ESI Group Annual Report 2016

Plain-text annual report

2016 REGISTRATION DOCUMENT Including the financial annual report Pioneer and leader in Virtual Prototyping Table of contents 5 FINANCIAL STATEMENTS.........................................................83 5.1. Consolidated financial statements ....................................83 5.2. ESI Group annual financial statements ........................ 118 6 RESOLUTIONS SUBMITTED FOR APPROVAL BY THE GENERAL MEETING…………………..........................……143 6.1. Decisions falling within the competence of the Ordinary General Meeting ................................................ 143 6.2. Decisions falling within the competence of the Extraordinary General Meeting ....................................... 147 6.3. Joint decisions ........................................................................ 159 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL.....................................................................160 7.1. Information on the Company ........................................... 160 7.2. Information on the Company's capital.......................... 163 7.3. Presentation of stock option and free share grant plans ............................................................................... 168 7.4. ESI shares – market .............................................................. 171 8 ADDITIONAL INFORMATION ..............................................173 8.1. Persons responsible for the Registration Document.......................................................173 8.2. Statutory auditors ................................................................ 173 8.3. Documents available to the public ................................. 174 1 THE GROUP ..................................................................7 1.1. Activities, strategy, and markets ......................... 7 1.2. History of the Group .............................................. 15 1.3. Group structure ....................................................... 16 1.4. Selected financial information........................... 18 1.5. Major investments during the past three fiscal years .................................................... 19 1.6. Risk factors ................................................................ 20 2 CORPORATE GOVERNANCE……..............................24 2.1. Corporate governance procedures ................... 24 2.2. Workings of the Board of Directors and Executive Management .................................. 25 2.3. Composition of the Board of Directors .............27 2.4. Conditions for preparing and organizing the work of the Board of Directors .................... 34 2.5. Principles and rules for determining compensation ............................................................ 38 2.6. Internal control and risk management procedures ..................................................................43 2.7. Statutory Auditors’ report, prepared in accordance with article L.225-235 of the French Commercial Code on the report of the Chairman of the Board of Directors of ESI Group...............48 3 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY ...................................................... 50 3.1. ESI Group policy in terms of social and environmental responsibility ....................... 50 3.2. Being a committed employer ............................... 52 3.3. Being an outstanding partner ...............................60 3.4. Being an environmentally friendly player .......62 3.5. Serving civil society ...................................................66 3.6. Report of the inspecting organization ................69 4 MANAGEMENT REPORT..........................................71 4.1. Business activities during FY2016 ......................71 4.2. Outlook .........................................................................77 4.3. Information on the agreements signed or pursued during fiscal year 2016 ........................78 4.4. Factors that may have an impact in the event of a public offering ...........................81 4.5. Table summarizing the results of the past 5 fiscal years .....................................................82 ESI Group French limited company (société anonyme) with a share capital of EUR 17,975,976 Registered office: 100/102, avenue de Suffren, 75015 Paris Paris Trade and Company Register (RCS) number: 381 080 225 REGISTRATION DOCUMENT INCLUDING THE FINANCIAL ANNUAL REPORT Fiscal year 2016 (ended January 31, 2017) This Registration Document was filed with the French Financial Markets Authority (AMF) on Friday, May 19, 2017 in accordance with Article 212-13 of the AMF's General Regulations. It may not be used in connection with any financial transaction unless it is ac-companied by a memorandum approved by the AMF. The is- suer prepared this document and the signatories are responsible for the information herein. French copies of the Registration Document are available free of charge from ESI Group (the “Company” or the “Group”) - 100/102, avenue de Suffren, 75015 Paris, France - as well as on ESI Group's website (www.esi-group.com) and on the AMF's website (www.amf- france.org). This document is an English-language translation of ESI Group’s Document de Référence [Registration document], which was filed with the French Financial Markets Authority (AMF) on May 19, 2017, in accordance with Articles 212-13 of the AMF General Regulation. Only the French version of the Document de Référence is legally binding. 2ESI GROUP IN A NUTSHELL in Pioneer and world-leading provider in Virtual Prototyping that takes into account the physics of materials 6 1 0 2 E C N E R É F É R E D T N E M U C O D OUR MISSION Deliver Virtual Prototyping solutions to boost innovation and improve industrial product development OUR VISION Be the leader in Virtual Prototyping thanks to a unique knowledge in materials physics that brings products to life REVENUES GROWTH Revenues : +13% (in €m) Revenues distribution per activity Revenues distribution per area (in €m) 140.6 124.7 109.0 111.0 94.2 84.2 2010 2011 2012 2014 2015 2016 77% 23% LICENSES LICENSES SERVICES SERVICES Americas 16% (VS. 19%) Asia-Pacific 39% (VS. 36 %) 7 8 Europe, Middle East and Africa 45% (VS. 46%) (data vs. 2015) ESI GROUP • 2016 REGISTRATION DOCUMENT3 IMPROVEMENT IN PROFITABILITY EBITDA: +28% (in €m) 18.3 14.3 12.3 11.4 10.8 9.7 Current Operating Profit: +30% (in €m) Attributable Net Profit: +41% (in €m) 15.4 11.8 10.4 8.8 8.1 9.0 6.0 5.0 5.0 5.5 5.3 7.5 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 AN INNOVATIVE AND MULTISECTORAL OFFER GROUND TRANSPORTATION 56% R&D investments evolution: +12% (in €m) 32.7 29.1 23.9 20.6 21.3 18.7 2011 2012 2013 2014 2015 2016 Expertise based on 40 years of R&D 30.2% R&D investments/ Licenses revenues Industrial diversification (% of booking orders) OTHERS 6.5% GOVERNMENT, DEFENSE & MARINE 6% ENERGY 7% HEAVY INDUSTRY 12% AERONAUTICS & AEROSPACE 12.5% 12345678 ESI GROUP • 2016 REGISTRATION DOCUMENT4A GLOBAL COMPANY COVERING MORE THAN 40 COUNTRIES UNIQUE EXPERTISE +1,200 EMPLOYEES MAINLY ENGINEERS & DOCTORS Headquarters Subsidiaries Agents & Distributors A RESPONSIBLE COMPANY AWARDED FIRST PLACE OF GAÏA INDEX for companies under €150m of revenues. IINTEGRATED IN GAÏA INDEX which distinguished the 70 best companies with social, societal, environmental and governance practices. ESI GROUP • 2016 REGISTRATION DOCUMENT5A WELL-BALANCED CORPORATE GOVERNANCE A Board of Directors made up of 8 MEMBERS of which 5 INDEPENDENT MEMBERS and 3 WOMEN 4 SPECIALIZED COMMITTEES 1 Strategic Committee 2 Audit Committee 3 Compensation, Nomination and Governance Committee 4 Technology and Marketing Committee Independent members Non independent members STOCK MARKET INFORMATION (as of end of April 2017) €53.66 STOCK PRICE €320M MARKET CAPITALIZATION Stock price evolution between february 2014 and april 2017 (basis 100) 250 200 150 100 50 €24.04 8,591.77 4,107.75 €53.66 13,293.1 5,267.33 APR.-14 JUL.-14 OCT.-14 JAN.-15 APR.-15 APR.-15 JUL.-15 OCT.-15 OCT.-15 JAN.-16 APR.-16 JUL.-16 OCT.-16 JAN.-17 APR.-17 APR.-17 ESI Group CAC 40 CAC Mid & Small Share capital breakdown as of end of April 2017 Founders and Board members 37.5% Public 55.8% Auto-control 6.8% ESI GROUP Euronext Paris Compartment B ISIN: FR0004110310 Quote: ESI Group Mnemonic: ESI Reuters: ESIG.PA Bloomberg: ESI:FP 12345678 ESI GROUP • 2016 REGISTRATION DOCUMENT6 1 THE GROUP Throughout this registration document, the terms “the Group,” “ESI Group” and “ESI” refer to ESI Group, the parent company, as well as all affiliates. ESI Group is a leading innovator in Virtual Prototyping soft- ware and services. Specialist in material physics, ESI Group has developed a unique proficiency in helping industrial manufacturers re- place physical prototypes by virtual ones, allowing them to virtually manufacture, test and pre-certify their future prod- ucts. Coupled with latest-generation technologies, Virtual Prototyping is now anchored in the wider concept of the Product Performance Lifecycle (PPL), which addresses prod- ucts' operational performance throughout its entire lifecycle, from launch to disposal. The creation of Hybrid Twins lever- aging simulation, physics, and data analytics, enables manu- facturers to deliver smarter products, particularly using con- nected objects, to predict their performance and to antici- pate maintenance needs in the context of the transition to the factory of the future. 1.1. Activities, strategy, and markets 1.1.1. Main activities ESI Group has developed a suite of coherent industry-ori- ented applications to realistically simulate a product's behav- ior during testing, fine-tune fabrication and assembly pro- cesses in view of desired product performance, and evaluate the impact of the environment on the use of these products. These applications represent a unique, open, collaborative, and multi-sector Virtual Prototyping solution to gradually eliminate use of physical components and sub-assembly pro- totypes during the product development phase by letting manufacturers make decisions based on a “living” virtual prototype. Innovative visualization technologies such as IC.IDO and the availability of the Virtual Prototyping chain in Cloud/SaaS mode also considerably enhance the collabora- tive potential of ESI Group solutions while drastically reduc- ing acquisition and ownership costs for companies. Thanks to the recently-acquired technological bricks, partic- ularly the acquisition of ITI GmbH in January 2016, the Group boasts a prominent presence in the field of 0D-1D system simulation. Its expertise, which is acknowledged by major global companies, allows for direct access to functional fea- tures of an industrial product and makes it possible to repre- sent interactions and operation with its 3D components. 1.1.1.1. Software Editor/Distributor (Licensing activity) License Edition/Distribution is the Group's main activity, ac- counting for 77% of revenue is marketed in the form of proprietary user licenses based for the most part on an annual leasing system that by nature generates highly recurring revenue. in 2016. Software Most importantly, the use of the Information and Communi- cation Technologies of the future (ICT) such as Big Data, Ma- chine Learning, and the Internet of Things (IoT) now makes it possible to present and experience ESI Group’s solutions in an interactive space and enables real-time decision-making in an immersive virtual environment. This enhanced offer provides complete control over the entire lifecycle of an in- dustrial product, including modeling of potential evolutions during its useful life, from product commissioning to its op- erational withdrawal, as well as accounting for flaws, wear and tear, maintenance procedures, and running in of assisted operation. The innovative virtual prototype can now become agile and intelligent to support industrial manufacturers in their transition to the age of factories of the future and smart digital products. The Group has two main activities: the edition and distribu- tion of software and consulting services related to its soft- ware products. The significant added value provided by ESI Group's solu- tions requires major research and development work by highly qualified research engineers. ESI GROUP • 2016 REGISTRATION DOCUMENT 7Products are distributed worldwide. Distribution subsidiaries directly manage more than 90% of license sales, the rest be- ing entrusted to a network of third-party distributors and agents. The two distribution networks - direct and indirect - are complementary. The License activity may be broken down in two ways: •  By contract type: Annual license – user license contract renewable annu- ally and including maintenance services – this type of contract is predominant – or; Perpetual license – long-term license contract (paid-up licenses for the duration of legal protection) including maintenance services for renewable one-year periods;  Maintenance contract – Maintenance includes updates  1.1.1.2. Consulting services (Service Activity) In addition to its main business activity as a software vendor, the Group also provides consulting services directly related to Virtual Prototyping. The Service activity, which accounted for 23% of 2016 reve- nue, includes Consulting and Other Services. Consulting covers the following four fields: • Engineering studies are joint industrial projects carried out in partnership with major industrial corporations with the aim of promoting large-scale deployment of new applications with high economic potential that have already been proven technologically viable, such as the specialized products described below. The Group customizes its specialized software and the industry partner performs the prototype trials necessary to vali- date specialized simulation models. The Group invoices its partners for the cost of its services, but funds its own software development work. As a result, it retains the intellectual property rights to the software products de- veloped or modified; Field Services include support services in conjunction with software sales activities (on- and off-site training • •   • • 1 THE GROUP and technical support applicable as of the second year of a perpetual license contract. As of the second year, maintenance revenue is recognized as software (maintenance) revenue. Or, according to criteria concerning new client pur- chases: “Recurring Business” includes contracts renewed by customers with no modification from one year to the next, as well as additional features purchased for soft- ware already installed in the system of an existing cli- ent; “New Business” comprises new customers and new products purchased by existing clients. and technical assistance); Contracting consists of studies, and in particular appli- cation tests (design verification and virtual perfor- mance testing of industrial products). These services are generally invoiced based on time worked (lump sum or actual time spent) except for on line support services which may be provided as part of the support services included with the annual license for the use of software packages. Special Projects are R&D initiatives pertaining to the creation of pre-industrial digital simulation models for new applications. These cutting-edge, high-risk R&D projects can last from two to three years and are carried out in collaboration with university labs and/or corpo- rate R&D departments. The Group treats these projects as research and development or technology intelli- gence activities. In some cases, they lead to govern- ment-type co-financing arrangements in Europe and the United States. They allow the Group to become in- volved at a very early stage, as a scientific partner in a wide variety of innovative high-tech projects. ESI GROUP • 2016 REGISTRATION DOCUMENT 81 THE GROUP 1.1.2. Strategy 1.1.2.1. Accelerating industrial innovation with Virtual Prototyping The current global economic environment presents tough competitive challenges for industrial companies, calling for immediate and innovative answers. For ESI Group and its customers, this highlights more than ever the clear need for Virtual Prototyping. With Virtual Prototyping, manufacturing industries have the means necessary to rise to the foremost industrial challenge: delivering innovative products at a lower cost, more quickly and with greater reliability. Customers' main concerns include: • Identifying safety and performance issues early in the design cycle; Assessing how new materials and manufacturing meth- ods impact product performance and integrity; Implementing best practices to assure an optimum maintenance cycle and cost; Predicting equipment performance under extreme con- ditions and anticipating measures to reduce downtime and repair costs. • • • 1.1.2.2. Filling gaps and managing complexity in virtual product development with the end- to-end Virtual Prototyping method Real or virtual prototyping is essential to traditional product development processes. Industrial companies build and test physical prototypes to evaluate the product’s design effec- tiveness and examine potential improvements on a trial-and- error basis. Computer simulation helps reduce time and costs incurred in producing and testing real prototypes, making it possible to anticipate test results, eliminate useless tests, and drive de- sign changes more intelligently, thereby reducing the num- ber of real tests needed. However, once a real prototype is produced, it is still custom- ary and even prudent to calibrate the simulation model to match the actual test results, in order to make the simulation models credible. While the traditional methodology described above does bring about concrete gains, it has some inherent risks and significant gaps: • Coupling effects between design disciplines and regula- tions are unclear; The impacts of the manufacturing (and assembly) pro- cess and flaws in the procedure on product components • ESI Group aims to give customers across all industrial sectors the ability to virtually manufacture and assemble, part by part, complete and physically realistic virtual products that can be tested under normal and exceptional operating con- ditions. The Group's customers can thus enjoy a comprehen- sive and living view of issues related to manufacturing, as- sembly, and coupling between different product attributes and performance domains – long before physical prototypes can be created and tested. Virtual Prototyping delivers key information for design itera- tions that also help prepare physical testing in the best pos- sible way, right up to the pre-certification stage, and in some cases entirely eliminating the need for physical tests until fi- nal validation. Moreover, recent immersive and interactive 3D technologies now offer real-time visualization and handling of physical prototypes. Using Virtual Reality solutions such as IC.IDO, in- dustrial companies can now bring their product to life long before it is produced, and even entirely without a physical prototype. This revolutionary technology makes for collabo- rative, concurrent decision-making (multi-functional, multi- site and multi-physical) at each stage of the design process. • • are unknown; Calibration is often insufficiently tailored to a specific product, carried out too late in the process and in an extemporaneous manner on prototypes that do not represent the actual product; Innovations may be wrongly rejected due to unmanage- able complexity. In contrast, ESI’s Virtual Prototyping solutions provide a ra- tional and effective response to these fundamental concerns by placing Virtual Manufacturing and Virtual Reality at the core of a comprehensive design methodology that follows rigorous guidelines for building reliable models: • Virtual fabrication, step by step, while controlling and assembling the product and its components part by part; Virtual assessment of multi-domain performance, grad- ually optimized with respect to standards, conditions of use, and increasingly stringent current and future regu- lations, among other factors; Building of cause-and-effect relationships between de- sign and fabrication parameters, from component parts • • ESI GROUP • 2016 REGISTRATION DOCUMENT 9to the system as a whole, while making intelligent trade-offs by using interactive virtual reality on models of increasing complexity; Calibrating basic material physical properties at the start of the modeling phase to ensure realistic predic- tive models according to the circumstances and limits identified; Rigorous updates of these predictive models through predefined processes during assembly and multi-do- main testing; Assessment of robustness and safety interactions, reg- ularly controlled in a fully transparent way at each step, making it possible to pinpoint the best practices; Finally, this all contributes to the development of the • • • • 1.1.2.3. Control the product lifecycle following rollout Coupled with latest-generation technologies, ESI Group's all- around solution, which currently offers a comprehensive de- velopment and manufacturing process for industrial prod- ucts, is revolutionizing the traditional Product Lifecycle Man- agement (PLM) market. Indeed, Virtual Prototyping is part of an overarching approach known as Product Performance Lifecycle (PPL), which addresses products' operating perfor- mance throughout their complete lifecycle, from rollout to withdrawal. The ESI solution now relies on creation of a phys- ics-based Virtual Prototype, manufactured, assembled and structured component by component, and then endowed with multiple system connections that model interactions within the assembled product in an operational and inter- connected functioning format. This transformative approach to Virtual Prototyping also features the virtual reality solu- tion (IC.IDO), allowing customers to have teams all over the world share their product in real time, all in a 3D-4D environ- ment. However, to date, few if any methods are available to improve and control the life of a product subsequent to roll- out and adoption by users! That is where the extension of the PLM approach comes into play, inaugurating a new age of THE GROUP model to ensure that the final tests are right the first time. 1 Virtual Prototyping prevents risks and manages complexity, calibration and decision-making in an interactive way. This unique methodology supports industrial competitiveness by reducing costs and time to market. It benefits each stage of product development processes, enabling virtual pre-certifi- cation before the final physical test, which may be required for final validation. Innovations thus become dramatically easier to evaluate and implement. PPL. Indeed, the ever-growing number of possibilities offered by Big Data and the Internet of Things now make it possible to monitor the life of products after rollout, creating a new outlook for hybrid virtual representations, i.e. representa- tions that allow for updating of Virtual Prototypes using data measured in real time and enhanced by artificial intelligence. The creation of Hybrid Twins incorporating simulation, phys- ics, and data analytics makes it possible to create smart prod- ucts, particularly using connected objects, as well as to pre- dict their performance and anticipate their maintenance re- quirements, while providing an essential response to the fun- damental economic issues of smart factory of the future. This unique value proposition, incorporating numerous dis- ruptive innovations, is the fruit of the Group's longstanding technological differentiation strategy based on multiple in- ternational partnerships and highly innovative industrial co- creation projects, implemented with an eye to defining the Group's positioning throughout the product's manufacturing cycle and useful life. The Group has already achieved success in a number of initi- atives, thanks to a remarkable collaboration and co-creation approach between ESI Group and global leaders in various industries. The best is yet to come, thanks to the availability of greater computing power at an affordable cost and more user-friendly software solutions. ESI GROUP • 2016 REGISTRATION DOCUMENT 101 THE GROUP 1.1.3. Main markets 1.1.3.1. The Virtual Prototyping market ESI Group's business model seeks to take advantage of major industry trends moving toward “100% digital” and compre- hensive computerized Product Lifecycle Management (PLM). In this market, ESI Group's solutions bring a considerable and fundamental improvement in the decision-making process by allowing the physical properties and behavior of the ma- terials to be “realistically” taken into account in the digital model. Going beyond the design and development phases of the classic PLM model, ESI Group's solutions allow for com- plete control over the entire lifecycle of products and prod- uct performance, by offering a disruptive approach to virtual performance modeling of connected or unconnected prod- ucts in operation, as well as predictive maintenance right up to the end of the product's useful life (PPL). Market characteristics The highly-specialized nature of ESI Group's operations and its unique role in the field of Virtual Prototyping make it dif- ficult to delineate ESI’s market with any precision. The Group thus has little information that would shed light on the spe- cific characteristics or short-term outlook of this market, es- pecially since the very definition of the market varies greatly among the players in the industry. Nonetheless, US market research firm CIMData published a study on PLM (estimated at $40.7 billion) in April 2017, which included Virtual Prototyping under the category of “Simula- tion & Analysis Suppliers” (activity estimated at $5.2 billion). Most of the companies listed in this category are active in the field of analysis, however, within this panel, few companies reach the physical realism of the Virtual Prototyping solu- tions offered by ESI Group. High barriers to entry The complexity of the problems the Group addresses, its longstanding experience working closely with major indus- trial corporations, its significant investment in research and development, and the wide range of solutions it offers make it difficult for any newcomers to enter its market and com- pete with ESI Group. In particular, the specialized fields in which ESI Group works require an understanding not only of structured geometric data (digital modeling) provided by CAD/CAM/CAE, but also of the physical phenomena involved in simulation testing in order to make virtual models “realistic.” ESI Group’s technologies draw on: • Longstanding partnerships with major industry players that both use (manufacturing industries) and supply (software platforms) technical computing systems; Highly-skilled teams of researchers, which the Company has been able to attract and retain thanks to its special- ized expertise and reputation in the field of physical simulation; Licensing agreements signed in a wide range of particu- lar complex or highly specialized fields. • • All of these partnerships are the result of the exceptional ex- pertise gained since ESI's founding in 1973. The Group has a solid reputation as a complex problem-solver for major cor- porations worldwide in a variety of disciplines and industrial sectors (i.e. automotive, defense, aerospace, nuclear power, transportation, energy, electronics, consumer goods, bio- medical, etc.) Under current conditions, it would be a mistake to discount the possibility that new and larger competitors with greater resources could emerge in ESI Group’s field of activity. How- ever, especially with regard to key CAD/CAM players, major automakers seem neither to anticipate nor to want such a development, preferring to do business with companies spe- cialized in the area of physics-based simulation, distinct from their other technology vendors. Nevertheless, it should be mentioned that Dassault Sys- tèmes' CATIA V5/V6 software suite did bring a certain degree of standardization to the industry and was well-received by automakers as a way of facilitating the sharing of computa- tional data within the CAD/CAM world and ensuring compat- ibility with resource management systems. It is also worth noting the presence of Siemens/UGS in the technical data management field with its TeamCenter solutions, the de facto standard in the automotive market. In 2012, Siemens complemented its Simulation offering by acquiring the Bel- gian company LMS, followed by CD Adapco, a leader in digital and mechanical fluid simulation, in January 2016. In February 2016, MSC Software, a software publisher specializing in de- sign tools (CAE) was taken over by Hexagon AB. Given the high barriers to entry that protect the Group’s business, a new competitor would not be successful except in the event of an industry-wide trend toward consolidation. It would also be difficult for a new industry player to make the acquisitions necessary to quickly build up a physical sim- ulation product line as rich as that offered by ESI Group, and ESI GROUP • 2016 REGISTRATION DOCUMENT 11one that features the same prediction capabilities valued by the Group's major clients. The need for a change in methodology Although the solutions developed by ESI Group are typically used by major clients in highly specialized, mature markets – like the automotive industry – its products can be adapted to a wide range of industries. However, large-scale adoption of these solutions would re- quire a radical change in how things are done that breaks away from the traditional “trial and error” methods still widely used in many industrial fields. After the general downturn in the economy, which led to 1.1.3.2. Geographic areas Markets are segmented both by geographic area and in- dustry. Geographic areas are based on the economic breakdown of the company: • Americas = United-States and Brazil; 1 THE GROUP steep cuts in the research and development budgets of major manufacturers, the worldwide economic recovery and increased pressure from international competitors should push many companies to move away from their current methodologies toward Virtual Prototyping, especially in ar- eas such as aeronautics, energy and electronics. The Product Performance Lifecycle approach enables manu- facturers to develop a “hybrid twin” of their real product on a daily basis. This twin can be used to make decisions at every stage in the product lifecycle: from design to development, testing, manufacturing, operation, and elimination. ESI is now targeting the wider market of professional users such as maintenance workers and certified technicians who interact with both the products and consumers. • • Asia-Pacific = China, South Korea, India, Japan, Malay- sia and Vietnam; Europe, Middle East and Africa = Czech Republic, Eng- land, Germany, France, Italy, Netherlands, Russia, Spain, Sweden, Switzerland and Tunisia. 2016 2015 2014 Revenue (in € thousands) (as a % of the total) (in € thousands) (as a % of the total) (in € thousands) (as a % of the total) Europe, Middle East and Africa Asia-Pacific Americas TOTAL 63,419 54,864 22,268 45 % 39 % 16 % 57,098 44,291 23,329 46 % 36 % 19 % 53,480 38,475 19,062 48 % 35 % 17 % 140,551 100 % 124,718 100 % 111,017 100 % As in previous years, the Group maintained a strong international presence, with 87.2% of revenue generated outside France. 1.1.3.3. Industrial sectors ESI Group's product and service offering is grouped into product lines and industrial solutions according to seven main sectors: Ground transportation offering (automotive, railroad, etc.) ESI Group offers a wide variety of industry-leading Virtual Prototyping solutions for components and sub-assemblies used in the transportation industry, focusing on the following areas: • • • • • • Passenger safety (airbags, seats, etc.); Vehicle body manufacturing and assembly; Vehicle body with trims and interior; Driving and comfort (noise, vibrations, etc.); Engine and transmission; Aerodynamics, engine aerothermodynamics, drainage, ford crossing. Main clients: Alstom Transport, Audi, Fiat Chrysler Group, Ford Motor, General Motors, Honda, Hyundai, Mercedes- Benz, Renault-Nissan, Shanghai Automotive Industry Corpo- ration, Volkswagen Group. Aeronautics and Aerospace offering ESI Group's diverse offerings allow it to propose solutions in areas such as: • Engineering and optimization of air flow, noise, impact, electromagnetics, etc.; Improvement of noise and vibration factors. • Main clients: Airbus Group, AVIC, Boeing, Bombardier, Hon- eywell, Lockheed Martin, NASA, PCC Corporate, Rolls-Royce, Safran, Sikorsky, UTC Aerospace Systems. Heavy industry offering ESI Group's solutions are designed for companies working in heavy industry and raw materials processing. They also meet simulation needs in the following areas: • Manufacturing processes (metal, plastic or composite • materials, additive manufacturing); Optimization of parts assembly and simulation of their ESI GROUP • 2016 REGISTRATION DOCUMENT 121 THE GROUP behavior in their environment. Main clients: Alcoa, Arcelor Mittal, Caterpillar, General Elec- tric, Hitachi, Sumimoto, Takata, Whirlpool. Main clients: CEA, CEE, DCNS, European Space Agency, Hun- tington Ingalls Industries, Japan Automobile Research Insti- tute, Ministère de la Recherche (RTNL), NASA, U.S. Army. • Energy offering The main areas of application are the following: • Verification of compliance with technical regulations (safety and useful life); Performance and improvement of new energy sources, e.g. wind energy; Energy consumption optimization. • Main clients: Areva, EDF, GDF, General Electric, Japan Atomic Energy Agency, Mitsubishi Heavy Industries, Siemens, U.S. Department of Energy. Government and Defense offering ESI Group's product offering primarily covers the following areas: • • Complex physical phenomena; Comfort of military vehicles. In 2016, orders in the main industrial sectors broke down as follows: Electronics and Consumer Goods offering ESI Group solutions include: • Physical and chemical reactions involved in the indus- try; Unintended hypothetical circumstances and related safety measures. • Main clients: Aixtron, Applied Materials, Bertrandt, Gestamp Group, Google, LG, Samsung. Education offering The solutions offered by ESI Group can be divided into two main areas, namely: • Education and assistance in training future engineers in new Virtual Prototyping tools and technologies; Special Research Projects, undertaken in collaboration with universities to meet the needs of industry. • ESI GROUP • 2016 REGISTRATION DOCUMENT 13 1.1.4. Ecosystem ESI Group is particularly mindful of the richness and develop- ment of its ecosystem, which it considers as the cornerstone of its success. Year on year, the Group strives to strengthen its ecosystem, determining how to best target the very extensive and fast- growing community of professionals involved in product manufacturing and industrial processes. Always expanding, the network built with partners, customers, suppliers, and all of the Group's other stakeholders makes it possible to accel- erate and spread innovation and to support the sale of soft- ware and services. 1.1.4.1. Distribution network and local expertise Distribution network some 550 people worked within our In 2016, distribution network to cover software sales, services production, customers. The Group’s proprietary distribution net-work accounted for more than 90% of sales. Remaining sales were carried out indirectly via a network of third-party dis-tributors and agents, complementing and enhancing our direct network. support and THE GROUP 1 1.1.4.2. Partnerships The Group values its partnerships with hardware suppliers, software solution providers, leading industrial companies, and technological and academic institutes alike. These alli-ances are deeply rooted in its corporate strategy to develop and facilitate Virtual Prototyping. Corporate partnerships strategic ESI Group has always aimed to establish mutually beneficial partnerships with corporate international companies, working together to promote innovation. Strategic “partner-customers” The success of ESI Group's solutions is also the fruit of re-markable collaboration and a co-creation approach with world leaders such as Renault-Nissan, Volkswagen, Honda and EDF-AREVA. The Group's approach is based on building close and long-lasting relationships which support meeting the specific needs of customers looking to successfully incor-porate Virtual Prototyping into various industrial sectors. Strategic and academic partnerships To ensure constant innovation, ESI Group enters into part-nerships with many first-rate universities, technological insti-tutes and leading colleges, in the many countries where the Group does business. The purpose of these collaborations is to share experiences and explore new technologies, encour-aging young people to work in the industrial sector, finest employees of tomorrow, and foster innovation in education. training the Expertise The wide range of software and services ESI Group offers meets the increasingly demanding needs of industry at every step of product and process development. The Group brings this global expertise to each and every customer, anywhere in the world. ESI GROUP • 2016 REGISTRATION DOCUMENT 141 THE GROUP 1.2. History of the Group 1973 TO 1990 ■ In 1973, Alain de Rouvray, along with three other engineering colleagues and partners, Jacques Dubois, Iraj Farhooman and Eberhard Haug, created ESI (Engineering System International). The company ini- tially operated as a consulting company for European defense, aerospace, and nuclear industries. In 1979, the company opened a subsidiary in Germany. In 1985, ESI carried out the first successful digital crash-test simulation for a German consortium led by Volkswagen. This marked the start of development of its flagship software package, PAM-CRASH. 