Subscription and Capital Reorganisation

AIM: KLN

11 July 2013

The Kellan Group PLC

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

Capital reorganisation

Subscription for 120,000,000 New Ordinary Shares at 0.75 pence per share

and £600,000 nominal value Convertible Loan Note

Approval of the waiver obligations under Rule 9 of the City Code on Takeover and Mergers

Notice of General Meeting

Summary:

● Further to the announcement released by the Company on 25 June 2013, the Independent Directors have decided to proceed with the proposed transaction regarding the future funding of the Company offered by Paul Bell, the Company's largest shareholder.

● The proposed fundraising comprises the issue of 120,000,000 New Ordinary Shares at a price of 0.75 pence per share to Paul Bell and £600,000 nominal principal amount Convertible Loan Note at par to Paul Bell (together the "Subscription").

● As the proposed Subscription Price of 0.75 pence per Subscription Share and the Conversion Price under the Convertible Loan Note of 0.75 pence per New Ordinary Share will be less than the nominal value of the Existing Ordinary Shares, it is proposed that a Capital Reorganisation is effected to enable the Subscription to proceed.

● The Subscription is also conditional, inter alia, upon Shareholders passing the Resolutions at a General Meeting to grant the Directors the authority to allot the Subscription Shares, and to issue the Convertible Loan Note and to disapply the statutory pre-emption rights arising in respect of those allotments. The Subscription is also conditional upon the Subscription Shares being admitted to trading on AIM. Application will be made for the Subscription Shares to be admitted to AIM and it is expected that Admission will become effective and that dealings in these shares will commence on 19 August 2013.

Rule 9 Waiver:

● Paul Bell currently holds 88,991,840 Existing Ordinary Shares, representing 41.77 per cent. of the Existing Ordinary Shares. Immediately following completion of the Proposals and on Admission, Mr Bell will hold 208,991,840 New Ordinary Shares, representing 62.75 per cent. of the Enlarged Issued Share Capital. In addition, Mr Bell will hold £600,000 nominal principal amount of Convertible Loan Note which may be converted at the Conversion Price into 80,000,000 New Ordinary Shares, although these can only be converted to the extent that other Existing Loan Noteholders convert their Existing Loan Notes.

● Ordinarily the subscription by Paul Bell for the Subscription Shares and any New Ordinary Shares issued on the conversion of the Convertible Loan Note would trigger an obligation under Rule 9 for Mr Bell to make a general offer to all other Shareholders to acquire their shares in the Company. The Takeover Panel has agreed, however, to waive this obligation, subject to the approval of the Rule 9 Waiver by the Independent Shareholders.

Capital Reorganisation:

● It is proposed that the Subscription Shares will be issued at the Subscription Price of 0.75 pence. The Conversion Price at which the Convertible Loan Note may convert into New Ordinary Shares is also priced at 0.75 pence. As this is less than the current nominal value of the Existing Ordinary Shares, the Directors propose to carry out the Capital Reorganisation, whereby each Existing Ordinary Share will be subdivided into and reclassified as one Redenominated Share (being an ordinary share in the capital of the Company of 0.01 pence nominal value) and one Deferred Share (being a deferred share in the capital of the Company of 1.99 pence nominal value).

● Application will be made for the Redenominated Shares to be admitted to AIM and it is expected that Admission will become effective and that dealings in these shares will commence on 10 August 2013.

Irrevocable Undertakings:

● The Company has received irrevocable undertakings to vote in favour of Resolution 1 amounting to 53.31 per cent. of the Existing Ordinary Shares held by Independent Shareholders and to vote in favour of the remaining Resolutions amounting to 73.94 per cent. of the Existing Ordinary Shares.

Circular and Notice of General Meeting:

● A Shareholder Circular containing details of the proposed Subscription and Capital Reorganisation and a notice convening a General Meeting of the Company to be held at 2.30 p.m. on 9 August 2013 at the offices of The Kellan Group plc, 4th Floor, 27 Mortimer Street, London W1T 3BC will be sent to Shareholders tomorrow and will also be available on the Company's website, www.kellangroup.co.uk.

Tony Reeves, Chairman, commented:

"This investment from our major shareholder, coupled with efficiency savings made via organisational changes in Q1 2013 and encouraging Q2 performance levels, places the Group in a strong position for the future and enables us to consider appropriately funded acquisitions to take the Group forward. I would like to take this opportunity to thank all our shareholders and staff for their continuing support and commitment."

