Acquisition

Flomerics Group PLC
15 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 objective
is to firmly establish ourselves in our existing markets and, through the
proposed NIKA acquisition, expand the business geographically and into new
markets. NIKA provides us with new products, customers and expertise within an
area we have already proven our success. There is also a significant opportunity
to drive EFD.Lab sales into new geographies. We are building shareholder value
in 2006 and beyond by building a Flomerics with a greater exposure to a wider
range 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 is
acknowledged as being synonymous with the physical design of electronics and we
are 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 of
the entire issued share capital of NIKA, the German software developer
specialising in simulation tools for the prediction of fluid flow and heat
transfer.


The initial consideration for the proposed acquisition is to be satisfied by the
payment in cash of approximately €1.5 million (£1.0 million approximately) and
the issue of 7,558,033 new ordinary shares in the Company.  A proportion of the
initial consideration will be retained in escrow pending the end of the warranty
claim period under the Acquisition Agreement.


The terms of the Acquisition also include provision for the potential payment of
deferred consideration in the event that the Enlarged Group profit after tax
exceeds £2.7 million in the year ended 31 December 2007.  The maximum number of
new ordinary shares that may be issued under the deferred consideration
arrangements is 4,122,495.  In the event that the enlarged group profits do not
exceed £2.7 million in the year ended 31 December 2007 no deferred consideration
shares will be issued.


The new ordinary shares to be issued to the NIKA Shareholders are subject to
lock-up arrangements, which are explained below.


In order for the Acquisition to be effected it is necessary to seek the approval
of Shareholders to increase the authorised share capital of the Company and to
increase the share capital that the Directors are authorised to allot.  The
Acquisition is conditional therefore, inter alia, on Shareholders passing the
Resolutions.


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 developers
employed by NIKA's Russian subsidiary, Nika Software OOO. The principal product
is EFD.Lab, a CFD simulation tool aimed at design engineers that is tightly
integrated with the world's leading MCAD tools such as SolidWorks, ProEngineer
and CATIA. NIKA has also established a strong revenue stream though their
longstanding arrangement with SolidWorks Corporation ("SolidWorks") through
which NIKA's product COSMOSFloWorks is exclusively marketed by SolidWorks and
its international reseller channel.


EFD.Lab has become an integral part of the product development process for
hundreds of companies because the key technologies behind NIKA's unique
Engineering Fluid Dynamics (EFD) approach successfully address the high demands
of usability, accuracy, efficiency and affordability.  The fundamental
philosophy behind EFD has a lot in common with that behind the existing
Flomerics products, namely delivering complex simulation software in a way that
is easily accessible and usable by engineers with little experience of what is
otherwise the domain of more highly qualified specialists.  Whilst CFD is an
established technology which has been used by specialist engineers for many
years, the delivery of CFD based solutions to the MCAD users in the engineering
design community is relatively new. Since the number of installed seats of MCAD
software is orders of magnitude greater than the number of seats of simulation
software, this represents a significant opportunity for growth.


With their EFD approach, NIKA has created a new and much wider field of
applications for fluid flow and heat transfer analysis. The EFD products are
used by engineers in companies whose products depend in a critical way on fluid
flow and heat transfer phenomena.  NIKA has an impressive list of customers, a
number of which are also existing Flomerics customers. Existing customers
include 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            2,896
Adjusted EBITDA                        128            (425)            (460)


Note: Extracted from audited results. An adjustment has been made for a stock
sale in 2004 by adjusting the 2004 turnover and EBITDA down by €226,000 and
increasing the 2005 turnover and EBITDA by the same amount, as the Board
believes 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 of
NIKA's products. Having made these investments, as referred to elsewhere, NIKA
is now in a strong position to drive significant growth. This is reflected in
the 2006 first quarter billings which, after adjustment for stock sales, show in
excess 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 simulation
tool used as part of the design process for products such as vehicles, home
appliances and electronics by designers utilizing Mechanical Computer Aided
Design software.


