selection to lead RK Supply Chain, which provides the added benefit of realising the value in relationships across key manufacturing and retail accounts.
We have also benefited from being on a large number of PSLs, which provide a consistent base of work from which RKSC can continue to grow. The team consists of extremely capable, experienced consultants and the revised cost base has significantly increased revenues per head and overall profitability. 2010 has begun well and the business will re-grow in a prudent manner, leveraging the investment in the brand during last year.
RK Search
RK Search comprises four sub-brands, all of whose markets were hit hard by the recession.
As a result, during the year it was necessary to scale-back operations within RK Acumen (specialist consultancy recruiting for senior sales and solution owner roles within the outsourcing sector) and discontinue with RK Connect (middle management to director level positions across the contact centre function). Across the remaining brands we retained as many fee earners as possible, but the number of non-fee generating research staff and candidate liaison personnel were significantly reduced as we aligned to the prevailing market conditions.
We have recently seen some small signs of improved workflow from the financial community, related to growth rather than pure replacement positions. This leads us to believe that RK Catalyst (consultancy that recruits Finance Directors and Controllers for Private Equity-backed and AIM-listed businesses) should improve its performance in 2010. The technology players who are major clients for RK Commercial Contracts Practice (a complete recruitment service provided to the commercial contracts discipline, and the national market leader in its field) responded to the market downturn by largely withdrawing from external hiring in 2009. More positively, 2010 has begun with an improvement in the number of interim appointments and a cautious optimism with regard to permanent hires from some key historic clients.
Robinson Keane
Robinson Keane is a boutique board level headhunting business based in the Altrincham office, with both national and international reach.
Although 2009 was a difficult year, revenues held up better than might have been feared, at 15% below the previous year. Brand leadership remains strong, however, and the research team remains a distinctive strength of the business. In addition, we added a new fee earner to the business part way through the year and have developed a number of new business streams. Within the North West our reputation is at an all time high, a strength from which we can benefit as many large national and international headhunting firms are retreating to their London bases.
We have also seen a number of assignments for high profile clients such as Hilti, Tarmac and the NHS. During 2010 we are confident of our ability to take further market share, and anticipate improved business throughout the North West in the key areas of the NHS, local government and universities/higher education and it remains our intention to recruit further fee earners throughout the year.
Kellan Group Support Services
Having our support services situated in the one place has created a better level of interdepartmental communication and a more structured corporate environment for the first time.
We have some strong leaders across the group, particularly within credit, finance, IT, HR & Internal Recruitment and Marketing & Business Systems who are now delivering an effective but streamlined service to the business, supported by teams of dedicated specialists across all support services disciplines.
We have amalgamated the front office business systems department with the marketing department to generate synergies, cost savings and a single point of leadership. Our IT department has also worked hard to rationalise its cost base whilst simultaneously retaining key expertise and improving the overall support to the entire Group. Previous external support has been brought in house and centralised through the corporate head office.
Towards the end of 2008 we outlined how we had recruited a number of 'Head of' roles. The effect of this could be seen throughout 2009. The marketing department quickly and successfully put in preventative measures to make considerable savings over the year, whilst more closely aligning itself to the business in order to deliver better performance across a number of metrics including a 40% increase in bids/tenders won. During difficult times our HR department has become a critical part of the business and has maintained best practice and compassion when implementing difficult decisions efficiently.
Our People
2009 was a hard year for all of us and without exception each and every one of our people have applied themselves diligently, professionally and commercially. Many are taking on additional duties to ensure we successfully weather the economic storm and for a business built on its people, ours have proven themselves to be the very best and I am incredibly proud and privileged to be working with them.
The entire board recognised the importance and value of our people by opening up an employee Save as You Earn (SAYE) scheme. This was the first time our business had operated such a scheme, which was three times oversubscribed when applications closed. I am proud that we were able to use SAYE as a reward to our people and in turn they showed their belief and loyalty in their respective brands and business overall.
Outlook
There is still a lack of visibility in the demand for our services and overall our trading areas are very competitive with many competitors chasing the same business. However, I am pleased to say that in most of our businesses we have been successful in gaining exclusivity on an increasing number of assignments and this remains a focus for us throughout the year ahead. I would like to be able to discuss the longer term strategic plans for the Group, however at this time the immediate focus must be on the short to medium-term. We must continue to endure the current economic conditions and take advantage of any increase in business, whilst ensuring that we remain well positioned for the upturn. Therefore, all initiatives planned for 2010 are linked to improving our position.
The immediate plan for 2010 has been to focus on organic growth and the target remains for each business to achieve a sensible split between net fee income and staff related costs. Beyond that we should be able to obtain further synergies by getting our search and selection businesses to work more closely together and ensuring that we maximise our group preferred supplier contracts.
The difficult market conditions that the Group has experienced over the last 12 months are beginning to ease slightly. Client enquiries have been steadily growing over the last six months and the downward pressure we saw on margins is beginning to ease. We will continue to enforce rigid controls over costs, which we aim to streamline further, where appropriate.
The forthcoming year will, however, continue to challenge the wider recruitment sector and cash liquidity remains a key issue for the business. There are some signs that banks are cautiously re-entering the market and we anticipate this will increase the working capital available to our clients, some of which we hope will be diverted to recruitment.
Through our multi-brand approach Kellan Group is not exposed to the fluctuations within one industry. We believe that this, coupled with the long-term partnerships that our brands have fostered over 2009, offer us the certainty of a secure income stream which extends over many years.
This provides us with a stable platform from which we can take advantage of the current market conditions to secure further business. We will also continue to grow our business through organic growth and via acquisition. As more pressure is placed on value for money across all sectors the capability of the Group to provide clients with a total recruitment solution has never been so strong.
Above all we know that our success in 2010 will be based on all of our incredible people who have seen us through the difficulties and we will support them as much as we can throughout the year. I would like to thank our board colleagues and all investors for their loyalty, support and practical assistance throughout a challenging year.
Ross Eades
Chief Executive Officer
30 March 2010
Chief Financial Officer's report
Revenues in the Group fell by 37.4% in 2009 to £29,249,000 (2008: £46,720,000) and net fee income by 44.5% to £12,650,000 (2008: £22,812,000) reflecting the difficult market conditions in the UK recruitment sector.
