15th Jun 2006 07:10
Flomerics Group PLC15 June 2006 15 June 2006 Flomerics Group plc Proposed Acquisition of NIKA GmbH, Germany • World-leading technology enhances the Flomerics product range • Significant opportunity to expand NIKA sales into countries where Flomerics is already strong • Access to a much wider potential customer base of design engineers outside of Flomerics' existing core electronics markets • Initial consideration valued at £8.0 million made up of £1.0 million cash and £7.0 million in Flomerics shares • Consideration mainly in Flomerics shares demonstrates confidence of the vendors in the prospects for the enlarged business • Deferred consideration will only become payable if enlarged group profits exceed £2.7 million in year ended 31 December 2007 • Issue of consideration shares and therefore completion of the acquisition is conditional on the passing of appropriate resolutions at an EGM of Flomerics shareholders Commenting today Gary Carter, Chief Executive, said: "Following a very strong performance at our last set of results, our objectiveis to firmly establish ourselves in our existing markets and, through theproposed NIKA acquisition, expand the business geographically and into newmarkets. NIKA provides us with new products, customers and expertise within anarea we have already proven our success. There is also a significant opportunityto drive EFD.Lab sales into new geographies. We are building shareholder valuein 2006 and beyond by building a Flomerics with a greater exposure to a widerrange of potential clients and an increased product offering." Roland Feldhinkel, NIKA Managing Director added: "We are very excited to be a part of the Flomerics Group. Flomerics isacknowledged as being synonymous with the physical design of electronics and weare confident of establishing a similar standing for NIKA's products." For further information please contact: Flomerics Group 020 8487 3000 Gary Carter, Chief Executive Chris Ogle, Finance Director & Company Secretary Conduit PR 020 7429 6666 Laurence Read/ Angus Prentice 07979 955 923 Introduction Flomerics announces that it has reached agreement on the proposed acquisition ofthe entire issued share capital of NIKA, the German software developerspecialising in simulation tools for the prediction of fluid flow and heattransfer. The initial consideration for the proposed acquisition is to be satisfied by thepayment in cash of approximately €1.5 million (£1.0 million approximately) andthe issue of 7,558,033 new ordinary shares in the Company. A proportion of theinitial consideration will be retained in escrow pending the end of the warrantyclaim period under the Acquisition Agreement. The terms of the Acquisition also include provision for the potential payment ofdeferred consideration in the event that the Enlarged Group profit after taxexceeds £2.7 million in the year ended 31 December 2007. The maximum number ofnew ordinary shares that may be issued under the deferred considerationarrangements is 4,122,495. In the event that the enlarged group profits do notexceed £2.7 million in the year ended 31 December 2007 no deferred considerationshares will be issued. The new ordinary shares to be issued to the NIKA Shareholders are subject tolock-up arrangements, which are explained below. In order for the Acquisition to be effected it is necessary to seek the approvalof Shareholders to increase the authorised share capital of the Company and toincrease the share capital that the Directors are authorised to allot. TheAcquisition is conditional therefore, inter alia, on Shareholders passing theResolutions. Information on NIKA Background Formed in 1999, NIKA is a German based software group employing 68 people,including 47 employees working in a Moscow-based team of software developersemployed by NIKA's Russian subsidiary, Nika Software OOO. The principal productis EFD.Lab, a CFD simulation tool aimed at design engineers that is tightlyintegrated with the world's leading MCAD tools such as SolidWorks, ProEngineerand CATIA. NIKA has also established a strong revenue stream though theirlongstanding arrangement with SolidWorks Corporation ("SolidWorks") throughwhich NIKA's product COSMOSFloWorks is exclusively marketed by SolidWorks andits international reseller channel. EFD.Lab has become an integral part of the product development process forhundreds of companies because the key technologies behind NIKA's uniqueEngineering Fluid Dynamics (EFD) approach successfully address the high demandsof usability, accuracy, efficiency and affordability. The fundamentalphilosophy behind EFD has a lot in common with that behind the existingFlomerics products, namely delivering complex simulation software in a way thatis easily accessible and usable by engineers with little experience of what isotherwise the domain of more highly qualified specialists. Whilst CFD is anestablished technology which has been used by specialist engineers for manyyears, the delivery of CFD based solutions to the MCAD users