Flomerics has a well established sales network around the world and the
Directors believe that suitable acquisitions that bring additional products to
sell through that network will be value-enhancing for Shareholders. The Board
believe 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 two
other key benefits to Flomerics. First, the EFD tools are well-suited for many
problems confronted by mechanical design engineers within existing Flomerics
customers. EFD complements Flomerics' existing tools. FLOTHERM used by the
specialist thermal engineers for thermal design and FLO/PCB used by the
electrical engineers for the thermal aspects of PCB design. Flomerics is
therefore now able to offer solutions at all levels of the thermal design
process.


The second area of the NIKA business which is of significance to Flomerics is
the world-leading technology that will benefit Flomerics' existing stable of
products. This will enable Flomerics to strengthen its position in the
electronics design sector whilst enabling it to become a leading provider of CFD
solutions across a number of other application areas. There are also
considerable synergies in the Heating, Ventilation, and Air Conditioning (HVAC)
market where Flomerics' existing FLOVENT product and EFD.Lab offer solutions at
different levels of the design processes within this industry.


The breakdown of the revenues of Flomerics and NIKA illustrate further
complementary and synergistic aspects of the deal. Approximately 90% of
Flomerics 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 from
Germany, Austria and Switzerland, with much lower contributions from the UK and
the USA, for example, where Flomerics has strong representation. There is a
great opportunity to leverage Flomerics' infrastructure for the NIKA products
and the potential to repeat its success with electronics in other sectors.


Through the Acquisition, Flomerics will be able to offer solutions at all levels
of the thermal design process. In particular, Flomerics will look to expand its
sales into the significant MCAD market, where CFD tools are just beginning to be
used. Flomerics will also look to leverage existing infrastructure to increase
NIKA'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 both
NIKA's and Flomerics' customer lists, while NIKA's impressive customer list also
includes companies such as DAF, Electrolux, Honda, Lufthansa, Miele, Olympus,
Pirelli, Tyco and Volkswagen.  There are significant opportunities for growth
for the combined companies through wider geographic coverage and through access
to new industries.


Principal terms of the Acquisition


Initial consideration


Under the Acquisition Agreement, the initial consideration for the Acquisition
will 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 value
of €2,000,000, calculated as at the business day prior to Completion, will be
withheld from the initial consideration and will be payable eighteen months from
Completion, subject to any reductions in satisfaction of claims against the NIKA
Shareholders under warranties and indemnities in the Acquisition Agreement.


Deferred consideration


In addition to the initial consideration, further deferred consideration may
become payable dependent on the profitability of the Enlarged Group in the year
ended 31 December 2007.  The deferred consideration will be satisfied by the
issue of further Ordinary Shares based on a fixed number of shares for various
pre-agreed levels of the Enlarged Group's profitability as follows:


•         if the net profit for the year (determined on the basis of accounting
principles and policies of the Company as at 31 December 2005 and after
deduction of charges including amortisation, interest and taxation but before
dividends) shall exceed £2,700,000 then deferred consideration shall be payable;

•         the deferred consideration will be satisfied by the issue of further
Ordinary Shares credited as fully paid;

•         the number of new Ordinary Shares to be issued will be calculated
using a fixed value at 88.68 pence per share and an exchange rate of 0.68407407
pounds 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 a
maximum  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 maximum
number 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 December
2007 is less than £2,700,001, no deferred consideration will be payable.


Conditions


Completion of the proposed Acquisition is conditional upon Admission and the
passing of the Resolutions. The Company has undertaken and agreed with the NIKA
shareholders to use its best endeavours to achieve satisfaction of the
conditions by 30 business days from the date of the Acquisition Agreement.



The transaction is further conditional on the filing in Russia of an application
for the registration of NIKA as the owner of the copyright in certain software
presently registered in the name of certain NIKA Shareholders, and the transfer
by certain NIKA Shareholders of any copyrights and usage rights they have in
relevant software to NIKA.