ENQUIRIES:

Capital Reorganisation

Subscription for 120,000,000 New Ordinary Shares at 0.75 pence per share and £600,000 nominal value Convertible Loan Note

Approval of a waiver of the obligations under Rule 9 of the City Code on Takeover and Mergers

Notice of General Meeting

1. Introduction

Further to the announcement released by the Company on 25 June 2013, the Independent Directors have decided to proceed with the proposed transaction regarding the future funding of the Company offered by Paul Bell. The Independent Directors are grateful to both James McHugh and Paul Bell for the funding proposals offered by them but at this time they believe that the terms offered by Paul Bell are more beneficial to the Company and its shareholders as a whole. In order to complete the transaction proposed by Paul Bell the Company proposes to carry out a Capital Reorganisation for the purpose of effecting a fundraising in order to raise £1.5 million in aggregate before expenses. The proposed fundraising comprises the issue of 120,000,000 New Ordinary Shares at a price of 0.75 pence per share to Paul Bell and £600,000 nominal principal amount Convertible Loan Note at par to Paul Bell, the Company's largest shareholder.

As Paul Bell currently holds 88,991,840 Existing Ordinary Shares, representing 41.77 per cent. of the Existing Ordinary Shares, the issue to him of the Subscription Shares and any shares issued on the conversion of the Convertible Loan Note might otherwise result in him incurring an obligation under Rule 9 of the Takeover Code to make a general offer to all other Shareholders to acquire their shares in the Company. The Panel has agreed, however, to waive the obligation, subject to its approval by Independent Shareholders. Accordingly, a Resolution is being proposed at the General Meeting for this purpose and is required to be taken on a poll.

As the proposed Subscription Price of 0.75 pence per Subscription Share and the Conversion Price under the Convertible Loan Note of 0.75 pence per New Ordinary Share will be less than the nominal value of the Existing Ordinary Shares, it is proposed that a Capital Reorganisation is effected to enable the Subscription to proceed. Accordingly, a Resolution is also being proposed at the General Meeting for this purpose. Application will be made for the Redenominated Shares to be admitted to AIM and it is expected that Admission will become effective and that dealings in these shares will commence on 10 August 2013.

The Subscription is also conditional, inter alia, upon Shareholders passing the Resolutions at the General Meeting to grant the Directors the authority to allot the Subscription Shares, and to issue the Convertible Loan Note and to disapply the statutory pre-emption rights arising in respect of those allotments. The Subscription is also conditional upon the Subscription Shares being admitted to trading on AIM. The enabling Resolutions are contained in the Notice of General Meeting, which is set out at the end of this announcement. Application will be made for the Subscription Shares to be admitted to AIM and it is expected that Admission will become effective and that dealings in these shares will commence on 19 August 2013.

2. Background to and reasons for the Subscription

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

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

The Group has realigned the leadership and management team so as to ensure it has the right people in the right roles, creating a robust operational infrastructure to provide support to everyone across the business.

The £1.5 million funds to be raised pursuant to the Subscription, comprising £0.9 million in equity and £0.6 million in unsecured convertible debt, which will replace the £0.6 million interim related party Paul Bell working capital facility arranged on 21 March 2013, along with the recent steps to restructure the operational structure of the Group, which will yield an annualised saving of circa £0.59 million per annum, puts the Group in a good position to deliver improved results.

Under the terms of the Subscription, Paul Bell, (either in his own name or through his nominee, Fitel Nominees Limited), has agreed, conditional upon the passing of the Resolutions, to subscribe for 120,000,000 Subscription Shares at 0.75 pence per share and £600,000 nominal Convertible Loan Note.

The Convertible Loan Note is unsecured and repayable on 20 September 2017. The Convertible Loan Note may only be repaid by the Company prior to such date where all other outstanding indebtedness owed by the Company to Mr Bell has been repaid in full. The Convertible Loan Note becomes repayable on demand by Mr Bell upon the occurrence of certain stipulated events of default. In addition, following the maturity of the Convertible Loan Note on 20 September 2017, it becomes repayable on demand.

The Convertible Loan Note carries a 4 per cent. per annum coupon (after deduction of any applicable income tax), payable in equal six-monthly instalments on the interest payment dates of 30 June and 31 December and with the first such payment due on 31 December 2013.

The Convertible Loan Note may be converted into New Ordinary Shares at the Conversion Price prior to its maturity on 20 September 2017. Conversion of the Convertible Loan Note can only take place if and to the extent that Existing Loan Noteholders in the Company convert some or all of their Existing Loan Notes, in which case, the Convertible Loan Note will be capable of being converted up to the lesser of (a) the amount outstanding on the Convertible Loan Note and (b) the amount that will enable Mr Bell to maintain his percentage interest in the Company at the same level as it was immediately prior to any conversion by an Existing Loan Noteholder.

The Company will use its reasonable endeavours to procure that any New Ordinary Shares issued upon conversion of the Convertible Loan Note are admitted to trading on AIM as soon as practicable following conversion.

