K3 Business Technology Group Regulatory News (KBT)

2 Jun 2005 07:01

K3 Business Technology Group PLC02 June 2005 K3 BUSINESS TECHNOLOGY GROUP PLC ("K3" or "the Company") ANNOUNCES PROPOSED ACQUISITION OF INFORMATION ENGINEERING GROUP LIMITED Key Points • K3, the IT solutions provider, announces that it has conditionallyagreed to acquire the entire issued share capital of Information EngineeringGroup Limited ("IEG"), a UK distributor of SYSPRO Enterprise Resource Planningsoftware to the manufacturing sector. • The initial consideration for the acquisition is £3.81 milliontogether with deferred consideration and earn out arrangements of up to £2.25million. • The acquisition will further the Company's strategic aim of becomingthe leading UK supplier of Microsoft-based supply chain management solutions tosmall and medium enterprises in the retail, distribution and manufacturingsectors. It will bring the Company high levels of recurring revenue,cross-selling opportunities and significant realisable synergies. • Established in 1986 and headquartered in Manchester, IEG is adistributor and implementer of SYSPRO manufacturing, financial and distributionsoftware throughout the UK. SYSPRO is a Microsoft-based software suite whichprovides customers with real-time information throughout the supply chainprocess. IEG's other services include project management, implementationconsultancy, training and support. • For the year to 31 December 2003, IEG generated revenues of £4.6mand operating profits before goodwill amortisation of £0.1m for that financialyear. These results do not include annualised cost savings of approximately£0.6m realised by IEG in 2004. As at 31 December 2003 IEG had net liabilities of£0.2 million. • A circular will be sent to shareholders today convening anextraordinary general meeting to be held on 20 June 2005 to seek authority tofacilitate the Acquisition. • In a separate announcement today, K3 has also issued its preliminaryresults for the year to 31 December 2004. Andy Makeham, chief executive of K3, said: "We have been seeking opportunities to act as a consolidator within themanufacturing software sector and therefore the acquisition of IEG is anexciting development. IEG provides a market-leading ERP solution for mid-range manufacturers and thebusiness generates high levels of recurring revenue. It complements andstrengthens our existing manufacturing software portfolio and there is scope forboth cross-selling and cost savings. We expect IEG to be immediately earningsenhancing. K3 has been significantly transformed over the past 12 months and we now have inplace a strong platform from which to grow. Our goal remains that of becoming aleading supplier of Microsoft-based supply chain management solutions to SMEs inthe retail, distribution and manufacturing sectors." Enquiries: K3 Business Technology Andy Makeham, Chief Executive T: 020 7448 1000Group David Bolton, Finance Director Thereafter: 01282 864111 Biddicks Katie Tzouliadis T: 020 7448 1000 Robert W. Baird Limited Shaun Dobson T: 020 7488 1212 Nick Tulloch ACQUISITION OF INFORMATION ENGINEERING GROUP LIMITED Acquisition Statistics Number of Consideration Shares to be issued on Admission 2,263,158 Timetable of Events Latest time and date for receipt of Forms of Proxy 2.00 p.m. on 18 June 2005 Extraordinary general meeting 2.00 p.m. on 20 June 2005 Admission & dealings in the Consideration Shares on AiM commence 21 June 2005 Completion of the acquisition 21 June 2005 Introduction K3 announces that it has conditionally agreed to acquire the entire issued sharecapital of Information Engineering Group Limited ("IEG"), a UK distributor ofSYSPRO Enterprise Resource Planning software to the manufacturing sector (the"Acquisition"), for initial consideration of £3.81 million, to be satisfied by acombination of cash and shares, together with deferred consideration and earnout arrangements of up to £2.25 million. The Acquisition will further K3'sstrategic aim of becoming the leading UK supplier of Microsoft-based supplychain management solutions to small and medium enterprises ("SMEs") in theretail, distribution and manufacturing sectors. Further details of theAcquisition are set out below. Completion of the Acquisition is conditional on certain resolutions being passedby shareholders of K3 at an extraordinary general meeting of the Companyconvened for 2.00 p.m. on 20 June 2005 (the "EGM"). Information on IEG IEG, founded in 1986 and headquartered in Manchester, is a UK distributor andimplementer