Although the Group made significant cost reductions, cutting its administrative expenses to £17,094,000 (2008: £21,768,000 excluding the impairment of goodwill charge) the inevitable time taken to reduce the level of costs and respond to changing conditions did not prevent the Group returning a loss for the period of £4,423,000, a similar result to the prior year loss of £4,456,000.
One of the main key performance indicators used to measure trading performance, Adjusted EBITDA was a loss of £1,767,000 (2008: Profit £2,643,000). However, the effect of the cost reduction initiatives could be seen in the latter half of 2009 through a significantly improved second half with an Adjusted EBITDA loss of £355,000 compared to an Adjusted EBITDA loss of £1,412,000 in the first half of the year.
Onerous lease and restructuring costs
The Group recorded onerous lease and restructuring costs of £1,858,000 (2008: £600,000) during the period as we continued to cut and consolidate our cost base in line with reducing income levels.
£945,000 (2008 £185,000) of this relates to onerous lease costs whereby an accrual is made for residual property related costs on exited premises from the date of vacation through to the end of the lease term. The charge booked in 2009 relates principally to individual offices in Elland, Manchester and Leeds where the remaining staff were consolidated into existing premises.
£913,000 (2008 £415,000) was booked in respect of staffing restructure and redundancy costs as the Group was reluctantly forced into reducing its main cost: personnel. The charge represents redundancy monies and the cost of unworked notice periods, often referred to as "gardening leave".
Impairment of Goodwill
The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires an estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Details of the assumptions used are contained in note 10 to the accounts.
The outcome of the testing this year indicated there was no impairment required to the value of goodwill (2008 £5,049,000).
International Financial Reporting Standards ("IFRS")
The Group presented consolidated accounts under IFRS as adopted by the EU for the first time in 2007. In 2009 there were 2 additional standards the impacted the Group's annual report and accounts;
·; IFRS8 "Operating segments" which we adopted earlier than required, in 2008, to give more disclosure in the financial statements regarding the Group's operating segments.
·; IAS1 "Presentation of Financial Statements (Revised 2007)" which prescribes new titles and presentation layouts to the primary statements. We first adopted these layouts in the half year interim results of the Group for the 6 months ended 30 June 2009.
There was no effect on the results, cash flows or financial position of the Group through the adoption of either standard.
The accounts of the holding Company, Kellan Group plc continue to be reported under UK GAAP.
Monitoring, risk and KPIs
Risk management is an important part of themanagement process throughout the Group. The composition of the Kellan Group plc Board is structured to give balance and expertise when considering governance, financial and operational recruitment issues. Meetings incorporate, amongst other agenda items, a review of monthly management accounts, operational and financial KPIs and major issues and risks facing the business.
The most important KPIs used in monitoring the business are as follows:
12 months ended 12 months ended 15 months ended
31 December 2009 31 December 2008 31 December 2007
Revenue £ 29,249,000 £ 46,720,000 £ 30,275,000
Net Fee Income £ 12,650,000 £ 22,812,000 £ 14,981,000
Adjusted EBITDA £ (1,767,000) £ 2,643,000 £ 402,000
Adjusted EBITA as a % of Net Fee Income (17.5%) 9.7% (0.0%)
Days sales outstanding (DSO) 44 39 48
Headroom on working capital facilities £ 808,000 £ 4,700,000 £ 3,300,000
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 Company's activities are interest rate risk, liquidity risk, and credit risk. These are monitored by the board of directors and are disclosed further in notes 1 and 16 of the financial statements.
Towards the end of the year we initiated a fundraising of £1 million before expenses through the issue of convertible loan notes to shareholders. This transaction was completed in February 2010 with the funds being used to service scheduled loan capital and interest payments as well as maintain working capital requirements. All scheduled debt servicing payments were met during 2009.
It is likely that further funding will be required to meet the Group's working capital requirements during the latter part of 2010. The directors are confident that sufficient additional funding will be obtained as and when required although this can not be guaranteed.
Following the fund raising and an improvement in trading performance in the second half of 2009 we are in the process of agreeing formal amended terms with Barclays. If the Group is unable to agree amended terms the lenders could request early repayment of all outstanding borrowings. These discussions around future banking terms remain ongoing; however the Group has received a letter from its bank indicating they expect to continue to provide the facilities and the directors are not aware of any issues which would prevent the required amendments from being agreed.
• 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 2009 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.
Cash flow and financing
Consequential to the 2009 trading loss the net cash outflow from operating activities was £1,801,000 (2008: £3,452,000 inflow).
Investing activities comprised £10,000 of earned interest (2008: £77,000) and capital expenditure of £372,000 (2008: £599,000). Capital was spent mainly on fitting out the new London Head Office including IT Hardware as we centralised the back office into one location. As outlined in the half year interim report for the six months to June 30 2009 the final piece of the Quantica integration jigsaw is to be the consolidation of IT networks in 2010 when the respective contracts end. We have initiated planning for this and will have it completed by mid year.
Net cash inflow from financing activities amounted to £1,425,000 (2008: £2,170,000 outflow) comprising a drawdown on unutilised invoice discounting facilities to provide working capital as well as service the scheduled loan repayments and interest.
The net decrease in cash and cash equivalents in the period was £738,000 (2008: £760,000 increase).
As a result of the above the Group's gearing profile, being the face value of loans and borrowings £5,071,000 (2008: £3,360,000) as a percentage of total equity £19,689,000 (2008: £24,179,000), worsened to 25.8% from 13.9%.
Financial income and expenses
The financial expenses for the period of £359,000 (2008: £510,000) comprise interest and amortised loan costs in respect of bank loans and confidential invoice discounting facilities. Charges are partially offset by financial income of £44,000 (2008: £77,000), being interest of £10,000 and a credit of £34,000 in respect of the fair value of the interest rate collar instrument.
Tax
The Group's underlying tax credit was £336,000 (2008: charge of £18,000) relating to the release of a corporation tax liability of £212,000 (2008: charge of £145,000) and a release of £124,000 (2008: £127,000) in respect of deferred tax on the intangible amortisation. It is anticipated that the Group's ongoing rate will be broadly in line with the standard rate of corporation tax, subject to its ability to utilise tax losses brought forward and temporary timing differences.