The £900,000 subscription monies due from Mr Bell in respect of the Subscription Shares will be satisfied in cash. The £600,000 subscription monies due from Mr Bell in respect of his subscription for the Convertible Loan Note will be satisfied by way of the discharge of a corresponding amount due from the Company to him under the £600,000 working capital facility announced on 21 March 2013, which has been drawn down in full.

The Subscription is conditional, inter alia, upon Admission of the Subscription Shares to trading on AIM.

The New Ordinary Shares to be issued pursuant to the Subscription and those that may be issued pursuant to the conversion of the Convertible Loan Note will, when issued and fully paid, rank pari passu in all respects with the Redenominated Shares in issue following implementation of the Capital Reorganisation, including the right to receive all dividends and other distributions declared, made or paid after the relevant date of Admission. Pursuant to the terms of his Subscription for New Ordinary Shares, Mr Bell will be granted certain rights to participate in any future fundraisings carried out by the Company by way of the issue of new shares and/or convertible loan notes (whether or not on a pre-emptive basis), pro rata to his respective holding of New Ordinary Shares and/or the principal amount outstanding under his Convertible Loan Note (as applicable). Mr Bell shall also be entitled to a separate right to maintain his interest in the Company's voting rights attaching to the Company's New Ordinary Shares in the event that the Company elects to issue shares (whether for cash or non-cash consideration) for any other reason, at not less than 51 per cent. of the Company's issued share capital. These subscription rights shall remain in force for so long as Mr Bell (and any of his connected parties) owns or controls, directly or indirectly, 50 per cent. or more of the voting rights in the Company.

It is expected that Admission will become effective and dealings in the Subscription Shares will commence on 19 August 2013.

The Subscription is also conditional upon the passing of all the Resolutions. Accordingly, the Company has convened the General Meeting. The Notice of General Meeting is set out at the end of Shareholder Circular.

3. Information on Paul Bell

Mr Bell is a private individual who has an interest in a number of listed and private companies. He has been a shareholder in Kellan since January 2008 and currently holds 88,991,840 Existing Ordinary Shares, representing 41.77 per cent. of the Existing Ordinary Shares. Mr Bell is a graduate in Economics from Manchester University. Following a career in accountancy and then stockbroking, he has developed a number of interests in recruitment, payroll, property development and care homes. Mr Bell is married with 2 children. Further information relating to Mr Bell is set out in the Shareholder Circular. 

4. City Code on Takeovers and Mergers

The issue of the Subscription Shares and Convertible Loan Note to Paul Bell gives rise to certain considerations under the Code. Brief details of the aspects of the Code and the protections it affords to you as a Shareholder are described below.

The Code is issued and administered by the Takeover Panel. The Code governs, inter alia, transactions which may result in a change of control of a company to which the Code applies. The Company is a company to which the Code applies and its Shareholders are entitled to the protections afforded by its provisions.

Under Rule 9 of the Code ("Rule 9"), when a person acquires an 'interest' (as defined in the Code) in shares which, taken together with shares in which he is already interested and in which persons 'acting in concert' with him are interested (as defined in the Code), carry 30 per cent. or more of the voting rights of a company that is subject to the Code, then that person together with persons acting in concert with him are normally required to make a general offer in cash to all the remaining shareholders to acquire their shares.

Similarly where any person who, together with any person or persons acting in concert with him, is interested in shares which in aggregate carry not less than 30 per cent. of the voting rights of such a company, but does not hold shares carrying more than 50 per cent. of such voting rights, a general offer will normally be required if any further interest in shares is acquired by him or by any person acting in concert with him.

An offer under Rule 9 must be made at the highest price paid by the person required to make the offer, or any persons acting in concert with him, for any interest in shares in the company during the twelve months prior to the announcement of the offer for the remaining equity share capital of the company.

Mr Bell currently holds 88,991,840 Existing Ordinary Shares, representing approximately 41.77 per cent. of the Existing Ordinary Shares as at the date of this announcement. Immediately following completion of the Proposals and on Admission, Mr Bell will hold 208,991,840 New Ordinary Shares, representing 62.75 per cent. of the Enlarged Issued Share Capital. In addition, Mr Bell will hold £600,000 nominal principal amount of Convertible Loan Note which may be converted at the Conversion Price into 80,000,000 New Ordinary Shares. As noted above, conversion of the Convertible Loan Note can only take place if and to the extent that Existing Loan Noteholders in the Company convert some or all of their Existing Loan Notes, in which case, the Convertible Loan Note will be capable of being converted up to the lesser of (a) the amount outstanding on the Convertible Loan Note and (b) the amount that will enable Mr Bell to maintain his percentage interest in the Company at the same level as it was immediately prior to any conversion by an Existing Loan Noteholder.