of SYSPRO manufacturing, financial and distribution software. SYSPROis a Microsoft-based software suite providing Enterprise Resource Planning,Advanced Planning and Scheduling, e-commerce and accounting functionality withina single organisation or across multiple sites, thereby providing customers withreal-time information throughout the supply chain process. IEG implements SYSPRO solutions throughout the UK. IEG's other services includeproject management, implementation consultancy, training and support. In April 2003, IEG acquired two smaller competitors for an aggregateconsideration of approximately £0.4 million. Following the integration of thesecompanies and the completion of other cost initiatives, IEG has realisedannualised cost savings in 2004 of £0.6 million, the benefits of which are notreflected in the results for the year ended 31 December 2003; IEG recordedrevenues of £4.6 million and operating profits before goodwill amortisation of£0.1 million for that financial year. As at 31 December 2003, IEG had netliabilities of £0.2 million. Background to and reasons for the Acquisition It is Microsoft's stated intention to dominate the business application softwaremarket to SMEs and through ''Project Green'' they intend to develop the fullspectrum of business application software in ready-to-use template formats. K3has a very strong relationship with Microsoft and together they are developing aframework that will allow each such template to integrate with K3's range ofbusiness applications. K3's stated strategy is to become the leading UK supplier of Microsoft-basedsupply chain management solutions to SMEs in the retail, distribution andmanufacturing sectors. To that end, in March 2004, the Company sold its business based in Crewe,Cheshire, a supplier of legacy Enterprise Resource Planning software to themanufacturing sector. The product offering was not Microsoft-based and wastherefore not in keeping with K3's ongoing strategy set out above. The proceedsfrom the sale of the Crewe business were applied to part finance subsequentacquisitions made by K3, the first of which was K3 Elucid Limited in April 2004("Elucid"), one of the UK's market leading providers of multi-channel businesssolutions to small and medium-sized distribution companies, representing theCompany's first move into the distribution sector. In October 2004, the Companyacquired K3 Landsteinar Limited, K3 Landsteinar (Ireland) Limited and MiracleHindsight Limited (together, "Landsteinar"), one of the principal UK suppliersof Microsoft Navision retail solutions to medium-sized retailers, therebyfulfilling the Company's strategy to deliver supply chain management software tothe retail sector. The proposed acquisition of IEG brings to the Company a market-leading, midrangeMicrosoft-based Enterprise Resource Planning solution for the manufacturingsector, high levels of recurring revenue, cross selling opportunities andsignificant realisable synergies. Furthermore, as a result of the Acquisition,the Company is able to provide a complete range of Microsoft-based supply chainmanagement solutions to each of its three target sectors. The Directors expectthe Acquisition to be immediately earnings enhancing. The Directors believe that the platform is now in place to grow each of theCompany's businesses both organically and through the strategic acquisitions ofcomplementary businesses. Details of the Acquisition and financing arrangements Terms of the AcquisitionUnder the terms of the acquisition agreement between Patrick McCarthy, AndrewLatham and The Royal Bank of Scotland plc ("the Vendors") and the Company dated2 June 2005 ("the Acquisition Agreement"), K3 has agreed to acquire the entireissued share capital of IEG for initial consideration of £1.66 million in cash,comprising a pre-payment of £0.175 million made by the Company to the Vendors(other than the Bank) on 28 July 2004, cash of £1.2 million and the payment byK3 of £0.29 million in respect of an outstanding director's loan together withthe issue to the Vendors of £2.15 million in new Ordinary Shares in the Companyat a price of 95p per share ("the Consideration Shares"). In addition, loan notes are to be issued to the Vendors on completion of theAcquisition pursuant to which up to £2.25 million may be payable to the Vendors,£0.55 million of which is to be paid on 30 November 2005 with a further £0.1million to be paid on 30 November 2006. The remaining sum of up to £1.6 millionis to be paid as deferred consideration under an