1991 TO 1999 ■ In 1991, ESI became ESI Group and raised venture capital to enter the field of software edition. The company set up subsidiaries in the United States, Japan, and South Korea. In 1997, it took over Frama- soft (digital and mechanical simulation for the nuclear industry), followed by Dynamic Software (stamp- ing simulation) in 1999. 2000 TO 2010 ■ 2011 TO TODAY ■ In July 2000, ESI Group launched an IPO, raising some €30 million. From 2000 to 2008, ESI Group pursued a concerted external growth strategy, successively acquiring Mecas, strengthening its distribution network in Eastern Europe, STRACO (Vibro-Acoustic market), VASci (Vibro-Acoustic Sciences for noise and acoustic comfort simulation), ProCAST and Calcom (foundry and metallurgy simulation), the Product Division of CFD Research Corporation (fluid dynamics), the Service business of IPS International (virtual human models), ATE Technology International Ltd. (sec- tor diversification in China), the Vdot software platform (product development process management), and finally Mindware Engineering Inc. (fluid dynamics sector). Meanwhile, ESI Group strengthened its international presence by opening subsidiaries in Argentina, India, China, Italy, Brazil, and Tunisia. In 2011, ESI Group acquired the company IC.IDO, or “I see, I do” (immersive virtual reality solutions), followed by Efield AB (virtual simulation of electromagnetic phenomena). The following year, ESI Group took over OpenCFD Ltd (leader in open-source fluid dynamics software) from SGI, thereby taking own- ership of the OpenFOAM® brand. In 2013, ESI Group signed a joint venture agreement with AVIC-BIAM to collectively operate the new company “AVIC-ESI (Beijing) Technology Co. Ltd” (effective as of February 1, 2014), and subsequently acquired CyDesign Labs Inc. (system modeling). In 2015, ESI Group carried out the following acquisitions: CIVITEC (virtual simulation of automated driver assistance – ADAS), the business assets of PicViz Labs (Big Data-based predictive analysis), the technol- ogy assets of Ciespace (Cloud/SaaS offering), and the Presto software platform (electronics cooling mar- ket). In 2016, ESI Group continued to extend its strategic positioning by acquiring ITI GmbH (realistic simula- tion of mechatronic and multi-domain systems) and Mineset Inc. (Big Data visual analytics and machine learning). In late 2016, ESI Group signed a strategic, long-term partnership agreement with PARC, a Xerox Group company, with the goal of expanding and industrializing the advanced research project on Fault-Augmented Model Extension (FAME). In early 2017, ESI Group took over Scilab Enterprises, publisher of the Scilab open source analytical calculation software, with the goal of making immersive virtual engineering more accessible for a world- wide community of engineers and scientists. These numerous acquisitions have allowed ESI Group both to extend its sales positioning with an eye to ensuring optimal service to its customers, and to develop its product portfolio, putting forth a compre- hensive offering suited to the needs of industrial companies working in the industry of the future. ESI GROUP • 2016 REGISTRATION DOCUMENT 15 1.3. Group structure 1.3.1. Operational flowchart At April 30, 2017, the Group's operational flowchart was as follows: THE GROUP 1 Hierarchical attachment Operational attachment ESI GROUP • 2016 REGISTRATION DOCUMENT 16 1 THE GROUP 1.3.2. Legal flowchart At April 30, 2017, the Group's legal flowchart was as follows (in particular, this includes the acquisition of Scilab Enterprises, concluded in February 2017): Note: the percentages of equity and voting rights are identical. For more information, see note 7.9 “Table of controlled entities and affiliates at January 31, 2017” in the notes to the consolidated financial statements. ESI GROUP • 2016 REGISTRATION DOCUMENT 171.4. Selected financial information This information can be found in the consolidated financial statements. THE GROUP 1 CHANGE IN REVENUE (IN € MILLIONS) 1.4.1. Revenue 2016 annual sales came to €140.6 million, up 12.7% from the previous year. Acquisition-related revenue amounted €6.4 million (+5.1%) reflecting the implementation of initial commercial synergies. The positive currency effect came to €2.1 million (+1.7%), arising mainly from the positive trend of the Japanese yen. The product mix reflects the strong performance of Ser- vices, which now account for 23% of total revenue, com- pared to 22% last year. 1.4.2. Strategic business alignment Licenses revenue came to €108.3 million, up 11.6% from the previous year. This momentum was driven by the growth of the installed base (+13.0%), that holds a high repeat business rate of 89.1% measured for the organic perimeter and at con- stant exchange rates. New Business amounted to €17.9 mil- lion, a 3.0% increase from 2015. Services activity amounted to €32.2 million, up an impressive 16.5%. This activity was boosted by the continued expansion in engineering studies (+16.8%), ESI Group's core business, as well as strong growth in special projects (+57.1%), i.e. co-cre- ation and methodological transformation projects related to recently acquired and emerging technologies. 1.4.3. Breakdown of revenue by geographic area GEOGRAPHIC BREAKDOWN Business in BRIC countries accounted for 13.3% of rev-enue compared to 12.6% in 2015. This increase was due in large part to solid business performance in China and India. 1.4.4. Profitability EBITDA rose by 28.1%, from €14.3 million to €18.3 million, giving an EBITDA margin of 13.0% compared with 11.4 % in 2015. This rise was due in particular to the low increase of the Sales & Marketing (S&M) costs (+8.4%) and General and Administrative (G&A) costs (+9.8%), respectively represent- ing29.8% and 13.5% of total sales. As a reminder, EBITDA as presented here excludes non-re- ESI GROUP • 2016 REGISTRATION DOCUMENT 18 1 THE GROUP curring profit and includes the impacts of capitalization of re- search and development expenses and net allowances on im- pairment of accounts receivable. Current Operating Profit jumped 30.1% to €15.4 million, showing a current operating margin of 10.9%, i.e. growth of 1.4 percentage points compared to last year. EBIT surged by 46.7% to €13.7 million, for a margin of 9.8%, up 2.3 percentage points compared to FY2015. This impres- sive growth, bigger than that of EBITDA and Current Operat- ing Profit, was mainly due to the lower non-recurring costs. Last year, this item included expenses associated with the most recent technological acquisitions. The Financial Result, impacted by the rise in interest ex- penses and foreign exchange losses following appreciation of the Japanese yen against the euro in the second semester, stood at €-2.1 million compared to €-0.9 million in 2015. Attributable Net profit came to €7.5 million, i.e. a net margin of 5.4%. EBITDA CURRENT OPERATING RESULT ATTRIBUTABLE NET PROFIT [IN € MILLIONS AND AS A % OF REVENUE) [IN € MILLIONS AND AS A % OF REVENUE) [IN € MILLIONS AND AS A % OF REVENUE) 1.5. Major investments during the past three fiscal years 1.5.1. The Group’s recurring investments The Group's recurring investments in operations represent approximately 2% of its revenue. Over the past three finan- cial years, these investments amounted to €1.8 million in 2014, €2.7 million in 2015 and €2.3 million in 2016. This amount does not include the intangible assets recognized when allocating the acquisition prices (see notes 6.1 and 6.2 to the consolidated financial statements) or for the acquisi- tion of technological bricks. These investments pertain mainly to the computer equipment required to grow the Group's business as well as the work required to outfit and equip various facilities of the Group. Investments are primar- ily financed using the Group's equity. 1.5.2. The Group’s non-recurring investments a) Acquisitions of intangible assets Since 1994, the Group has been acquiring both companies and specific branches of companies in order to supplement its offering and expand its market opportunities. Intangible assets subject not to amortization but rather to impairment tests, including goodwill and intangible assets Research & development costs ESI Group capitalizes the research and development costs that meet the six criteria set forth under IAS 38 in its annual financial statements. Information on research and develop-ment costs in note 6.1.2 to the is found consolidated financial statements. The net carrying amount of capitalized research and devel-opment costs stood at €38.3 million at January 31, 2017 and corresponds to approximately 14 months of research and development. indefinite useful with an an impairment test as described the consolidated financial statements. life, have been subject to to in note 3.1 ESI GROUP • 2016 REGISTRATION DOCUMENT 19The change in the net carrying amount of these intangible assets between January 31, 2016 and January 31, 2017 is pre- sented in the table below. See notes 3.2.1 and 6.1.1 to the consolidated financial statements for further information. THE GROUP 1 (In € millions) Goodwill Intangible assets with an indefinite useful life TOTAL January 31, 2016 Change in scope of consolidation Foreign exchange gain/(loss) January 31, 2017 38.5 12.0 50.5 2.2 2.2 0.1 0.1 40.8 12.0 52.8 b) Financial investments The Group does not engage in any type of financial investments and uses strictly conventional investments to earn interest on its available liquid assets. 1.5.3. Future investments The Group will continue to invest in order to update and im- prove its production capacities and efficiency. The Group seeks out new opportunities that would allow it to increase its market share or to improve the services provided to its customers. In 2017, the Group plans to spend approximately €4.0 mil- lion. Capital costs committed at the time of writing came to approximately €1.1 million. On February 24, 2017, the Group took over the French company Scilab Enterprises, publisher of the Scilab open source analytical calculation software, with the goal of making immersive virtual engineering more accessible for a worldwide community of engineers and sci- entists. In order to evaluate any investment opportunities that could potentially improve its solutions, the Group has established a Product Council that helps the Group Executive Committee to make investment decisions based on market priorities and expected outcomes. 1.6. Risk factors The Group has reviewed the major risks that could have a material effect on its business activities, financial position, or results, and considers that there are no material risks other than those outlined in the four categories below. 1.6.1. Strategic risks international economic and Risk associated with the political environment The global economic, commercial, and social as well as geo- political context may influence the Group's results and reve- nue growth. In particular, the economic context and limited visibility may have an impact on customer investments and lead to lengthened sales cycles. In addition, some regions or countries may pursue protection policies that impede rollout of the company's solutions. To limit the impact of economic conditions on its activities and financial results, the Group implements a policy of diver- sifying its customer base by strengthening its presence in new business sectors and geographic areas. Risk of dependence on a single client or sector The Group strives to diversify its business, both geograph- ically and by industry. The Ground Transportation sector ac- counts for 56% of orders and uses a variety of technologies, thereby limiting any risk of dependence. For several years, the Group's twenty largest customers have accounted for approximately 40% of orders. To minimize this risk, the Group pursues a policy of diversify- ing its customer base in both geographic and sectoral terms. Risk related to technological changes and the ability to respond rapidly to clients’ needs ESI Group's business is based on a close customer relation- ESI GROUP • 2016 REGISTRATION DOCUMENT 201 THE GROUP ship that aims to meet clients' innovation needs in the differ- ent industrial sectors suitable for implementing Virtual Pro- totyping. Nevertheless, to protect against the risk of disruptive tech- nological changes in all the layers of the Group's products and services, the following networks have been developed: – The Scientific Committee; – Strategic partnerships with customers working in co-crea- tion with the Group; – Academic partnerships providing access to the latest tech- nological information; – Distribution partnerships with key hardware and Cloud companies that offer advance access to the latest technol- ogies. In addition, the Group takes part in innovation projects co- financed by European Union bodies, competitiveness clus- ters in France, and American research projects such as SBIR 1.6.2. Operating risks Business risk Since it deals with a very diverse customer base made up of major multinational industrial corporations, ESI's client insol- vency risk is low and fully provisioned. Intermediate payment installments are scheduled at the end of each quarter in or- der to approve the progress thus far and to justify the recog- nition of revenues. The payment terms used by the Group vary from country to country. These terms stand at an average of 50 days for Northern Europe, the United States and Japan, and at 60-100 days for Southern Europe (including France). In many cases where China is concerned, it takes over a year to collect on accounts receivable. An analysis of receivables by age is car- ried out each quarter in order to ensure collection and, where necessary, to establish the required provisions. The amounts of doubtful receivables are presented in note 4.2 to the consolidated financial statements. The Group is not exposed to any specific risks related to sup- pliers and partners. Its very limited use of subcontractors, typically on a personnel level, is not in any way strategic and does not represent any sort of risk factor. Moreover, the Group has standard terms in place based on the type of service rendered. Risk related to service contracts Revenue generated by the Group's Services Activity is recog- nized according to the percentage-of-completion method, and account for 23% of the Group's total revenue. In the case of fixed-price service contracts, the risk of underestimating costs is borne largely by ESI Group. Nonetheless, this risk is and Darpa. Together, these enable ESI to produce increas- ingly innovative solutions in a timely manner. Risk related to management and key personnel Today, the expertise and experience of key personnel are shared broadly among qualified teams. No employee is the exclusive owner of a code or piece of knowledge; in other words, all this information is shared among the teams. The Group's success depends in large part on its ability to at- tract, retain, and motivate quality employees, with a con- stant focus on aligning skills with the Group's needs and chal- lenges. To limit this risk, the Group has implemented an employee loyalty policy, primarily by creating Employee Share Owner- ship Plans (stock option and free shares) and Skill Develop- ment Plans. based on the Group's experience in the issues involved in the project. This risk is hedged by a contingency coefficient ap- plied both to the price and to the deadline; it varies from 0% for standard projects to 50% for highly innovative projects. In addition, bids may include clauses limiting the services provided and providing for the negotiation of amendments to contracts in the event of additional requests by the client. Risk related to inability to provide the expected results de- pends on the agreements and preliminary work carried out to grasp the problem, which has so far allowed ESI Group to avoid this risk. No agreements are signed without having a precise idea of how to proceed in order to deliver the ser- vices agreed upon. Furthermore, the risk of results being re- jected is covered by acceptability criteria specified either in the bid or at the start of work. Risk associated with the quality of products and services ESI Group is committed to offering high-quality products and services, in accordance with its focus on customer satisfac- tion. These initiatives require implementing processes and mechanisms that enable effective management of develop- ment and production projects. To reduce the risk of quality being compromised, for several years the Group has been pursuing overall ISO 9001 certification with the aim of incor- porating all of its subsidiaries. The Group's pursuit of this certification is a testament to its confidence in the quality of the solutions it provides to its customers, as well as its concern for excellence regarding overarching alignment of processes in managing quality risks. Overarching certification guarantees that ESI Group pays ESI GROUP • 2016 REGISTRATION DOCUMENT 21 particular attention to excellence regarding all of its pro- cesses as well as its employees. Risk related to the security of facilities and internal systems To reduce the risk related to the security of facilities and in- ternal systems, the Group has established security and data backup mechanisms and restricts access to critical and sensi- tive information. An experienced security officer constantly watches systems and network security. The internet connec- tions and firewalls of all facilities are centrally managed and monitored, thus minimizing the risk of intrusion and/or pi- racy. Critical services are regularly backed up in accordance with a documented process, and, in the event of a major mal- function or other catastrophe, a backup site has been de- signed and is operational. Industrial and environmental risk The Group is bound by a best-efforts obligation towards its customers (regarding the integrity of the algorithms used in its software) but is not obliged to produce a specific result regarding implementation of its software. 1.6.3. Financial risks Exchange rate risk See notes 7.1.4 and 7.3 to the consolidated financial state- ments. Interest rate risk See notes 7.1.2, 7.1.4 and 7.3 to the consolidated financial statements. Equity risk See notes 9.1 and 7.3 to the consolidated financial state- ments. 1.6.4. Legal risks The Group has a legal affairs department that is divided into two branches: – the corporate legal affairs branch, which is responsible for monitoring, researching and optimizing the Group's legal situation as well as coordinating the legal aspects of sub- sidiaries’ operations; – the intellectual property branch, which ensures that the Group's intellectual property rights (software codes, data- bases, inventions and expertise, trademarks, etc.) are pro- tected, and takes all necessary measures (trademark regis- tration, patent applications, confidentiality agreements, establishing exclusive rights, etc.) to safeguard them. This 1 THE GROUP ESI Group designs, develops and markets Virtual Pro- totyping software. The environmental impact of these activ- ities is relatively small by nature and limited mainly to the production of paper waste and used computer equipment. This impact is further minimized by the fact that a large por- tion of the devices are leased from companies that resell or recycle their equipment. The automatic fire extinguishing systems installed, where necessary, in the Group's computer rooms do not use halon, and comply with environmental standards. To the best of its knowledge, the Group does not currently, nor has it ever violated any environmental regulation, and no legal action has ever been taken against it in relation to the environment. Furthermore, the Group's digital simulation products allow its clients to reduce the number of full-scale tests (crash tests, foundry, injection, welding, etc.) and thus allow them to cut back significantly on raw materials and en- ergy. For more information on the Group's corporate responsibil- ity, refer to section 3, “Corporate Social, Societal, and Envi- ronmental Responsibility.” Risk related to impairment of goodwill or of intangible assets See notes 3.1 and 6.1.3 to the consolidated financial state- ments. Liquidity risk See notes 7.1 and 7.3 to the consolidated financial state- ments. branch is responsible for intellectual property audits when acquisitions are made, and for drafting, revising, or negoti- ating all contracts involving customers and partners, par- ticularly consortium agreements. Intellectual property risks Given the nature of its activities, the risks faced by the Group pertain mainly to intellectual property. These potential risks are as follows: Counterfeiting of products marketed by the Group With respect to the risk of counterfeiting by third parties, no significant incidents of counterfeiting have been observed. ESI GROUP • 2016 REGISTRATION DOCUMENT 221 THE GROUP The passwords used to access the Group's products are gen-erated by ESI Group regardless of how the software is distrib-uted (distributors and agents), and are linked to the FlexNet Publisher software (formerly known as Flexlm), which repre-sents the world standard for secure computer codes. In the event that a way around the FlexNet code is found, ESI Group also uses a counterfeit detection tool together with a legal assistance service to prosecute counterfeiters. This service has proven to be highly effective. for the codes developed Risk related to claims by third parties as to the ownership of codes published by the Group With regard to the risk of third-party claims, the Group's soft-ware products are, broadly speaking, either developed within the Group or acquired through mergers or acquisi- tions. In rare cases, they are the result of development con- tracts signed with third parties. in-house, the Group's As companies retain ownership of the intellectual property under the em-ployment contracts and supplementary provisions in accordance with labor law. Where necessary, development agreements are signed between ESI Group and its subsidiaries in charge of development in order to ensure that ESI Group is considered the owner of the intellectual property. through an external For audit property growth operation, if time, beginning, should be conducted ahead of laws. necessary, by analyzing local intellectual property Furthermore, acquisition include warranties of title. This particularly allows the Company to avoid buying an empty shell or software code with too attached. Likewise, the Group relies on a systematic review process for software development contracts made with third parties, such as university partners, in order to ensure effective, risk-free transfer of intellectual property in the event that an ESI Group contract ensuring effective transfer is not used. Contractual liabilities and damage clauses software code acquired agreements always intellectual strings many an Transfers of more rights than necessary due to customers’ General Purchase Conditions The risk of improper transfers is eliminated by having all con-tracts reviewed by in-house intellectual property law specialists. licenses and Prevention of undue granting of free transference of profits within R&D consortia The intellectual property branch of the Legal Department has a long history of working with consortia and negotiating with them in the interests of the Group, particularly rejecting the granting of free licenses for in-house research when said research only involves using pre-existing or improved software belonging to ESI Group. the situation today, an contentious legal action, tax burden due its ordinary business litigation, governmental or Risk of or arbitration surrounding public With to increased finances reconsideration of existing tax mechanisms, establishment of new taxes, or more aggressive tax collection could have negative consequences on the Group's net financial income. As part of in France and internationally, ESI Group is particularly concerned with issues relating to the French Research Tax Credit (CIR) and transfer pricing. The Group receives assistance in these matters from specialized external consultants and has the established This documentation the context of government policies of periodic the exception of disputes regarding ordinary business in any operations, government or legal procedure, or any arbi-tration process liable to have material impact on its financial position, activities or results (see note 10.2.2 to the consoli-dated financial statements). The Group therefore believes that it has the resources and processes required to adequately cover any legal risks that it may face. appropriate documentation. in the Company review. With is verified involved is not liabilities and damage clauses, Regarding contractual the Group always refuses damage clauses and indirect liabilities (such as its contractual liabilities to the amount of a particular event whenever possible. losses) and limits ESI GROUP • 2016 REGISTRATION DOCUMENT 232 CORPORATE GOVERNANCE In accordance with the provisions of Article L. 225-37, subparagraphs 6-10 of the French Commercial Code, this chapter includes the Chairman's report on corporate gov- ernance, internal control and risk management proce- dures (the “Report”) and outlines the following items: • The Corporate Governance Code followed by the Company and application of the recommenda- tions contained therein; The composition of the Board and the application of the principle of balanced gender representation; Conditions for preparing and organizing the work of the Board of Directors; The limits the Board of Directors imposes on the pre- rogatives of the Chief Executive Officer and Chief Op- erating Officers; The principles and rules set out by the Board of Di- rectors to determine compensation and benefits of • • • • • any kind granted to executive corporate officers; As well as internal control and risk management pro- cedures implemented by the Company. The other information referred to in Article L. 225-100-3 of the French Commercial Code, and particularly infor- mation concerning the share capital and shareholding structure, can be found in section 7. This Report was prepared with the assistance of ESI Group executive management as well as the Legal Affairs, Human Resources and Finance and Administration De- partments. In accordance with Article L. 225-37 of the French Com- mercial Code, the Board of Directors approved the Chair- man's report at its April 18, 2017 meeting. The Report is also subject to review and approval by the Combined Gen- eral Meeting of June 29, 2017. 2.1. Corporate governance procedures d note that the Corporate Governance Code followed by the Company since April 2010 is the Middlenext Code. It is It may be consulted at www.middlenext.com. The most re-cent edition of the Code, including new areas of attention and recommendations, was published in September 2016. The members of the Board of Directors have familiarized themselves with the Code and reiterated their commitment to comply with all recommendations included therein and to periodically review the areas of attention. four new Throughout FY2016, the Company focused on (i) taking account of the areas of attention set out in the Middlenext Code and (ii) adapting its practices to ensure compliance with all recommendations mentioned in the Code. In this respect, it is noted that, in accordance with the “comply or explain” principle, as well as AMF Recommendation no. 2013-20, a cross-reference table laying out the different recommendations of the Corporate Governance Code fol- lowed by the Company is provided below. TABLE SHOWING THE APPLICATION OF RECOMMENDATIONS OF THE CORPORATE GOVERNANCE CODE Content of the recommendation Application by the Company Paragraph of Registration Document Recommendation followed by the Company Recommendation followed by the Company R.1. Code of Ethics of the Board of Directors R.2. Conflict of interest* R.3. Composition of the Board - Presence of independent members on the Board Recommendation followed by the Company R.4. Communication of information to members of the Board Recommendation followed by the Company R.5. Organization of Board and Committee meetings R.6. Establishment of Committees R.7. Establishment of Board rules of procedure R.8. Choice of each Director R.9. Terms of office of members of the Board Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company 2.4 2.4 2.3 2.4 2.4 2.4 2.4 2.3 2.3 ESI GROUP • 2016 REGISTRATION DOCUMENT 242 CORPORATE GOVERNANCE R.10. Director compensation R.11. Assessment of the work done by the Board R.12. “Shareholder”* relations R.13. Definition and transparency of compensation paid to corporate executive officers R.14. Preparation of “executive”* succession R.15. Combined employment contract and Directorship R.16. Severance pay R.17. Supplementary pension plans R.18. Stock options and grant of free shares R.19. Review of areas of attention * New recommendation Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company Recommendation followed by the Company 2.5.1 2.4 2.4 2.5.2 2.4 2.5.2 2.5.2 2.5.2 2.5.2 2.1 2.2. Workings of the Board of Directors and Executive Management 2.2.1. Chairman of the Board of Directors In accordance with article 11 of the articles of association, the Board of Directors elects a Chairman from among its natural person members, for a term that may not exceed his or her term as Board member. The Board of Directors also determines the compensation to be paid to the Chair- man. The Chairman organizes and supervises the work of the Board. He/she ensures that the Company's various bodies function properly, with particular attention to guaranteeing that Board members are able to fulfill their mission. 2.2.2. Chief Executive Officer In accordance with legal provisions, the Board entrusts executive management of the Company either to the Chairman of the Board of Directors or to another natural person, whether or not a Board member, who holds the title of Chief Executive Officer. The choice between these two executive management op- tions is made by the Board of Directors. The Board's deci- sion regarding the choice of executive management struc- ture is made by majority vote of the Board members pre- sent or represented. The Board's choice is reported to the shareholders and to third parties in accordance with the provisions set forth by the regulations in force. The option selected by the Board of Directors must remain in effect until the end of the term of office of the Chief Ex- ecutive Officer or Chairman, if the Chairman also serves as Chief Executive Officer. At the end of this period, the Board of Directors must again decide on the Company's execu- tive management structure. The Board of Directors may, People over the age of 80 may not serve as Chairman of the Board of Directors. If the current Chairman comes to exceed this age, he or she will automatically be deemed to have resigned. Mr. Alain de Rouvray, one of the Company's co-founders, is Chairman of the Board of Directors. It is noted that the General Meeting of July 22, 2015 decided to reappoint Mr. Alain de Rouvray for a term of four years, to expire upon the General Meeting of 2019. with the consent of the Chief Executive Officer or Chair- man, if the Chairman also serves as Chief Executive Officer, decide to modify the executive management structure be- fore the end of their term of office. Such change in the ex- ecutive management structure does not require an amendment to the articles of association. At its July 22, 2015 meeting, the Board of Directors de- cided to combine the functions of Chairman and Chief Ex- ecutive Officer and to reappoint Mr. Alain de Rouvray as Chief Executive Officer for a term of four years expiring in 2019. This arrangement was consistently chosen as the most appropriate, considering the Company's size and the presence of two Chief Operating Officers who can assist the Chairman and Chief Executive Officer. The Chief Executive Officer is granted the broadest possi- ble powers to act in all circumstances on behalf of the Company. The powers of the Chief Executive Officer may be limited by the Board of Directors. ESI GROUP • 2016 REGISTRATION DOCUMENT 25CORPORATE GOVERNANCE 2 2.2.3. Chief Operating Officers At the proposal of the Chief Executive Officer, regardless of whether this function is performed by the Chairman of the Board of Directors or by another person, the Board of Directors may appoint one or more individuals as Chief Operating Officer to assist the Chief Executive Officer. In accordance with article 14 of the articles of association, the number of Chief Operating Officers may not exceed five. The Board of Directors determines the scope and duration of the powers granted to the Chief Operating Officer, with the Chief Executive Officer's agreement, and sets their compensation. With respect to third parties, the Chief Op- erating Officer has the same powers as the Chief Executive Officer. If the Chief Executive Officer resigns or is no longer able to carry out his duties, the Chief Operating Officers will re- tain their responsibilities and duties until the appoint- ment of a new Chief Executive Officer unless the Board of Directors decides otherwise. Chief Operating Officers may be dismissed at any time at the recommendation of the Chief Executive Officer. If Chief Operating Officers are dismissed without just cause, such dismissal may be grounds for compensation. At its July 22, 2015 meeting, the Board of Directors de- cided to reappoint Mr. Vincent Chaillou and Mr. Christo- pher St. John as Chief Operating Officers for a term of four years, expiring in 2019. • • • • • 2. To enter into commercial contracts or agreements on behalf of the Company within its commercial territory and authority; 2.2.4. Limits on the powers of the Chief Executive Officer and Chief Operating Officers The powers of the Chief Executive Officer are not subject To create or acquire stakes in other companies, to to any limits. perform any other type of similar undertaking, to ac- However, the powers of the Chief Operating Officers to act cept management positions in other companies, to as legal and commercial representatives of the Company establish or dissolve subsidiaries and to divest own- have been delegated by the Chairman of the Board of Di- ership interest; rectors. The following powers have thus been delegated to To propose mergers; the Chief Operating Officers, Mr. Vincent Chaillou and Mr. To grant loans; Christopher St. John: To bind the Company as a guarantor or in any other 1. To represent the Company, in general, in all ongoing debt-related situation with respect to third parties; business affairs of ESI Group with respect to third par- To settle any disputes and to take legal action, with ties and in compliance with the Group procedures; the exception of debt recovery actions that form part of the Company’s ongoing operations and urgent ac- tions such as provisional or conservatory measures that cannot be postponed in the interests of the Com- pany; To set up retirement plans for the employees of the Company; To sell or dispose of, purchase or acquire, or transfer or mortgage any assets belonging to the Company worth more than €50,000; To enter into commercial contracts or transactions exceeding €250,000, with the exception of intra- Group contracts issued by the Company, which Mr. Vincent Chaillou and Mr. Christopher St. John may sign without any limitation as to amount; In general, to take any action related to the Company involving an amount greater than €50,000; In general, to enter into any agreement or transac- tion involving other Group companies, clients or partners falling outside the Company’s commercial territory or authority. 