Loss per share
Loss per share (basic and diluted) remained constant at 5.1p (2008: Loss 5.1p)
On an adjusted basis, after adding back the impairment of goodwill in the prior year, loss per share (Basic and diluted) worsened to 5.1p (2008: Profit 0.7p).
Options held in respect of the ordinary shares of the Company do not have a dilutive effect on the earnings / loss per share calculation.
Will Coker
Chief Financial Officer
30 March 2010
Consolidated Statement of Comprehensive Income
for the period ended at December 31 2009
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
Note |
£000 |
£000 |
|
Revenue |
|
29,249 |
46,720 |
|
Cost of sales |
|
(16,599) |
(23,908) |
|
Gross profit/net fee income |
|
12,650 |
22,812 |
|
Administrative expenses |
|
(17,094) |
(26,817) |
|
Operating (loss)/profit before impairment charge |
|
(4,444) |
1,044 |
|
Impairment of goodwill |
10 |
- |
(5,049) |
|
Operating loss |
2 |
(4,444) |
(4,005) |
|
Financial income |
5 |
44 |
77 |
|
Financial expenses |
5 |
(359) |
(510) |
|
Loss before tax |
3 |
(4,759) |
(4,438) |
|
Tax credit /(charge) |
6 |
336 |
(18) |
|
Loss for the period |
|
(4,423) |
(4,456) |
|
Attributable to: |
|
|
|
|
Equity holders of the parent |
|
(4,423) |
(4,456) |
|
Loss per share in pence |
|
|
|
|
Basic and diluted |
7 |
(5.1) |
(5.1) |
|
|
|
|
|
The above results relate to continuing operations.
There are no adjustments between the loss for the year and the total comprehensive expense for the year or for the comparative year.
Consolidated statement of financial position
as at 31 December 2009
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
Note |
£000 |
£000 |
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
9 |
803 |
970 |
|
Intangible assets |
10 |
23,202 |
23,644 |
|
|
|
24,005 |
24,614 |
|
Current assets |
|
|
|
|
Trade and other receivables |
12 |
5,232 |
7,096 |
|
Cash and cash equivalents |
13 |
641 |
1,379 |
|
|
|
5,873 |
8,475 |
|
Total assets |
|
29,878 |
33,089 |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Loans and borrowings |
14 |
4,871 |
767 |
|
Trade and other payables |
15 |
3,237 |
3,986 |
|
Other financial liabilities |
|
102 |
135 |
|
Corporation tax payable |
|
- |
207 |
|
Provisions |
18 |
368 |
326 |
|
|
|
8,578 |
5,421 |
|
Non-current liabilities |
|
|
|
|
Loans and borrowings |
14 |
- |
2,320 |
|
Provisions |
18 |
625 |
59 |
|
Deferred tax liabilities |
11 |
986 |
1,110 |
|
|
|
1,611 |
3,489 |
|
Total liabilities |
|
10,189 |
8,910 |
|
Net assets |
|
19,689 |
24,179 |
|
|
|
|
|
|
Equity attributable to equity holders of the parent |
|
|
|
|
Share capital |
19 |
1,742 |
1,742 |
|
Share premium |
20 |
13,728 |
13,728 |
|
Merger reserve |
20 |
16,081 |
16,081 |
|
Capital redemption reserve |
20 |
2 |
2 |
|
Retained earnings |
|
(11,864) |
(7,374) |
|
Total equity |
|
19,689 |
24,179 |
These financial statements were approved by the Board of directors on 30 March 2010 and were signed on its behalf by:
Ross Eades Will Coker
Director Director
Consolidated statement of changes in equity
for the period ended 31 December 2009
|
|
|
|
|
|
Capital |
|
|
|
|
|
Share |
Share |
Merger |
redemption |
Retained |
Total |
|
|
|
capital |
premium |
reserve |
reserve |
earnings |
equity |
|
|
Note |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
Balance at 31 December 2007 |
|
1,742 |
13,740 |
16,081 |
2 |
(3,050) |
28,515 |
|
Loss for the period |
|
- |
- |
- |
- |
(4,456) |
(4,456) |
|
Total comprehensive income for the period ended 31 December 2008 |
|
- |
- |
- |
- |
(4,456) |
(4,456) |
|
Share issue costs |
|
- |
(12) |
- |
- |
- |
(12) |
|
Share-based payment charge |
|
- |
- |
- |
- |
132 |
132 |
|
Balance at 31 December 2008 |
|
1,742 |
13,728 |
16,081 |
2 |
(7,374) |
24,179 |
|
Loss for the period |
|
- |
- |
- |
- |
(4,423) |
(4,423) |
|
Total comprehensive income for the period ended 31 December 2009 |
|
- |
- |
- |
- |
(4,423) |
(4,423) |
|
Share-based payment credit |
17 |
- |
- |
- |
- |
(67) |
(67) |
|
Balance at 31 December 2009 |
|
1,742 |
13,728 |
16,081 |
2 |
(11,864) |
19,689 |
Consolidated statement of cash flows
for the period ended 31 December 2009
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
Note |
£000 |
£000 |
|
Cash flows from operating activities |
|
|
|
|
Loss for the period |
|
(4,423) |
(4,456) |
|
Adjustments for: |
|
|
|
|
Depreciation and amortisation |
|
886 |
867 |
|
Interest income |
|
(10) |
(77) |
|
Interest paid |
|
286 |
339 |
|
Amortisation of loan costs |
|
73 |
73 |
|
Net (gain)/ loss on measurement of interest rate swap to fair value |
|
(34) |
98 |
|
Loss on disposal of property, plant and equipment |
|
95 |
37 |
|
Impairment of goodwill |
|
- |
5,049 |
|
Equity-settled share-based payment (credit) / expenses |
|
(67) |
132 |
|
Non cash taxation (credit) / charge |
|
(336) |
18 |
|
|
|
(3,530) |
2,080 |
|
Decrease in trade and other receivables |
|
1,865 |
3,349 |
|
Decrease in trade and other payables |
|
(749) |
(2,200) |
|
Adjustment to goodwill for pre-acquisition accruals not required |
|
- |
272 |
|
Increase in provisions |
|
608 |
140 |
|
|
|
(1,806) |
3,641 |
|
Tax received / (paid) |
|
5 |
(189) |
|
Net cash (outflow)/ inflow from operating activities |
|
(1,801) |
3,452 |
|
Cash flows from investing activities |
|
|
|
|
Interest received |
|
10 |
77 |
|
Acquisition of property, plant and equipment |
9 |
(372) |
(599) |
|
Net cash outflow from investing activities |
|
(362) |
(522) |
|
Cash flows from financing activities |
|
|
|
|
Share issue costs |
|
- |
(12) |
|
Drawdown / (repayment) of invoice discounting facility balances |
|
2,551 |
(979) |
|
Interest paid |
|
(286) |
(339) |
|
Repayment of term loan borrowings |
|
(840) |
(840) |
|
Net cash inflow/(outflow) from financing activities |
|
1,425 |
(2,170) |
|
Net (decrease) / increase in cash and cash equivalents |
|
(738) |
760 |
|
Cash and cash equivalents at the beginning of the period |
|
1,379 |
619 |
|
Cash and cash equivalents at the end of the period |
13 |
641 |
1,379 |
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 30 March 2010. The financial information set out in this announcement does not constitute the company's statutory accounts for the years ended 31 December 2009 or 31 December 2008. Statutory accounts for the years ended 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. Statutory accounts for the year ended 31 December 2008 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2009 will be delivered to the Registrar in due course.