in the engineeringdesign community is relatively new. Since the number of installed seats of MCADsoftware is orders of magnitude greater than the number of seats of simulationsoftware, this represents a significant opportunity for growth. With their EFD approach, NIKA has created a new and much wider field ofapplications for fluid flow and heat transfer analysis. The EFD products areused by engineers in companies whose products depend in a critical way on fluidflow and heat transfer phenomena. NIKA has an impressive list of customers, anumber of which are also existing Flomerics customers. Existing customersinclude Black & Decker, Honda, Delphi, Electrolux, Thales, BAE Systems, Siemens,Mitsubishi and Toyota. Financial information on NIKA In •'000s 2003 2004 2005 Adjusted Turnover 1,812 2,276 2,896Adjusted EBITDA 128 (425) (460) Note: Extracted from audited results. An adjustment has been made for a stocksale in 2004 by adjusting the 2004 turnover and EBITDA down by €226,000 andincreasing the 2005 turnover and EBITDA by the same amount, as the Boardbelieves this gives a more representative view of the performance of NIKA. Up to 31 December 2005, €8.5 million had been invested into the development ofNIKA's products. Having made these investments, as referred to elsewhere, NIKAis now in a strong position to drive significant growth. This is reflected inthe 2006 first quarter billings which, after adjustment for stock sales, show inexcess of 50% growth over the equivalent period in 2005. Background to and rationale for the Acquisition NIKA's principal product is EFD.Lab, a Computational Fluid Dynamics simulationtool used as part of the design process for products such as vehicles, homeappliances and electronics by designers utilizing Mechanical Computer AidedDesign software. Flomerics has a well established sales network around the world and theDirectors believe that suitable acquisitions that bring additional products tosell through that network will be value-enhancing for Shareholders. The Boardbelieve that the EFD.Lab product developed by NIKA is such a product. In addition to the existing and fast growing market for EFD, NIKA brings twoother key benefits to Flomerics. First, the EFD tools are well-suited for manyproblems confronted by mechanical design engineers within existing Flomericscustomers. EFD complements Flomerics' existing tools. FLOTHERM used by thespecialist thermal engineers for thermal design and FLO/PCB used by theelectrical engineers for the thermal aspects of PCB design. Flomerics istherefore now able to offer solutions at all levels of the thermal designprocess. The second area of the NIKA business which is of significance to Flomerics isthe world-leading technology that will benefit Flomerics' existing stable ofproducts. This will enable Flomerics to strengthen its position in theelectronics design sector whilst enabling it to become a leading provider of CFDsolutions across a number of other application areas. There are alsoconsiderable synergies in the Heating, Ventilation, and Air Conditioning (HVAC)market where Flomerics' existing FLOVENT product and EFD.Lab offer solutions atdifferent levels of the design processes within this industry. The breakdown of the revenues of Flomerics and NIKA illustrate furthercomplementary and synergistic aspects of the deal. Approximately 90% ofFlomerics business is in the electronics sector. NIKA on the other hand has 90%of its business outside the electronics sector. 43% of NIKA's sales come fromGermany, Austria and Switzerland, with much lower contributions from the UK andthe USA, for example, where Flomerics has strong representation. There is agreat opportunity to leverage Flomerics' infrastructure for the NIKA productsand the potential to repeat its success with electronics in other sectors. Through the Acquisition, Flomerics will be able to offer solutions at all levelsof the thermal design process. In particular, Flomerics will look to expand itssales into the significant MCAD market, where CFD tools are just beginning to beused. Flomerics will also look to leverage existing infrastructure to increaseNIKA's product sales in territories currently not covered by them. Many well-known companies such as Alcatel, BAE Systems, Black & Decker, Bosch,Delphi, Intel, Mitsubishi, Thales, Samsung, Siemens, and Toyota appear on bothNIKA's and Flomerics' customer lists, while NIKA's impressive customer list alsoincludes companies such as DAF, Electrolux, Honda, Lufthansa, Miele, Olympus,Pirelli, Tyco and Volkswagen. There are significant opportunities for growthfor the combined companies through wider geographic coverage and through accessto new industries. Principal terms of the Acquisition Initial consideration Under the Acquisition Agreement, the initial consideration for the Acquisitionwill be satisfied by the issue of 7,558,033 Ordinary Shares and the payment of€1,497,206.56 in cash. Under the Escrow, shares and cash for an aggregate valueof €2,000,000, calculated as at the business day prior