3. To hire or terminate any employee, executive, consult- ant, sales representative, distributor or agent and to de- termine the scope of their powers and their title (with the exception of managers and directors) and to estab- lish or increase any compensation, commission or pen- sion for all such individuals or legal entities. Annual compensation shall not exceed €100,000. To hire managers and directors and determine or modify their annual compensation; To purchase or acquire, sell or dispose of, lease or rent, or mortgage any real estate property; To pledge any movable property or receivable; To enter into credit arrangements; To take out loans on behalf of the Company (with the exception of the use of bank overdrafts granted to the Company); In all cases, the Chief Operating Officers require the Com- pany's prior written consent to carry out the following transactions on behalf of the Company: • • • • • • • • • • ESI GROUP • 2016 REGISTRATION DOCUMENT 262 CORPORATE GOVERNANCE 2.2.5. Group Executive Committee (“GEC”) The GEC makes all decisions relative to the Company's growth strategy in the following areas: • • • • • • To date, GEC membership is as follows: Distribution (establishments and subsidiaries); Sales and Marketing; Production of products and solutions; Service activity; Finance and Administration; Human Resources; Last name, First name Title Quality; IT. • • In collaboration with the Specialized committees, the GEC prepares and submits documentation to the Board of Di- rectors regarding certain operations that require Board approval before they can be carried out and/or imple- mented. Mr. de Rouvray, Alain Chairman of the Board and Chief Executive Officer of the Company Mr. Chaillou, Vincent Board member and Chief Operating Officer in charge of Editions Operations Mr. St. John, Christopher Chief Operating Officer in charge of Distribution and Support Operations Mr. Bastian, Laurent Chief Financial Officer Mr. Salari, Mike Mr. Schmitt, Peter Executive Vice President, Engineering Services Executive Vice President, Marketing and Sales Mr. Matzen, Christian Executive Vice President, Immersive Virtual Prototyping Mr. Tanasescu, Christian Executive Vice President, Systems Modeling and Data Analytics Mr. Gremaud, Marco EMEA Managing Director Ms. Romefort-Régnier, Corinne Corporate Governance Director, Secretary of the Committee 2.3. Composition of the Board of Directors Chairman of the Board of Directors In accordance with article 10 of the articles of association, the Company is administered by a Board of Directors com- posed of at least three members and at most the maximum number of members permitted by law, unless a decision is made to increase this maximum in the event of a merger. The Board of Directors pursues an ongoing objective of in- creasing the diversity and complementarity of skills re- quired for service on the Board and ensuring balanced representation of all shareholders and women. Directors are appointed by the annual Ordinary General Meeting, based on the recommendations of the Board of Directors, for a term of four years, in accordance with the recommendations of the Corporate Governance Code (R.9). These duties expire at the end of the Ordinary Gen- eral Meeting called to approve the financial statements of the previous fiscal year and held during the year in which the term of the Board member in question is scheduled to expire. Directors may be re-elected. They may be dis- missed at any time by the Annual General Meeting. The age limit to serve on the Board of Directors is 80. If a member of the Board of Directors exceeds this limit, he or she will automatically be deemed to have resigned. He or she will nonetheless retain his/her seat until the first Board meeting following the date at which the Director in question exceeded the age limit. ESI GROUP • 2016 REGISTRATION DOCUMENT 27The Board of Directors is currently made up of the following eight members: CORPORATE GOVERNANCE 2 Title Start of first term End of term Age Last name, First name Mr. de Rouvray, Alain Mr. Chaillou, Vincent Ms. de Rouvray, Cristel (1)(2) Chairman and Chief Executive Officer Board member Board member Mr. des Isnards, Charles-Helen (2) Independent Board member Mr. d’Hotelans, Éric Ms. Jacq, Véronique Independent Board member Independent Board member Ms. Ramanathan, Rajani Independent Board member Mr. de Balmann, Yves Independent Board member 1991 2004 1999 2008 2008 2014 2014 2016 AGM 2019 73 years old AGM 2020 67 years old AGM 2017 40 years old AGM 2017 72 years old AGM 2019 66 years old AGM 2018 49 years old AGM 2018 50 years old AGM 2020 71 years old (1) Ms. Cristel de Rouvray is the daughter of Mr. Alain de Rouvray, Chairman and Chief Executive Officer. (2) The renewal of the appointments of these Directors is submitted for approval by the Combined General Meeting of June 29, 2017. The following provides a summary of the changes in the composition of Board of Directors over the course of FY2016 as well as the changes expected to be made over the course of the current fiscal year: Resignation Reappointment Appointment FY2016 N/A FY2017 N/A Mr. Vincent Chaillou Ms. Cristel de Rouvray Mr. Charles-Helen des Isnards Mr. Yves de Balmann N/A ESI GROUP • 2016 REGISTRATION DOCUMENT 282 CORPORATE GOVERNANCE Personal information of current Board members Alain de Rouvray Chairman and Chief Executive Officer ate of birth: 10/8/1943 French D Vincent Chaillou Board member and Chief Operating Officer ate of birth: 3/24/1950 French D Founder of ESI Group, Alain de Rouvray has been the Chairman and Chief Executive Officer since its creation in 1991. He holds an engineering degree from Ecole Centrale de Paris (1967), a degree from La Sorbonne in Economic sciences (1967), and a Ph.D. in civil engineering from the University of Berkeley (1971). Alain de Rouvray started his career as Research Engi- neer at Ecole Polytechnique (Solid Mechanics Laboratory) in 1972. He then became Director of the Advanced Mechanics De- partment for the international software subsidiary of CISI Group from 1972 to 1976. In 1973, he founded ESI SA and was the COO and Commercial Director from 1973 to 1990. Vincent Chaillou is the Company COO in charge of the Software Publishing Division. Vincent Chaillou holds a PhD in civil engineering from the Ecole des Ponts et Chaussées (1973) and an engineering degree from Ecole Polytechnique (1971). Before joining ESI Group in 1994, he served as General Manager of the AEC Business Unit, a department of ComputerVision (which has now merged with PTC). During his 16 years at ComputerVision, he held several management positions in sales, marketing and general management, specifically in the Asia-Pacific region. From 1994 to 1998, he was Regional Vice Presi- dent for the American territory within ESI Group and CEO of ESI Software. Current offices held: None Offices held over the past five years: None Current offices held: • Member of the Board of the association Alliance In- dustrie du Futur Member of the Board of the association TECH'IN France Member of the Board of the association ASTech Member of the Board of the association IDFORCAR Member of the Board of the Railenium Technologi- cal Research Institute Member of the Board of the company CADEMCE SAS Member of the Board of Nuclear Valley Member of the Board of the French Mechanics asso- ciation Treasurer of the Excelcar collaborative innovation platform • • • • • • • • Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris Offices held over the past five fiscal years: NONE ESI GROUP • 2016 REGISTRATION DOCUMENT 29Cristel de Rouvray Board member ate of birth: 10/15/1976 French, American D CORPORATE GOVERNANCE 2 Charles-Helen des Isnards Independent Board member ate of birth: 01/01/1945 French D A graduate of Stanford University and the London School of Economics, where she obtained a Ph.D. in economics, Cristel de Rouvray is a resident of the United States. She divides her time between the position of Board member at ESI Group and that of consultant at College Track in Oakland, California. After an international career within BUE, UBAF and CIC Group in France and in Italy, Charles-Helen des Isnards con- tributed to the creation of CIC Finance as member of the Board. He served as Deputy Chief Executive Officer of CM- CIC Corporate Advisory until September 2012. He is a grad- uate of the Paris Institute of Political Studies and holds a de- gree in law. Current offices held: None Offices held over the past five years: None Current offices held: • Member of the Board of the association Les Arts Floris- sants Member of the Board of the Day-Solvay Foundation Offices held over the past five years: Member of the Supervisory Board of the company Na- ture & Découvertes • • • Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris ESI GROUP • 2016 REGISTRATION DOCUMENT 302 CORPORATE GOVERNANCE Éric d’Hotelans Independent Board member ate of birth: 07/03/1950 French D Véronique Jacq Independent Board member ate of birth: 01/02/1968 French D Éric d’Hotelans held positions in the information technology sector, first at Tandem (US computer manufacturer, taken over by HP), where he headed the Europe/Finance Business Unit. In 1998, he joined CMG, one of the oldest European IT services companies, as a member of the Executive Committee. In this capacity, he created CMG France (1,200 employees), the Group’s French subsidiary, of which he became Chairman and CEO. He left CMG group in 2003, following its acquisition by UK group Logica. He then participated in the development of an investment fund based in Riyadh, Saudi Arabia, specializing in research and analysis of IT-related activities. In 2003, he joined the Board of Directors of M6 Group as Deputy Chairman in charge of management activities, assuming responsibility for the Group’s online sales in 2009. A Civil Engineer and graduate of the Ecole des Mines de Paris (French engineering school), Véronique Jacq began her career in the Nuclear Safety Authority (1994-2000). In 1997, she was appointed Deputy Director in charge of monitoring the safety of EDF nuclear power plants. In 2000, she joined Anvar (now OSEO) as Director of Busi- ness Development. In 2003, she joined the 2nd Chamber of the French Court of Auditors, where she was responsi- ble for auditing financial statements and management re- ports of companies and government agencies as well as international organizations. In 2007, she joined CDC En- treprises, a CDC subsidiary company specializing in pri- vate equity, and in 2010 became Deputy General Manager in charge of Business Development. In 2012, she became head of digital technology investments first at CDC Entre- prises and then at Bpifrance as of 2013. Current offices held: • • • • • President of the company Home Shopping Services SA President of the company CADEMCE SAS Member of the Board of the company M6 Films Member of the Board of the company M6 Diffusion SA Member of the Board of the company Société Nouvelle de Distribution SA Member of the Board of the company Métropole Produc- tion SA Chair of the M6 Group Corporate Foundation • • • • • Current offices held: • Member of the Board of the company OpenClass- rooms Censor of the company Bonitasoft Censor of the company Scality Censor of the company Teads Offices held over the past five years: Censor of the company DelfMEMS • • • • • Offices held over the past five years: Managing Director of the company Home Shopping Ser- vices SA Member of the Board of the M6 Group Corporate Foun- dation Business address: M6 - 89 Avenue Charles de Gaulle - 92575 Neuilly-sur-Seine Cedex Business address: Bpifrance - 6-8 Boulevard Haussmann, 75009 Paris ESI GROUP • 2016 REGISTRATION DOCUMENT 31Rajani Ramanathan Independent Board member ate of birth: 3/25/1967 American, Indian D CORPORATE GOVERNANCE 2 Yves de Balmann Independent board member ate of birth: 05/28/1946 French, American D Rajani Ramanathan has held a variety of positions, from run- ning her own companies in India to scaling a multi-billion-dol- lar company from a startup to a fully operational business. She currently serves as an advisor or investor in several technol- ogy startups including Realine Technology, Growbot, Medium, Invicara, Pipefy, Wizcal, SaferMobility and Trendbrew. She joined Salesforce.com in 2000, when it was a small startup, and she helped build it into a high growth Fortune 500 com- pany over 14 years. In her most recent role as Executive Vice President of Technology & Products, her responsibilities in- cluded delivering highly innovative products while ensuring that every employee has every chance of success. In 2014, she was awarded the YWCA TWIN (Tribute to Women and Indus- try) Award, which has long been considered one of Silicon Val- ley's most prestigious awards honoring women who exem- plify leadership excellence in executive-level positions. A graduate of Stanford University in the United States and Ecole Polytechnique in France, Yves de Balmann began his career at Citibank where he served as North American Ex- ecutive Director for the Rates and Currency Derivatives Di- vision, as well as his own Trading Department. He joined Bankers Trust in 1988. After the 1999 merger of this com- pany with Deutsche Bank, de Balmann became Co-Head of the Global Investment Bank (GIB) Department of Deutsche Bank and Vice Chairman and CEO of Deutsche Bank Alex. Brown, the US division of the German bank, which brings together investment banking and intermediation activi- ties. He held these positions until 2001. He also served on the Board of the Global Corporates and Institutions Divi- sion (GCI). In 2002, he created the company Bregal Invest- ments, a first-rate international player in the field of pri- vate equity, which he co-managed until 2012. He lives in California. Current offices held: • Member of the Board of the company CloudCherry Offices held over the past five years: None Current offices held: • Member of the Board of the company Excelon Corpo- ration Member of the Board of the company Finaliste Member of the Board of the non-profit organization Sweetwater Spectrum Offices held over the past five years: Member of the Board and non-executive Chairman of the company IP Management Member of the Board of the company Laureate Edu- cation • • • • • Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris Business address: ESI Group - 100-102 Avenue de Suffren, 75015 Paris Experienced and complementary Directors As can be seen in the short biographies presented above, , through the members of the Board of Directors their education and their professional experience, consid- erable expertise in the fields of management and finance. have Furthermore, most Directors are perfectly familiar with the Company’s area of technology. Finally, their diverse profiles guarantee that the Board benefits from a comple- mentary set of skills. ESI GROUP • 2016 REGISTRATION DOCUMENT 322 CORPORATE GOVERNANCE Independent members of the Board of Directors The criteria used by the Compensation, Nomination and Governance Committee, and subsequently by the Board of Directors, to deem a Board member independent and to prevent potential conflicts of interest between the Board Member and management, the Company or the Group are as follows, in accordance with the recommendations of the Corporate Governance Code (R.3): • five years; Independent Board members must not be salaried employees or corporate officers of the Company or of a company within the Group, and must not have held such a position within the last They must not have had a significant business rela- tionship with the Company or the Group (client, sup- plier, competitor, service provider, creditor or banker) over the preceding two years; They must not be a Reference Shareholder of the Company or hold significant voting rights; They must not have a close relationship or immedi- ate family ties with a corporate officer or Reference Shareholder; They must not have been an auditor of the company • • • • in the course of the previous six years. As for Board members who hold a significant number of shares in the Company, the Board has recommended that they be considered independent as long as they do not take part in control of the Company. Should Board mem- bers come to hold more than 10% of the Company's capi- tal or voting rights, the Board of Directors must systemat- ically review their status as independent members, at the recommendation of the Compensation, Nomination and Governance Committee, in consideration of the Compa- ny's capital structure and the existence of any potential conflicts of interest. The Board of Directors reviews the situation of its mem- bers vis-à-vis these independence criteria on a yearly ba- sis. At the present time, five Directors are considered as independent: • • • • • Mr. Charles-Helen des Isnards; Mr. Éric d’Hotelans; Ms. Véronique Jacq; Ms. Rajani Ramanathan; Mr. Yves de Balmann. Internationalization of the Board of Directors and greater presence of women The Board of Directors is currently made up of eight mem- bers, five men and three women. As such, the gender gap does not exceed two, as required by law No. 2011-103 of January 27, 2011 on gender equality in Boards of Direc- tors and Supervisory Boards. In addition, three Directors, Ms. Cristel de Rouvray, Ms. Rajani Ramanathan and Mr. Yves de Balmann have dual nationality, thereby enriching the Board with the cultural diversity they offer. Length of terms Directors serve four-year terms. This duration is in line with the recommendation R.9 of the Middlenext Code. Considering its size and the composition of its Board, the Company believes that four-year terms foster both long- term commitments on the part of Board members and bet- ter decision making thanks to in-depth knowledge of the Company, its markets and its activities, while also rein- forcing Directors' independence due to more frequent submission of appointment renewals to the Company's Shareholders. It is noted that the Extraordinary General Meeting of July 23, 2013 decided to shorten the length of terms on the Board of Directors from six to four years, without affecting terms in progress at that date, so as to allow Shareholders to be consulted sufficiently often regarding Board ap- pointments. Absence of criminal convictions or incriminations of corporate officers In the past five years, to the best of the Company's knowledge, no Board member nor executive has been con- victed of any fraudulent offense, been associated with a company's bankruptcy, receivership or liquidation, or re- ceived an official public incrimination or sanctions by stat- utory or regulatory authorities. Furthermore, to the best of the Company's knowledge, none of its Board members or corporate executives has been barred, by court order, from serving as a member of an administrative, management or supervisory body of any company, or from participating in the management and business dealings of any company during the last five years. ESI GROUP • 2016 REGISTRATION DOCUMENT 33 2.4. Conditions for preparing and organizing the work of the Board of Directors CORPORATE GOVERNANCE 2 Rules of procedure of the Board of Directors The Board of Directors adopted a set of rules of procedure in 2009. These rules set out the operational procedures of the Board and its Committees, as well as the rules of pro- fessional ethics applicable to all Directors (R.7). These rules of procedure were reviewed in April 2013 and April 2016 to take account of the latest regulatory particular regarding the responsibilities of the Audit Committee, and to ensure that the rules are con-sistent with best practices of corporate governance. In light of the recent revision of the Middlenext Code in Sep-tember 2016, the Board recommends modifying the rules of procedure as necessary in the near future to guarantee compliance with the new recommendations set forth in the Code. The rules of procedure can be consulted on the Company's website (www.esi-group.com). Each member receives a copy of these rules upon being appointed. changes , in • • • • In accordance with recommendations R.1, R.2 and R.7 of the Middlenext Code, these rules of procedure particularly specify the following points: • The composition of the Board of Directors and the procedure for determining whether a Board member is an independent member; Directors' duties and responsibilities (especially in terms of professional ethics, disclosure and manage- ment of conflicts of interest and compliance with rules applicable to insiders); The operational procedures of the Board of Directors (frequency of meetings, procedure for calling meet- ings, procedure for notifying members, use of vide- oconferencing technology) and the Committees; The rules regarding Directors' compensation; The role of the Board of Directors and the Commit- tees. Professional ethics of Board members and prevention of conflicts of interest Regarding professional ethics, it is noted that Board mem- bers are to refer to the Director Charter set forth by the French Institute of Corporate Directors and appended to the rules of procedure of the Board of Directors. Concerning prevention and management of conflicts of in- terest, the rules of procedure and the Charter recommend that each Director strive to avoid any potential conflict be- tween his/her moral and material interests and those of the Company. Each Director is obligated to inform the Board of any conflict of interest liable to involve him/her. Should the Director be unable to avoid a conflict of inter- est, he/she must recuse him/herself from any delibera- tions and decisions regarding the issues in question. To the Company's knowledge, at the date this report was drawn up, there was no conflict of interest between the duties of the individual Board members with respect to the Company and their private interest and other duties. • Duties and powers of the Board of Directors The Board of Directors is and must remain a collegial body • that collectively represents all Shareholders. It must act in keeping with the Company's corporate interests under any and all circumstances. The Board of Directors deter- mines the guidelines for the Company's operations and oversees the application thereof. Subject to the powers ex- pressly given, under the law, to General Meetings, the Chairman and Chief Executive Officer and the Chief Oper- ating Officers and in keeping with the corporate purpose, the Board of Directors may handle any matter relevant to the Company's operations and meets to decide all matters within its responsibility. The Board of Directors is entrusted with the following re- sponsibilities in accordance with the law: • Preparing for and calling Annual General Meetings; • • • Preparing the wording of the resolutions to be voted on by the Shareholders; Deciding on the executive management structure of the Company by opting to appoint as Chief Executive Officer either the Chairman of the Board of Directors or another individual; Determining the powers that may be delegated to a subsidiary's General Manager and setting monetary limits on these powers; Preparing parent-company and consolidated annual financial statements and interim financial state- ments, the annual management report and the in- terim financial report, as well as approval of these documents; Approving the Report of the Chairman of the Board ESI GROUP • 2016 REGISTRATION DOCUMENT 342 CORPORATE GOVERNANCE of Directors on corporate governance, internal con- trol and risk management; Approving the agreements referred to in Article L. 225-38 of the French Commercial Code; Authorizing guarantees and similar undertakings; Appointing or dismissing the Chairman and Chief Ex- ecutive Officer and the Chief Operating Officers, and • • supervising their management of the Company; Creating committees within the Board of Directors, establishing the rules of procedure that set out their responsibilities and operational procedures, ap- pointing and determining the compensation of the members of these committees; Distributing Directors' fees. • • • Decisions and meetings of the Board of Directors The Board meets as often as required for the interests of the Company. The frequency and length of the Board of Di- rectors' meetings must be such as to allow members to conduct an in-depth review and discussion of the topics falling under its responsibility. The same principle applies to meetings of Board Committees. In accordance with Middlenext Code Recommendation R.5, the rules of procedure state that the Board of Direc- tors meets at least four times per year. In addition to mandatory dates, the Board must also meet to: • Draw up the annual financial statements and prepare for the Annual General Meeting called to approve said financial statements; Report on half-year results; Discuss the financial position, the cash position, the Company's obligations and the share buyback pro- gram. • • The Board of Directors must also meet, when convened by the Chairman, in the event of major operations such as the following: • • Business acquisitions or divestitures; Significant operations outside the Group's estab- lished strategy; Organic growth or restructuring operations. • The draft minutes of each Board of Directors meeting are formally approved and signed by the Board members dur- ing the subsequent meeting. The minutes relate the dis- cussions, specify the decisions made and mention the questions and hesitations raised. Furthermore, during each meeting any major facts or events pertaining to the Company's operations or its gen- eral situation arising since the previous meeting are brought to the Board members' attention. Board of Directors' meetings are not valid unless at least half of its members are in attendance. The Board’s deci- sions are made by majority vote among the members pre- sent or represented. In the event of a tie, the Chairman of the meeting casts the deciding vote. In accordance with the provisions of the articles of association, Board mem- bers who take part in the Board meeting via videoconfer- ence or teleconference are considered present for the pur- pose of determining whether a quorum is present. This provision does not apply to decisions for which the French Commercial Code expressly bars the use of these methods. An attendance sheet is drawn up and signed by the Board members taking part in the Board of Directors' meeting. The Board of Directors met nine times in FY2016, on the dates listed below, with an average attendance rate of 91%: Date February 18, 2016 March 11, 2016 April 08, 2016 May 18, 2016 July 21, 2016 September 16, 2016 November 30, 2016 December 23, 2016 January 06, 2017 Board member attendance 100% 100% 86% 86% 100% 88% 88% 75% 100% ESI GROUP • 2016 REGISTRATION DOCUMENT 35During FY2016, in addition to reviewing, monitoring and approving the budget for the fiscal year, drawing up the annual and interim financial statements, preparing for the General Meeting, examining agreements falling under Ar- ticle L.225-38 of the French Commercial Code and other ongoing management decisions, the Board of Directors fo- cused primarily on: • Establishing the terms of and implementing a share buyback program approved by the Combined Gen- eral Meeting of July 21, 2016; Attributing stock options and free share grants; Approving the procedure to determine Directors' fees; • • CORPORATE GOVERNANCE 2 The Company’s funding; External growth operations. • • Moreover, in accordance with Middlenext Code Recom- mendation R.14, the Board of Directors and the Compen- sation, Nomination and Governance Committee addressed the issue of executives becoming suddenly unavailable fol- lowing an accident or other eventuality, as well as the mat- ter of succession in their duties. A plan was drawn up fol- lowing these discussions. As part of this work, the Board of Directors relied on the work and recommendations of the Committees estab- lished within the Company. Communication of information to members of the Board In accordance with the rules of procedure, before each Board meeting Board members each receive a dossier containing the agenda for the meeting, the draft minutes from the previous meeting and any document pertaining to the different items on the agenda. The Chairman makes every effort to provide these items three to five days be- fore each meeting. The Chairman also follows up on mem- bers' requests for additional information. Board members consider that they receive sufficient information to carry out their duties. Furthermore, all topics addressed during the meeting are reviewed and discussed in depth among the members be- fore being put to a vote following the discussion. Finally, in accordance with Middlenext Code Recommendation R.4, Directors are regularly kept informed between meet- ings when required by events within the Company. Establishment of specialized committees The purpose of the committees is to optimize the discus- sions of the Board of Directors and to ensure that the Board is prepared to make its decisions. The Committees thus draw up proposals, recommendations and opinions relative to their respective areas at each of their meetings. In accordance with current legislation and Middlenext Code Recommendation R.6, the following Committees have been established within the Company: • The Strategic Committee; • • • The Audit Committee; The Compensation, Nomination and Governance Committee; The Technology and Marketing Committee. ESI GROUP • 2016 REGISTRATION DOCUMENT 362 CORPORATE GOVERNANCE The specialized committees are currently composed as follows: Specialized committees of the Board of Directors Last name, First name Independence Strategic Committee Audit Committee Compensation, Nomination and Governance Committee Technology and Marketing Committee Mr. de Rouvray, Alain Mr. Chaillou, Vincent Ms. de Rouvray, Cristel Mr. des Isnards, Charles-Helen Mr. d’Hotelans, Éric Ms. Jacq, Véronique Ms. Ramanathan, Rajani Mr. de Balmann, Yves No No No Yes Yes Yes Yes Yes Chair Member Member Member Chair Member Member Ms. Corinne Romefort-Régnier also attends all Board and Committee meetings as Secretary. Member Chair Member Member Member Member Member Member Chair r p ules of Strategic Committee As defined in the rocedures of the Board of Di- rectors, the Strategic Committee is in charge of preparing the deliberations of the Board of Directors on the major strategic challenges of the Group, especially development axes and financing as well as examining the evolution of the Group's business portfolio. The Strategic Committee met twice during the past year with an average attendance rate of 100%. Audit Committee In accordance with regulations in force, Board members in management roles within the Company are not allowed to serve as members of the Audit Committee, and all mem- bers are independent. In addition, the majority of its mem- bers have expertise in the area of finance or accounting. The Chairman and CEO of the Company is invited and at- tends the meetings of the Audit Committee. According to the regulation in force, the Audit Committee monitors issues relating to the preparation and control of accounting and financial information. Without prejudice to the powers of the bodies responsible for administration, management and supervision, this committee is responsible, in particular, for the following tasks: • Monitoring the process of drawing up financial doc- uments and, if necessary, making recommendations to ensure their integrity. Monitoring the effectiveness of internal control and risk management systems as well as internal audit systems, if necessary, in terms of the preparation and • • • • • processing of financial and accounting information, when such initiatives are compatible with the Com- mittee's independence. Issuing a recommendation regarding appointment of auditors by the General Meeting, as well as regarding the potential reappointment of auditors. Monitoring auditors as they fulfill their duties. Ensuring auditors’ independence. Regularly reporting to the Board of Directors regard- ing its activities. It also reports on the results of cer- tification of financial statements, how said certifica- tion has contributed to the integrity of financial in- formation, and the role that the committee played in the process. The committee immediately reports any problems that may arise. The Audit Committee met six times throughout FY2016 with an average attendance rate of 100%. In most cases, the statutory auditors are also invited to attend these meetings. Compensation, Nomination and Governance Committee As defined in the rules of procedures of the Board of Di- rectors, the Compensation, Nomination and Governance Committee, composed of five members of whom three are independent, is responsible for (i) preparing the decisions of the Board of Directors concerning compensation of ex- ecutive officers and the policy for granting stock options and/or purchase of shares, and (ii) preparing changes to the composition of the Company’s governing bodies. The Compensation, Nomination and Governance Commit- ESI GROUP • 2016 REGISTRATION DOCUMENT 37tee met four times throughout FY2016 with an average at- tendance rate of 100%. Technology and Marketing Committee The Technology and Marketing Committee is in charge of advising the Board on aspects of product strategy, organ- izing the publishing company (in particular, the method- ologies of product management and R&D), and evaluating Board assessment In accordance with Middlenext Code Recommendation R.11, in FY2016, the Board of Directors carried out a yearly internal self-assessment of its composition, organi- zation and mode of operation. This assessment was per- formed using a questionnaire addressed to each Director and including questions regarding diversification and CORPORATE GOVERNANCE 2 potential partnerships or acquisitions related to technol- ogy and marketing. The Committee also advises the Board of Directors on all aspects of commercializing solutions. The Technology and Marketing Committee met five times in FY2016 fiscal year with an average attendance rate of 95%. composition of the Board. The questionnaire was dis- cussed and summarized during the Board Retreat. Im- provements were proposed during the discussion, mainly intended to enhance debates regarding future changes to the Board and to share information regarding the market. Shareholder relations The Board of Directors ensures that dialogue with the Company's Shareholders can always take place under the best possible conditions. In particular, Directors are in- vited to attend the General Meeting and analyze the re- sults of the vote on each resolution. They pay special at- tention to negative votes so as to draw the appropriate conclusions before the following General Meeting. Moreo- ver, in addition to the General Meeting, the Chief Executive Officer, Chief Operating Officers and Chief Administrative and Financial Officer regularly meet with Shareholders and Investors at individual meetings and during road shows and conferences, provided that such events do not take place during blackout periods. 