Going concern
The financial statements have been prepared on a going concern basis.
The accounts for the year ended 31 December 2008 highlighted that due to the recent decline in the UK recruitment market, the Group expected to breach some of the financial covenants contained in its borrowing agreement with its lender during the first half of 2009. Covenants on these borrowings, which comprise a term loan taken out to acquire Quantica Plc in September 2007 and an invoice discounting facility used for working capital, are tested quarterly using the 12 month period to the date of the respective test. As predicted, some of the covenants have been breached during the current period. The facilities themselves have not been breached.
The Group's lender continues to be supportive. Positive discussions around future banking terms and the Group's existing and projected working capital requirements are ongoing. However, if the Group is unable to agree amended terms the lender could request early repayment of all outstanding borrowing.
At an EGM of the company on 18 January 2010 resolutions to remove authorised share capital restrictions as well as grant the Directors authority to allot new shares and to disapply statutory pre-emption rights (in respect of such an allotment) were passed. Consequent to the resolutions above, on 5 February 2010, the Group raised £1million before approximate expenses of £40,000, via the issue of a convertible loan note, with warrants attached, to eight existing shareholders. The funds were used to strengthen the Group's balance sheet and to enable it to continue to meet repayment obligations on the Group's outstanding long term debt whilst also maintaining sufficient working capital for day to day requirements. However it is expected that further funding will be required to meet the Group's working capital requirements in the foreseeable future. The Directors are confident that sufficient additional funding will be obtained as and when required although this cannot be guaranteed.
Having assessed the position of the bank and the ability to obtain additional funding, the Directors consider that there is a reasonable expectation 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 for the reasons described above, 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 the ongoing availability of the existing facilities given the covenant breaches and the ability to obtain additional 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.
Foreign currency
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.
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 and improvements 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).
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 Mean 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 amounts of the Group's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.
For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable Group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or Groups of assets.
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, risk adjusted, 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 the threshold for vesting.
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 an offer is accepted by a candidate and where a start date has been determined. An adjustment is made for possible cancellations of placements prior to, or shortly after, the commencement of employment based on the group's experience of such an event occuring; and
• 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.
Expenses continued
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.
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.
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".
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.
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:
|
International Accounting Standards (IAS/IFRS) |
Effective date |
|
|
IAS 19* |
Limit on a defined benefit asset, minimum funding requirements and their interaction |
01/01/2011 |
|
IAS 24* |
Related party disclosures |
01/01/2011 |
|
IAS 32* |
Classification of rights issues |
01/02/2010 |
|
IFRS* |
Improvements to IFRS - various clarifications and elimination of inconsistencies |
01/01/2010 |
|
IFRS 1* |
First-time adoption of International Financial Reporting Standards - |
|
|
|
Additional exemptions for first-time adopters |
01/07/2010 |
|
IFRS 3* |
Business combinations accounting (revised) |
01/07/2009 |
|
IAS 27* |
Consolidated and separate financial statements (amendment) |
01/07/2009 |
|
IAS 39* |
Financial instruments: recognition and measurement: eligible hedged items (amendment) |
01/07/2009 |
|
IFRS 1* |
Adoption of international financial reporting standards (revised) |
01/07/2009 |
|
IFRS 2* |
Group cash-settled share-based payments transactions |
01/01/2010 |
|
IFRS 9* |
Financial instruments |
01/01/2013 |
|
|
|
|
|
International Financial Reporting Interpretations Committee (IFRIC) |
Effective date |
||
|
IFRIC 19* |
Extinguishing financial liabilities with equity instruments |
01/04/2010 |
|
|
IFRIC 17* |
Distributions of non-cash assets to owners |
01/07/2009 |
|
|
IFRIC 18* |
Transfer of assets from customers |
01/07/2009 |
|
|
IFRIC 14* |
Limit on a defined benefit asset, minimum funding requirements and their interaction |
01/01/2011 |
|
|
|
|
|
|
* 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 goodwill
The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires 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. 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 note 9 and 10.
(c) Share-based payments
Employee services received, and the corresponding increase in equity, 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 17and include, among others, the dividend growth rate, expected volatility, expected life of the options and number of options expected to vest. More details including carrying values are disclosed 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 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) Income taxes
The Group is subject to income tax and significant judgement is required in determining the provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Group recognises tax liabilities based on estimates of whether additional taxes and interest will be due. This assessment relies on estimates and assumptions and may involve a series of complex judgements about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.
(f) 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.
(g) Onerous leases and dilapidations
Inherent uncertainties in measuring the provision are the estimated cost of returning the properties to their original state at the end of the lease and estimates of rents that will be received in the future on vacant property.