to Completion, will bewithheld from the initial consideration and will be payable eighteen months fromCompletion, subject to any reductions in satisfaction of claims against the NIKAShareholders under warranties and indemnities in the Acquisition Agreement. Deferred consideration In addition to the initial consideration, further deferred consideration maybecome payable dependent on the profitability of the Enlarged Group in the yearended 31 December 2007. The deferred consideration will be satisfied by theissue of further Ordinary Shares based on a fixed number of shares for variouspre-agreed levels of the Enlarged Group's profitability as follows: • if the net profit for the year (determined on the basis of accountingprinciples and policies of the Company as at 31 December 2005 and afterdeduction of charges including amortisation, interest and taxation but beforedividends) shall exceed £2,700,000 then deferred consideration shall be payable; • the deferred consideration will be satisfied by the issue of furtherOrdinary Shares credited as fully paid; • the number of new Ordinary Shares to be issued will be calculatedusing a fixed value at 88.68 pence per share and an exchange rate of 0.68407407pounds sterling for each euro, and on this basis having an aggregate value of: • €8.91 for every £1 by which the net profit exceeds £2,700,000 up to amaximum of £3,100,000; plus • an additional €4.45 for every £1 by which the net profit exceeds£3,100,000 up to a maximum of £3,500,000; but • the maximum deferred consideration shall be €5,344,200 and the maximumnumber of new Ordinary Shares to be issued as deferred consideration 4,122,495; • if the net profit of the Enlarged Group in the year ended 31 December2007 is less than £2,700,001, no deferred consideration will be payable. Conditions Completion of the proposed Acquisition is conditional upon Admission and thepassing of the Resolutions. The Company has undertaken and agreed with the NIKAshareholders to use its best endeavours to achieve satisfaction of theconditions by 30 business days from the date of the Acquisition Agreement. The transaction is further conditional on the filing in Russia of an applicationfor the registration of NIKA as the owner of the copyright in certain softwarepresently registered in the name of certain NIKA Shareholders, and the transferby certain NIKA Shareholders of any copyrights and usage rights they have inrelevant software to NIKA. The transaction is also conditional upon no material adverse change affectingNIKA or the Company between exchange of the Acquisition Agreement and prior toCompletion. Warranties and tax indemnity The Acquisition Agreement contains customary warranties from the NIKAShareholders usual for this type of transaction. In addition, an indemnity isgiven for unprovided tax liabilities (subject to various usual exceptions) priorto 31 December 2005. Management and employees The existing management team of NIKA, including Managing Director RolandFeldhinkel, will be remaining with the Enlarged Group. Wolfgang Biedermann, theCEO of NIKA's largest shareholder, Pricap Venture Partners AG ("Pricap"), willbe joining the Board. Pricap has a portfolio of investments with a net equityvalue of approximately €35 million. Wolfgang Biedermann serves on thesupervisory board of several German public and non-public companies. Financial effects of the Acquisition It is expected that there will be some cost savings as a result of theAcquisition, partly through removal of duplicated functions. In 2006 it isanticipated that there will be restructuring costs in the order of £200,000,which will offset any savings. The benefits of the cost savings are expected tofirst come through in the year to 31 December 2007 when annual savings ofapproximately £300,000 are expected. With the benefit of the expected cost savings and the impact of additional salesresources in the USA and Europe, the Board expects the acquisition to beearnings enhancing in 2007(1). (1) This statement regarding earnings enhancement is not a profitforecast and should not be interpreted to mean that Flomerics' future earningsper share will necessarily match or exceed the historical published earnings pershare of Flomerics Effects on share capital and lock-up arrangements The number of initial consideration shares to be retained subject to the Escrowarrangements will be determined by reference to the Flomerics share price on thebusiness day prior to Completion. Assuming the share price is 92.5 pence, whichwas the closing price as at 14 June 2006, being the last practicable date priorto the publication of this announcement, 6,258,770 of the initial considerationshares would be issued at Completion and 1,299,263 would be subject to theEscrow arrangements described above. At Completion, based on the assumptions above, NIKA Shareholders will inaggregate hold 29.4 per cent. of the enlarged issued share capital of theCompany of which Pricap's shareholding would represent 17.8 per cent. of theenlarged issued share