2.5. Principles and rules for determining compensation 2.5.1. Compensation paid to Directors In respect for fulfillment of their duties, Directors receive Directors' fees the overall amount of which is set by the General Meeting. These Directors' fees are distributed, upon the recommendation of the Compensation, Nomina- tion and Governance Committee, according to the fre- quency of meetings, members' attendance, participation and, where applicable, duties as Chairs of Specialized com- mittees. Special assignments entrusted to Directors are also taken into account to determine compensation. Some Directors receive specific amounts in respect of special as- signments entrusted to them by the Board of Directors over a fiscal year. Moreover, the Board may grant exceptional compensation for special assignments or mandates entrusted to Direc- tors and subject to the procedure for approving regulated agreements. In its eighth resolution, the Combined General Meeting of July 21, 2016 set the total compensation paid to members of the Board of Directors in the form of Directors' fees for FY2016 at €160,000, stipulating that the Board of Direc- tors would distribute this amount among its members. In accordance with the provisions of Article L. 225-102-1 of the French Commercial Code, please find below the to- tal compensation received by the Directors for FY2016. ESI GROUP • 2016 REGISTRATION DOCUMENT 382 CORPORATE GOVERNANCE Summary table of Directors' fees and other components of compensation paid to corporate officers (Table 3 of AMF recommendations) Directors' fees paid to executive and non-executive corporate officers FY2016 FY2015 FY2014 EXECUTIVE CORPORATE OFFICERS Mr. Alain de Rouvray Mr. Vincent Chaillou NON-EXECUTIVE CORPORATE OFFICERS Mr. Jacques Dubois Ms. Cristel de Rouvray – Directors' fees – Other compensation Mr. Charles-Helen des Isnards Mr. Éric d’Hotelans Ms. Véronique Jacq Ms. Rajani Ramanathan Mr. Yves de Balmann Mr. Michel Barbier de la Serre Mr. Francis Bernard TOTAL – Directors' fees – Other compensation 2.5.2. Compensation paid to Executive corporate officers 10,000 10,000 6,000 6,000 10,000 6,000 N/A 4,000 6,643 17,500 70,503 31,500 16,500 12,182 27,567 16,750 N/A N/A 47,042 54,270 31,033 16,500 14,078 18,033 N/A N/A N/A 45,036 0 31,500 16,500 7,363 8,893 N/A 8,393 12,902 137,999 146,686 153,230 70,503 54,270 0 Report on the principles and criteria for attributing and distributing compensation payable to executive corporate officers in respect of their term, as provided for in Article L. 225-37-2 of the French Commercial Code In accordance with Article L. 225-37-2 of the French Com- mercial Code, as introduced by the French “Sapin II” law on transparency, prevention of corruption and moderni- zation of the economy, the General Meeting of June 29, 2017 will be asked to approve the principles and criteria for attributing and distributing compensation payable to executive corporate officers in respect of their term. This proposal will be included in Resolution 7, which appears in section 6 of this Registration Document. In accordance with Article L. 225-37-2, it is noted that payment of variable and exceptional components for FY2017 will be subject to the approval of such amounts by the General Meeting convened to approve the financial statements for FY2017. To date, the executive corporate officers this report con- cerns are the following: Mr. Alain de Rouvray, Chief Exec- utive Officer, Mr. Vincent Chaillou, Chief Operating Officer in charge of , Mr. Christopher St. John, Chief Operating Officer in charge of Distribution and Support Edition Operations . Fundamental principles for setting the compensation of Operations executive corporate officers The Board of Directors refers to the recommendations contained in the Middlenext Code to determine the compensation and benefits granted to corporate officers. As such, the Company bases its compensation criteria on the following principles: comprehensiveness, balance between the different components of compensation, benchmarks, consistency, clear rules, measurability and transparency (R.13). The Compensation, Nomination and Governance Committee bases its work on discussion sessions held throughout the year, and interim preparatory work led by the Committee Chair. At the March 28, 2017 meeting, the Compensation, Nomination and Governance Committee examined the principles and criteria applied to determine, distribute and allocate components of the overall compensation and benefits of any kind to ESI ESI GROUP • 2016 REGISTRATION DOCUMENT 39Group executive corporate officers for FY2017. These principles and criteria will subse-quently be submitted to the General Meeting for approval. Compensation of executive corporate officers The Compensation, Nomination and Governance Commit- tee puts forth a proposal to the Board of Directors regard- ing compensation of executive corporate officers, taking care to ensure that the rules applied to determine said compensation are consistent with the annual assessment of the Company's performance. It also takes account of Shareholders' interests, changes to the Middlenext Code and the compatibility of objectives with the medium-term strategy. The Committee establishes the structure of this compensation based on general or specific studies regard- ing market practices for comparable companies. It en- sures that no item of compensation is disproportionate and analyzes compensation as a whole, taking account of all related components: fixed and variable compensation, long-term, share-based compensation plans and benefits of any kind. Fixed compensation Fixed compensation paid to executive corporate officers is determined based on the level and complexity of respon- sibilities, individuals' experience in the position and length of service in the Group, as well as practices ob- served in groups or companies of similar size. It is re- viewed regularly. Fixed compensation paid to executive corporate officers has remained unchanged since 2015 (2014 for the Chief Executive Officer) and was renewed in the same amount for FY2017. Variable compensation Executive corporate officers receive a variable component of annual compensation, calculated on the basis of de- manding, precise, 100% quantitative and pre-established criteria set out by the Board of Directors acting on the rec- ommendation of the Compensation, Nomination and Gov- ernance Committee. This variable compensation must be in line with the Company's medium-term strategy and Shareholders' interests. The maximum amount of com- pensation is reviewed on a regular basis. Variable compensation must not lead to excessive or priate risks. To this end, it remains fixed component. Variable compensation paid to executive cor-porate officers has remained unchanged since 2015 (2014 for the Chief Executive Officer) and was renewed in the same amount for FY2017. compared to the inappro- fair CORPORATE GOVERNANCE 2 and motivation among managers and employees, while taking account of market practices. Each long-term com- pensation plan is submitted to the Annual Ordinary Gen- eral Meeting of Shareholders for approval. The Group's long-term compensation policy is adjusted according to the population in question. The Chief Executive Officer is not eligible for long-term compensation due to his position as a founding Share- holder of the Company. Chief Operating Officers may par- ticipate in the stock option plans and free share plans of- fered as part of the employee loyalty and motivation pol- icy. The conditions governing acquisition and ownership of shares under these plans apply equally to all beneficiar- ies, regardless of status as corporate officers. Benefits in kind Benefits in kind include various components determined by the personal situation of corporate officers: Company car or equivalent allowance; • Housing allowance in the event of an assignment • away from home. Exceptional compensation When warranted by extremely special circumstances (e.g. significance for the Company, commitment required or challenges involved), executive corporate officers may be eligible for exceptional compensation. The decision to grant such compensation must be exceptional, justified and explained by the Board. Payment is subject to ap- proval by the Annual Ordinary General Meeting of Share- holders. Commitments in favor of executive corporate officers Severance pay No severance pay is provided for with regard to executive corporate officers. Non-competition benefit Executive corporate officers are not eligible for specific benefits other than those provided for in their corporate officer contract. Supplementary retirement plan No supplementary retirement plan is provided for with regard to executive corporate officers. and scheme healthcare Provident reimbursement plan Executive corporate officers are eligible for the provident scheme and healthcare expense reimbursement plan open to all employees. expense Long-term share-based compensation The Group's long-term compensation policy reflects an overarching competitive strategy of promoting loyalty ESI GROUP • 2016 REGISTRATION DOCUMENT 40 2 CORPORATE GOVERNANCE Prohibition on combining employment contract and corporate office Upon proposing a nomination for the position of Chief Ex- ecutive Officer or Chief Operating Officer, the Board of Di- rectors decides on the suspension of the nominee's em- ployment contract, unless otherwise stipulated by the General Meeting of Shareholders. Summary table of allowances and benefits for executive corporate officers (Table 11 of AMF recommendations) Executive corporate officers Employment contract Supplementary retirement plan Payments or benefits due as a result of termination or change in position Mr. Alain de Rouvray Chairman and Chief Executive Officer Mr. Vincent Chaillou Chief Operating Officer Mr. Christopher St. John Chief Operating Officer No X Yes Suspended Suspended Yes No Yes X X X No X X X Summary table of compensation and stock options granted to each executive corporate officer, in euros (Table 1 of AMF recommendations) ALAIN DE ROUVRAY Compensation owed for the year Value of multi-year variable compensation granted during the year Value of stock options granted during the year Value of free shares granted during the year Value of provisions for post-employment benefits VINCENT CHAILLOU Compensation owed for the year Value of multi-year variable compensation granted during the year Value of stock options granted during the year Value of free shares granted during the year Value of provisions for post-employment benefits CHRISTOPHER ST JOHN Compensation owed for the year Value of multi-year variable compensation granted during the year Value of stock options granted during the year Value of free shares granted during the year Value of provisions for post-employment benefits FY2016 FY2015 610,059 593,769 None None None None None None None None 265,235 251,837 None None 147,950 74,456 None None None 74,456 268,490 251,853 None None 147,950 22,206 None None None 22,206 Summary table of compensation due and paid to each executive corporate officer, in euros (Table 2 of AMF recommendations) Mr. de Rouvray Salary Bonuses Directors' fees 2016 2015 Amounts owed Amounts paid Amounts owed Amounts paid 362,136 80,394 10,000 362,136 63,430 10,000 362,554 63,503 10,000 362,554 60,261 10,000 ESI GROUP • 2016 REGISTRATION DOCUMENT 41Benefits in kind TOTAL Mr. Chaillou Salary Bonuses Directors' fees Benefits in kind TOTAL Mr. St. John Salary Bonuses Benefits in kind TOTAL CORPORATE GOVERNANCE 2 157,529 610,059 157,529 593,095 157,711 593,769 157,711 590,527 2016 2015 Amounts owed Amounts paid Amounts owed Amounts paid 198,550 53,280 6,000 7,405 198,550 52,842 6,000 7,405 198,550 39,827 6,000 7,459 198,550 20,194 6,000 4,681 265,235 264,797 251,837 229,425 2016 2015 Amounts owed Amounts paid Amounts owed Amounts paid 177,650 48,840 42,000 268,490 177,650 43,925 42,000 263,575 177,650 32,203 42,000 251,853 177,650 39,706 42,000 259,356 Share subscription and purchase options granted (Tables 4, 5 and 8 of AMF recommendations) A record of previous share subscription and purchase op- tions can be found in section 7 of this document. Share subscription or purchase options granted to executive corporate officers during FY2016 No share subscription or purchase options were granted to executive corporate officers during FY2016. Performance shares granted to corporate officers (list of names) during FY2016 No performance shares were granted to corporate officers during FY2016. STOCK OPTIONS EXERCISED BY EACH EXECUTIVE CORPORATE OFFICER DURING FY2016 No share subscription or purchase options were exercised by corporate officers during FY2016. Free shares granted to each corporate officer (Tables 6 and 7 of AMF recommendations) Name of corporate officer Number and date of plan Number of free shares granted Value of shares according to the method used for the consolidated financial statements Date of delivery Date of availability Christopher St. John No. 6 (July 21, 2016) Vincent Chaillou No. 6 (July 21, 2016) No. 14 (June 26, 2012) No. 14 (June 26, 2012) TOTAL 5,000 3,100 5,000 3,600 16,700 147,950 75,609 147,950 87,804 459,313 A record of previous free share grants can be found in section 7 of this document. 2018 2016 2018 2016 2020 2016 2020 2016 ESI GROUP • 2016 REGISTRATION DOCUMENT 422 CORPORATE GOVERNANCE 2.6. Internal control and risk management procedures 2.6.1. Control environment General organization ESI Group is a multinational corporation that includes 35 subsidiaries (the “subsidiaries”), 30 of which are based outside of France. To ensure that business operations and management ac- tivities run efficiently, that objectives are met and that the Group's control system is effective, executives are deter- mined to harmonize the operational rules of the subsidi- aries. This also applies to internal control activities and is reflected in the gradual standardization of information systems and processes throughout the organization. This is facilitated by the fact that the subsidiaries' business ac- tivities are similar to those of the parent company, ESI Group, as regards the distribution of products. Given current constraints, particularly regarding the size of the subsidiaries, available human resources and regula- tions that differ from country to country, the Group’s structure is based on the following key factors: • A matrix-based structure organized around business activities and markets that ensures Group-wide shar- ing of information; A centralized organization to manage the Group's business activities; Limited hierarchical levels to streamline decision- making processes; A relatively small size for efficient communication among the various departments. • • • The Company considers that internal control processes are intended to provide reasonable assurance that the fol- lowing objectives are met (the principles implemented cannot provide absolute control of risks): • Ensuring that management activities and operations, as well as employee conduct, are in keeping with the guidelines set out by the Company's management and the operational departments overseeing the var- ious business activities and countries, as well as any applicable laws and regulations and the Company's core values and internal rules; Anticipating and managing risks that stem from the Group's business activities and risks of error or fraud, especially in the areas of accounting and fi- nance; Verifying that the accounting, financial and manage- ment information reported to corporate bodies, Shareholders and third parties accurately reflects • • the Company's position and the business situation. Persons responsible for internal control Within the Company The Board of Directors The Board of Directors is responsible for the Company's risk assessment policies, implementation of an internal control system suitable for managing these risks and ini- tiatives to monitor the effectiveness of this system. This policy features a system of checks and procedures regard- ing financial management, as well as operational and com- pliance monitoring. Group Executive Committee The Group Executive Committee oversees the internal control policy. The Committee generally meets once a month. Board Retreat The Board Retreat takes place once per year to bring to- gether the members of the Board of Directors, the Group Executive Committee and employees of the Company or its subsidiaries, depending on the topics to be discussed. It serves to assess the activities of the Board of Directors and the Specialized Committees, review ongoing strategic matters and define specific objectives to be achieved dur- ing the following year, which are then submitted to the Board of Directors for approval. The Board Retreat also analyzes the results of the self-assessment carried out by the Board of Directors and the Specialized Committees, and reviews the issue of balance of powers within corpo- rate governance bodies. The 2016 Board Retreat took place in September, and the 2017 meeting is slated for August. Operational departments These departments primarily supervise business pro- cesses and manage projects. Their role is to oversee the implementation of procedures in order to guarantee: • Effective business processes: identification of busi- ness opportunities, distribution network, partner- ships, responsiveness, assessment of potential eco- nomic benefits, negotiation and signing of contracts, profitability monitoring; ESI GROUP • 2016 REGISTRATION DOCUMENT 43CORPORATE GOVERNANCE 2 • Effective project management: evaluation of tech- nical feasibility, team management and leadership, compliance with specifications, customer satisfac- tion tracking and customer service. Functional departments The functional departments are responsible for formaliz- ing internal control procedures in their respective areas and coordinating and applying these procedures. academic institutions to ensure that the Group's in- tellectual property rights are protected. Management of confirmed disputes is handled by third- party experts under the supervision of the Legal Affairs Department. The department plays an active role in mer- gers and acquisitions (e.g. corporate audits, intellectual property audits, participation in acquisition agreement negotiations). a) Administration and Finance Department The Administration and Finance Department handles im- plementation of the internal control policy on a financial level by: • Establishing the operating procedures for the inter- nal control system; Holding meetings between the managers of the ma- jor business units and the main entities of the Com- pany to review responsibilities and the structure of the internal control system across the various busi- nesses. • The Administration and Finance Department comprises the following units: • Accounting and Consolidation, in charge of: , – recording transactions – the financial statements at the end of on a daily basis each period, producing – drawing up the Group's consolidated financial statements, – ensuring compliance with legal, tax and labor obligations; Contro , in charge of: – preparing and monitoring the budget, lling – issuing periodic report , – internal control on both an operational and financial level; Cash management, in charge of: ing – managing cash flows, – project financing – hedging currency and interest rate risks; Information Systems Department (ISD). • • • b) Legal Affairs Department The Legal Affairs Department is divided into two branches: • The Corporate Legal Affairs branch which is respon- sible for monitoring and streamlining procedures, as well as corporate legal intelligence and coordinating the legal aspects of the operations of Group subsidi- aries; The Intellectual Property branch, which reviews, drafts and negotiates various contracts with clients and partners in the industry, government bodies and • c) Quality Control Department Under the supervision of Executive Management, the Quality Control Department is responsible for implement- ing the quality control policy and the corresponding sys- tem, in keeping with Group strategy and the following four pillars: • Organization and learning: Strengthening employ- ees' skills and motivation in line with the “One ESI” corporate culture; Internal processes: Overall management of quality to facilitate harmonization, development of a risk-man- agement culture, simplification of processes and per- formance enhancement; Clients: Identifying and meeting clients' needs, with a particular focus on sales and management of client accounts, especially in highly competitive sectors facing increasing regulations, with an eye to promot- ing the Virtual Prototyping approach in a spirit of co- creation ; Profitability: internal organization by business unit to optimize monitoring and continuous improve- ment of performance in terms of growth and profita- bility. • • • d) Human Resources Department Working closely with Senior Management, the ESI Group Human Resources Department assists the Company's strategy by factoring in employer-employee considera- tions. ESI Group's Human Resources policy has four main com- ponents: • • • • Personnel management includes the following activities and initiatives: • Personnel management; Performance management; Compensation management; An advisory function for operational staff. Ensure compliance with all legal and regulatory re- quirements; Administer payroll and personnel files; Oversee and manage labor relations; Ensure that employment reporting is carried out and produce performance indicators; • • • ESI GROUP • 2016 REGISTRATION DOCUMENT 442 CORPORATE GOVERNANCE • • Ensure that employees are kept properly informed; Ensure that information is relayed to senior manage- ment; Develop Group HR procedures. • Performance management entails attracting, integrating, retaining and developing the highest level of performance for each employee and ensuring adherence to the Compa- ny's strategy. • Recruitment: employment management, anticipat- ing skill needs both qualitatively and quantitatively; Training: identifying needs, preparing a training plan and implementing in-house and external training courses; Performance evaluation: employee reviews, per- sonal development plans, identifying potential, ca- reer planning and promotions. • • Compensation management entails coordinating and overseeing the Group's compensation policy and: • Ensuring the wage revision process in accordance with time frames, budgets and reporting; Leading the annual process of setting and paying var- iable compensation; Overseeing stock option, free share awards and com- pany savings programs in the Group; Preparing all the items needed by the Company's governance bodies (Compensation Committee); Ensuring that employee and employment data are • • • • by using reported fostering subsidiaries HR-IS. independence Advising operational staff: among Managers on employment issues by offering them assistance in the field on a day-to-day basis, and by providing them with services tailored to their specific needs. The Group Human Resources Department sets the guidelines for the Group's human resources policy, broken down into operational objectives for regional Directors of Human Resources. Regional HR Directors coordinate in collaboration with a team of HR operating managers located in each country, and with support from the central HR department. implementation of these objectives the Company Statutory auditors Third-parties of The statutory auditors, who certify the regularity, truthfulness and the fair presentation of the financial statements provided to the Shareholders at the balance sheet date, may in their audit opinions recommendations regarding the internal control system , used to prepare financial information. include Legal counsel The Company calls on renowned law firm for dispute management, as well as a tax advisory firm. The Company also calls on specialists from time to time to review complex mergers and acquisitions. legal aspects of the s 2.6.2. Organization of internal control The increasingly international nature of our business and the cross-organizational character of projects involving international interactions of ever-greater complexity and speed have highlighted the need for more rapid and effi- cient methods and operational management tools, both centrally and in the subsidiaries. The Administration and Finance Department is organized so as to ensure internal control in the following three ar- eas: • An organization and network of local financial con- trollers located in most of the Group's subsidiaries; Centralized tools and databases; Processes to organize reporting and control of finan- cial information. • • A network of financial controllers This network makes it possible to cover all aspects of fi- nance at the local level and to pass the statutory financial information and reporting data up to central staff. The financial control system for the Group's subsidiaries the across spread attached controllers an organizational and functionally is implemented by a network of some fifteen local financial three regions: EMEA, Asia and the Americas, each region overseen by a regional financial controller. Each local and regional financial controller, while reporting to local his or her local manager (the head of standpoint, is from entity) the to hierarchically and, Administration and Finance Department and ultimately, to the Group Chief Administrative Financial Officer. These local controllers head up a local team of financial, accounting or administrative staff (from one to three depending on the size of the local financial entity) control tasks. In the case of smaller entities, local financial controls under the outside . management of In addition to this network, a central team of six controller financial controllers is distributed among the three the Group, namely lines of principal business to carry out all firms handle the regional in order financial , Distribution and Support. Edition Operations ESI GROUP • 2016 REGISTRATION DOCUMENT 45The management information system Financial control is based on a management IT system consisting of the following centralized tools and data- bases: • A single sales database (SalesForce) serves as the backbone of the organization and internal control system for sales. This data flows into a single finan- cial database (NCA) to determine monthly revenues and the order book; A financial consolidation tool, Talentia CPM, which enables the Company to centralize financial data from the various accounting departments of subsidi- aries. It should be noted that subsidiaries account for their operations using their own accounting systems and ensure proper reporting of data to the parent company using consolidation packages which are all centralized and processed using Talentia; An HR data management tool called HR-Information System (HR-IS base) allows for Group-level consoli- dation of data relating to salaries and headcount. In particular, this tool makes it possible to monitor the different of steps in the hiring process and provide managers with any information necessary to opti- mize management of their teams. HR-IS data is in- cluded in the source information used for financial reporting regarding employees. • • information Main accounting and financial monitoring processes he Group prepares consolidated financial statements on a quarterly basis. Its revenue is also published on a T quarterly basis, with statements published twice a year. A Group-wide budget is established at the financial beginning of each fiscal year and monitored monthly. Consolidation process The process of preparing the consolidated financial the state-ments accounting and financial data provided by each entity with the Group. These procedures include: • follows procedures to centralize A reporting schedule and calendar of tasks to be car- ried out by the persons involved; Use of a specialized consolidation software package; A distinction between preparation of consolidated fi- nancial information, performed by the consolidation manager, and control activities performed by the central financial controllers and the Chief Adminis- trative and Financial Officer; Assistance from accounting experts for certain sensi- tive and technical issues, especially outside of France; • • • for subsidiaries CORPORATE GOVERNANCE 2 • A review of the interim and yearly financial state- ments by statutory auditors, the Audit Committee and the Board of Directors. Budget monitoring and reporting process The yearly budgets are prepared at the start of the fiscal year in accordance with the assumptions laid out the pre- ceding year for the three-year business plan, and the five- year strategic objectives reviewed annually by senior management. Throughout the year, a monthly reporting system serves to: • Monitor the budget so as to track the amount, nature and allocation of expenses compared to the current year's budget; Set out monthly forecasts used to predict earnings, initially for the first half year, and subsequently for the second half. • ling Control thus provides key management indicators used to monitor the Company's performance. These indicators, reported to executives, provide the in- formation necessary for management of the Company. They include, among other indicators: Orders in the Licensing and Service Divisions; • Output and backlog of the Service Division; • Change in headcount and in average personnel costs; • The cash position and three-month projections. • In conjunction with the budgeting and reporting process, the Company has implemented a structure based on Per- formance Units, each with a manager in charge of oversee- ing the unit based on key performance indicators (KPI) in a balanced scorecard format. These indicators cover four areas: financial, sales, internal processes and organization and learning. Revenue recognition process The Finance Department revenue is responsible and ensuring: for • • • • accuracy of the Consistency between actual revenues and contrac- recognition tual data as regards the Licensing Division; The accuracy of billing information; The primarily for the Service Division. of the services invoiced, exhaustiveness Client risk management process Client risk is managed at two different levels: • Upstream, by assessing client risk before processing orders; Downstream, through a periodic follow-up proce- dure suited to each client in order to reduce out- standing debt. Regular monitoring of average payment times makes it possible to assess how effectively accounts receivable are ESI GROUP • 2016 REGISTRATION DOCUMENT 46 2 CORPORATE GOVERNANCE managed across the various subsidiaries. Cash management process The Chief Administrative and Financial Officer, with the support of cash management teams, is responsible for managing cash flows and monitoring: • Cash levels necessary to cover the Company's ongo- ing business needs while tracking inflows and out- flows; Profitability and the risk level of various cash surplus investments; Foreign exchange risks, in order to take any neces- sary corrective action; Implementation of loans necessary for growth of the Company. • • • The cash position of each entity is centralized and a con- solidated quarterly forecast is drawn up each month. Payroll management process The payroll process falls under the responsibility of the Director of Human Resources and involves: • Processing the various items involved in calculating salaries; Entering payroll information in the accounting sys- tem; Provisioning for paid vacation in order to distribute the expense over the full year; Ensuring compliance with labor-related reporting obligations. • • • ISO 9001:2008 2.6.3. Risk management Process management and certification The Company, which has been granted ISO 9001:2008 cer- tification, has oriented its quality control procedures to- ward developing a worldwide certification for the entire Group, aiming to include all its subsidiaries whether or not they are already certified. This process, combined with the new requirements of the ISO 9001:2015 stand- ard, is an additional asset to strengthen process-based management and facilitate implementation of risk man- agement, ensuring long-term and effective prevention. risk coverage – general Insurance and information The Company has taken out an insurance policy that co- recovery, additional operat-ing vers the cost of costs and operating losses (loss of profit resulting from data the decrease in revenues caused by the interruption or de- cline in the Company's business activities) in the event of direct damage to its equipment. For its foreign subsidiaries, damages that would fall under operational civil liability coverage, including “employer li- ability” and/or “workers’ compensation” policies and au- tomobile-related risks, are excluded from this policy. The French policy (head office and subsidiaries) is not a replacement for those taken out outside of France in ac- cordance with local laws from local insurance companies licensed to operate in the country in question. ESI Group has also taken out an insurance policy covering civil liability of the managers and corporate officers of the Company and its subsidiaries (D&O), as well as insurance policies covering the Company's key protagonists. ESI Group has also taken out a Group-wide international insurance policy to cover all employees who travel outside of France. ESI GROUP • 2016 REGISTRATION DOCUMENT 47CORPORATE GOVERNANCE 2 2.7. Statutory Auditors’ report, prepared in accordance with article L.225-235 of the French Commercial Code on the report of the Chair- man of the Board of Directors of ESI Group This is a free translation into English of the Statutory Auditors’ report on the report of the Chairman of the Board of Directors of ESI Group issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunc tion with, and construed in accordance with, French law and professional auditing standards applicable in France. Year ended January 31, 2017 To the Shareholders, In our capacity as Statutory Auditors of the Company, and in accordance with Article L.225-235 of the French Commercial Code, we hereby report to you on the report prepared by the Chairman of your company in accordance with Article L.225- 37 of the French Commercial Code for the year ended January 31, 2017. It is the Chairman's responsibility to prepare, and submit to the Board of Directors for approval, a report describing the internal control and risk management procedures implemented by the Company and providing the additional infor- mation required under Article L.225-37 of the French Commercial Code relating in particular to corporate governance. It is our responsibility to: • Report to you on the information contained in the Chairman’s report on internal control and risk management pro- cedures relating to the preparation and processing of financial and accounting information, and Attest that the report contains the other information required under Article L.225-37 of the French Commercial Code, it being specified that we are not responsible for assessing the fairness of this information. • We conducted our work in accordance with professional standards applicable in France. Information concerning the internal control and risk management procedures relating to the preparation and processing of financial and accounting information Professional standards require that we perform procedures to assess the fairness of the information on internal control and risk management procedures relating to the preparation and processing of financial and accounting information set out in the Chairman’s report. These procedures mainly entailed: • Obtaining an understanding of the internal control and risk management procedures relating to the preparation and processing of financial and accounting information on which the information presented in the Chairman's report is based, and of the existing documentation; Obtaining an understanding of the work performed to support the information provided in the report and of the existing documentation; Determining whether any material weaknesses in the internal control procedures relating to the preparation and processing of financial and accounting information that we may have identified in the course of our work are properly described in the Chairman's report. • • On the basis of our work, we have no comments or reservations regarding the information provided on internal control and risk management procedures relating to the preparation and processing of financial and accounting information, set out in the Chairman of the Board’s report, prepared in accordance with Article L.225-37 of the French Commercial Code. ESI GROUP • 2016 REGISTRATION DOCUMENT 48 2 CORPORATE GOVERNANCE Other information We attest that the Chairman’s report contains the other information required by article L.225-37 of the French Commer- cial Code. Neuilly-sur-Seine and Paris-La Défense, May 18, 2017 The statutory auditors PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau ESI GROUP • 2016 REGISTRATION DOCUMENT 49 3 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY ESI Group joins the Gaia Index ESI Group tied for first place in the 2016 Gaia ranking, in the category of companies with revenue of less than €150 million (up from third place in 2015), and for the first time was included in the Gaia Index, made up of the top 70 out of 230 com- panies. The Gaia Index (www.gaia-index.com) was created in 2009 and is now the benchmark sustainability index for medium- sized listed French companies. Developed by EthiFinance, (www.ethifinance.com) the Gaia Index selects small and me- dium-sized companies based on their non-financial performance. 