(h) Revenue recognition
In determining revenue for permanent placements an adjustment is made for possible cancellations of placements prior to, or shortly after, the commencement of employment applying an estimate based on the group's experience of such an event occurring. 2 Reconciliation of operating loss to Adjusted EBITDA and EBITA
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Operating loss as per accounts |
|
(4,444) |
(4,005) |
|
Add back |
|
|
|
|
Impairment of goodwill |
|
- |
5,049 |
|
Amortisation of intangible assets |
|
442 |
442 |
|
Share-based payments (credit) / charge |
|
(67) |
132 |
|
Onerous leases |
|
945 |
185 |
|
Restructuring costs |
|
913 |
415 |
|
Adjusted EBITA |
|
(2,211) |
2,218 |
|
Depreciation |
|
444 |
425 |
|
Adjusted EBITDA |
|
(1,767) |
2,643 |
3 Expenses and auditors' remuneration
Included in loss before tax is the following:
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Pension contributions |
|
164 |
168 |
|
Depreciation of owned property, plant and equipment |
|
444 |
425 |
|
Impairment of goodwill |
|
- |
5,049 |
|
Amortisation of intangible assets (charged to administration expenses) |
|
442 |
442 |
|
Operating leases rentals - hire of plant and machinery |
|
95 |
122 |
|
Operating leases rentals - hire of other assets |
|
1,183 |
1,339 |
|
Loss on disposal of property, plant and equipment |
|
95 |
37 |
Auditors' remuneration:
Amounts payable to BDO LLP in respect of both audit and non-audit services are set out below:
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Fees payable to the auditors for the audit of the Company's annual accounts |
|
20 |
20 |
|
|
|
|
|
|
Fees payable to the auditors for other services: |
|
|
|
|
The audit of the Company's subsidiaries |
53 |
82 |
|
|
Other services relating to taxation |
24 |
42 |
|
|
Other non-audit services |
2 |
3 |
|
|
|
79 |
127 |
|
4 Staff numbers and costs
The weighted average number of persons employed by the Group (including directors) during the period, analysed by category, was as follows:
|
|
Number of employees |
|
|
|
2009 |
2008 |
|
Recruitment |
160 |
281 |
|
Administrative staff |
64 |
81 |
|
Temporary workers (whose costs are included in cost of sales and services charged within revenue) |
1,162 |
1,318 |
|
|
1,386 |
1,680 |
The aggregate payroll costs of these persons were as follows:
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Wages and salaries |
|
16,411 |
18,889 |
|
Social security costs |
|
1,481 |
1,758 |
|
Other pension costs |
|
164 |
168 |
|
|
|
18,056 |
20,815 |
|
Share-based payments (see note 17) |
|
(67) |
132 |
|
|
|
17,989 |
20,947 |
Directors' and key management personnel remuneration:
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. During the period these were considered to be the directors of the Company.
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Emoluments |
|
402 |
427 |
|
Company contributions to money purchase pension schemes |
|
33 |
31 |
|
Share-based payments (see note 17) |
|
(92) |
97 |
|
|
|
343 |
555 |
There were 3 directors in defined contribution pension schemes during the period (2008: 2).
The total amount payable to the highest paid director in respect of emoluments was £170,227 (2008: £219,460). Company pension contributions of £15,469 (2008: £19,000) were made to a money purchase scheme on his behalf.
The share-based payments charge for the year was a net credit, consequential to the departure of one director and the reversal of previously booked share-based payment charges in respect of options that would never vest.
The directors made no gains on options exercised during the current or prior periods.
5 Finance income and expense
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Interest income on financial assets |
|
10 |
77 |
|
Net profit on measurement of interest rate collar to fair value |
|
34 |
- |
|
Financial income |
|
44 |
77 |
|
Interest expense on financial liabilities |
|
286 |
339 |
|
Amortisation of loan costs |
|
73 |
73 |
|
Net loss on measurement of interest rate collar to fair value |
|
- |
98 |
|
Financial expenses |
|
359 |
510 |
6 Taxation
Recognised in the income statement
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Current tax (credit) / expense |
|
|
|
|
Current period |
|
- |
145 |
|
Adjustments for prior periods |
|
(212) |
- |
|
|
|
(212) |
145 |
|
Deferred tax credit |
|
|
|
|
Origination and reversal of temporary differences |
|
(124) |
(127) |
|
|
|
(124) |
(127) |
|
Total tax (credit) / expense in income statement |
|
(336) |
18 |
Reconciliation of effective tax rate
|
|
|
12 months |
12 months |
|
|
|
ended |
ended |
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
|
|
£000 |
£000 |
|
Loss before tax for the period |
|
(4,759) |
(4,438) |
|
Total tax credit / (expense) |
|
336 |
(18) |
|
Loss after tax |
|
(4,423) |
(4,456) |
|
|
|
|
|
|
Tax using the UK corporation tax rate of 28% (2008: 28.5%) |
|
(1,333) |
(1,265) |
|
Non-deductible expenses including impairment |
|
67 |
1,723 |
|
Losses carried forward |
|
1,166 |
- |
|
Utilised brought forward losses |
|
(24) |
(190) |
|
Prior year provision release |
|
(212) |
- |
|
Other short term timing differences |
|
14 |
- |
|
Movement on other deferred tax assets not recognised |
|
(14) |
(250) |
|
Total tax (credit) / expense |
|
(336) |
18 |
7 Earnings per share
Basic and diluted earnings per share
The calculation of basic earnings per share at 31 December 2009 was based on the loss attributable to ordinary shareholders of £4,423,000 (2008: loss of £4,456,000) and a weighted average number of ordinary shares outstanding of 87,086,336 (2008: 87,086,336), calculated as follows:
|
Weighted average number of shares |
2009 |
2008 |
|
Issued ordinary shares at 1 January |
87,086,336 |
87,086,336 |
|
Effect of shares issued |
- |
- |
|
Weighted average number of shares at end of period |
87,086,336 |
87,086,336 |
|
Loss for the year |
(4,423,000) |
(4,456,000) |
|
Basic and diluted loss per share in pence |
(5.1) |
(5.1) |
|
Adjusted basic and diluted earnings/(loss) per share in pence [(1)] |
(5.1) |
0.7 |
There was no dilution in the current and prior period due to the loss in the period.