earn-out arrangement based onthe profit before tax and goodwill amortisation ("Profit") (the calculation ofwhich is subject to certain adjustments) achieved by IEG for each of thefinancial periods from 1 June 2005 to 31 May 2006 (the "First Period") and 1June 2006 to 31 May 2007 (the "Second Period") respectively. In each of theFirst Period and the Second Period the payment to the Vendors of the deferredconsideration is triggered by the Profit for the relevant period being at least£0.75 million. The Vendors will then receive £3.40 for every £1.00 by which theProfit in the First Period exceeds £0.75 million up to a maximum of £850,000(i.e. where the Profit for the First Period is £1.00 million) and £3.00 forevery £1.00 by which the Profit in the Second Period exceeds £0.75 million up toa maximum of £750,000 (i.e. where the Profit for the Second Period is £1.00million). Any deferred consideration due in respect of the First Period shall bepaid on the later of five business days after determination of the relevantProfit and 30 November 2006 and payment of any deferred consideration due inrespect of the Second Period shall be paid on the later of five business daysafter determination of the relevant Profit and 30 November 2007. Should the netassets of IEG as at 31 May 2005 (the "May Net Assets") be less than the netassets of IEG as at 31 December 2004 (the "December Net Assets"), then theprofit for the First Period upon which the amount of deferred considerationpayable to the Vendors in the First Period is calculated shall be reduced by thesame amount by which the May Net Assets are less than the December Net Assets.Should the Profit in either the First Period or the Second Period be more than£1.0 million then 50 per cent. of any sum in excess of £1.0 million may becarried forward or backward respectively in respect of the relevant Profitcalculation. Under the terms of the loan note instrument of the Company to be dated oncompletion of the Acquisition ("the Loan Note Instrument"), the Company has theoption to elect to satisfy up to £0.25 million of the amount owing to eachVendor in each of the First Period and the Second Period by allotting to themOrdinary Shares at a price per Ordinary Share equal to the average mid-marketprice for the 15 business days prior to the due date for payment of the deferredconsideration for the relevant period (the "Mid-Market Price"), discounted by 20per cent., provided that such option will not be exercised by the Company unlessthe relevant Mid-Market Price is at least £1.20 per Ordinary Share. The Loan Note Instrument also contains customary restrictions on what actionsthe Company can take in respect of the business of IEG following completion ofthe Acquisition in order to protect the deferred consideration payable to theVendors. The loan notes are unsecured and unguaranteed and attract interest at the rateof 6 per cent. per annum on the first £0.65 million from completion of theAcquisition; on the deferred consideration for the First Period, from the end ofthe First Period; and on the deferred consideration for the Second Period, fromthe end of the Second Period, in each case such interest accruing to the date ofredemption of the relevant loan notes, such interest to be payable on actualredemption. The loan notes contain provisions for set off by the cancellation ofsuch number of loan notes as equates to any agreed or determined claim under thewarranties contained in the Acquisition Agreement. In the event of certain insolvency events or a change of control of the Companyor IEG then the loan notes become repayable based upon the Profit calculated byreference to the date of the happening of such event. Under the terms of the Acquisition Agreement, in the event that the Mid-MarketPrice of the Consideration Shares still held by the Vendors on 30 November 2007is less than 95p, then the Vendors shall be entitled to call upon the Company tomake a payment in cash to the Vendors to make up 75 per cent. of the deficitbetween the actual Mid-Market Price on 30 November 2007 and 95p per OrdinaryShare, being the price at which the Consideration Shares are to be allotted tothe Vendors. There is currently outstanding a director's loan owing by Patrick McCarthy toIEG in the sum of £0.29 million. The Company has agreed to pay this amount toPatrick McCarthy prior to Completion on the condition that such sum isimmediately paid by Patrick McCarthy to IEG to clear his outstanding director'sloan account. In the event that completion of the