Ordinarily the subscription for Subscription Shares and any New Ordinary Shares issued on the conversion of the Convertible Loan Note would trigger an obligation under Rule 9 for Mr Bell to make a general offer to all other Shareholders to acquire their shares in the Company. The Takeover Panel has agreed, however, to waive this obligation, subject to the approval of the Rule 9 Waiver by the Independent Shareholders. Accordingly, Resolution 1 set out in the Notice of General Meeting is being proposed at the General Meeting to approve the Resolution required to approve the Rule 9 Waiver, which will be taken on a poll. Paul Bell will not be entitled to vote on this Resolution.

On Admission, Mr Bell will be interested in shares carrying more than 50 per cent. of the voting rights of the Company and would be able to acquire further shares and, accordingly increase his aggregate interest in the Company's voting rights, without incurring an obligation to make a general offer to Shareholders of the Company under Rule 9.

5. Conflict of Interest

Quentin Spratt (appointed to the Board as a nominee of Mr Bell) has a conflict of interest, for the purposes of the Code, in relation to the proposed Subscription and the Rule 9 Waiver. Mr Spratt is also not considered to be an independent director for the purposes of the AIM Rules in respect of the related party transaction represented by the Subscription. Accordingly, Mr Spratt has not, therefore, participated in any of the Board's deliberations in this regard. None of the other Directors has any relationship, arrangement or understanding with Mr Bell.

6. Related Party Transaction

Paul Bell (who holds an interest in approximately 41.77 per cent. of the Existing Ordinary Shares) is classified as a related party of the Company for the purposes of the AIM Rules, by virtue of him having a substantial shareholding (as defined by the AIM Rules) in the Company. Mr Bell is subscribing for the Subscription Shares and the Convertible Loan Note and such participation constitutes a related party transaction under the AIM Rules.

The Independent Directors, having consulted with the Company's nominated adviser, Sanlam Securities UK, consider that the terms of the Subscription to be fair and reasonable so far as the Shareholders are concerned. In providing advice to the Independent Directors, Sanlam Securities UK has taken into account the Independent Directors' commercial assessments.

7. Background to and reasons for the Capital Reorganisation

The current market value of the Existing Ordinary Shares is below their nominal value. Under the Act, a company cannot issue shares at a price below their nominal value and this therefore impacts its ability to raise new money.

It is proposed that the Subscription Shares will be issued at the Subscription Price of 0.75 pence. The Conversion Price at which the Convertible Loan Note may convert into New Ordinary Shares is also priced at 0.75 pence. As this is less than the current nominal value of the Existing Ordinary Shares, the Directors propose to carry out the Capital Reorganisation, whereby each Existing Ordinary Share will be subdivided into and reclassified as one Redenominated Share (being an ordinary share in the capital of the Company of 0.01 pence nominal value) and one Deferred Share (being a deferred share in the capital of the Company of 1.99 pence nominal value).

The Existing Ordinary Shares are currently admitted to CREST. Application will be made for the Redenominated Shares arising from the Capital Reorganisation, to be admitted to CREST, all of which may then be held and transferred by means of CREST. The record date of the Capital Reorganisation is 6.00 p.m. on 9 August 2013.

The rights attaching to the Redenominated Shares will be identical in all respects to those of the Existing Ordinary Shares.

The Company does not intend to issue new share certificates to Shareholders following the Capital Reorganisation.

Application will be made for the Redenominated Shares to be admitted to AIM and it is expected that Admission will become effective and dealings in the Redenominated Shares will commence on 10 August 2013.

8. Current trading

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

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

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

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

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

9. General Meeting

A General Meeting of the Company has been convened to be held at 2.30 p.m. on 9 August 2013 at the offices of The Kellan Group plc, 4th Floor, 27 Mortimer Street, London W1T 3BC.

10. Irrevocable undertakings to vote in favour of the Resolutions

Michael Jackson, Rakesh Kirpalani, Dr Gerald Bereika, Donald Hanson, Ross Eades, and Anthony Reeves, who in aggregate hold 66,149,130 Existing Ordinary Shares, representing 31.05 per cent. of the Existing Ordinary Shares held by Independent Shareholders, have undertaken to vote in favour of the Resolutions.

Paul Bell, who holds 88,991,840 Existing Ordinary Shares, representing 41.77 per cent. of the Existing Ordinary Shares, has undertaken to vote in favour of the Resolutions (other than Resolution 1 on which he is unable to vote).

Accordingly, the Company has received irrevocable undertakings to vote in favour of Resolution 1 amounting to 53.31 per cent. of the Existing Ordinary Shares held by Independent Shareholders and to vote in favour of the remaining Resolutions amounting to 73.94 per cent. of the Existing Ordinary Shares.