3.1. ESI Group policy in terms of social and environmental responsibil- efficient. Within the Group, the CSR policy is seen as a genuine cor- porate commitment and one that will create value. ESI Group has made a list of the stakeholders inside and out- side the Group on whom it has the greatest influence: em- ployees, customers, the environment and civil society, to- wards all of whom serious commitments have been made. This fourth CSR report outlines a wider scope as described in section 3.1.3. ity Aware of its responsibility in each of the three pillars of sustainable development, ESI Group has gradually de- vised a CSR policy that contributes to shared economic and social development and the preservation of human equilibrium. ESI Group's ambition is to become the leader in Virtual Prototyping through responsible innovation. The Group therefore plans to be the favored development partner for its customers, able to understand and assist them in their approach in bringing to market innovative, quality prod- ucts that are also sustainable, ethical and highly resource- 3.1.1. Our CSR approach In 2013, the Group carried out diagnostics that enabled it to draw up an inventory of the existing process, assess the measures and initiatives taken in support of sustainable development, and identify the relevant indicators, all of which were real issues for the Group. Starting in 2014, the Group's CSR has been guided by a pragmatic goal of continuous improvement, as ESI seeks to advance the implementation of best practices in the ar- eas where it has the greatest responsibilities and the greatest impact. Since then, ESI Group has been dedicated to developing actions that uphold these beliefs in terms of social and en- vironmental responsibility. ESI GROUP • 2016 REGISTRATION DOCUMENT 50 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 3.1.2. Commitments Divided into four axes and expressed as eight commitments, the CSR strategy aims at ensuring harmonious work condi- tions for its employees, providing its customers with innovative solutions that allow them to become long-term partners, and limiting the Group’s and its customers’ environmental footprint while acting ethically and responsibly within civil society. 3.1.3. Methodology Data collection and consolidation Qualitative and quantitative information is collected and consolidated at the Group’s head office. Social reporting is covered by an HR officer who works with local HR representatives. The corporate communica- tion team is responsible for environmental and societal reporting through local professional representatives. The Group plans to gradually broaden the scope until it covers every subsidiary in a reliable manner. The data available are sorted into three geographic areas corresponding to the Company's business divisions: Americas = the United States and Brazil; • Asia-Pacific = China, India, Japan, Malaysia, South Ko- • rea and Vietnam; Europe, Middle East and Africa = Czech Republic, France, Germany, Italy, Netherlands, Russia, Spain, Sweden, Switzerland, Tunisia and the United King- dom. • Scope In keeping with its commitments, in 2016 ESI Group con- tinued its actions to expand the collection and analysis of indicators internationally. • Scope of social reporting: Since 2012, most indicators analyzed for the entire workforce have been managed on a single source using the employment data management software (called HR- IS, or Human Resources Information System). Along with this analysis is the annual worldwide survey initi- ated in 2014 on the operations, legislation, practices and norms of the different subsidiaries. This gives the Group a reliable, international picture of all employment indi- cators. One exception remains, however, concerning the absenteeism rate, which not all subsidiaries are able to report in a sufficiently reliable way, due partly to termi- nology and partly to local practices. To remedy this sit- uation, these indicators previously provided only for France, Germany, the Czech Republic and Japan for the year 2015 are being reviewed for a total of 13 countries for 2016. ESI GROUP • 2016 REGISTRATION DOCUMENT 51CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 • Scope of environmental reporting: In 2016, the Company included Tunisia and India to ex- pand the scope of reporting for environmental data. As a result, environmental data are now provided for France, Germany, the Czech Republic, Japan, the United States, Tunisia and India, representing 85% of the total workforce. • Scope of societal reporting: Societal information is provided at a global level, with the reporting scope covering 100% of our headcount. 3.1.4. ESI Group values infuse The values of ESI Group recognized organization with a culture and an ambition that have produced innovation for the benefit of the Group’s customers and employees for more than 40 years. These values—Passion, Global, Change, Trust, Social Re-sponsibility and Energy—anchor the Group’s identity and fit logically together, as can be seen in the corporate social responsibility actions defined below. our 3.2. Being a committed employer ESI Group aims to be a leading employer among all soft- ware and service providers on the market and plans to stay that way. This strategy is based on the following principles: • Develop talents and encourage leadership and col- laborative management; Promote diversity and multicultural exchanges. • This strategy draws on various tools, including the Human Resources Information System (HR-IS) to consolidate the HR reporting process worldwide, and lends greater flexi- bility to the organization. It also promotes better use of re- sources by focusing on skills, to encourage a more in- volved, multi-disciplinary managerial culture. The plat- form provides an ongoing view of changes in employment indicators and makes it possible to drive our resource needs more easily. A selection of employment indicators is provided monthly to the Group Executive Committee in order to measure the effectiveness of HR policies. The data from HR-IS are provided on a worldwide scope. 3.2.1. Employee headcount ESI Group’s employees consist primarily of highly-trained engineers and Ph.D.s from prestigious universities and in- close stitutes worldwide. relationship addition the In to that the Group has always had with these employees’ schools, there are a number of other factors that experience and foster highly qualified recruitment and exemplify ESI’s commitment internal development. These include ESI’s positioning in the field of virtual simulation that takes into account the physics of materials, to value factors grams, and its focus on internal promotion within prominence as a publicly listed company on the Paris stock exchange, the Group’s continuing education its international network. pro Data related to headcount is calculated on the number of employees as of January 31, 2017. the Group's ESI GROUP • 2016 REGISTRATION DOCUMENT 52CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 CHANGE IN HEADCOUNT OVER THREE YEARS The Group's total headcount includes permanent and fixed-term employees as well as those on student con- tracts such as work/study programs and internships. It does not include temporary workers, consultants and ex- ternal distribution networks. January 31, 2017, the ESI Group workforce consisted of 1,190 employees, compared to 1,144 for FY2016, and On in-cluded 11 employees from companies acquired over the period. The average headcount in 2016 was 1,153 em-ployees, compared 1,054 in 2015. The percentage of the Group’s workforce on permanent contracts was 94.8%. Limited employment contracts such as internships and apprenticeships account for 2% of the total workforce. In 2016, ESI pursued its ambition to manage its staff in connection with business growth. These figures should be analyzed in light of the mergers and acquisitions carried out over the period. 3.2.2. Develop talents and encourage leadership and collaborative management innovation, Human resources are ESI’s greatest source of value. Developing talent is key to ensuring the Group’s long- term viability. To meet the ever more complex issues manufacturers face, and to remain on the cutting edge of technological the Group must build employee loyalty and continuously enhance employees’ expertise. Furthermore, the Group’s sheer size and its distribution in numerous countries mean that many projects involving various entities and cultures must be managed on a Group-wide scale. Leadership, expertise and collaborative management are essential qualities that will make ESI Group successful at what it does. Recruiting and retaining talent The Group pays special attention to the entry of new hires through an induction program managed locally by each subsidiary. In order to standardize and globalize the induction process for new employees, a welcome portal was designed on the internal website to guide new hires through the steps of onboarding and guarantee level of individual access to a unique information to support them in their first days, weeks and months at ESI Group. The Group has defined an internal mobility program enabling each employee to express their motivations and thereby highlight their skills and expertise by applying for positions available within the Group. Professional development and career management The Group has an individual performance and develop- ment review process that calls for at least one meeting per year between an employee and his or her supervisor in order to evaluate the employee's performance during to the past year in relation to predetermined objectives, year. and the for d a perfor- In 2016, 96% of all Group employees mance evaluation interview. coming goals set receive It also provides better access Building on this continuous progress since 2013, in Feb- ruary 2017 the Group computerized the management of these annual interviews. The initial phase of integrating annual interviews into the computer system is underway in the Americas, Europe and India, and will be extended with the integration of Asia to cover the entire scope by 2018. This new phase in the performance evaluation process aims to enhance annual interviews by promoting data exchange, monitoring and archiving, especially for and employee remote teams. to professional and training objectives to help foster more performance proactive and advanced management of development. These assessment interviews are the means for collecting information as to training needs and staff development, it easier to construct appropriate and they make local training plans the needs of a that meet changing business. These evaluation interviews also identify the company's present the opportunity to and put professional talents greatest potential in place development employees grow within the company. Additionally, this system particularly provides support for certain employees via an individualized plan for improving performance. satisfaction, to help those data, ESI GROUP • 2016 REGISTRATION DOCUMENT 53 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 Professional training Training programs have also been implemented within the Group's various subsidiaries. Training plans are in line with ESI Group's strategy and market trends. They allow employees to learn more about the portfolio of solutions available and to boost their managerial and professional skills (techniques, sales, etc.). In 2016, 583 employees, or 49% of the workforce, received training, at a cost to the Company of €361,000. In total for 2016, 9,033 training hours were provided, or an average of 15.4 hours of training per employee trained. Actions supporting apprenticeship Numerous partnership agreements have been signed with universities and engineering schools that allow ESI Group to play an active role in the training of young people. In Europe , one can point to the École Centrale Paris, the Technical University of Dresden (Germany), the University of West Bohemia (Czech Republic), ENIT of Tunisia, etc., with which ESI Group has special arrangements. The universities of Alabama, Shanghai and Beijing, along with the Indian Institute of Sciences among others, work and North Africa closely with ESI in the Americas and in Asia-Pacific. Additionally, the Group is very involved in working with young people and integrated 57 students in 2016 (48 interns, five apprentices and four doctoral students). the Company's Well-being at work The Group is aware that improving conditions at work has a direct impact on the well-being, effectiveness and motivation of employees and that it significantly performance. overall improves Various initiatives have been launched in different countries in recent years to enhance employee well- the responsibility of the being local Human Resources Departments with . These actions are under employee representative bodies such as the France’s Health, Safety, and Working Conditions Committee (CHSCT). Moreover, the majority of projects carried out for our customers are completed that engineers do not necessarily need to be at the customer's site to develop or apply the software. This limits lengthy travel for employees and so improves their work-life balance. in-house, meaning , who wor k 3.2.3. Promote diversity and multicultural exchanges Diversity is one of the values emphasized by the Group because it enriches society. The power of ESI Group’s highly innovative solutions has made it possible to develop successfully worldwide. As an international company, ESI Group is proud to have a diverse, multicultural workforce. The Group has always valued difference and encouraged its employees to share their ideas beyond borders to cre- ate a modern and efficient work environment to better boost its expertise all the time by bringing in top serve its international customers. ESI Group endeavors talent from around the world. to The charts below present a breakdown of employees by region and by country. EMPLOYEE DISTRIBUTION BY REGION Americas Europe, Middle East and Africa Asia-Pacific Note: Among the 56.4% of employees located in the Europe, Middle East and Africa region, 54.4% are located in Europe. EMPLOYEE DISTRIBUTION BY COUNTRY Brazil China Czech Republic France Germany India Italy 2016 11.1% 56.4% 32.5% 2016 0.8% 2.9% 6.1% 24.9% 16.6% 19.0% 1.3% 2015 10.8% 55.7% 33.6% 2015 0.9% 3.2% 5.9% 24.5% 15.9% 19.7% 1.2% ESI GROUP • 2016 REGISTRATION DOCUMENT 54CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 Japan Malaysia Netherlands Russia South Korea Spain Sweden Switzerland Thailand Tunisia United Kingdom United States Vietnam GENDER BREAKDOWN AND EQUALITY 6.2% 0.3% 0.2% 0.5% 3.0% 1.4% 0.8% 1.3% 0.2% 2.0% 1.4% 10.3% 0.9% 6.2% 0.3% 0.2% 0.4% 3.3% 1.4% 0.7% 1.5% 0.1% 2.4% 1.6% 9.9% 0.7% among permanent The percentage of women , which is relatively low employees was 19.7% and unchanged low representation is primarily due to the small number of women in engineering schools, which are our main source for recruiting. The proportion of women from previous years. This in 2016 has begun to rise in recent years but remains in such very low in post-secondary engineering courses (19.8% institutes in 2014). Female students are much better represented in biology, social sciences and psychology (51%, 58% and 70% respectively in 2014). These figures show that women are more highly represented in sectors dealing with psychology or healthcare (72.8% and 69.9% respectively) and much less so in engineering (14.5%) (source: NSF report – Women, Minorities, and Persons with Disabilities in Science and Engineering – January 2017). Nevertheless, our HR professionals are aware of the need to add women to local teams and carefully consider female candidates whenever the Group is hiring. In 2016, 50 women joined the Group, which represents 25% of total new recruits. The Group strives to ensure that all its subsidiaries com- ply with the applicable regulations regarding gender equality in the workplace and non-discrimination. Job postings are written in a unisex manner. Principles of non-discrimination The Group complies with laws and regulations banning any form of discrimination based on age, race, gender, eth- nicity, nationality, religion, health, disability, marital sta- tus, sexual orientation, political or philosophical opinions, trade union affiliation or any other aspect protected by lo- cal legislation. Furthermore, the Company does not toler- ate any form of sexual, physical or moral harassment, co- ercion or bullying. To provide more detailed information, particularly with respect to gender equality and non-discrimination, the Group completed its social HR database by introducing the status of manager for individuals who supervise one or more employees, and 13.9% of these managers are ESI GROUP • 2016 REGISTRATION DOCUMENT 553 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY women. Inclusion of employees with a disability to ensure taken steps The Company has that employees with a disability have access to all advertised positions. Since the beginning of 2017 at its Rungis site in France, the Group has been working with Cèdre, which is within a special category of company that aims to create permanent jobs for people with disabilities. Employer-employee dialogue The quality of the employer-employee relationship is a key factor in determining the quality of life in the work- to place and company productivity. complying with regulatory requirements, healthy employer-employee dialogue improves the company’s performance in both of these areas. A strong relationship the Group's is guaranteed between employer and employees their plus and management through representatives. employees the frequent exchanges between In addition The employee representative bodies are appointed in accordance with the applicable laws in their respective countries. We had 14 employee representative bodies at in Europe and Asia-Pacific. our various These bodies, based in the United Kingdom, France, Ger- many, China, Japan and India, involved a total of 42 em- 3.2.4. Other indicators sites ESI Group reports on other employment indicators re- quired by Articles L. 225-102-1 and R. 225-104 to R. 225-105-2 of the French Commercial Code. Work schedules In 2016, 4.2% of the total workforce was part-time; ad- ditionally, most part-time jobs are created to meet the needs of employees who request them to plan around their parental leave or retirement, or to go back to school. The length of the work week is set in compliance with local legislation. The global average working week is 39.8 hours. In the great majority of its subsidiaries, ESI Group offers its employees flexible work schedules. In some coun- tries, particularly Japan, schedules are set to meet the requirements of the job but are limited to eight hours per day. ployees who actively participated in a total of 60 meetings during 2016. • Summary of agreements Summary of collective agreements: the French sub- sidiary signed a variety of agreements with its em- ployee representatives, such as the reduced work- load agreement, the profit-sharing agreement and the company savings plan agreement; Summary of agreements relating to health and safety: no company signed an agreement in this re- gard. • Internal communication ESI Group has introduced several communication tools so that its employees stay well-informed while working across over 20 countries. A welcome portal was integrated into the Group’s internal website to teach new employees about the Group and its structure and values, and also to provide access to the in- formation they need to help their integration go smoothly. Chatter, an enterprise social network, allows all employ- ees to share ideas and inform each other about a wide range of topics. Multiple communication initiatives are available to strengthen information sharing and cohesion within the Group, such as global presentations, monthly newsletters, Flash Corporate News bulletins, corporate and products webinars, and Virtual Coffee Breaks. In France, work hours are organized based on days worked or according to a fixed schedule. An employee who works on a days-worked basis works a certain number of days during the year, while an employee who works on a schedule basis works the number of hours stipulated under the employment agreements: • Managers who work on a full-time, days-worked basis work 217 days per year, plus one extra day for France's “national solidarity day”; Non-managers work an average 35-hour work week following France's "RTT" (days off) law to re- duce work hours. • Employee distribution by activity 2016 2015 Cost of sales Licensing Cost of sales Consulting and Support Research and Development Sales and Marketing General and Administrative 9.3% 21.3% 34.4% 23.0% 11.9% 9.2% 23.0% 33.1% 22.7% 12.0% ESI GROUP • 2016 REGISTRATION DOCUMENT 56 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 Licensing These teams are made up of engineers in charge of provid- ing customers with technical support, distributing soft- ware and handling royalties on third-party products. Research and Development These teams are made up primarily of highly-educated en- gineers; their expertise and experience are key to the Group’s added value. R&D teams are primarily located in India, France, Ger- many and the United States. Sales and Marketing These teams include, at the central level: • • Marketing and Communication; Product Marketing; Business development for the sale of products • and related services in the deployment phase. At the distribution level: Pre-sale support; • Direct sales; • Customer support. • Consulting and Support These teams are made up of engineers in charge of project production and those responsible for providing technical support (including via a hotline) either directly to custom- ers or via our subsidiaries. General and Administrative This category consists of employees from the Finance, IT, Human Resources, Quality and Legal departments, along with a portion of our management teams. Workforce breakdown by age The average age of employees is 38.5 (male employees 38.8, female employees 36.8). ESI Group is compliant with laws promoting hiring and re-taining people regardless of age. As such, 15.6% of em-ployees are aged 50 or more, i.e. 185 people worldwide (157 men and 28 women). Of those aged 50 and older, 67.8% are located in Europe, compared to 20% in the Americas and 10.3% in Asia. In addition, 41.5% of Group employees are under 35, which contributes to youth employment overall. In 2016, 73.6% of employees hired were under 35. Workforce breakdown by seniority seniority in the Group is seven years. This The average relatively low level is due on the one hand to the high proportion of employees under 35 (41.5%), who are currently in a strong position on the labor market and therefore more mobile early in their careers, and on the other hand to the fast growth of the software publishing industry. The average however, is 10.5 years. seniority for employees over the age of 35, ESI GROUP • 2016 REGISTRATION DOCUMENT 57 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 Employee turnover Recruitments EUROPE, MIDDLE EAST AND AFRICA Apprenticeship/internship Temporary contracts Permanent contracts AMERICAS Apprenticeship/internship Temporary contracts Permanent contracts ASIA-PACIFIC Apprenticeship/internship Temporary contracts Permanent contracts GRAND TOTAL Departures EUROPE, MIDDLE EAST AND AFRICA Apprenticeship/internship Temporary contracts Permanent contracts AMERICAS Apprenticeship/internship Temporary contracts Permanent contracts ASIA-PACIFIC Apprenticeship/internship Temporary contracts Permanent contracts GRAND TOTAL 2014 2015 2016 97 35 4 58 25 11 14 57 1 12 44 179 93 39 6 48 31 5 26 58 8 8 42 182 120 29 25 66 21 9 1 11 45 5 10 30 186 2014 2015 2016 90 34 7 49 27 7 1 19 39 7 32 156 84 37 4 43 34 6 28 40 1 14 25 158 82 29 9 44 24 8 16 37 7 30 143 In 2016, ESI Group hired 107 employees on permanent contracts. In addition to these hirings, 11 employees were incorporated over the course of the year due to mergers. The departure rate of permanent employees in 2016 was 7.8% [(departures/average headcount) x 100] compared to 10.2% in 2015. The 2016 turnover rate excluding temporary employees was 10.1% [((departures in year N + new hires in year N)/2)/average headcount in year N-1] x 100] compared to 11.9% in 2015. Absenteeism Absenteeism is monitored locally in accordance with the regulations in force in the various countries where ESI Employee turnover is declining, with a total improvement of 2.1 points over the past three years. ESI’s turnover rate is below the high rate typical of the ser- vice sector, at 16% according to the BenchmarkPro study conducted with 30,000 companies in 2016 by ComptData Surveys. The change in this indicator has encouraged the Group to continue its efforts in boosting employee loyalty, particu- larly by developing internal mobility. Group is present. The Group does not have a standardized ESI GROUP • 2016 REGISTRATION DOCUMENT 58 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 system in place to manage absences across all of its sub- sidiaries. However, while taking into account the variety of laws and the numerous particular factors considered by countries in terms of absenteeism as well as local management of this information, ESI Group has chosen to extend the defi- nition of absenteeism to the following circumstances: • Absence of an employee due to illness for any length of time; Long-term absence (more than 20 business days) due to illness; Leave granted to parents following the birth or adop- tion of a child in their household (maternity and pa- ternity leave); Parental leave granted to parents so that they can raise their young children (the legal duration of this • • • • • leave varies according to local laws); An accident that befalls an employee while perform- ing his or her job or during job-related travel (work- place and travel accidents); An illness that befalls an employee solely due to his or her work in the Company (occupational illness). Information on absenteeism was gathered for a scope cov- ering 66.8% of the Group in 2016. France, Germany, the Czech Republic, Spain, Russia, the United Kingdom, Brazil, China, South Korea, Vietnam and Japan all reported their absenteeism data. The Group's intention is to be able to measure the impact of these days of absence on the em- ployment of staff so as to make the necessary corrections to our procedures, working conditions and, if necessary, internal safety procedures. BREAKDOWN OF ABSENTEEISM (IN % OF TOTAL DAYS WORKED) Illness Long-term illness Maternity leave Paternity leave Parental leave Leave for personal reasons 35% 13% 12% 10% 25% 5% In 2016, absences related to birth, adoption, or raising of one or more children represented almost 50% of absences within the selected parameters. This can be partly ex- plained by the high proportion of employees under the age of 40 years old within the Company. The Group’s business is such that the risk of workplace ac- cidents is limited. Any day of absence for workplace acci- dent, job-related travel or occupational illness has been noted on the total of subsidiaries. Health and safety ESI Group has set an objective to provide high-quality wel- fare coverage for all its employees throughout the world with regard to healthcare, aging, disability and death. This coverage takes the form of policies that are best tailored to the needs of employees and in compliance with local regulations and cultures. The subsidiaries already offer all their employees supple- mentary health insurance, except for Tunisia, which is cur- rently looking into offers with a local healthcare provider. In addition, eight subsidiaries in Europe and two in Asia- Pacific have a provider whose mission is to monitor and advise the Company and its employees about risks related to workplace health and safety. In all, 30 employees are involved in these local organizations. Compensation policy To attract and retain the best talent on the market, ESI Group offers an attractive compensation and benefits package. This policy aims to recognize employee talent by rewarding both individual and collective performance. The compensation of employees comprises both direct and indirect elements. The latter includes deferred cash or in-kind additions to their monthly compensation (bo- nuses, commissions, savings plan, benefits, etc.). All the countries in the employment reporting scope offer their employees indirect compensation. In Europe and the Americas, six subsidiaries out of 15 have created an employee savings program. A FCPE, or corporate mutual fund, for employee share- holders was set up in France in 2013 to collect future profit-sharing amounts and voluntary contributions within the Company savings plan. This FCPE allows em- ployees to buy Company shares, with the employer match- ing contributions of 100% for up to €400 per year. Over this amount, ESI matches 20% of employee contributions in an amount ranging from €401 to a maximum of €2,000. At January 31, 2017, the FCPE owned 32,260 Company shares. ESI GROUP • 2016 REGISTRATION DOCUMENT 593 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3.3. Being an outstanding partner The Group solutions help its customers cope with the challenges of their digital transformation. These solutions meet the continuously changing regulations that govern the Group’s businesses, in order to: • • Provide innovative, sustainable, high-quality solutions that meet our clients' requirements; Build long-term, trusting relationships. 3.3.1. Innovative, high-quality solutions Innovative solutions How can an organization bring innovative products to market while keeping costs and deadlines reasonable? How can an organization integrate new materials and pro- cesses safely? How can an organization reduce the impact of these new materials, such as composites, on product performance and integrity? What are the best practices for optimizing the product lifecycle and maintenance costs? What processes will ensure that recycling require- ments are met? To meet its customers’ demand for ever more innovative products, the Group offers Virtual Prototyping solutions that save manufacturers and their subcontractors signifi- cant amounts of time and money, and therefore support their efforts to innovate. These are all key advantages that help customers keep up with international competition. ESI Group gives its customers the capacity to perform vir- tual simulations as of the preliminary design phase, dur- ing detailed design phases, and throughout the product lifecycle, and also to approve the performance of their complete digital model step by step before producing a physical prototype. This approach makes it easier to make key decisions very early in the process. Innovation is made possible through reliable virtual prototypes and helps customers get their product right on the first time. A comprehensive approach to quality In 2000, ESI Group obtained its first ISO 9001 certification, followed by the independent certification of its subsidiar- ies, so as to guarantee the quality of its products and ser- vices and ensure client satisfaction. Since 2010, ESI Group has extended the scope of its certification using a system common to all its subsidiaries. Since risk management and quality management are closely linked, this worldwide certification is a sign of confidence in the quality of the so- lutions that the Group offers its customers and guarantees that particular attention is paid to excellence and to the alignment of all the Group's processes. In 2016, the overall certification applied to 88% of the workforce, up from to 83% in 2015. Global certification is now successfully applied in Europe, Asia and the United States, within the ESI Group parent company and most of its subsidiaries: ESI US R&D, ESI France, ESI Japan, Calcom ESI SA in Switzerland, ESI SW India (which now includes the Pune and Bangalore sites), ESI SW Germany, ESI NA in the United States, ESI Mecas in Czech Republic, ESI Service Tunisia, ESI GmbH, ESI Korea and ESI China. 2016 also proved to be very successful with the integration of two new entities—ESI Italia and ESI His- pania—and the gradual rollout of the risk-based approach to meet the new ISO 9001:2015 standard. ESI Group's ob- jective is to have full global certification by 2020. The roadmap is updated every year to identify new entities to bring under the Group, taking account of their impact on business, new acquisitions and the associated risks and opportunities. The benefits of ISO 9001 certification accrue to external as well as in-company stakeholders. Outside the Company, certification guarantees that ESI Group provides products and services that meet the needs of its clients, while it con- tinues to evaluate and improve its processes. Within the Company, certification calls on employees to actively en- gage in an overall consistent management system. All people hired in France (including all types of contacts of more than six months) have to undergo training in Quality in the year following their hire. The objectives of this training are to: • • Understand the quality management system; Realize the importance of complying with defined rules and to grasp how each employee contributes to making the quality system work. In 2016, this represented 21 persons for a total of 42 hours of training. ESI GROUP • 2016 REGISTRATION DOCUMENT 60CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 3.3.2. Build long-term, trusting relationships Subcontractors and suppliers ESI Group has a wide range of internal skills that cover its software Edition activity on the one hand and its services activities on the other. However, when it is necessary to mobilize resources outside its usual scope of business, or when specific expertise is recommended, ESI Group may occasionally call on external suppliers. ESI Group remains fully responsible for all outside sub- contractors. In this regard, the subcontractors are subject to the same rules and verifications as any other employee of the Group. To provide its customers with quality products, ESI Group monitors and regularly evaluates all suppliers having an effect on quality through a questionnaire completed in- house to assess the supplier based on the service pro- vided. A list of approved suppliers is made available for this purpose on the intranet and updated periodically. Relations with our business partners The Company strives to establish transparent and loyal business dealings and to deal honestly and fairly with all clients, no matter the size of their company. The Company is committed to providing quality products and services that meet the needs of its customers. Purchasing decisions are made based on an objective as- sessment of the reliability and integrity of the supplier or subcontractor, as well as on the overall appeal of their of- fer in relation to short- and long-term aims and consider- ations. In order to protect the Company’s interests, goods and services are purchased based on price, quality, perfor- mance, delivery, and suitability criteria. The Company takes care not to become dependent on suppliers or sub- contractors. Also, the Company requires its suppliers and subcontrac- tors to comply strictly with all legal provisions relating to their activities and their professional environment. Actions taken to prevent corruption The Group’s Ethics Charter strictly prohibits any form of corruption in its relations with its business and institu- tional partners and with the administration. No financial or in-kind gratuities may be given with a view to obtaining an advantage, nor may such gratification be received to benefit a company or person. Therefore, it is prohibited to offer or accept gifts worth more than the amounts set by the law or in-house policies. It is also prohibited to pay, offer or agree to pay for gifts, bribes or other gratifications, or to grant undue benefits, whether directly or via an intermediary, to a public agent and/or a private person in any country with a view to ob- taining favorable treatment or influencing the outcome of a negotiation involving the Company. Moreover, ESI Group is prohibited from directly or indi- rectly receiving, giving, promising or soliciting illegal pay- ments or other undue benefits with a view to granting, ob- taining or maintaining a contract or any other advantage. Fraud and money laundering Fraud and money laundering are processes that disguise the illegal origin of money, typically related to criminal ac- tivity. The Group’s Ethics Charter stipulates that ESI Group comply with laws on fraud and money laundering and conduct business only with reputable partners. Moreover, each employee must be vigilant regarding any payments made, in order to detect any irregularities, es- pecially concerning partners whose business conduct may raise suspicion. Compliance with antitrust laws Competition is necessary for economic efficiency. It is one of the essential conditions of the open and fair economy in which the Company believes. Consequently, in its Ethics Charter, ESI Group prohibits any exchange of confidential information and any arrangement—formal or informal— or attempt to enter into arrangements with competitors which seek to fix prices or conditions of sale, to share a market or to boycott a particular market actor, for exam- ple in the course of meetings of professional organizations or associations. Furthermore, the Company refrains from abusing a domi- nant position or a monopoly and also from acquiring or maintaining a dominant power other than by recognized legitimate means such as patents, skills, superior know- how or geographical location. Measures to promote consumer health and safety Due to the nature of its business, which is rooted in the sale of software and services, the Group’s impact on the health and safety of its direct customers is very limited. However, the products developed by ESI Group are used to bring to market innovative products at a lower cost and with greater reliability. The Group’s Virtual Prototyping solutions enable it to satisfy its customers’ main needs, namely to: • Identify challenges in terms of safety and perfor- mance early in the design cycle; Assess ways in which new materials and manufac- turing processes will impact the overall performance of the product and its operation; Predict the performance of equipment used in ex- treme conditions and anticipate any necessary ad- justments. • • ESI GROUP • 2016 REGISTRATION DOCUMENT 613 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY Virtual Prototyping gives manufacturers a “live” and com- prehensive vision of problems in relation to manufactur- ing, assembly and coupling between the characteristics of different products and their performance. It provides vital information during the successive iterations of the design phase, and offers the privilege of anticipating the results of physical tests, allowing the necessary changes to be car- ried out before the actual manufacture of a product. For example, using Virtual Prototyping to design airbags or carrying out an in-depth study of advanced driver assis- tance systems (ADAS) increases the safety of vehicles for consumers. ESI Group solutions give consumers greater safety and comfort. 