Acquisition does not takeplace such amount will remain outstanding as a loan due from Patrick McCarthy tothe Company. Completion of the Acquisition is conditional, amongst other things, upon: • the passing of the necessary resolutions at the EGM; • no material breach of warranty arising between exchange andcompletion of the Acquisition Agreement; • no material adverse change affecting IEG between exchange andcompletion of the Acquisition Agreement; and • the conditions precedent, required to be satisfied under certainfinancing documents in relation to the Acquisition being satisfied. The Vendors (other than the Bank) have agreed to give certain warranties to theCompany relating to IEG, including customary indemnities in relation totaxation. Any claims under the warranties are subject to certain limitations.The maximum liability of the Vendors (other than the Bank) is capped at theamount of consideration received by them, no individual claim can be broughtunless it exceeds £5,000 and no claims can be brought unless the aggregateamount of such claims exceed £50,000 and no claims (save with regard totaxation) can be brought after the date which is 18 months after completion ofthe Acquisition Agreement. In order to protect the goodwill of the Company andits subsidiaries ("the Group"), the Vendors (other than the Bank) have alsoagreed not to compete with the IEG business, or to solicit its employees,suppliers or customers for a period of three years following completion of theAcquisition. Both Patrick McCarthy and Andrew Latham are to be employed by the Company fromcompletion of the Acquisition as General Manager and Technical Manager of IEGrespectively. Such appointments shall be subject to employment contracts to beentered into between the Company and Patrick McCarthy and Andrew Lathamrespectively on completion of the Acquisition. Each contract is for an initialfixed term of 24 months continuing thereafter terminable by either party givingthe other six months' written notice. The Vendors have agreed to give undertakings pursuant to the AcquisitionAgreement with effect from Admission not to dispose of any interests in any ofthe Consideration Shares to be issued to them (subject to certain exemptions)until after the first anniversary of Admission. Following this date, the Vendorscan dispose of up to 25 per cent. of their respective holdings of ConsiderationShares in each consecutive three month period, such restrictions terminating onthe second anniversary of Admission. Subject to certain conditions, the Vendorshave agreed that from Admission they will not dispose of the ConsiderationShares issued to them other than through Robert W. Baird Limited ("Baird"), suchobligations terminating on the third anniversary of Admission. Notwithstandingthe above, the Company and Baird have consented to the disposal by the Vendors(other than the Bank) of Consideration Shares issued to them with an aggregatevalue of £500,000. Pursuant to the Acquisition, IEG has entered into a deed of variation inrelation to its existing arrangements for the distribution of SYSPRO EnterpriseResource Planning software (the "Software") in the UK to enable Syspro Limited,the owner of the Software, to appoint IEG as a non-exclusive distributor of theSoftware in the UK pending a new distributorship agreement being entered intobetween Syspro Limited and IEG. Financing arrangements The Company currently has an outstanding loan to CA Fastigheter AB("Fastigheter"), an associated company of Per Johan Claesson, a non-executivedirector of the Company (the "Fastigheter Loan"). The Fastigheter Loan amountsto £0.75 million. The Fastigheter Loan was made by Fastigheter in connectionwith the acquisition of Landsteinar in October 2004. The Fastigheter Loan wasmade on 1 October 2004 and, at that time, it was envisaged by both the Companyand Fastigheter that the Fastigheter Loan would be a short-term arrangement.However, in order to facilitate the Acquisition and for the purposes of theCompany's working capital, Fastigheter has agreed to continue the FastigheterLoan. Johan and Marianne Claesson AB ("JMC"), which is also an associated company ofPer Johan Claesson, has agreed, for the purpose of facilitating the Acquisitiononly, to make available to the Company a loan facility of up to £1 million (the"JMC Facility"). The JMC Facility is expected to be drawn down in full oncompletion of the Acquisition. Interest shall accrue on the JMC Loan Facility ata rate of 8.5 per cent. per annum, calculated daily and payable