capital of the Company. Each NIKA Shareholder has agreed under the terms of the Acquisition Agreement toretain shares issued to him in the Company for a minimum of 12 months fromCompletion and a minimum of 50% of the shares between 12 and 18 months fromCompletion, and to retain shares issued as deferred consideration for a minimumperiod of 6 months. However, a NIKA Shareholder will be permitted to dispose ofshares in the Company: • for the purpose of funding an amount payable in respect of any claim for breach of warranty or otherwise under the Acquisition Agreement; • solely to fund payment of any tax due and payable by a NIKA Shareholder arising from the sale and transfer of his shares in NIKA; • as part of accepting an offer for those shares as part of a general takeover offer for Flomerics (and may give an irrevocable undertaking so to do); or • to a personal representative or spouse. Current trading In the preliminary results for the year ended 31 December 2005, released on 3March 2006 the Company made the following statement: "The Company has a clear strategy for both organic and non-organic growth and amanagement team committed to delivering it. With a more sales led approach,world leading technologies, a team of experts across various different fieldsand a good financial base, the Directors believe the prospects for the Companyare excellent." Since that time the Flomerics Group has continued to trade in line withmanagement expectations and the Directors remain confident about the prospectsfor the Flomerics Group for the remainder of the year. Extraordinary General Meeting The issue of the Completion Shares is conditional on the passing of theResolutions to increase the authorised share capital of the Company and toauthorise the Directors to allot new shares to the NIKA Shareholders. It isproposed to increase the authorised capital from £200,000 to £400,000 and toauthorise the Directors to allot new shares up to a maximum of £315,000 innominal value. Currently £150,358.19 of share capital is issued. The Resolutionsif passed would allow the Directors to allot up to a further £116,805.28 sharecapital in nominal value to the NIKA Shareholders (representing the maximumnumber of shares that may be issued to them under the Acquisition Agreement) andpreserve a general authority for them to issue a further £47,836.53 of sharecapital in nominal value. If the Resolutions are not passed then the Acquisition will not be completed. The Completion Shares, will when issued, rank pari passu with the existingordinary shares. Application will be made for admission of the CompletionShares to AIM and Admission is expected to become effective on 6 July 2006. The Directors, who in aggregate hold 1,938,126 ordinary shares, representingapproximately 12.9% of the issued ordinary share capital of the Company at thedate of this announcement, intend to vote in favour of the Resolutions. DEFINITIONS The following definitions apply throughout this announcement unless the contextrequires otherwise: "Acquisition" the proposed acquisition of the entire issued share capital of NIKA "Acquisition Agreement" a sale and purchase agreement dated 14 June 2006 between the Company and the NIKA Shareholders relating to the Acquisition "Admission" the admission of the Completion Shares to trading on AIM becoming effective in accordance with the AIM Rules "AIM" the Alternative Investment Market of the London Stock Exchange "AIM Rules" the AIM Admission Rules published by the London Stock Exchange "Board" or "Directors" the directors of the Company "business day" a day (other than a Saturday) on which banks are generally open for business in London "CFD" Computational Fluid Dynamics "Company" or "Flomerics" Flomerics Group plc "Completion" completion of the Acquisition Agreement "Completion Shares" the new shares in Flomerics (other than those subject to the Escrow) to be issued to certain of the NIKA Shareholders as initial consideration under the Acquisition Agreement "Enlarged Group" the Company and its subsidiaries, including, after its acquisition, NIKA and its subsidiaries "Escrow" the escrow arrangements under the Acquisition Agreement "Extraordinary General Meeting" the meeting of Flomerics shareholders to be held on 5 July 2006 "Flomerics Group" the Company and its subsidiaries "FSA" The Financial Services Authority "London Stock Exchange" London Stock Exchange plc "MCAD" Mechanical Computer Aided Design "NIKA" Nika GmbH "NIKA Shareholders" the shareholders in NIKA as at the date of the Acquisition Agreement, and the sellers under the Acquisition Agreement "Notice of Extraordinary General the notice of the Extraordinary General Meeting setMeeting" or "Notice of EGM" out at the end of the Circular "Ordinary Shares" the ordinary shares of one pence each in the capital of the Company "Resolutions" the resolutions set out in the Notice of Extraordinary General Meeting This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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