The transaction is also conditional upon no material adverse change affecting
NIKA or the Company between exchange of the Acquisition Agreement and prior to
Completion.



Warranties and tax indemnity



The Acquisition Agreement contains customary warranties from the NIKA
Shareholders usual for this type of transaction. In addition, an indemnity is
given for unprovided tax liabilities (subject to various usual exceptions) prior
to 31 December 2005.



Management and employees



The existing management team of NIKA, including Managing Director Roland
Feldhinkel, will be remaining with the Enlarged Group. Wolfgang Biedermann, the
CEO of NIKA's largest shareholder, Pricap Venture Partners AG ("Pricap"), will
be joining the Board.  Pricap has a portfolio of investments with a net equity
value of approximately €35 million. Wolfgang Biedermann serves on the
supervisory 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 the
Acquisition, partly through removal of duplicated functions.  In 2006 it is
anticipated 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 to
first come through in the year to 31 December 2007 when annual savings of
approximately £300,000 are expected.



With the benefit of the expected cost savings and the impact of additional sales
resources in the USA and Europe, the Board expects the acquisition to be
earnings enhancing in 2007(1).



(1)           This statement regarding earnings enhancement is not a profit
forecast and should not be interpreted to mean that Flomerics' future earnings
per share will necessarily match or exceed the historical published earnings per
share of Flomerics



Effects on share capital and lock-up arrangements



The number of initial consideration shares to be retained subject to the Escrow
arrangements will be determined by reference to the Flomerics share price on the
business day prior to Completion.  Assuming the share price is 92.5 pence, which
was the closing price as at 14  June 2006, being the last practicable date prior
to the publication of this announcement, 6,258,770 of the initial consideration
shares would be issued at Completion and 1,299,263 would be subject to the
Escrow arrangements described above.



At Completion, based on the assumptions above, NIKA Shareholders will in
aggregate hold 29.4 per cent. of the enlarged issued share capital of the
Company of which Pricap's shareholding would represent 17.8 per cent. of the
enlarged issued share capital of the Company.



Each NIKA Shareholder has agreed under the terms of the Acquisition Agreement to
retain shares issued to him in the Company for a minimum of 12 months from
Completion and a minimum of 50% of the shares between 12 and 18 months from
Completion, and to retain shares issued as deferred consideration for a minimum
period of 6 months. However, a NIKA Shareholder will be permitted to dispose of
shares 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 3
March 2006 the Company made the following statement:

"The Company has a clear strategy for both organic and non-organic growth and a
management team committed to delivering it. With a more sales led approach,
world leading technologies, a team of experts across various different fields
and a good financial base, the Directors believe the prospects for the Company
are excellent."

Since that time the Flomerics Group has continued to trade in line with
management expectations and the Directors remain confident about the prospects
for the Flomerics Group for the remainder of the year.



Extraordinary General Meeting



The issue of the Completion Shares is conditional on the passing of the
Resolutions to increase the authorised share capital of the Company and to
authorise the Directors to allot new shares to the NIKA Shareholders. It is
proposed to increase the authorised capital from £200,000 to £400,000 and to
authorise the Directors to allot new shares up to a maximum of £315,000 in
nominal value. Currently £150,358.19 of share capital is issued. The Resolutions
if passed would allow the Directors to allot up to a further £116,805.28 share
capital in nominal value to the NIKA Shareholders (representing the maximum
number of shares that may be issued to them under the Acquisition Agreement) and
preserve a general authority for them to issue a further £47,836.53 of share
capital 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 existing
ordinary shares.  Application will be made for admission of the Completion
Shares to AIM and Admission is expected to become effective on 6 July 2006.



The Directors, who in aggregate hold 1,938,126 ordinary shares, representing
approximately 12.9% of the issued ordinary share capital of the Company at the
date of this announcement, intend to vote in favour of the Resolutions.


DEFINITIONS



The following definitions apply throughout this announcement unless the context
requires 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 set
Meeting" 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 Exchange