3.4. Being an environmentally friendly player Considering the nature of its activity—distribution of software and consulting services—the Group believes its impact on the environment to be very limited. All of its activities are carried out in offices. However, the Group has still pledged to work towards limiting its environmental footprint by: • Developing solutions that will help reduce the environmental footprint of manufacturers and comply with regula- tory requirements; Limiting the environmental impact of our global offices. • Scope adopted: France, Germany, Czech Republic, Japan, United States, Tunisia and India. 3.4.1. Overall environmental policy Group believes ESI environmental responsibility should be a priority for all companies, and strives to reduce its environmental impact both directly and indirectly. that The main environmental challenges facing the Group are: 1. External, to help customers significantly reduce their environmental footprint by providing solutions allow- manufacturing and assembly ing for the realistic simulation of the behavior of a prod- cycle; uct throughout the design, 2. Internal, to limit impacts linked to: – Emissions of greenhouse gases associated with travel by Group employees, – Waste electrical and electronic equipment (WEEE), – Energy consumption in its buildings and data centers. In view of its business, ESI Group has no knowledge of in- dustrial or environmental risks liable to have a significant impact on its assets or earnings. Most of its assets being intangible in nature, ESI Group believes that its environ- mental footprint is very small. Given the limited industrial and environmental risks in- herent to the Group’s operations, costs related to the as- sessment, prevention and treatment of industrial and en- vironmental risks are immaterial. As all Group sites are the owners. Accordingly, ESI Group does not have full leased, building improvement costs are borne entirely by control over these aspects. Moreover, for environmental risks were recorded in the Group’s 2016 consolidated fi-nancial statements. guarantees provisions no or involved. That implementing an Continuously raising employee awareness For ESI Group, policy only makes sense if all of the Group’s employees environmental is why the Group constantly are strives of measures avoid wasting energy, and thereby to reduce its environmental An Environment, Health and Safety Charter that applies in France must be extended to the entire Group. raise taken to employees’ awareness impact. its to 3.4.2. Solutions to help reduce our environmental footprint From the outset, by developing innovative Virtual Proto- typing products, ESI Group has sought to measure the im- pact of its solutions on society. Indeed, ESI’s solutions en- able reductions in the number of physical prototypes, which are costly and require large amounts of energy, raw materials and time, and bringing more environmentally friendly production to the market. Tighter regulations on greenhouse gas emissions and re- cycling requirements, higher fuel prices and consumers’ growing environmental concerns are all boosting demand for more environmentally friendly products. Reducing one’s environmental footprint now drives industry inno- vation. All the sectors where ESI Group operates are work- ESI GROUP • 2016 REGISTRATION DOCUMENT 62 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 ing to improve their environmental performance by man- ufacturing more environmentally friendly products, de- veloping more ecological manufacturing processes, and reducing or eliminating physical prototypes. ESI Group enables its clients to significantly reduce their environmental footprint with the use of its Virtual Proto- typing solutions. By successfully combining advanced manufacturing processes with the most innovative mate- rials, such as composites, ESI’s solutions bring customers the following advantages: • Reduced total product weight: using ESI’s Virtual Seat Solution, the company Expliseat has developed the lightest seat ever certified by the European Avia- tion Safety Agency (EASA). This titanium seat is 50% lighter than the lightest models currently available on the market (8 kg to 10 kg). This significant weight reduction could result in an estimated 3% to 5% re- duction in fuel usage, saving USD 300,000 to USD 500,000 per aircraft per year. Reduced waste associated with prototyping and manufacturing: with ESI Group solutions, Patriot Foundry & Castings, specializing in manufacturing parts in bronze-, aluminum- and zinc-based alloys, • • • • reduced its scrap rate by 98% in casting a gearbox part. Improved useful life and recyclability of products: by taking into account the effects caused in stamping and assembling various parts during Virtual Proto- typing of a car suspension system, Honda was able to figure out why two subcontractors following the same specifications were supplying components with very different fatigue performances. Reduced gas emissions: the European target to re- duce new car CO2 emissions to 95 grams by 2021 is largely based on reducing the mass and use of new materials (aluminum, magnesium, composites, etc.), requiring the development of new, industrially via- ble fabrication and assembly processes. Reduced energy consumption: by properly managing and optimizing the office temperature control sys- tem developed using Scilab Cloud, Sanofi was able to reduce its energy consumption by 15%. As such, digital prototypes can significantly reduce con- sumption of raw materials and energy and help achieve compliance with environmental standards for new prod- ucts as shown in these examples. 3.4.3. Limiting the Group’s environmental impact 3.4.3.1. Use of resources and measures to reduce consumption Energy use In 2016, electricity consumption on the Rungis site totaled 439,275 kWh, an average of roughly 2,988 kWh per em- ployee. The significant 57% decrease is due to both the de- localization of most of the data center operations at the Ter@tec site and the measures taken based on the energy audit. On the Ter@tec campus where ESI has been in- volved since 2012, comparing electricity consumption be- tween 2016 and 2015 is not relevant due to the installa- tion of the PoD (Point of Delivery, a high-density mobile data center that can house up to 3,500 server nodes). Elec- tricity consumption data is not available for the other French sites, as it is either included in rental charges or collective. Average electricity consumption per employee came to 2,726 kWh for the sites in Germany, Japan, the Czech Re- public, India and Tunisia. However, it should be noted that data on electricity consumption is not available for one of the three German sites. Moreover, energy consumption in the United States is not measurable since the facilities are leased. Energy usage is included in the utility fees, which include factors other than electricity, and is re-evaluated annually. ESI Group does not use renewable energy on the sites con- tained in the 2016 reporting scope. To minimize energy consumption, the Group has installed LED lights at its Rungis, Paris and Ter@tec offices in France and at its offices in India. In addition, during up- grades of certain workspaces in France, the Group has given preference to lighting with low power consumption, removed hot water tanks from restrooms, and refur- bished air conditioning systems. Motion sensors have been installed for lighting systems in Tunisia, ESI Software in Germany and the Milpitas site in the United States. Following the energy audit in 2015, the site in Rungis, France was fitted with a main switch to control the light- ing system. Other actions are likely to be taken in the longer term, such as optimizing management of when the ventilation system is running, or managing and optimizing the temperature of the cold water line; however, such changes depend on the landlord. Paper consumption Everyday use by employees is the main source of paper consumption. ESI GROUP • 2016 REGISTRATION DOCUMENT 633 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY PAPER CONSUMPTION PER EMPLOYEE (IN NUMBER OF REAMS OF 500 SHEETS) For all data studied (with the exception of Japan), average paper consumption in 2016 was low, and had decreased by over 24% from 2015, with about two reams of paper used per employee. ESI Group also continues to pursue its electronic docu- ments program by implementing IT tools and processes to reduce the use of paper and energy consumption related to printing. Dematerialization has been established for many documents, including travel orders, leave requests and offer reviews. In addition, SharePoint, a Cloud-based service for electronic document archiving and storage, was installed in 2016. Yooz, a Cloud-based software solu- tion used to automate invoicing and purchasing processes, was also implemented in 2016. In early 2017, employee representatives were elected in a fully electronic voting process, preventing the need to print ballots for the nine offices in France. Annual evalua- tions were also performed electronically in 2017 using the Loopline Systems tool. In 2014, in a process of environmental responsibility, a new “greener” paper was promoted among all purchasers of French office consumables. On a lighter basis weight of 75 g versus 80 g, this paper helps reduce environmental 3.4.3.2. Waste management and pollution Treatment and recycling of waste Due to its activity, ESI Group mainly produces non-haz- ardous waste, as well as paper, cardboard and plastic. To the best of its knowledge, the Group does not generate any hazardous waste. In 2014, recycling bins were introduced on the Lyon site, the second biggest site in France, as it was done in 2013 on the Rungis site. Thus almost 100% of the French work- force is aware of this action in their daily lives. Since early 2017, the Rungis site has been testing a more elaborate waste sorting system that better meets environmental standards in partnership with Cèdre, a company that col- lects and manually sorts office paper into five categories impact. In France, 90% of purchased paper was recycled. Water consumption The software publishing business is not very water-inten- sive as the activities do not require water for production. ESI Group’s water is therefore solely for sanitary use and is drawn from urban networks. It is difficult to perform an accurate assessment of water consumption. The Group is the lessee of all of its offices, and the water consumption of each site is included in rental charges and can therefore not be broken down in detail. However, as for the sites for which we have infor- mation (the Rungis site in France, ESI Mecas in the Czech Republic, ESI GmbH in Germany and the two sites in In- dia), water consumption remained stable in 2016 com- pared to last year, with average consumption of 5.7 m3 per employee. Land use Non applicable. ESI Group is the tenant of all its offices. Combating food waste Non applicable. ESI Group does not manage company res- taurants directly. to optimize recycling. All German, American and Czech sites are also equipped with bins for sorting waste. It is planned to extend this measure to all European sites in the future. With regard to other specific waste, notably waste electri- cal and electronic equipment (WEEE), ESI Group attaches great importance to the environmental management of its IT equipment, in terms of both its use and its recycling. The Group’s IT equipment mainly comprises desktop and laptop computers, servers, copiers and printers. The Group cannibalizes computer hardware (uses parts of one machine to repair another) whenever possible to give a second life to some faulty equipment. ESI GROUP • 2016 REGISTRATION DOCUMENT 64CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 is the and cleaning collecting In Germany, the United States, end-of-life or In France and is collected by an authorized obsolete hardware provider that manages the processing of electronic waste. facilities management department, in coor-dination with the IT used departments, tasked with electronic equipment. Waste management then passed on local authority of each city. Furthermore, on request to our supplier in France, a printer cartridges are collected and recycled the completely chain. Lastly, entire ink cartridges, batteries, defective light bulbs and fluores- cent tubes are recovered by our various suppliers. Con-tainers are available to staff for this purpose in offices. except Tunisia, environmental via in ecological scope, the to is 3.4.3.3. Greenhouse gas emissions (GHG) related to business travel Measures to limit business travel As ESI Group operates both in France and internationally, and as its activity is within the tertiary sector, transport is the main source of its greenhouse gas emissions. To limit travel, in 2015, the Group redefined its travel policy in France, which will be extended to the entire Group in the future. Employees are encouraged to travel by train rather than by plane for trips of less than three hours. In France, a car policy also applies to people with a company car (as the French vehicle fleet is mainly comprised of vehicles under three years old). In 2015, ESI Group began to redraft its “Good driver charter” to incorporate limitations on, among other things, engine power and CO2 emissions. This policy is initially applicable to French employees. To limit the use of transport, the Group also provides employees with web conferencing tools to facilitate cooperation between employees working locations without requiring them to travel. Some meeting rooms are also equipped with audio and/or video conferencing sys- tems all workstations are equipped with the Skype for Business software allowing online audio and video meetings up to 250 persons. In 2016, an average of 86 audio meetings, lasting about one hour on average, were organized within the Group every day using Skype for Business. remote meetings. Also, in different facilitate to Emissions associated with Group employees In 2016, emissions resulting from business travel by French employees by train and by air totaled 361,634 kg of CO2, representing 1,218 kg per employee, down 9% compared with 2015. In the United States, these emissions totaled 325,381 kg of CO2 in 2016, representing 2,645 kg per employee. It should be noted that 40% of the Executive Committee is based in the United States. Measures to reduce discharges into the air, water and soil ESI Group’s software publishing activity has very limited impact on the air, water and soil compared to other indus-trial activities requiring heavy production work. Noise pollution and other types of pollution linked to activities The majority of ESI Group’s activities are not a source of noise pollution. The only facilities that generate noise lia-ble to affect the vicinity are data centers, the two main ones being in France. To protect employees authorized to enter computer rooms, the Group provides anti-noise headphones. A memo in computer rooms is given to employees with access to such areas in the course of their duties. governing working conditions located the Group’s that manage in Germany due in the Czech Republic and 50 In Germany, 37,130 kg of CO2 were produced in 2016 through business travel by German employees by train and by air (two out of three entities), representing 308 kg per employee. Across the entire scope, emissions resulting from business travel by air and by train remained stable despite the rise in staff numbers. It is worth noting that this data is provided by travel agencies travel reservations. Any reservations made by employees themselves are not included. In 2016, 43 employees in France had a company car, along with 33 in Germany, but there were no company cars in the United States, India or Tunisia. In Japan, only one person had a company car. The granting rate of company cars was higher in particular to the higher proportion of salespeople and to German culture which encourages this type of compensation. The estimate of annual CO2 emissions from company car travel in France was 152,940 kg or 3,557 kg per company car, down nearly 10% from the previous year. employees Overall, business generated 514.6 metric tons of CO2 in 2016, a 2% decrease despite a rise in the number of employees. in the Czech Republic, the As for company cars estimated emissions in 2016 were 102,233 kg of CO2, an average of 3,098 kg per car, dropping nearly 17% compared with 2015. Lastly, for Germany, vehicle emissions fell 9% to 232,550 kg of CO2, an average of 4,651 kg per car. The drop in CO2 emissions noted by the Group in 2016 is due to a combination of the measures implemented over the past few years and increased employee awareness about the issue. travel by French ESI GROUP • 2016 REGISTRATION DOCUMENT 65 3 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3.5. Serving civil society Partnerships are an integral part of the Group’s business strategy to facilitate and promote Virtual Prototyping while acting sustainably: • Boost innovations and establish partnerships with the academic and scientific communities; Act ethically and responsibly. • Exemplary corporate conduct and excellent relationships with all stakeholders are, for our Company, the foundation necessary for balanced and durable growth. For this rea- son, ESI Group is especially attentive to the following points: • • • Total transparency to all of its stakeholders; Complete satisfaction of clients’ needs; Supporting regional development by encouraging lo- cal recruitment and partnerships; Support for innovation through co-creation projects. • The Group considers its main stakeholders to be its em- ployees, customers, suppliers, and industry and academic partners, but also its investors and shareholders. Innovation, which is at the core of ESI Group’s business lines, is also a key issue of CSR. Innovation continually im- proves production processes and shortens the design pe- riod and the time it takes to develop new, more efficient and more reliable products. To remain at the leading edge of innovation, the Group in- vested 30.2% of its Licensing revenues in R&D in 2016. Innovation makes it possible to resolve the multiple con- straints and pressures that weigh on all manufacturers— to develop a safer, more efficient and more environmen- tally friendly product faster and at a lower cost. The inno- vative Virtual Prototyping solutions offered by ESI Group allow us to approach these ever-present economic goals. ESI Group strongly believes that its ability to innovate and research is a key factor in its differentiation and hence its competitiveness, two essential levers for sustainable growth. 3.5.1. Partnerships with the academic and scientific communities Relations with the digital community The Group makes a point of creating and maintaining ex- cellent relationships with the various members of the dig- ital community, including those in industry, academic in- stitutions and voluntary associations. It does so in order to facilitate collaboration and thus to foster industrial in- novation. The Company is an active member of the Board of Direc- tors of TECH IN France (formerly AFDEL, the French asso- ciation of software publishers), which helps promote the software publishing industry and develop digital simula- tion, and which currently represents over 350 members. In so doing, ESI Group is strengthening its position in France as a leading player in digital transformation and is bringing in its vision for virtual engineering as well as its economic and social values. Participation in regional competitiveness clusters and technology research institutes (IRT) ESI Group participates in several competitiveness clus- ters, principally in France. These clusters provide the proximity needed for collaborative work with major in- dustrial players and research and development organiza- tions in order to bring highly innovative products to mar- ket. Located all over France, these organizations are as fol- lows: Aerospace Valley (Toulouse), ASTech Paris Région (Île-de-France), Nuclear Valley (Burgundy), Mov’eo (Nor- mandy and Île-de-France), I-Trans (Nord Pas-de-Calais and Picardy), iD4CAR (Brittany and Pays de la Loire), Sys- tematic (Île-de-France), Minalogic (Grenoble and Rhône- Alpes), Pôle Pégase (Provence-Alpes-Côte d’Azur) and Pôle ViaMeca (Auvergne-Rhône-Alpes). Since 2013, ESI Group has had a presence on the campus and the Board of Directors of Ter@tec, Europe’s largest in- tensive computing center, based on the Saclay platform in Île-de-France, alongside the CEA (the atomic and alterna- tive energy commission), a major player in research, de- velopment and innovation. Today, ESI Group is involved in several collaborative projects on that campus under the leadership of the System X IRT. ESI is also a member of the Executive Committee of the Systematic Paris Region Com- petitiveness Cluster. ESI Group is a member of the Board of Directors of AS Tech Paris Region, the competitiveness cluster of the aerospace industry, whose main objective is to make recommenda- tions to the Paris Region concerning the certification of R&D projects within its field. A prime mover of innovation in its key segments, ESI Group was a member of the iD4CAR Board of Directors in 2014. The aim of this cluster is to increase the competi- tiveness of the sustainable vehicles and transportation sector in western France through innovation. ESI is one of the founding members of Excelcar. Created in 2014, the aim of this association is to revitalize and create jobs around a technical platform for R&D excellence in Brittany, devoted to automotive applications and sup- ported by PSA. This initiative is supported by the Union des industries et des métiers la métallurgie of Ile-et-Vi- laine and Morbihan (UIMM 35-56), for the purpose of stimulating the automotive industry in Brittany around ESI GROUP • 2016 REGISTRATION DOCUMENT 663 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY PSA Rennes, which has announced its strategic plan for the coming years. ESI participates in the 3DMat innova- tion platform specifically for developing a digital simula- tion and Virtual Prototyping channel for new multi-mate- rial and composite architectures, with priority given to the automotive industry. Again in the transportation sector, ESI is an active mem- ber of the Board of IRT Railenium, whose main mission is to lengthen the lifecycle of railway infrastructure and cap- italize on the rapid international development of its new products. Involving a broad consortium of manufacturers and research organizations, in 2011, ESI Group was se- lected by the Investissements d’Avenir (Grand Emprunt) Program. ESI is also a founding member of the CADEMCE and and technology researchers) SAS railway testing platform. ESI also assists the mechanical engineering field and pro- motes its activities. The Company is a member of the Board of Directors of the Association Française de Méca- nique (AFM), a body for information, dialogue and discussion for the mechanical engineering community transfer (industry professionals and teachers organizations, representing French mechanical engineering to its foreign counterparts. In the field of aeronautics, ESI actively participates in ini- tiatives from the Council for Civil Aeronautics Research by the seven top (CORAC) undertaken as part of the Plan d’Investissement French aeronautics companies, which are members of d’Avenir. In 2014, ESI was invited join the Usine Aéronautique du Futur GIFAS, to (Aeronautics Factory of the Future) platform as an as- sociate member. This major initiative was launched to transform production facilities in the fast-moving aero- nautics industry, which must deal with an unprecedented increase in requirements. As a result, ESI participated in the development of a plan and is already contributing to four major projects that aim to spread the use of Virtual Prototyping and increase development of manufacturing processes for the future, such as additive manufacturing or robotic manufacturing of composite materials. 3.5.2. Act ethically and responsibly Ethics Charter In 2016, the Group issued its Ethics Charter to promote observance of its values and confirm its commitment to the main rules of conduct that the Group wants to see ap- plied internally. This Ethics Charter reaffirms the legal, regulatory and internal provisions relating to the respect of fundamental rights at work, professional integrity, the elimination of discrimination, and the prohibition of child labor and forced labor. It is based on the observance of the ESI also participates in other CORAC plans, like those for the DEPACE platforms for the Composite Aircraft of the Future, the SEFA platform to develop the Cockpit of the Future, and the plans for the Helicopter of the Future, in order to strengthen French excellence in these fields. In this way, ESI helps to make commercial aircraft cockpits safer and more comfortable, and thus keep cost margins under control for manufacturing important parts in heli- copter transmissions boxes. Since 2013, a number of initiatives have emerged to de- sign the Usine de Demain (Factory of the Future) and to use it to drive competitiveness and attractiveness for the region. ESI Group participates in the Nouvelle France In- member of the Alliance pour l’Industrie du Futur. dustrielle national initiative, and is, on this basis, an The SOFIA program (Solutions pour la Fabrication active Industrielle Additive métallique) to support metal additive manufac-turing solutions in the aerospace industry is currently one of the ESI Group’s major projects. Regionally, ESI Group has worked with the Aquitaine- Limousin-Poitou-Charentes (ALPC) Regional Council to create the “it3D Aquitaine” simulation community. This group brings together a number of industrial, academic and institutional players from the region. It has led to the creation of the first interdisciplinary digital, technical, and scientific community dedicated to interactive simulation and virtual experience to support industries and future applications. Relations with customer-partners The Group’s success also stems from an approach based on close collaboration with world leaders in each sector where the Group is active, including Renault- Nissan and Volkswagen in the automotive industry and EDF-AREVA in energy. By building strong relations with large indus-trial firms, the Group can perfectly match their Virtual Prototyping needs. These strategic partnerships help the Group’s customers assess their innovation requirements and implement them jointly with ESI Group. tional Labor Organization. The Ethics Charter was dissem-inated to all employees and is available in six languages on the Group’s internal and external websites. five-member Ethics Committee was Ethics Committee A formed to make sure the Ethics Charter is applied properly. The Ethics Committee is responsible for creating an envi ethical rules promoted by the conventions of the Interna- ronment where employees can adhere to the Ethics ESI GROUP • 2016 REGISTRATION DOCUMENT 67 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 ter and ensure that its principles are upheld by everyone, every day. The Committee listens to and Char assists employees so that they can discuss any issue involving the implemen-tation of and compliance with the Ethics Charter. It also works to make sure that all Group subsidiaries apply the principles set out in the Charter. This Committee meets every quarter to discuss ethics is- sues and come up with corrective measures, if necessary. ESI GROUP • 2016 REGISTRATION DOCUMENT 683 CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3.6. Report of the inspecting organization Year ended January 31, 2017 To the Shareholders, Following the request made to us by ESI Group SA and in our capacity as an independent third-party organization ac- credited by Cofrac under no. 3-1081 (scope available at www.cofrac.fr), we submit to you our report on the consolidated corporate social responsibility information presented in the management report written with regard to the period ending January 31, 2017 pursuant to Article L. 225-102-1 of the French Commercial Code. Company responsibility It is the duty of the Board of Directors to prepare a management report including the consolidated corporate social re- sponsibility information referred to in Article R. 225-105-1 of the French Commercial Code (hereinafter the “Infor- mation”) and prepared in accordance with the guidelines (the “Guidelines”) used by the Company and available on re- quest at the Group’s registered office, a summary of which appears in the methodological note available on the Group's website. Independence and quality control Our independence is defined by regulatory requirements, the Code of Ethics of our profession and Article L. 822-11 of the French Commercial Code. Furthermore, we have implemented a quality control system including documented poli- cies and procedures to ensure compliance with ethical standards, professional standards and applicable laws and regu- lations. Independent third-party organization’s responsibility On the basis of our work, our responsibility is to: • Attest whether the required information is presented in the Management Report or, if not presented, whether an appropriate explanation is given in accordance with the third paragraph of Article R. 225-105 of the French Com- mercial Code and Decree No. 2012-557 of April 24, 2012 (Attestation of CSR Information presentation); Express limited assurance on whether the CSR Information is presented, in all material aspects, in accordance with the Reporting Criteria. • Attestation of presence of CSR Information We conducted the following procedures in accordance with professional standards applicable in France: • Compared the Information presented in the Management Report with the list provided in Article R. 225-105-1 of the French Commercial Code; Verified that the Information covers the consolidated perimeter, namely the Company and its subsidiaries as aligned with the meaning of Article L. 233-1 and the entities which it controls as aligned with the meaning of Article L. 233- 3 of the French Commercial Code; Verified that, in the absence of certain consolidated information, explanations were provided in accordance with the provisions of Decree No. 2012-557 of April 24, 2012. • • Based on this work, and given limitations mentioned above, we confirm the presence in the Management Report of the required CSR Information. Opinion stating reasons on the accuracy and fairness of the CSR Information Nature and scope of our work Our work was carried out by a team of two people between April 26, 2017 and May 10, 2017, for a period of about six person-days at the ESI Group headquarters. We conducted the work in accordance with the standards of professional practice applicable in France, with ISAE 3000 and with the decree of May 13, 2013 stating how the third-party independent organization is to carry out the assignment. ESI GROUP • 2016 REGISTRATION DOCUMENT 69CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 3 We conducted three interviews with the persons responsible for preparing the CSR Information in the departments in charge of the process of gathering the information and, when necessary, those responsible for the internal control and risk management procedures, so as to: • Assess the appropriateness of the Guidelines in terms of their relevance, completeness, neutrality, comprehensibil- ity and reliability, taking into consideration best practices, if any, in the sector; Verify the implementation within the Group of a process for collecting, compiling, processing and checking the CSR Information with regard to its completeness and consistency. We reviewed the internal control and risk manage- ment procedures relating to the preparation of the CSR Information. • We identified consolidated information to test and determined the nature and extent of tests, taking into account the importance of the information in question in relation to the social, societal and environmental consequences of the activ- ity and the characteristics of the Group, its CSR objectives and best practices in its sector. For the CSR Information we judged to be most important at the level of the consolidating entity, we: • Consulted the documentary sources and conducted interviews to corroborate the qualitative information (organi- zation, policies, actions, etc.); Carried out analytical procedures on the quantitative information and, based on sampling, verified the calculations and the consolidation of the data; Ran detailed tests based on sampling(1) ithat consisted of verifying the calculations made and comparing them with the data in the supporting documents, and we verified their consistency with the other information contained in the management report. • • For the other consolidated CSR Information, we judged its consistency in light of our knowledge of the Company. Finally, we judged the validity of any explanations given as to the total or partial absence of certain information. It is our belief that the sampling methods and sample sizes we used in exercising our professional judgment allow us to draw a conclusion of moderate assurance. A higher level of assurance would have required a more extensive review. Our work covered on average 60% of the consolidated value of the numerical indicators in the employment portion and 60% of the consolidated value of the numerical indicators in the environmental portion. Due to the use of sampling techniques as well as to the limitations inherent in the operation of any information and internal control system, the risk of not detecting a material irregularity in the CSR Information cannot be totally ruled out. Comments on the Information ESI Group elected, as explained in the “Scope” paragraph, to collect CSR Information for the year ended January 31, 2017 on a narrow but significantly expanding scope. Conclusion Based on our work, we have not identified any significant misstatement that causes us to believe that CSR Information, taken together, has not been fairly presented, in accordance with reporting criteria. Lyon, May 11, 2017 FINEXFI Isabelle Lhoste, Partner i Companies selected for the tests: Rungis, Germany and Czech Republic sites for the environmental component and France sites for the social component. ESI GROUP • 2016 REGISTRATION DOCUMENT 704 MANAGEMENT REPORT Fiscal year 2016 (ended January 31, 2017) In accordance with Article L.451-1-2 of the French Mone- tary and Financial Code, this chapter includes the Board’s Management Report to the Combined General Meeting of June 29, 2017. This report accounts for the Company’s ac- tivities during the 2016 fiscal year (ended January 31, 2017), including the result of these activities and the Com- pany’s outlook, and presents the Company’s accounts and balance sheets for the fiscal year. Information on various risk factors is included in Chapter 1, under Section 1.6, “Risk factors.” Information on corporate governance and the managing boards and their members is included in Chapter 2 of this Document. The report on corporate, social and environmental re- sponsibility is reproduced in full in Chapter 3 of this Doc- ument. Information on the company’s share capital and the par- ticipation of shareholders in the General Meeting is in- cluded in Chapter 7 of this Document. 