(1) Adjusted earnings per share is after eliminating the impairment of goodwill in the prior year of £5,049,000. There is no dilution of the adjusted earnings per share in the current period due to the Group's losses and in the prior period due to the options being "underwater".
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 2009 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
||
|
Operating segment |
|
|
|
|
|
|
|
|
|
|
|
|
£000 |
|
£000 |
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
4,232 |
|
4,982 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
2,822 |
|
3,829 |
|
||
|
Quantica S&S |
|
Controllable contribution |
|
|
|
|
|
|
919 |
|
931 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
6,222 |
|
11,955 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
918 |
|
1,983 |
|
||
|
Quantica Technology |
Controllable contribution |
|
|
|
|
|
415 |
|
1,023 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
8,168 |
|
13,905 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
3,294 |
|
7,610 |
|
||
|
Berkeley Scott |
Controllable contribution |
|
|
|
|
|
|
|
946 |
|
3,424 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
6,327 |
|
10,033 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
3,138 |
|
5,525 |
|
||
|
RK Accountancy |
Controllable contribution |
|
|
|
|
|
|
1,230 |
|
2,681 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
2,286 |
|
2,948 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
1,244 |
|
2,113 |
|
||
|
RK SCP |
|
Controllable contribution |
|
|
|
|
|
|
180 |
|
621 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
RK Search and |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
2,014 |
|
2,897 |
|
||
|
Robinson Keane |
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
1,234 |
|
1,752 |
|
||
|
(aggregated) |
|
Controllable contribution |
|
|
|
|
|
264 |
|
488 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Kellan central costs |
Other costs |
|
|
|
|
|
|
|
|
|
|
(5,721) |
|
(6,525) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
29,249 |
|
46,720 |
|
||
|
|
|
Net Fee Income |
|
|
|
|
|
|
|
|
|
|
12,650 |
|
22,812 |
|
||
|
|
|
Controllable contribution |
|
|
|
|
|
|
3,954 |
|
9,168 |
|
||||||
|
|
|
Other costs |
|
|
|
|
|
|
|
|
|
|
(5,721) |
|
(6,525) |
|
||
|
Kellan Group Total |
Adjusted Ebitda |
|
|
|
|
|
(1,767) |
|
2,643 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Short leasehold |
Computer |
|
|
|
premises and |
and office |
|
|
|
improvements |
equipment |
Total |
|
|
£000 |
£000 |
£000 |
|
Cost |
|
|
|
|
Balance at 1 January 2008 |
517 |
2,730 |
3,247 |
|
Additions |
246 |
353 |
599 |
|
Disposals |
(98) |
(488) |
(586) |
|
Balance at 31 December 2008 and 1 January 2009 |
665 |
2,595 |
3,260 |
|
Additions |
270 |
102 |
372 |
|
Disposals |
(186) |
(188) |
(374) |
|
Balance at 31 December 2009 |
749 |
2,509 |
3,258 |
|
Depreciation and impairment |
|
|
|
|
Balance at 1 January 2008 |
275 |
2,139 |
2,414 |
|
Depreciation charge for the period |
115 |
310 |
425 |
|
Disposals |
(88) |
(461) |
(549) |
|
Balance at 31 December 2008 and 1 January 2009 |
302 |
1,988 |
2,290 |
|
Depreciation charge for the period |
161 |
283 |
444 |
|
Disposals |
(118) |
(161) |
(279) |
|
Balance at 31 December 2009 |
345 |
2,110 |
2,455 |
|
Net book value |
|
|
|
|
At 31 December 2007 |
242 |
591 |
833 |
|
At 31 December 2008 |
363 |
607 |
970 |
|
At 31 December 2009 |
404 |
399 |
803 |
10 Intangible assets
|
|
|
|
|
Customer |
|
|
|
|
Goodwill |
Brand name |
relations |
Total |
|
|
|
£000 |
£000 |
£000 |
£000 |
|
Cost |
|
|
|
|
|
|
Balance at 1 January 2008 |
|
24,989 |
922 |
3,609 |
29,520 |
|
Adjustment to fair value |
|
(272) |
- |
- |
(272) |
|
Balance at 31 December 2008 and 31 December 2009 |
|
24,717 |
922 |
3,609 |
29,248 |
|
Amortisation and impairment |
|
|
|
|
|
|
Balance at 1 January 2008 |
|
- |
23 |
90 |
113 |
|
Impairment of goodwill |
|
5,049 |
- |
- |
5,049 |
|
Amortisation |
|
- |
90 |
352 |
442 |
|
Balance at 31 December 2008 and 1 January 2009 |
|
5,049 |
113 |
442 |
5,604 |
|
Amortisation |
|
- |
90 |
352 |
442 |
|
Balance at 31 December 2009 |
|
5,049 |
203 |
794 |
6,046 |
|
Net book value |
|
|
|
|
|
|
At at 31 December 2007 |
|
24,989 |
899 |
3,519 |
29,407 |
|
At at 31 December 2008 |
|
19,668 |
809 |
3,167 |
23,644 |
|
At 31 December 2009 |
|
19,668 |
719 |
2,815 |
23,202 |
Goodwill
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Berkeley Scott Regional (Former Gold Helm Roche) branch network |
1,920 |
1,920 |
|
Berkeley Scott London (Former Sherwoods) branch network |
569 |
569 |
|
RK Group |
10,482 |
10,482 |
|
Quantica Technology |
3,202 |
3,202 |
|
Quantica Search & Selection |
3,466 |
3,466 |
|
Other |
29 |
29 |
|
|
19,668 |
19,668 |
The recoverable amount of all the CGUs is based on a value-in-use calculation using cash flow projections based on 2009 actual performance. An appropriate terminal value based on a perpetuity calculation is then generated. The key assumptions used in the impairment testing were the cash flows and discount rates.
Cash flows
Cash flows are based on a controllable contributions of each CGU remaining at 2009 levels in 2010, with a return to 2008 levels in 2011. These levels have been assumed to remain flat to 2014 with an annual 2% growth rate assumed thereafter. An allocation of shared overheads has been applied to the cash flows of each individual CGU.
Discount rate
A discount rate of 14.0% (2008: 14.8%) reflects management's current estimate of the pre-tax cost of capital of the Group and is applied to each of the CGUs listed above.