quarterly, withthe first payment being due on 30 September 2005. The JMC Facility is to berepaid in 12 quarterly installments commencing on 31 March 2006. The Company has agreed with Fastigheter and JMC that, in consideration ofFastigheter agreeing to continue the Fastigheter Loan and JMC making the JMCFacility available to the Company, debentures (the "Debentures") will be grantedby the Company in favour of each of Fastigheter and JMC over the Company'sassets (including the Company's investments in its subsidiaries other than thoseof IEG) by way of security for monies outstanding under each of the FastigheterLoan and the JMC Facility. In addition, the Company has agreed that, shouldthere be a future refinancing of the Group, then the first 40 per cent. of fundsraised through such activity shall be applied in repaying any bank indebtednessof the Group, with the remainder being applied in repaying first the JMCFacility and then the Fastigheter Loan. The Company has also agreed with JMC that, in consideration of JMC making theJMC Facility available to the Company, the Company shall grant to JMC warrantsto subscribe for 400,000 Ordinary Shares pursuant to a warrant instrument of theCompany (the "Warrant Instrument") to be entered into on completion of theAcquisition. Under the terms of the Warrant Instrument, JMC may subscribe(subject to certain conditions) for up to 400,000 Ordinary Shares at any timeduring the three year period commencing on the date of the Warrant Instrument ata price per Ordinary Share being the lower of £1.00 and the price at which anyshares are issued by the Company by way of rights issue or open offer during theperiod of 12 months from the date of the Warrant Instrument. By reason of the fact that Per Johan Claesson is a non-executive director and asubstantial shareholder (as defined in the AiM Rules) of the Company and bothFastigheter and JMC are associates (as defined in the AiM Rules) of Per JohanClaesson, the above arrangements are deemed to be related party transactionsunder the AiM Ruules, requiring notification to Shareholders. With the exceptionof Per Johan Claesson, the Board of K3 considers, having consulted with Baird,that the terms of these related party transactions are fair and reasonableinsofar as K3 shareholders are concerned. The granting of Debentures to each of Fastigheter and JMC are substantialproperty transactions under section 320 of the Act by virtue of Per JohanClaesson, being a director of the Company and are conditional upon the approvalof Shareholders. This approval will be sought pursuant to the Section 320Resolution at the Extraordinary General Meeting. The total expenses of the Acquisition and its associated financing arrangementsare expected to be £0.5 million. Consideration Shares The Consideration Shares will be issued credited as fully paid and will rankpari passu in all respects with the existing Ordinary Shares, including theright to receive all dividends and other distributions declared or paid thereonfollowing Admission. Application will be made to the London Stock Exchange for the new OrdinaryShares to be issued pursuant to the Acquisition to be admitted to trading onAiM. It is expected that Admission will become effective and dealings in the NewOrdinary Shares will commence on AiM on 21 June 2005. Extraordinary General Meeting The EGM will be convened at 2.00 p.m. on 20 June 2005 to pass certainresolutions concerning the Acquisition and to approve the financing arrangementsset out above. Current trading and prospects In a separate announcement today, the Group has issued its preliminary resultsfor the year ended 31 December 2004. K3's growth prospects have been transformed with the changes made during 2004.The re-shaping of the Company has taken K3 into related sectors, which offermore attractive opportunities for earnings growth and there is now have a solidplatform in place from which to move forward. Most importantly, all divisionsnow have a strong product offering of Microsoft-based solutions. There are good growth opportunities across all three divisions, mostparticularly within retail and distribution and the launch of the newSmartVisionCRM product offering the prospect of revitalisation of themanufacturing software division. Since the year end, Elucid has secured a majorcontract worth some £0.3 million and Landsteinar has secured seven new businesscontracts worth in total £6.7 million. ENDS This information is provided by RNS The company news service from the London Stock Exchange