4.1. Business activities during FY2016 4.1.1. Highlights of FY2016 Financial data The success of ESI Group’s commercial offering was con- firmed in 2016, as testified by its strong revenue growth in 2016. The growth of its Licensing activity, particularly sustained in Asia, and the marked dynamism of its high value-added services reflect an increasing need for sup- port in industrial customers’ transition to the Industry of the Future, confirming ESI’s PPL (Product Performance Lifecycle) approach. Over the fiscal year, revenues gener- ated from recent acquisitions, mainly linked to ESI ITI GmbH, reflect the implementations of initial commercial synergies. There was a positive currency effect of €2.1 million, arising mainly from the positive trend of the Japa- nese yen, though the effect was limited by the fall of the British pound. Total gross margin improved due to an improved Services margin and a maintained high margin in Licenses. Fur- thermore, R&D investments continued at a high rate of €32.7 million. Sales and Marketing and General and Ad- ministrative costs grew at a slower rate than revenue growth. These elements all led to a substantial improvement in profitability, as evidenced by an increase in all profitabil- ity indicators despite continued investment in R&D and external growth. Finally, year-end available cash was up compared to the previous fiscal year. Structural changes On February 5, 2016, ESI Group acquired 100% of the cap- ital of the American company Mineset Inc. This acquisition was financed by a drawdown on the syndicated loan signed in November 2015. The Group also bought out several minority interests, in- cluding those in ESI Software Germany, increasing its shareholding to 98.5% as at January 31, 2017, in ESI Ser- vices Tunisia, increasing its shareholding to 95%, and in CyDesign Labs Inc., thereby increasing its shareholding to 99.9%. Rollout of solutions Renewal of major contracts in the Automotive sector The signatures in 2016 of the three-year agreement with Volkswagen Group with an expanded perimeter for the ninth consecutive time (in a highly sensitive context), and of a second joint contract with Renault-Nissan, reflect an indisputable need for ESI’s virtual engineering solutions. These solutions offer customers a unique, multi-domain and multi-physics environment that enables them to vir- tually manufacture and assemble essential components using a single core model that captures the level of physi- cal information needed to meet industrial and regulatory requirements. Collaboration with Honda, another key partner, was also solidified, reaffirming the strategic ties between ESI and Automotive, a sector at the forefront of the transition to Digital Factory. Business sector diversification ESI Group has notably strengthened its position in the Aerospace sector, which has become the Group’s second most important sector after Ground Transportation. As a sign of the sector’s steady shift to Digital Factory, innova- tive Services orders saw strong growth throughout the fis- cal year. ESI GROUP • 2016 REGISTRATION DOCUMENT 71 MANAGEMENT REPORT 4 Successful integration of the ESI ITI GmbH solution The integration of recent acquisitions continued success- fully in 2016, confirming ESI Group’s expertise in that do- main. The strong sales growth posted by ESI ITI GmbH, the leader in 0D-1D mechatronic and multi-domain systems simulation with its SimulationX solution, reflects the achievement of commercial synergies. More broadly, the relevance of the Group’s strategic vision of bringing to- gether the different universes of modelling with areas of physics, from the most simplified (0D-1D dimensional sys- tems) to the most sophisticated (3D-4D components), is reaffirmed. 4.1.2. Figures from the consolidated financial statements 4.1.2.1. Review of financial performance The consolidated financial information presented below is compliant with IFRS standards. 4.1.2.1.1. Consolidated key figures (In € millions) 2016 2015 Variation at actual currency rate Variation at constant currency rate Total sales Licenses Services Gross margin % of sales EBITDA (1) % of sales Current operating profit % of sales EBIT % of sales Net profit (Group share) % of sales 140.6 108.3 32.2 103.1 73.3% 18.3 13.0% 15.4 10.9% 13.7 9.8% 7.5 5.4% 124.7 + 12.7% + 11.0% 97.0 27.7 90.4 72.5% + 11.6% + 16.5% + 9.9% + 15.0% + 14.0% + 11.9% 14.3 + 28.1% + 14.6% 11.4% 11.8 9.5% 9.4 7.5% 5.3 4.3% + 30.1% + 13.8% + 46.7% + 25.9% + 41.1% + 18.3% (1) EBITDA excluding non-recurring result, and including the impacts of capitalization of development expenses and net allowance on account depreciation. receivables' 4.1.2.1.2. General information Sales growth 2016 revenue totaled €140.6 million, up €15.9 million (12.7%). Acquisition-related revenue contributed €6.4 million, reflecting the implementation of initial commer- cial synergies. There was a positive currency effect of €2.1 million, arising mainly from positive movements of the Japanese yen. The product mix remained stable, with Services perform- ing well, and now accounting for 23% of total sales com- pared to 22% in the previous year. Licensing sales totaled €108.3 million, up 11.6% com- pared with the previous year. That solid growth was driven by the growth in the installed base (+13.0%), that holds a high repeat business rate of 89.1% measured for the organic perimeter and at constant exchange rates, while new business remained stable. Services sales totaled €32.2 million, a strong growth of 16.5%, driven by a solid +16.8% increase in engineering studies, the core of ESI Group's activity, and by the re- markable growth (+57.1%) of special projects that sup- port the group’s methodological transformation, includ- ing co-creation projects linked to recently-acquired emerging disruptive technologies. The geographical split in sales reflected strong activity in Asia and in the BRIC countries, particularly China and In- dia. Improved gross margin The gross margin increased to 73.3% of sales, compared with 72.5% in 2015. This solid performance is driven by an improved margin in Services and a maintained high margin in Licenses. This improvement was driven by the ESI GROUP • 2016 REGISTRATION DOCUMENT 724 MANAGEMENT REPORT dynamic growth of the high-value-added engineering studies delivered by ESI Group to industrial firms wishing to make the transition to Digital Factory. • Continued investments R&D investments, the lifeblood of technological innova- tion, were maintained at a high level of €32.7 million, up 12.3%. This ongoing effort reflects ESI’s constant focus on the newly acquired technologies that underpin its disrup- tive PPL approach. These investments represent 30.2% of Licensing sales. Once the French Research Tax Credit (CIR) and capitalization are taken into account, the total R&D costs recorded in the P&L statement amounted to €26.9 million at actual rates, an increase of 18.3%. development costs Strong growth of profitability indicators EBITDA rose by 28.1%, from €14.3 million to €18.3 mil- lion, giving a margin rate of 13.0% compared with 11.4% in 2015. This improvement benefited from slight in- creases in Sales & Marketing (S&M) and General & Admin- istrative (G&A) costs (+8.4% and +9.7%, respectively), which now represent 29.8% and 13.5% of total sales. ) grew by 30.1% to €15.4 Current Operating Profit (CO million, showing a current operating margin of 10.9%, or P 1.4 percentage points higher than the previous year. EBIT increased by 46.7% to €13.7 million, giving a 9.8% margin, up 2.3 percentage points over the previous year. This strong growth, stronger than the increase in EBITDA and COR, was primarily due to the lower non-recurring costs due to expenditure related to the Group’s most re- cent technological acquisitions recorded in non-recurring items in 2015. The Financial Result was €-2.1 million compared to €-0.9 million in 2015, affected by a rise in interest charges and exchange losses, following appreciation of the Japanese yen against the euro in the second semester. Attributable Net Profit totaled €7.5 million, to yield a net margin of 5.4%. 4.1.2.2. Financial position – consolidated balance sheet The main changes in the balance sheet over the fiscal year are described below: • Non-current assets, less non-current liabilities (ex- cluding financial debt), increased by €8.5 million. This growth is explained by the acquisitions of tech- nological bricks and companies for an amount of €4.4 million and by the development costs capitalization which had impacted the fixed assets by €2.8 million; Financial debt increased by €5.3 million, due to two opposing effects: rising debt due to recent acquisi- tions and the factoring of the 2015 CIR debt, which was partially offset by the reimbursement of €4.3 million of the syndicated loan. The use of the revolv- ing credit line remained stable, at €8.0 million. Equity stood at €99.5 million, up due to appropriations from net profit for the year. Net financial debt totaled €37.4 million. Gearing (net financial debt to equity) represents 37.6% of equity, versus 39.3% at January 31, 2016. increased by €3.7 million, from €10.3 million to €14.1 million at January 31, 2017. At Net cash available January 31, 2017, ESI Group also held 7.0% of its equity in treasury stock. 4.1.2.3. Risk management Country risks and foreign exchange risk Because of its international dimension, particularly in countries with a currency other than the euro, the Group is exposed to country risk and foreign exchange risk. A description of these risks and their hedging is detailed in notes 7.1.4 and 7.3 to the consolidated financial statements. Foreign exchange risk Most of the Group's financial debts have variable interest rates. In order to limit the negative impacts of rate fluctuation, the Group applies a non-speculative management policy, which uses derivatives. A detailed description of this risk and of hedging can be found in notes 7.1.2, 7.1.4, and 7.3 to the consolidated financial statements. 4.1.2.4. Cash flows and financing available at January, 31, 2017 amounted to €14.1 million, made up of a positive cash position of Net cash €14.5 million less a €0.4 million bank overdraft. The € +3.7 million increase over FY2016 can be explained by the events listed below. Net cash flows came to €10.5 million compared to €7.5 million for the previous fiscal year. This change is primarily due to: • • • • An increase in EBITDA of €4.0 million; A reduction of €0.6 million in development cost A reduction of €1.1 million in non-recurring, capitalization; acquisition-related costs; An impact of the financial result on cash flows of €- 2.2 million, including €-0.5 million due to higher ESI GROUP • 2016 REGISTRATION DOCUMENT 73 interest on loans, and a €-1.7 million currency foreign currency transactions (the result of impact on cash flows of hedging instruments remained stable compared to the previous year); An increase of €0.4 million in taxes paid. in working capital requirement (WCR) had negative impact of €1.5 million. The amount income from operations is thus €9.0 compared improvement marked Current capital expenditures paid by the worth €2.3 million, compared to €2.9 • Variation a limited of million, to Company are million for the a 2015. cash flows previous fiscal year. In FY 2015, ESI made significant investments in the area of high 4.1.3. Research and development performance computing 4.1.3.1. Research and development costs Research and development costs are recorded as soon as they are incurred. These costs amounted to €32.7 million in 2016, an increase of 12.3% compared to the previous year. This investment rise mainly concerns development on last external growth operations. The capitalization of R&D costs had a €+2.8 million impact on the income statement in 2016. A breakdown of the expenses is provided in the note 6.1.2 to the consolidated financial statements. Research and development (R&D) policy The Edition Department in charge of R&D delivers prod- ucts in line with the Group's strategy and market needs. It also seeks to maintain the competitive edge of ESI Group's solutions, focusing on: • Generic analysis and simulation tools needed to ap- proach the market (Virtual Tool); Business solutions that provide realistic physical modeling properties via simulation tests; Component lines to manage processes and best prac- tices by industrial segment or multi-model design (Virtual Component); Systems involving component chains or mechatronic systems and sub-systems (Virtual System); Complete prototyping lines covering all aspects of the virtual engineering process in line with the cus- lifecycle management process, tomer's product providing optimization and 3D visualization capabil- ities and assisting in the local, departmental, or global decision-making process; Comprehensive, "living” virtual prototyping plat- forms that support all product modules and cus- tomer processes and that improve the customer's products performance cycle. • • • • • MANAGEMENT REPORT 4 (HPC). In addition to these current capital expenses, there were acquisitions of technological bricks and subsidiaries and payment earnouts for €4.7 million. The main financing flows were related to recent the acquisitions reimbursement on maturity of the syndicated loan for €-4.3 million. Financial debts also increased due to factoring of the CIR debt for €2.4 million. The use of revolving credit remained stable at €8 million. Overall, increased by €5.1 million. for €5.8 million financial debts over-drafts excluding and to • The R&D policy supports: The business model in an effort to adapt the changes in how products are used and to push boundaries for new computer platforms (GPU, SaaS, Cloud) or plat- forms in development with a view to upgrading the installed base; Product improvements with a view to expanding the installed base or winning over new customers with existing products; New products with a view to encouraging our cus- tomers to deploy new products and processes or to improve their performance by working jointly with ESI Group. • • The Edition Operation allots different levels of investment depending on the maturity of the product: • • • Investments are made in mature products to ensure maintenance, product improvements, widespread adoption of major innovations, and the delivery of new, competitive products; Investments are made in emerging products with greater demand and with the potential to drive growth, in order to accelerate adoption of these products in industrial applications; Investments are made in innovative products by in- creasing research contracts with leading customers in order to ensure the viability of these new tools, and where applicable, to increase the chance of com- mercial success. The Products Direction also maintains a technology watch in support of all products. The Edition Operation follows an approach that is both • Ensuring generic products and components to meet specific and generic in nature to meet different goals: multiple needs in multiple industrial segments and to support developments of services, customers, or ESI GROUP • 2016 REGISTRATION DOCUMENT 74 4 MANAGEMENT REPORT • • • third parties; Ensuring the competitiveness and productivity of our products by targeting specific, high-potential business applications and solutions; Maximizing synergies between products to make it easier to release competitive, affordable versions and minimize maintenance efforts; Integrating this generic expertise into a comprehen- sive virtual prototyping platform that makes it easy to take needs into account for specific applications or custom services. The Edition Operation continues to partner actively to en- sure: • The identification of technologies, acquisition tar- gets, and market opportunities in collaboration with its Scientific Committee; An evaluation of financing opportunities to guide the levels of investment; A discovery process in partnership with the various approaches to research and development (academic chairs, European projects, and co-creation projects); Rapid industrialization for optimal market introduc- tion. • • • This environment reduces risks and ensures a high rate of co-financing and research tax credits. The Edition Operation follows a methodology tailored to the needs of highly innovative customers and always uses the best tools on the market to avoid redundancies and the obsolescence of in-house solutions. In addition, near- shoring or multi-shoring, which is used to strike a balance between human interests and financial interests, is being expanded to reduce dependence on exchange rate effects and also to reduce related expenses. 4.1.3.2. Intellectual property (excluding trademarks) Most of the Company’s intellectual property consists of software and databases that are protected by interna- tional copyright, by specific laws concerning database producers within the European Union, and by competition law outside the EU. The ownership of all development work ordered and per- formed by ESI Group's subsidiaries is transferred to the Company. ESI Group products are either owned directly by the Company or published by the Company under a publishing contract and owned by its subsidiaries. Most of the software products and databases published by the Company belong to ESI Group. The Company is the beneficiary of publishing contracts for the few products that belong to third parties. These prod- ucts represent either software integrated within the Com- pany’s offering (for which replacement solutions could be obtained in the event that the third-party software is dis- continued) or complementary solutions. These latter so- lutions are not, however, critical to the operation of the Company's software. Furthermore, some of the Company’s subsidiaries own pa- tents. 4.1.4. ESI Group annual financial statements and allocation 4.1.4.1. ESI Group annual financial statements ESI Group is the parent company of the Group; therefore, it owns or controls all of its subsidiaries. It oversees all of its subsidiaries and centralizes most of software publishing activities. ESI Group’s revenue consist mainly of: 1. Royalties paid by subsidiaries, distributors, and agents and received for software licensing; 2. Amounts billed to direct customers for software of profits licens-ing and/or services, in territories not covered by its subsidiaries; Management fees billed to subsidiaries as compensation for ESI Group oversight responsibilities; Self-created assets stemming from development work. The operating result for 2016 is a profit of €3.2 million 4. compared to a profit of €1.6 million for the previous year. 3. ESI GROUP • 2016 REGISTRATION DOCUMENT 75 MANAGEMENT REPORT 4 This increase of €1.5 million is explained in the table below: (in € thousands) Operating profit Increase in revenue Increase in inventory Increase in net impact of capitalization of R&D costs (capitalization and amortization) Increase in external expenses Increase in salaries and social charges Change in provisions for contingencies and risks (operating result) Other change TOTAL CHANGE 2016 3,192 2015 1,649 Change 1,543 5,156 622 257 (2,890) (1,373) (265) 37 1,543 The financial result is a loss of €2.5 million compared to a profit of €0.5 million in 2015. The financial result can be broken down as follows: (in € thousands) Realized foreign exchange currency result Unrealized foreign exchange currency result Interest on loans Provision for depreciation of investments Other financial income (expenses) TOTAL January 31, 2017 January 31, 2016 (230) (484) (868) (827) (83) (2,492) 1,471 313 (431) (910) 80 522 Current income before tax is a profit of €0.7 million, compared to €2.1 million in 2015. The Company has also recorded €0.7 million of of exceptional essentially composed loss, allowances. capital The Company recognizes a credit tax income of €1.7 accelerated million, compared to €2.2 million in 2015, which corresponds to a corporate tax expense of €1.3 million, to a CIR credit of €2.8 million and to a CICE credit of €0.1 million. Net profit stands finally at €1.6 million, compared Equity fell by €0.9 million, to €4.0 million in 2015. from €92.0 to €91.2 million due to: • • Decreases in retained earnings (€3.2 million) follow- Net i ing a change in accounting methods for retirement and post-employment benefits (ESI now applies the ncome (+ €1.6 million); The are preferred method for recording these commitments in the balance sheet); Capital increases after the exercise of stock options Net capital assets increased by €7.0 million, from • (€+0.4 million); • Changes in regulated provisions (€+0.3 million). main changes in the balance sheet over the fiscal year described below: • €114.9 million to €121.9 million, due mainly to an in- crease in capitalized and • million to €44.4 million, up €1.1 million. The annual syndicated debt repayment of €4.3 million partially offsets the increase of €5.4 million, which particularly resulted from new acquisitions for €4.5 million. an increase in investments for €3.9 million. Financial debt remained relatively stable, from €43.3 costs for €3.5 million development ESI GROUP • 2016 REGISTRATION DOCUMENT 76 4 MANAGEMENT REPORT In accordance with Articles L. 441-6-1 and D. 441-4 of the French Commercial Code regarding reporting of payment terms, at January 31, 2017, the balance of ESI Group's liabilities to its vendors breaks down as follows: Term <30 days 30 to 60 days 60 to 90 days 90 to 120 days > 120 days SUB-TOTAL Invoices not received TOTAL Terms greater than 120 days are debts to Group subsidi- aries. Two branches are integrated within ESI Group’s financial statements; details are shown in Note F.3. to the financial statements. annual 4.1.4.2. Allocation of profits Situation at January 31, 2017: • Net profit for the year: €1,632,373.85; 2016 (in € thousands) 2015 (in € thousands) 9,182 2,582 1,693 1,072 13,466 27,994 10,594 5,314 3,075 342 805 9,299 18,835 11,645 38,588 30,480 Profit carried forward: €30,927,210.21; Total to be allocated: €1,632,373.85. • • Allocation: • • Following this allocation, the balance of the legal reserve stands at €1,797,597.60, representing 10% of share capi- tal. Profit carried forward stands at €32,548,508.07. €11,075.99 to the legal reserve; €1,621,297.86 to profit carried forward. 4.2. Outlook 4.2.1. Subsequent events In February 2017, ESI announced the acquisition of Scilab Enterprises SAS, editor of Scilab, recognized as the best open source alternative to the commercial software MATLAB®. Scilab offers extended solutions for numerical computation and a powerful development environment for engineering and scientific applications. The acquisi- tion of Scilab Enterprises will help ESI Group broaden its positions at the early design and analysis stages of indus- trial products. Following the acquisition of ITI and its sys- tem modeling software SimulationX (0D-1D models), this extended position aligns with the Group’s disruptive transformation strategy aimed at providing all players in 4.2.2. Business trends the industrial product development process with the power of computer modeling at the earliest stages. Engi- neers working in a traditional PLM (Product Lifecycle Management) approach already use analytical mathemat- ical models created under Scilab to explore design options rapidly with simplified 0D models before moving on to de- tailed design work with more refined (0D-1D to 3D-4D) models, certification, and production. In February 2017, the Company also bought back out- standing minority interest in its subsidiary ESI Italia, which it now wholly owns. 2016 was characterized by the success of legacy solutions as well as by new acquisitions focused on the develop- ment of innovative solutions within the PPL strategy. 2017 promises to be a year of integration and transfor- mation for the Group, both in continuing investment and expanding its Virtual Prototyping and hybrid solutions, ESI GROUP • 2016 REGISTRATION DOCUMENT 77MANAGEMENT REPORT 4 and also in adapting its commercial and marketing re- sources to a new commercial dynamic. The Group remains confident in its ability to amplify its own ongoing transfor- mation into the Industry of the Future. This should con- tribute to positioning the Group ideally to capture the growth arising from the diversification and democratiza- tion of Virtual Prototyping and its expansion towards the in-service performance, while continuing to improve its profitability. 4.3. Information on the agreements signed or pursued during fiscal year 2016 4.3.1. Agreements signed by a director or significant shareholder of the Company with a subsidiary under Article L. 225-102-1 To the Company’s knowledge, currently there are no agreements between any director or significant shareholder of the Company and any subsidiary. 4.3.2. Regulated agreements falling under Article L. 225-38 of the French Commercial Code Buyback of shares from a Shareholder holding more than 10% of voting rights On December 20, 2016, the Company purchased 8,000 shares from the successors of Mr. Jacques Dubois (former Director, deceased in 2015), who at that date held more than 10% of voting rights, under its share buyback pro- gram. The transaction was approved by the Board of Di- rectors in its meeting of November 30, 2016. These shares were bought back at the average market price over the 20 trading sessions preceding the transac- tion after a deduction of 5%, the price corresponding to €39.29 per share or €314,320 for the 8,000 shares. The reason for this purchase was the Company’s intention to maintain the shares and either to subsequently use them as part of its share purchase option program or to allocate free shares to employees and/or directors, in ac- cordance with Article L. 225-209 of the French Commer- cial Code. Consultancy contract with a Board member It is recalled that on April 15, 2015, the Company signed a consultancy contract with Mrs. Cristel de Rouvray, Director. The agreement was made in accordance with Article L. 225-38 of the French Commercial Code, having received prior authorization from the Board of Directors at their meeting on April 14, 2015. This contract was renewed under the same conditions in FY2016 and reviewed by the Board on April 8, 2016. Following a review by the Compensation, Nomination and Governance Committee on March 28, 2017, the Board decided to renew the contract but to review its conditions to bring them closer to market conditions. The purpose of this contract is to grant to Mrs. de Rouvray specific missions relating to human resources, consulting, and strategic management. It is recalled that the special statutory auditors’ report on regulated agreements falling under Article L. 225-38 of the French Commercial Code, as reproduced in section 4.3.3. below, is submitted for consideration and approval by the Share- holders’ meeting of June 29, 2017. ESI GROUP • 2016 REGISTRATION DOCUMENT 78 4 MANAGEMENT REPORT 4.3.3. Statutory Auditors’ report on regulated agreements This is a free translation into English of the Statutory Auditors’ report on regulated agreements issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accord- ance with, French law and professional auditing standards applicable in France. Special Statutory Auditors’ report on regulated agreements and commitments (Annual meeting of the shareholders on results for the year ended January 31, 2017) To the Shareholders, As your Company’s Statutory Auditors, we hereby present our report on regulated agreements and commitments. It is our responsibility to communicate to you, based on information provided to us, the characteristics, the principal terms and conditions, and the grounds of the interest to the Company of those agreements and commitments brought to our attention or which we may have discovered during the course of our audit, without expressing an opinion on their usefulness and appropriateness or identifying any other such agreements and commitments. It is your responsibility, pursuant to Article R. 225-31 of the French Commercial Code, to assess the interest involved in the conclusion of these agreements and commitments for the purpose of approving them. Our role is also to provide you with the information stipulated in Article R. 225-31 of the French Commercial Code relating to the implementation during the past fiscal year of any agreements and commitments previously approved by the Share- holders’ General Meeting. We conducted the procedures we deemed necessary in accordance with the professional guidelines of the French Na- tional Institute of Statutory Auditors (Compagnie Nationale des Commissaires aux Comptes) relating to this engagement. These procedures consisted in verifying the concordance of the information provided to us with the relevant source doc- uments. AGREEMENTS AND COMMITMENTS SUBMITTED FOR THE APPROVAL OF THE SHAREHOLDERS’ MEETING Agreements and commitments authorized during the fiscal year Pursuant to Article L. 225-40 of the French Commercial Code, we have been advised of the following regulated agree- ments and commitments which had received prior authorization from your Board of Directors. Buyback of shares from a Shareholder holding more than 10% of voting rights • With: The successors of Mr. Jacques Dubois, former Director deceased in 2015. • • Nature and purpose: Buyback by the company of its own shares. Terms and conditions: On December 20, 2016, your company purchased 8,000 shares from the successors of Mr. Jacques Dubois, a former Director deceased in 2015, under its share buyback program. These shares were bought back at the average market price over the 20 trading days preceding the transaction after a deduction of 5%, or the price corresponding to €39.29 per share or €314,320 for the 8,000 shares. • Grounds of the interest for the company: The reason for this purchase was the Company’s intention to maintain the shares and subsequently use them as part of its share purchase option program, or to allocate free shares to em- ployees and/or directors, in accordance with Article L. 225-209 of the French Commercial Code. Nature and purpose: Consultancy contract. Consultancy contract with a board member • With: Ms. Cristel de Rouvray. • • Terms and conditions: On April 15, 2015, the Company signed a consultancy contract with Ms. Cristel de Rouvray, Di- rector. The agreement was made in accordance with Article L. 225-38 of the French Commercial Code, having received prior authorization from the Board of Directors at their meeting of April 14, 2015. The initial duration of the contract was from April 15, 2015 to January 1, 2016, automatically renewable for a period of one year. This contract was renewed under the same conditions in FY2016 and reviewed by the Board on April 8, 2016. The annual cost of this contract is estimated at USD77,875 • Grounds of the interest for the company: The purpose of this consultancy contract is to grant to Mrs. Cristel de Rouvray specific missions relating to human resources, consulting, and strategic management. ESI GROUP • 2016 REGISTRATION DOCUMENT 79 MANAGEMENT REPORT 4 AGREEMENTS AND COMMITMENTS PREVIOUSLY APPROVED BY THE SHAREHOLDERS’ MEETING We have not been informed of any agreements previously approved by the Shareholders’ meeting, the performance of which continued during the previous fiscal year. Neuilly-sur-Seine and Paris-La Défense, May 18, 2017 The Statutory Auditors PricewaterhouseCoopers Audit Thierry Charron ERNST & YOUNG Audit Frédéric Martineau ESI GROUP • 2016 REGISTRATION DOCUMENT 80 4 MANAGEMENT REPORT 4.4. Factors that may have an impact in the event of a public offering In accordance with article L. 225-100-3 of the French Commercial Code, the following is clarified: • • The structure of the share capital as well as direct or indirect investments of which the Company is aware and all such information is included in Section 7.2.4. of Chapter 7 under the heading “Change in the break- down of the Company’s share capital”; To the Company’s knowledge, there are no agree- ments or other commitments signed by the share- holders other than those mentioned in Section 7.2.4. of Chapter 7 under the heading “Shareholders’ agree- ments”; There are no securities giving special control rights other than double voting rights stipulated in Article 9 of the Articles of Association and mentioned in Sec- tion 7.1.2. of Chapter 7 under the heading “Double voting rights (article 9 of the articles of association)”; • • • • • • • There are no restrictions in the bylaws on the exer- cise of voting rights and the transfer of shares; Voting rights attached to ESI shares with regard to the employee savings plan are exercised by the ESI FCPE; The rules for appointing and removing members of the Board of Directors are those of common law; Concerning the powers of the Board of Directors, cur- rent authorizations are described in the table sum- marizing powers delegated with regard to share re- demption and capital increases in Section 7.2.2. of Chapter 7; Any amendments to ESI Group’s articles of associa- tion are made in accordance with legal requirements and regulations; There are no agreements providing for compensa- tion in the event of the departure of directors. ESI GROUP • 2016 REGISTRATION DOCUMENT 81MANAGEMENT REPORT 4 4.5. Table summarizing the results of the past 5 fiscal years Balance sheet date 01/31/2017 01/31/2016 Restated 01/31/2015 01/31/2014 01/31/2013 Duration of fiscal year (months) 12 12 12 12 12 CAPITAL AT BALANCE SHEET DATE Share capital Number of shares – ordinary shares – preference shares Maximum number of shares to be created – via convertible bonds 17,975,976 17,865,216 17,845,266 17,806,896 17,613,387 5,991,992 5,955,072 5,948,422 5,935,632 5,871,129 – via subscription rights 207,080 207,080 159,095 178,910 225,850 OPERATIONS AND RESULTS Revenue (excl. tax) 84,313,214 79,156,886 68,487,405 65,743,553 62,077,701 Earnings before tax, employee profit- sharing, allowances for amortization and provisions 28,651,433 30,414,474 25,228,586 25,909,345 20,463,075 Income tax (1,669,380) (2,205,946) (1,865,499) (1,427,906) (1,079,267) Employee profit-sharing 15,967 for amortization and Allowances provisions Net income Distributed earnings EARNINGS PER SHARE Earnings after tax and employee profit- sharing, before allowances for amortization and provisions Earnings after tax, employee profit- sharing, allowances for amortization and provisions Dividend PERSONNEL 28,688,439 19,916,428 26,012,821 20,703,306 17,980,688 1,632,374 3,931,981 1,081,264 6,633,945 3,561,654 5.06 4.00 4.55 4.61 3.67 0.27 0.66 0.18 1.12 0.61 Average headcount 234 217 212 202 185 Payroll 14,159,959 13,203,318 12,446,007 12,200,768 11,645,485 Amounts paid in benefits (social security, social welfare, etc.) 6,711,622 6,295,088 5,772,990 5,652,434 5,314,973 ESI GROUP • 2016 REGISTRATION DOCUMENT 82 5 FINANCIAL STATEMENTS 5.1. Consolidated financial statements 5.1.1. Consolidated income statement (in € thousands) Licenses and maintenance Consulting Other REVENUE Cost of sales Research and development costs Selling and marketing expenses General and administrative expenses CURRENT OPERATING RESULT Other operating income and expenses Total operating expenses INCOME FROM OPERATIONS FINANCIAL RESULT Share of profit of associates INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTERESTS Provision for income tax NET INCOME BEFORE MINORITY INTERESTS Minority interests NET INCOME (GROUP SHARE) Earnings per share (in euros) Diluted earnings per share (in euros) Note January 31, 2017 January 31, 2016 108,316 31,177 1,058 140,551 (37,491) (26,942) (41,842) 97,038 26,524 1,155 124,718 (34,305) (22,772) (38,611) (18,912) (17,223) 15,365 (1,644) (126,830) 11,807 (2,454) (115,365) 13,721 (2,115) 89 11,695 (3,992) 7,703 180 7,523 1.36 1.35 9,353 (950) 123 8,527 (3,157) 5,370 40 5,330 0.96 0.96 4.1 6.1.2 3.2.2 4.4 7.2 8.1 9.3 9.3 ESI GROUP • 2016 REGISTRATION DOCUMENT 83 5 FINANCIAL STATEMENT Statement of comprehensive income (in € thousands) NET INCOME BEFORE MINORITY INTERESTS Other comprehensive income recycled to income Change in the fair value of hedging instruments Translation differences Other comprehensive income (loss) not recycled to income Actuarial gains and losses INCOME AND EXPENSES RECORDED DIRECTLY IN EQUITY COMPREHENSIVE INCOME Attributable to Group equity holders Attributable to minority interests The notes are an integral part of the consolidated financial statements. 