Sensitivity Testing
It would require an increase in the discount rate of 1.6% before any CGU would indicate an impairment.
A sensitivity has been applied to the cash flows whereby 2008 levels are predicted to return only in 2014 with straight line growth in the intervening periods. The application of this sensitivity to each CGU did not give rise to any impairment.
Goodwill impairment
Further impairment of Goodwill has been considered in the current period but none has been booked. The impairment in the prior period of £5,049,000 related to Quantica Technology of £2,847,000 and Quantica Search & Selection of £2,202,000. The Directors believe that the assumptions used in testing impairment at 31 December 2009 are still valid and have not materially changed. These assumptions will continue to be reassessed on a six monthly basis.
11 Deferred tax assets and liabilities
Recognised deferred tax liabilities
Recognised deferred tax liabilities are at present attributable to unamortised fair value adjustments on business combinations. The movement on the accounts is as follows:
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Balance at 1 January 2009 |
1,110 |
1,237 |
|
Credited to the income statement |
(124) |
(127) |
|
Balance at 31 December 2009 |
986 |
1,110 |
At 31 December 2009 the amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised are as follows:
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Trading losses carried forward |
4,243 |
168 |
|
Capital losses carried forward |
561 |
561 |
|
Decelerated capital allowances |
693 |
400 |
|
Other temporary and deductible differences |
275 |
618 |
|
|
5,772 |
1,747 |
12 Trade and other receivables
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Trade receivables |
3,879 |
5,532 |
|
Other receivables |
175 |
409 |
|
Prepayments and accrued income |
1,178 |
1,155 |
|
|
5,232 |
7,096 |
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
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Cash and cash equivalents |
641 |
1,379 |
14 Other interest-bearing loans and borrowings
The carrying value and face value of loans and borrowings are as follows:
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Non-current liabilities |
|
|
|
Secured bank loans |
- |
2,320 |
|
|
|
|
|
Current liabilities |
|
|
|
Current portion of secured bank loans |
2,320 |
767 |
|
Invoice discounting facility |
2,551 |
- |
|
|
4,871 |
767 |
Terms and debt repayment schedule
|
|
|
|
|
|
Carrying |
|
Carrying |
|
|
|
|
|
Face value |
amount |
Face value |
amount |
|
|
|
|
|
31 December |
31 December |
31 December |
31 December |
|
|
|
Nominal |
Year of |
2009 |
2009 |
2008 |
2008 |
|
|
Currency |
interest rate |
maturity |
£000 |
£000 |
£000 |
£000 |
|
Bank loan (Barclays) |
Sterling |
4% |
2012 |
2,520 |
2,320 |
3,360 |
3,087 |
|
|
|
above |
|
|
|
|
|
|
|
|
LIBOR |
|
|
|
|
|
|
|
|
|
|
2,520 |
2,320 |
3,360 |
3,087 |
The 5 year term loan of £2,520,000 (2008: £3,360,000) and invoice discounting facility balance utilised of £2,551,000 (2008: £ nil) 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.
15 Trade and other payables
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Trade payables |
386 |
446 |
|
Social security and other taxes |
823 |
1,364 |
|
Other creditors |
374 |
627 |
|
Accruals and deferred income |
1,654 |
1,549 |
|
|
3,237 |
3,986 |
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 £5,071,000 (2008: £3,360,000) as a percentage of total equity £19,689,000 (2008: £24,179,000), worsened to 25.8% from 13.9%.
Trade receivables impairment
Movement on trade receivables impairment provision:
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Provision brought forward |
348 |
416 |
|
Increase/(decrease) in provision |
(142) |
(68) |
|
Provision carried forward at year end |
206 |
348 |
The trade receivables past due and not impaired at the balance sheet date amounted to £2,274,000 (2008: £2,912,000) and comprised £1,809,000 (2008: 2,479,000) overdue by up to 30 days, £320,000 (2008: £326,000) overdue by 30-60 days and £145,000 (2008: £107,000) 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:
|
|
Loans and receivables |
|
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Current financial assets |
|
|
|
Trade and other receivables |
4,054 |
5,941 |
|
Net cash and cash equivalents |
641 |
1,379 |
|
Total financial assets |
4,695 |
7,320 |
Financial liabilities
The financial liabilities of the Group comprised:
|
|
Measured at amortised cost |
|
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Current financial liabilities |
|
|
|
Trade and other payables |
3,237 |
3,986 |
|
Loans and borrowings |
4,871 |
767 |
|
Total current financial liabilities |
8,108 |
4,753 |
|
|
|
|
|
Non-current financial liabilities |
|
|
|
Loans and borrowings |
- |
2,320 |
|
Total financial liabilities |
8,108 |
7,073 |
Bank loans and invoice discounting balances amounting to £4,871,000 (2008: £3,360,000) are secured by cross guarantees and mortgage debentures on certain Group companies.
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 £102,000 (2008: £135,000). The directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost in the financial statements approximate their fair values.
Effective interest rates and repricing analysis - Group
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature or, if earlier, are repriced.
|
|
2009 |
|
2008 |
||||||||
|
|
Effective interest rate |
Total £000 |
0 to
£000 |
1 to
£000 |
2 to
£000 |
|
Effective interest rate |
Total £000 |
0 to
£000 |
1 to
£000 |
2 to
£000 |
|
Cash and cash equivalents |
0.1% |
641 |
641 |
- |
- |
|
0.1% |
1,379 |
1,379 |
- |
- |
|
bank loans |
7.8% |
(2,320) |
(2,320) |
- |
- |
|
5.9% |
(3,087) |
(767) |
(767) |
(1,553) |
|
Derivative collar |
n/a |
(102) |
(102) |
- |
- |
|
n/a |
(135) |
(135) |
- |
- |
|
Invoice discounting |
3.5% |
(2,551) |
(2,551) |
- |
- |
|
0% |
- |
- |
- |
- |
|
|
|
(4,332) |
(4,332) |
- |
- |
|
|
(1,843) |
477 |
(767) |
(1,553) |
The above table is based on the balances at the balance sheet date. The effect of future interest cashflows can be determined from the above effective interest rates which are subject to change.
