Fundraising, Debt Restructuring and Trading Update

AIM: KLN

2 February 2011

The Kellan Group PLC

("Kellan", the "Company" or "Group")

£1.35 Million Fundraising, Debt Restructuring and Trading Update

Highlights

·; £1.35 million raised to provide working capital and to fund organic growth

·; Funds raised through a combination of new equity and convertible loan notes

·; Significant participation from Board and existing Shareholders

·; Existing bank facility restructured

·; EBITDA breakeven achieved in H2 2010, with trading conditions improving

Kellan, a leading IT, accountancy, hospitality, leisure and professional services recruitment group, is pleased to announce that the Company has raised a total of £1,350,500, pursuant to the issue of 16,975,000 new ordinary shares ("Ordinary Shares") in the capital of the Company (the "Subscription") at 2 pence per share and the issue of £1,011,000 nominal of unsecured convertible loan notes 2015 ("Loan Notes") (together "the Fundraising"). The Ordinary Shares and Loan Notes are being subscribed for by the directors of the Company ("Directors") (excluding Michael Jackson ("Independent Director")), certain members of the Company's senior management and certain existing shareholders of Company ("Shareholders").

The Company intends to use the proceeds of the Fundraising for working capital generally and to increase its fee earner headcount to drive organic growth as market conditions continue to improve. 

The Subscription

The 16,975,000 new Ordinary Shares to be issued pursuant to the Subscription ("Subscription Shares") are being issued at a price of 2 pence per share.

When issued and fully paid, the Subscription Shares will rank equally in all respects with the Company's existing issued Ordinary Shares, including the right to receive all dividends and other distributions declared, made or paid after Admission.

It is expected that admission of the Subscription Shares will become effective and dealings will commence on 4 February 2011. Following admission of the Subscription Shares to trading on AIM ("Admission"), the Company will have 104,814,599ordinary voting shares in issue.

Loan Notes

The Loan Notes, which have a four year term from the date of their issue, shall bear interest at the rate of 10 per cent. per annum, payable half yearly in arrears, until such time as they are repaid or converted in accordance with their terms of issue. 50 per cent. of such interest shall be paid in cash with the balance being satisfied by the issue of new Ordinary Shares at a price per share equal to the lower of 2.5p or the volume weighted average price of the 20 trading days preceding the relevant half year end.

A holder of Loan Notes may, by service of a conversion notice on the Company, direct the Company to allot and issue such number of new Ordinary Shares (rounded down to the nearest whole number) as is equal to the nominal value of the number of the Loan Notes to be converted divided by 2.5p.

The right to convert the Loan Notes will automatically lapse after four years or (if earlier) after a takeover offer for the Company becomes unconditional in all respects. 

Directors', senior management and significant Shareholder participation in the fundraising

Certain Directors, senior management and a significant Shareholder have agreed to subscribe for certain Subscription Shares and/or Loan Notes. The nominal amount of Loan Notes and/or the total number of Ordinary Shares subscribed for and the subsequent holdings of the relevant individuals as a percentage of theissued ordinary share capital as enlarged by the Subscription are as follows:

In addition to the above, Don Hanson, a Shareholder, has agreed to subscribe for £500,000 nominal amount of Loan Notes.

The issue of the Loan Notes and issue of the new Ordinary Shares to the Directors (other than the Independent Director), of whom Anthony Reeves and John Bowmer are also "substantial shareholders" of the Company for the purposes of the AIM Rules, is deemed to be a related party transaction under the AIM Rules. In accordance with Rule 13 of the AIM Rules, the Independent Director, having consulted with Merchant Securities Limited, the Company's nominated adviser, considers that the fundraising, the issue of the Ordinary Shares and Loan Notes on the terms of the convertible loan note instrument are fair and reasonable insofar as the Company's shareholders are concerned.

Debt restructuring

In addition to the above, the Company has entered into an amendment letter ("Amendment Letter") with respect to its existing £9.4 million facilities agreement ("Facility") with Barclays Bank plc ("the Bank") dated 24 August 2007. Under the Amendment Letter, the Bank has agreed to a repayment holiday to be applied to all principal amounts outstanding under the Facility during 2011. To date, the Company has been repaying £210,000 of capital per quarter and as of today's date, an aggregate principal amount of £1.68 million remains outstanding under the Facility. These quarterly payments will be subject to a one year repayment holiday but quarterly interest payments will continue during 2011. The repayment of the principal amount outstanding under the Facility will recommence on 31 March 2012 and the maturity date has, accordingly, been extended by one year. The Amendment Letter also contains provisions to reset various ratios in relation to the debt covenants under the Facility, which the Board feels better reflect the business than when originally set in 2007. The repayment holiday becoming effective is conditional, inter alia, upon the Company raising at least £840,000 of new capital either by way of an equity or loan note issue. The issue of the Loan Notes will satisfy this condition.

Trading Update

After reporting a loss at EBITA level of £419,000 during the first half of 2010, the Group's trading during the second half of 2010 has improved. The Board expects the Group to achieve break-even at the EBITA level for the second half of 2010 and also expects to report a modest increase in annual revenues of approximately £29.9 million (2009: £29.2 million).

The Group's key performance indicator, Net Fee Income, has grown sequentially throughout 2010 compared with H2 2009, with noticeable recoveries in key hospitality and technology markets where the Group's businesses grew their profits strongly and look set to continue this growth into 2011. The accountancy and finance market in the North remains stable year on year with the Group now focusing more resources on London and the South East where activity is considerably higher.

The search and selection businesses in retail and manufacturing have experienced tough conditions and although sales have fallen year on year, higher productivity per head coupled with tight cost control means that the business contribution has shown a modest increase over the period. The focus for each business is to achieve its respective targets while investing in additional sales staff to match the needs of its growth plans. This will include an aggressive recruitment drive following completion of the fundraising.

Tony Reeves and John Bowmer, Non-Executive Co-Chairmen of Kellan, commented:

"We are delighted that the Directors and existing Shareholders have shown their ongoing support for the business. We are also pleased to see an improved trading performance in the second half of the year, with increased revenue for 2010 compared with the previous year, in the backdrop of implementing a strict cost control exercise.

"This capital funding through the Subscription and the issue of the Loan Notes will resolve the Group's previous liquidity issues and allow it to focus on organic growth, ensuring that the Group is well positioned to enter 2011 in a position of relative strength."

ENQUIRIES:

NOTES:

Kellan is a market leading recruitment business operating across a wide range of functional disciplines and industry sectors.

Kellan operates through a portfolio of premium brands within the currently fragmented recruitment sector. Currently, through its three recruitment brands, Berkeley Scott, Quantica and RK, Kellan has the capability and resource to recruit professionals into finance & accounting, information technology, supply chain & procurement, legal, retail, manufacturing, catering, hospitality and leisure.

Kellan currently operates through 16 UK offices, seven businesses and three brands.

http://www.kellangroup.co.uk/