Following the breach of covenants in the year, the lender could request immediate repayment of all outstanding borrowing and consequently all borrowing at the current period end is recorded as being due within one year. In agreement with its lender the Group continues to make repayments on its bank loan in line with the original repayments schedule which runs to 2012.
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 £164,463 (2008: £167,660). Pension contributions totalling £3,700 (2008: £7,641) were outstanding at the period end.
Share-based payments
Approved and unapproved share schemes
The Group has 5 share option schemes in existence:
1999 Unapproved Scheme - 1,575 options remain unexercised at 31 December 2009
The scheme is no longer used to grant new options and all residual options in existence have vested.
2004 Approved EMI Scheme - 76,688 options remain unexercised at 31 December 2009
The ability of a company to utilise EMI options is governed by conditions, including those of size, that are prescribed by HMRC. Following the acquisition of Quantica plc in September 2007 the Group became too large to grant EMI options and any subsequent grants were made within the rules of alternative schemes. The reduction in headcount and net assets of the Group in 2009 may result in the Group becoming once more eligible to grant EMI options and if such a situation eventuates, the Group would utilise the existing 2004 scheme to conduct such a grant.
2008 Unapproved Non-executive Directors Scheme - 4,354,317 options remain unexercised at 31 December 2009
This scheme was established in 2008 as non-executive Directors are ineligible to participate in an all employee scheme. Vesting criteria are purely share price related.
2008 Unapproved All Employee Scheme - 2,805,014 options remain unexercised at 31 December 2008
The scheme was established in 2008 for employees of the Group and is currently the main vehicle by which options are granted unless the Group's EMI scheme becomes available for re-use. 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 145,001 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 - 4,429,100 options remain unexercised at 31 December 2009
The scheme was established in 2009 offering all employees the opportunity to purchase shares. 116 employees took up the initial offer. Vesting conditions are purely length of service related with all options vesting and exercisable after 3 years. At 31 December 2009, there were 86 employees in the scheme in 2009.
The number and weighted average exercise prices of share options and warrants are as follows:
|
|
31 December 2009 |
|
31 December 2008 |
||
|
|
Weighted |
Number |
|
Weighted |
Number |
|
|
average |
of options |
|
average |
of options |
|
|
exercise price |
|
|
exercise price |
|
|
|
£ |
|
|
£ |
|
|
Outstanding at the beginning of the period |
0.37 |
8,168,289 |
|
0.54 |
1,445,582 |
|
Options granted during the period |
0.03 |
6,707,659 |
|
0.24 |
7,204,341 |
|
Options exercised during the period |
- |
- |
|
- |
- |
|
Options lapsed during the period |
0.26 |
(3,209,254) |
|
0.32 |
(481,634) |
|
Outstanding at the end of the period |
0.20 |
11,666,694 |
|
0.37 |
8,168,289 |
|
Exercisable at the end of the period |
0.39 |
4,577,581 |
|
0.52 |
352,231 |
The exercise price of options outstanding at the end of the period ranged between £0.03 and £0.99 (2008: £0.15 and £0.99) and their weighted residual contractual life was 9 years (2008: 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 (2008: £0.027).
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:
|
|
|
31 December |
31 December |
|
|
|
2009 |
2008 |
|
Fair value at measurement date |
|
£176,287 |
£195,781 |
|
Weighted average share price |
|
£0.04 |
£0.24 |
|
Weighted average exercise price |
|
£0.03 |
£0.34 |
|
Expected volatility |
|
90% |
40% |
|
Expected option life (years) |
|
3.5 |
1.4 |
|
Expected dividends |
|
0% |
0% |
|
Risk-free interest rate |
|
2.5% |
5% |
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 £67,000 (2008: £132,000 expense).
18 Provisions
|
|
Onerous |
|
|
Contracts and Dilapidations |
|
|
£000 |
|
Balance at 1 January 2009 |
385 |
|
Provisions made during the period |
1,133 |
|
Provisions used during the period |
(525) |
|
Balance at 31 December 2009 |
993 |
|
|
|
|
Non-current at 31 December 2008 |
59 |
|
Current at 31 December 2008 |
326 |
|
|
385 |
|
Non-current at 31 December 2009 |
625 |
|
Current at 31 December 2009 |
368 |
|
|
993 |
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
|
|
Ordinary shares |
|
|
In thousands of shares |
31 December 2009 |
31 December 2008 |
|
In issue at 1 January and 31 December - fully paid |
87,086 |
87,086 |
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Authorised |
|
|
|
Ordinary shares of £0.02 each |
2,895 |
2,895 |
|
|
|
|
|
Allotted, called up and fully paid |
|
|
|
Ordinary shares of £0.02 each |
1,742 |
1,742 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to 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.
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:
|
|
31 December |
31 December |
|
|
2009 |
2008 |
|
|
£000 |
£000 |
|
Less than 1 year |
1,307 |
1,168 |
|
Between 1 and 5 years |
3,286 |
2,107 |
|
More than 5 years |
41 |
78 |
|
|
4,634 |
3,353 |
During the period £1,277,930 was recognised as an expense in the income statement in respect of operating leases (2008: £1,461,000), excluding amounts charged in respect of onerous contracts.
22 Post balance sheet events
At an EGM of the company on 18 January 2010 resolutions to remove authorised share capital restrictions as well as grant the Directors authority to allot new shares and to disapply statutory pre-emption rights (in respect of such an allotment) were passed.
Consequentially to the resolutions above, on 5 February 2010, the Group raised £1million before approximate expenses of £40,000, via the issue of a convertible loan note, with warrants attached, to 8 existing shareholders.
The funds were used to strengthen the Group's balance sheet and to enable it to continue to meet repayment obligations on the Group's outstanding long term debt whilst also maintaining sufficient working capital of day to day requirements.
23 Annual Report
The Annual Report for the year ended 31 December 2009 will be posted to shareholders shortly. The Annual General Meeting of the Company will be held at the Company's office at 27-35 Mortimer Street, London W1T 3BL, on 18 May 2010 at 10.00 a.m.
Copies of the report will be available from the Company's office and also from the Company's website www.kellangroup.co.uk.
Related Shares:
Kellan Group