5.1.2. Consolidated balance sheet Assets (in € thousands) NON-CURRENT ASSETS Goodwill Intangible assets Property, plant and equipment Investment in associates Deferred tax assets Other non-current assets Cash-flow hedging instruments CURRENT ASSETS Trade receivables Other current receivables Prepaid expenses Cash and cash equivalents TOTAL ASSETS January 31, 2017 January 31, 2016 7,703 5,370 (8) 27 (481) (462) 7,241 7,064 178 23 61 43 127 5,497 5,454 44 Note January 31, 2017 January 31, 2016 3.2 6.1 6.2 8.2 10.1.1 7.1.4 4.2 10.1.2 10.1.3 7.1.3 122,794 40,810 57,830 4,440 890 10,901 7,900 22 104,921 74,064 12,273 4,115 14,470 227,715 112,966 38,508 54,623 4,266 859 10,548 4,072 90 94,049 67,676 12,692 3,355 10,327 207,015 ESI GROUP • 2016 REGISTRATION DOCUMENT 84 Liabilities (in € thousands) EQUITY Equity (Group share) Capital Additional paid-in capital Reserves and retained earnings Net income (loss) Translation differences Minority interests NON-CURRENT LIABILITIES Long-term share of financial debt Provision for employee benefits Deferred tax liabilities Cash-flow hedging instruments Other long-term debt CURRENT LIABILITIES Short-term share of financial debt Trade payables Accrued compensation; taxes and others short-term liabilities Provisions for contingencies, risks and disputes Deferred income FINANCIAL STATEMENT 5 Note January 31, 2017 January 31, 2016 9.1 7.1.2 5.3 8.2 7.1.4 7.1.2 10.2.1 10.2.2 4.3 99,488 98,475 17,976 25,218 45,915 7,523 1,843 1,013 48,766 36,031 8,472 2,963 53 1,247 79,461 15,805 10,895 29,329 1,042 22,389 91,727 90,842 17,865 24,938 40,882 5,330 1,827 884 44,040 32,597 6,820 3,281 21 1,321 71,248 13,967 8,073 26,593 1,551 21,064 TOTAL LIABILITIES 227,715 207,015 The notes are an integral part of the consolidated financial statements. ESI GROUP • 2016 REGISTRATION DOCUMENT 855 FINANCIAL STATEMENT 5.1.3. Consolidated statement of changes in equity (In € thousands except number of shares) Number of shares Capital Additional paid-in capital Net income, reserves and retained earnings Translation differences Equity attributable to parent company owners Minority interests Total Equity AT JANUARY 31, 2015 5,948,422 17,845 24,899 41,879 1,773 86,396 457 86,853 Change in fair value of hedging instruments Translation differences Actuarial gains and losses Income and expenses recognized directly in equity Net income COMPREHENSIVE INCOME Proceeds from issue of shares 6,650 20 39 Treasury shares Share-based payments Transactions with non-controlling interests AT JANUARY 31, 2016 5,955,072 17,865 24,938 Change in fair value of hedging instruments Translation differences Actuarial gains and losses 23 46 69 5,330 5,399 (229) 286 (1,123) 46,212 (8) (476) 54 23 54 46 54 123 5,330 54 5,454 7 (3) 4 40 44 59 (229) 286 (1,123) 90,842 (8) 25 (476) 1,827 25 23 61 43 127 5,370 5,497 59 (229) 286 384 884 (740) 91,727 (8) 27 (481) 2 (4) Income and expenses recognized directly in equity (485) 25 (459) (2) (462) Net income COMPREHENSIVE INCOME Proceeds from issue of shares 36,920 111 280 Treasury shares Share-based payments Transactions with non-controlling interests 7,523 7,039 (315) 333 169 7,523 180 7,703 25 7,064 178 7,241 391 (315) 333 (9) 160 391 (315) 333 111 99,488 (49) 1,013 AT JANUARY 31, 2017 5,991,992 17,976 25,218 53,438 1,843 98,475 The notes are an integral part of the consolidated financial statements. ESI GROUP • 2016 REGISTRATION DOCUMENT 865.1.4. Consolidated statement of cash flows (in € thousands) January 31, 2017 January 31, 2016 FINANCIAL STATEMENT 5 Net income before minority interests Share of profit of associates Amortization and provisions Net impact of capitalization of research & development costs Income taxes (current and deferred) Income taxes paid Unrealized financial gains and losses Share-based payment transactions Gains and losses on asset disposals CASH FLOWS Trade receivables Trade payables Other receivables and other liabilities Change in working capital requirement NET CASH FROM OPERATING ACTIVITIES Purchase of intangible assets Purchase of property, plant and equipment Proceeds from the sale of assets Acquisition of subsidiaries, net of cash acquired Other investment operations NET CASH USED FOR INVESTING ACTIVITIES Proceeds from loans Repayment of borrowings Proceeds from issue of shares Purchase and proceeds from disposal of treasury shares CASH FLOWS FROM FINANCING ACTIVITIES Effect of exchange rate changes on cash and cash equivalents INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Opening cash position Closing cash position (1) NET CHANGE IN CASH AND CASH EQUIVALENTS (1) The notes are an integral part of the consolidated financial statements. 7,703 (89) 4,574 (2,832) 3,992 (3,243) (60) 333 130 10,509 (6,649) 2,949 2,198 (1,502) 9,007 (528) (2,201) - (4,361) (3,566) (10,656) 19,891 (14,775) 391 (315) 5,193 186 3,729 10,327 14,056 3,729 5,370 (123) 3,860 (3,456) 3,157 (2,817) 1,190 286 14 7,481 (7,573) 211 (445) (7,807) (326) (2,590) (2,637) 24 (17,552) (2,112) (24,866) 47,916 (24,222) 59 (229) 23,523 55 (1,613) 11,940 10,327 (1,613) Net cash and cash equivalents at January 31, 2017 comprised €14.47 million in assets less €0.414 million in bank overdrafts. ESI GROUP • 2016 REGISTRATION DOCUMENT 875 FINANCIAL STATEMENTS 5.1.5. Notes to the consolidated financial statements Table of contents of notes to the consolidated financial statements Note 1. Note 2. Note 3. Note 4. Note 5. Note 6. Note 7. Accounting principles Significant events of the year Scope of consolidation Operating data Personnel costs and employee benefits Intangible and tangible assets Financing and financial instruments 88 89 89 95 98 102 105 Note 1. Accounting principles Note 1.1. General information ESI Group is a listed French limited company (société anonyme), registered in France and governed by French law. ESI Group has its head office at 100-102 Avenue de Suf- fren, Paris (75015), France. ESI Group is the parent company of some 30 subsidiaries operating throughout the world, together comprising Group . ESI ESI Group is the world's foremost creator of Virtual Pro- the totyping software and services. Specializing in the physics of materials, ESI Group has developed unique expertise to help industrial players replace physical prototypes with virtual ones, thus making it possible to virtually manufac- ture and test the products of the future, ensuring pre-cer- tification. Used together with latest-generation technolo- gies, today Virtual Prototyping is part of an overarching approach to the Product Performance Lifecycle (PPL), which addresses products' operating performance throughout its useful life cycle, from rollout to withdrawal. The creation of Hybrid Twins incorporating simulation, physics and data analysis makes it possible to create smart products, particularly using connected objects, as well as to predict their performance and anticipate their maintenance requirements. The Group's fiscal year runs from February 1 to January 31. Financial statements are presented in thousands of euros. The 2016 financial statements were approved by the Board of Directors on April 18, 2017 and will be submitted to the General Meeting of June 29, 2017 for approval. As such, FY2016 ended on January 31, 2017. Note 1.2. Accounting standards applied The consolidated financial statements at January 31, 2017 were prepared in accordance with the IFRS standards, as approved by the European Union at January 31, 2017. These standards are available on the European Union website. Note 8. Note 9. Note 10. Note 11. Note 12. Note 13. Income tax Equity and earnings per share Other balance sheet items Related party transactions Fees paid to statutory auditors Subsequent events 110 112 113 114 115 115 Note 1.3. New IFRS standards and interpretations standards, amendments and interpretations New effective in the European Union and mandatory for fiscal years beginning on or after February 1, 2016 The adoption of the following texts had no significant im- pact on the information presented by the Group: • • Amendments to IFRS 11 – Joint Arrangements; Amendments to IAS 16 and IAS 38 – Fixed assets: Clarification of acceptable methods of depreciation and amortization; Annual improvements – 2012-2014 cycle; Amendments to IAS 1 – Presentation of Financial Statements; Amendments to IAS 27 – Equity Method in Separate Financial Statements. • • • Application of new standards prior to their mandatory effective date The Group did not opt for early application of standards and interpretations not mandatory as of February 1, 2016, in particular the following: • IFRS 15 “Revenue from Contracts with Customers” applicable to fiscal years beginning on or after Janu- ary 1, 2018; IFRS 9 “Financial instruments” applicable to fiscal years beginning on or after January 1, 2018; • The impact of these new standards on consolidated finan- cial statements is currently being analyzed. In addition, the Group's consolidated financial statements do not take into account any new standards, amendments and interpretations not yet approved by the European Un- ion at January 31, 2017, in particular IFRS 16 “Leases” ap- plicable to fiscal years beginning on or after January 1, 2019. The impact of this new standard on consolidated fi- nancial statements is currently being analyzed. ESI GROUP • 2016 REGISTRATION DOCUMENT 88 Note 1.4. Use of estimates and assumptions Preparation of the consolidated financial statements re- quires the use of various estimates and assumptions made by the Group's management. These estimates and as- sumptions have an impact on the valuation of assets and liabilities, as well as on the amounts recorded as income or expenses throughout the fiscal year. Estimates include, but are not limited to, assumptions used to determine the Note 2. Significant events of the year Change in scope of consolidation – see details in notes 3.2 and 3.4 In H1 2016, Group acquired 100% of the capital of the U.S.- based company Mineset Inc. on February 5, 2016. This ac- quisition was financed through a drawdown on the syndi- cated loan signed in November 2015. Note 3. Scope of consolidation FINANCIAL STATEMENTS 5 impact of options and free shares granted to employees, business combinations, revenue recognition, depreciation of non-current assets, valuation of deferred tax assets, val- uation of derivative instruments, capitalized development costs, provisions for impairment of doubtful receivables, taxes, risks and disputes, as well as provisions for post- employment benefits. The Group also repurchased a number of minority inter- ests, particularly concerning ESI Software Germany, of which the Group holds 98.5% at January 31, 2017, ESI Ser- vices Tunisia of which the Group owns 95%, and CyDesign Labs Inc. of which the Group owns 99.9%. Note 3.1. Accounting policies related to the scope of consolidation Consolidation method The annual financial statements of the companies con- trolled by ESI Group are fully consolidated from the date at which ESI Group takes control until the date when con- trol is transferred outside the Group. Associates, defined as companies over which the Group exercises significant influence, are accounted for using the equity method. The Group does not own stakes in any entity over which it ex- ercises joint control. The Group's scope of consolidation at January 31, 2017 is detailed in note 3.4. Closing date Subsidiaries with a closing date other than January 31 pre- pare interim financial statements as of January 31 for con- solidation purposes. Internal transactions All transactions between consolidated companies, includ- ing intra-Group gains, are eliminated in the consolidated financial statements. Conversion of the financial statements of non-French subsidiaries The Group's foreign subsidiaries generally use local cur- rency as their functional currency. ESI Group's functional and presentation currency is the euro. Balance sheet items of foreign subsidiaries are translated to euros at the closing rate, with the exception of compo- nents of the net equity, which are maintained at the his- torical rate. Income statements are translated at the aver- age exchange rate for the period. Translation differences are recorded in a specific “Translation differences” Other Comprehensive account on a Income. line separate in the in Transactions and balances foreign currencies At the closing date, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the year-end exchange rate. Foreign exchange gains and losses on transactions in foreign currencies are recorded as such, with the exception of those arising from transactions that may be characterized as long-term investments, which are recorded in equity on a separate line in the Other “Translation Comprehensive differences.” (OCI), under Income Business combinations Business combinations are recognized by the acquisition method: • The identifiable assets acquired and liabilities as- sumed are measured at fair value as of the acquisi- tion date; Any non-controlling interest in the acquiree (i.e. mi- nority interest) is measured either at fair value (“full goodwill method”) or at the non-controlling inter- est’s proportion of the acquiree’s identifiable net as- set (“partial goodwill method”). This option applies on an individual transaction basis. • Costs directly related to the acquisition are recorded as expenses when incurred, in “Other operating income and expenses.” ESI GROUP • 2016 REGISTRATION DOCUMENT 895 FINANCIAL STATEMENTS Any contingent consideration related to business combi- nations is recognized at its fair value on the acquisition date. After the acquisition date, contingent consideration is measured at fair value at the end of each subsequent re- porting period. Any changes in the fair value of contingent consideration arising more than one year after the acqui- sition date are recognized in income. Changes in fair value within one year of the acquisition date are recognized in income if they clearly result from events after the acquisi- tion date. Other changes are offset against goodwill. Where put options have been granted to minority share- holders of subsidiaries, the amount recognized in liabili- ties is measured at the present value of the option exercise price and recorded in “Other long-term debt” or “Other short-term liabilities” according to its maturity date. The balance is allocated either to Goodwill (“full goodwill method”) or to Equity (“partial goodwill method”). Dis- counting adjustments are recorded in the Financial Result. Subsequent gains and losses (or changes) in fair value of the liability are recognized directly in equity At the acquisition date, goodwill represents the difference between: • The fair value of the consideration transferred, plus the total minority interests in the acquiree and, for step acquisitions, the fair value of the stake previ- ously held at the corresponding acquisition date, re- valuated in the income statement; and The net fair value of the identifiable assets and lia- bilities acquired. • ESI GROUP • 2016 REGISTRATION DOCUMENT 90The Group has 12 months from the acquisition date to de- termine the fair value of the assets and liabilities and de- clare the amount of goodwill acquired. If the acquisition price is lower than the fair value of identified assets, lia- bilities and contingent liabilities, the difference is immedi- ately recorded in the income statement. In accordance with IFRS standards, goodwill is not amor- tized but is instead subject to an impairment test. This test is performed at least once a year and when an impairment indicator is identified. Goodwill is allocated to cash-gener- ating units (“CGU”) for the purposes of impairment test. For intangible assets acquired in the context of a business combination, the amortization expenses as well as the costs directly attributable to acquisitions are presented on a separate line of the income statement entitled “Other op- erating income and expenses.” The “Current operating re- sult” presented in the income statement is equal to “In- come from operations” less “Other operating income and expenses.” Impairment test of goodwill and other intangible assets with an indefinite useful life ESI Group uses a single CGU for the entire Group. The Group's strategy is to focus on growth through innovation stemming from its R&D efforts and the integration of ac- quired technologies (source codes, algorithms, etc.). As the Group has pursued its development, it has become clear that certain technologies acquired to resolve a spe- cific issue could be used to resolve other issues as well. In- corporating this technology portfolio in the Group's soft- ware packages makes it possible to use all of these tech- nologies in all of the Group's projects depending on the so- lutions required. The consequence of this ever-increasing integration is that it is more and more difficult to allocate revenue to a specific technology and to thus create a CGU for each technology or software program. In addition, the revenue earned by a sales subsidiary is de- pendent not only on its own commercial performance but FINANCIAL STATEMENTS 5 also, even more so, on the software offering. The large multinational corporations with which ESI Group works regard the Group as a partner. As both a software pub- lisher and technological partner, ESI helps implement standardized methods within their organizations. It should be noted that the Group's top twenty customers have accounted for more than 40% of its order bookings for several years. The impairment test is based on discounted value of fore- cast future cash flows according to business projections, technology penetration and the competitive situation. Fu- ture cash flows are estimated as follows: • • • The last fiscal year for the reference year (Y); Annual budget for the following year, Y+1; Cash flows for the years Y+2 to Y+5 are estimated on the basis of Y+1 data by applying growth rates that reflect the Group's strategy, have been approved by senior management and, can be based on past expe- rience. The discount rate applied as of January 31, 2017 is the Group’s weighted average cost of capital (WACC) adjusted with a risk premium. It stands at 11.4% compared to 11% at January 31, 2016. The present value of the CGU is determined by adding: • The present value of forecast future cash flows over the explicit period of 5 years, as described above; The terminal value, calculated by capitalizing to per- petuity the last cash-flow of the explicit period. The long-term growth rate applied is 1%. • This present value of the CGU either confirms the fair value of the assets of the CGU, or serves as a basis for cal- culating potential impairment. The impairment test performed on the CGU at January 31, 2017 did not identify any loss in value for these assets. The test was analyzed for sensitivity to reasonably plausible changes in key assumptions, based on a 1% increase in the discount rate and a 1% decrease in the long-term growth rate. No impairment has been identified. Note 3.2. Impact of the change in the scope of consolidation on goodwill and non-recurring result 3.2.1. Change in goodwill (in € thousands) January 31, 2016 Increase Decrease Gross values TOTAL NET VALUES 38,508 38,508 2,223 2,223 Foreign exchange gain/loss January 31, 2017 78 78 40,810 40,810 ESI GROUP • 2016 REGISTRATION DOCUMENT 915 FINANCIAL STATEMENTS Acquisition of Mineset Inc. In February 2016, ESI Group acquired a 100% interest in the US-based company Mineset Inc., specialized in machine learning. At the preliminary allocation of the acquisition price of €4.017 million, the net assets acquired were revaluated at €1.797 million. Details of this valuation are presented below. As a result, goodwill comes to €2.22 million. (in € thousands) Capitalized development costs Deferred tax liabilities on intangible assets Deferred tax assets on tax loss carryforwards Carrying amount of net assets prior to the acquisition NET ASSET VALUE AT ACQUISITION DATE (100%) Follow-up on FY2015 acquisitions Preliminary allocation 1,885 (628) 509 32 1,797 Acquisition of CIVITEC In March 2015, ESI Group acquired an 80% interest in CIVITEC. The definitive allocation of the acquisition price of €0.9 million remained unchanged vis-a-vis the preliminary valuation and did not lead recognition of goodwill. The net asset value described below comes to €1.125 million for a 100% stake, i.e. €0.9 million for the interest held by ESI Group (80%). (in € thousands) Deferred tax assets on tax loss carryforwards Not booked pension obligations Carrying amount of net assets prior to the acquisition NET ASSET VALUE AT ACQUISITION DATE (100%) Definitive allocation Preliminary allocation 272 (9) 863 1,125 272 (9) 863 1,125 Acquisition of ITI GmbH In January 2016, ESI Group acquired a 96% interest in ITI GmbH. Allocation of the acquisition price of €17.952 million led to the recognition of goodwill amounting to €14.541 million. The net asset value described below comes to €3.549 million for a 100% stake, i.e. €3.407 million for the interest held by ESI Group (96%). (in € thousands) Client Relationship Capitalized development costs Deferred tax liabilities on intangible assets Deferred tax assets on tax loss carryforwards Carrying amount of net assets prior to the acquisition Other items NET ASSET VALUE AT ACQUISITION DATE (100%) Allocation at January 31, 2017 Allocation at January 31, 2016 3,044 1,469 (1,422) 220 170 68 3,549 3,044 1,469 (1,354) 220 174 - 3,553 3.2.2. Non-recurring result Other operating income and expenses are mostly composed of acquisition costs incurred during the fiscal year, as well as amortization costs related to intangible assets acquired as part of a business combination. (in € thousands) Amortization of acquired intangibles assets Acquisition costs Other external expenses and income TOTAL OTHER OPERATING INCOME AND EXPENSES January 31, 2017 January 31, 2016 (1,470) (195) 21 (1,644) (1,160) (1,294) - (2,454) ESI GROUP • 2016 REGISTRATION DOCUMENT 92FINANCIAL STATEMENTS 5 Note 3.3. Off-balance sheet commitments related to acquisitions during the fiscal year There are no off-balance sheet commitments related to the acquisition of Mineset Inc. Note 3.4. List of entities in the scope of consolidation The table below presents the dates of creation head offices capital directly or indirectly held: and addresses of Group subsidiaries and the percentage of ESI GROUP • 2016 REGISTRATION DOCUMENT 935 FINANCIAL STATEMENTS Subsidiaries SUBSIDIARIES FULLY CONSOLIDATED Engineering System International Engineering System International GmbH ESI Japan, Ltd. ESI North America, Inc. Hankook ESI Co., Ltd. ESI Group Hispania s.l. STRACO Mecas ESI s.r.o. ESI UK Limited ESI US Holding, Inc. ESI US R&D, Inc. Calcom ESI SA ESI Software (India) Private Limited Hong Kong ESI Co., Limited Zhong Guo ESI Co., Ltd ESI-ATE Holdings Limited ESI ATE Technology (China) Ltd. ESI South America Comércio e Serviços de Informatica, Ltda ESI Italia s.r.l. Pacific Mindware Engineering Private Limited ESI Services TUNISIA ESI Group Beijing Co., Ltd ESI Software Germany GmbH Efield AB ESI US Inc. OpenCFD Limited CyDesign Labs, Inc. CYDESIGN LTD ESI Services Vietnam Co., Ltd CIVITEC ITI GmbH ITI Southern Europe Mineset Inc. SUBSIDIARIES ACCOUNTED FOR USING THE EQUITY METHOD AVIC-ESI (Beijing) Technology Co. Ltd % of capital held Date of creation or acquisition Subsidiary head office January 31, 2017 January 31, 2016 April 1973 July 1979 July 1991 March 1992 Rungis, France Neu-Isenburg, Germany Tokyo, Japan Farmington Hills, Michigan, USA Seoul, South Korea September 1995 Madrid, Spain February 2001 Compiègne, France April 2001 Plzen, Czech Republic May 2001 Oxford, England January 2002 August 2002 Dover, Delaware, United States San Diego, California, USA August 2002 Lausanne, Switzerland December 2002 Bangalore, India February 2004 Hong Kong, China February 2004 Guangzhou, China February 2004 Hong Kong, China July 2006 Beijing, China August 2006 June 2008 São Paulo, Brazil September 2008 December 2008 April 2009 October 2010 August 2011 December 2011 February 2012 September 2012 October 2013 October 2013 December 2013 March 2015 January 2016 January 2016 February 2016 Bologna, Italy Pune, India Tunis, Tunisia Beijing, China Stuttgart, Germany Sollentuna, Sweden Farmington Hills, Michigan, USA Berkshire, England Palo Alto, United States Oxford, England Ho Chi Minh City, Vietnam Versailles, France Dresden, Germany Rungis, France Milpitas, USA 100% 100% 97% 100% 99% 100% 98% 95% 100% 49% 74% 99% 100% 100% 100% 100% 100% 95% 90% 100% 95% 100% 98.5% 100% 100% 100% 99.9% 99.9% 100% 80% 96% 96% 100% 100% 100% 97% 100% 99% 100% 98% 95% 100% 49% 74% 99% 100% 100% 100% 100% 100% 95% 90% 100% 90% 100% 95.5% 100% 100% 100% 99.5% 99.5% 100% 80% 96% 96% - February 2014 Beijing, China 45% 45% ESI US Holdings is fully consolidated, as ESI Group has exclusive control. ESI GROUP • 2016 REGISTRATION DOCUMENT 94Note 4. Operating data Note 4.1. Revenue There are two main sources of ESI Group revenue: a soft- ware user licensing and related maintenance activity, and a service activity. To ensure better management of orders and business opportunities, the Group has a customer base and CRM (Customer Relationship Management) software. As rev- enue from the License activity is recognized upon instal- lation or renewal, the notion of backlog is only relevant for the Service activity, for which revenue is recognized based on actual production. The backlog represents at all times the amount of revenue remaining to be recog- nized (future production) on orders already recorded. Each of the Group’s production units is in charge of con- tinuously monitoring the backlog of its activity. User Licensing and maintenance Licensing revenue is generated from royalties paid un- der licensing agreements granted to end customers and related maintenance services. Royalties are earned for the following two types of services: • Lease of annual renewable licenses that include the right to use the software plus maintenance services for one year. In this case, revenue from mainte- nance accounts for Sale of perpetual rights to use the software plus one year (renewable) of maintenance services. In this case, revenue from maintenance accounts for 15% of total royalties; • FINANCIAL STATEMENTS 5 • 5% of total royalties; Maintenance services on software for which per- petual user rights have been purchased. Maintenance services include updates and technical support. • • Revenue from user licensing is recorded when: • The Group can demonstrate the existence of an agreement with the client; The software has been delivered and accepted; The amount of the user license for the software is determined or determinable; Recovery is likely. • If any of these four criteria is not met, revenue from user licensing is deferred until all criteria are met. Revenue from maintenance is differed and recorded according to the straight-line method over the term of the mainte- nance agreement, which is generally one year. Services Service revenue consists mainly of consulting and train- ing fees. It is recognized according to the percentage of completion method. Corresponding costs are recorded as soon as they are incurred. A provision for losses on completion is recorded if necessary. Services also include sale of IT equipment, particularly that related to Virtual Reality. (in € thousands) January 31, 2017 January 31, 2016 TOTAL LICENSES AND MAINTENANCE Consulting Other revenue TOTAL SERVICES CONSOLIDATED REVENUE O/w total co-financed research and development projects included in service revenue Note 4.2. Trade receivables Trade receivables are initially recorded at their nominal value, as the potential impact of discounting is immate- rial. They are then recorded at amortized cost, less im- pairment resulting from irrecoverability, when applica- ble. Receivables are depreciated when their net realizable 108,316 31,177 1,058 32,235 140,551 5,041 97,038 26,524 1,155 27,680 124,718 3,209 value, estimated by reference to the risk of non-recovery as determined by type of receivable, is less than their carrying amount. Depending on the nature of receiva- bles, the risk associated with bad debts is appreciated individually or based on statistical methods. ESI GROUP • 2016 REGISTRATION DOCUMENT 95 5 FINANCIAL STATEMENTS DETAILS OF TRADE RECEIVABLES • (cid:23)(cid:138)(cid:135)(cid:3)(cid:10)(cid:148)(cid:145)(cid:151)(cid:146)(cid:821)(cid:149)(cid:3)(cid:133)(cid:142)(cid:139)(cid:135)(cid:144)(cid:150)(cid:135)(cid:142)(cid:135)(cid:3)(cid:143)(cid:131)(cid:139)(cid:144)(cid:142)(cid:155)(cid:3)(cid:133)(cid:145)(cid:143)(cid:146)(cid:148)(cid:139)(cid:149)(cid:135)(cid:149)(cid:483) Major industrial corporations, especially compa- nies in the automotive, aerospace and steel indus- tries; (in € thousands) Trade receivables Work in progress and non-invoiced receivables Impairment of trade receivables TOTAL TRADE RECEIVABLES, NET OF IMPAIRMENT • • Government agencies for governmental and de- fense projects; Academic bodies. January 31, 2017 January 31, 2016 62,143 16,389 (4,468) 74,064 57,472 13,902 (3,699) 67,676 (in € thousands) Impairment TOTAL January 31, 2016 Provisions Reversals Foreign exchange gain/loss January 31, 2017 (3,699) (3,699) (1,145) (1,145) 344 344 32 32 (4,468) (4,468) AGE OF TRADE RECEIVABLES (in € thousands) Not due 0 to 30 days 30 to 90 days Higher than 90 days Total January 31,2017 January 31,2016 54,538 7,079 6,529 5,918 74,064 51,105 8,301 5,299 2,971 67,676 The large amount of not due receivables is due to the highly seasonal nature of sales, with Q4 accounting for more than 40% of Group revenue. Receivables overdue by more than 90 days mainly include Chinese state and public-sector clients, whose payment terms are longer. Note 4.3. Deferred income Deferred income essentially corresponds to maintenance to be rendered. (in € thousands) Maintenance services to be rendered Other deferred income DEFERRED INCOME Note 4.4. Operating expenses (in € thousands) Other purchases and external expenses Real estate rentals Fees Taxes and duties Amortization and provisions January 31, 2017 January 31, 2016 18,765 3,624 22,389 16,204 4,860 21,064 January 31, 2017 January 31, 2016 (14,026) (6,291) (3,168) (587) (3,044) (13,300) (5,187) (2,786) (538) (2,921) ESI GROUP • 2016 REGISTRATION DOCUMENT 96Personnel costs (1) Other external expenses and income TOTAL CURRENT OPERATING EXPENSES Other operating income and expenses (2) TOTAL OPERATING EXPENSES (1) Details on personnel costs are presented in note 5.2. (2) Details on other operating income and expenses are presented in note 3.2.2. Note 4.5. Information by geographic area In accordance with paragraphs 31-34 of IFRS 8, ESI Group presents revenue from ordinary activities and non-current assets by region (the three main regions be- ing EMEA (Europe, Middle East, Africa), Asia-Pacific and FINANCIAL STATEMENTS 5 (86,592) (11,478) (125,186) (1,644) (126,830) (78,594) (9,585) (112,911) (2,454) (115,365) the Americas). Indeed, the Group works in a unique seg- ment, with close ties between its two identified busi- ness, Licenses and Services. Revenue is distributed over the regions where it was ef- fectively generated. (in € thousands) Europe, Middle- East and Africa Asia-Pacific Americas Eliminations Consolidated YEAR ENDED JANUARY 31, 2017 External clients Affiliate companies NET SALES ASSETS ALLOCATED YEAR ENDED JANUARY 31, 2016 External clients Affiliate companies NET SALES ASSETS ALLOCATED 63,419 80,148 143,567 286,979 57,098 76,535 133,633 253,466 54,864 9,286 64,150 41,661 44,291 8,206 52,497 33,243 22,268 8,863 31,131 23,506 23,329 6,944 30,273 21,279 - 140,551 (98,296) (98,296) (124,431) - (91,685) (91,685) (100,973) - 140,551 227,715 124,718 - 124,718 207,015 Intra-Group transactions consist mainly of royalties paid by the Group's subsidiaries. These royalties are proportional to Licensing revenue and based on the practices observed between software publishers and distributors within the industry covered by ESI Group. Note 4.6. Off-balance sheet commitments related to operational activities The Group leases all of its office buildings and some of its computer equipment through simple lease contracts. These contracts are not capitalized. Minimum future lease payments due under lease contracts as of January 31, 2017 are listed below: Due at January 31 (in € thousands) 2018 2019 2020 2021 2022 and beyond Total Minimum rental payment 6,693 4,519 3,645 2,692 4,117 21,665 At January 31, 2017, ESI Group also had a rent security deposit with Crédit du Nord in an amount of €82 thousand, es- tablished in December 2012 and expiring in December 2022. ESI GROUP • 2016 REGISTRATION DOCUMENT 975 FINANCIAL STATEMENTS Note 5. Personnel costs and employee benefits Note 5.1. Headcount Headcount is calculated on a “Full-Time Equivalent” (FTE) basis and distributed as follows: (FTE) France Rest of the world January 31, 2017 January 31, 2016 286 867 1,153 288 767 1,054 Note 5.2. Personnel costs Personnel costs are presented by destination in the in- come statement. Their break down by nature is as fol- lows: (in € thousands) January 31, 2017 January 31, 2016 Salaries Payroll taxes Share-based payments Post-employment benefits TOTAL PERSONNEL COSTS (68,962) (16,653) (333) (644) (86,592) (61,876) (15,858) (286) (575) (78,594) Note 5.3. Provision for employee benefits In certain countries, the Group's employees benefit from different pension plans, retirement compensation, length-of-service awards linked to seniority require- ments and additional post-employment benefits. To cover these benefits, the Group has defined-contribution plans and defined-benefit plans in place. A defined-contribution plan is a pension plan into which the Group pays fixed contributions to a third-party en- tity. The Group does not have any obligation other than to pay the premiums, and the corresponding expense is recorded in the income statement for the fiscal year. A defined-benefit plan is a plan that guarantees a certain level of benefits in the future depending on salary, age and seniority of the employee. Such is the case for bene- fits that may be paid when the employee retires. For defined-benefit plans, in accordance with IAS 19 R “Employee Benefits,” obligations are determined using 5.3.1. Actuarial assumptions Discount rates Discount rates correspond to: • For France: AA-rate corporate bond rates in the Eu- rozone, adjusted according to the duration of the Group's commitments; For other counties: rates reported by the central banks. • Discount rates January 31, 2017 January 31, 2016 France Germany Japan South Korea India 1.70% 1.98% 0.60% 2.20% 7.30% 1.90% - 0.75% 2.10% 8.40% the projected unit credit method. This actuarial method stipulates that each period of service entitles the em- ployee to one unit of benefit rights and evaluates each of these units separately to arrive at a final commitment. These calculations use assumptions in terms of mortal- ity, staff turnover and future salary increases. Defined-benefit pension schemes and long-term bene- fits recognized in accordance with IAS 19 R are as fol- lows: • For France: retirement benefits, supplementary pension plan provided by an insurance company; For Korea, India and Japan: severance pay owed to employees upon departure from the company re- gardless of reason for departure, calculated on the basis of length of service within the company; For Germany: defined-contribution benefits owed to selected managers. • • Rate of salary increase Details by country are presented below: Rate of salary increase January 31, 2017 January 31, 2016 France Germany Japan South Korea India 2.50% 2.00% 3.00% 3.00% 10.00% 2.50% - 3.00% 3.00% 8.33% ESI GROUP • 2016 REGISTRATION DOCUMENT 98FINANCIAL STATEMENTS 5 Staff turnover rates Turnover rates are calculated per subsidiary and per age group according to the past experience of each subsidiary. 5.3.2. Change in commitment and provisions (in € thousands) January 31, 2016 Change in scope of consolidation Change in equity (OCI) Provisions Reversals Foreign exchange gain/loss January 31, 2017 TOTAL PROVISION EMPLOYEE BENEFITS FOR 6,820 308 724 542 (100) 178 8,472 ANALYSIS OF THE VARIATION IN THE PROVISION RECORDED IN THE BALANCE SHEET: (in € thousands) January 31, 2017 January 31, 2016 CHANGE IN COMMITMENTS Commitments at opening Acquired companies Costs of services rendered in the period Interest expenses Benefits paid Actuarial gains and losses Foreign exchange gain/loss COMMITMENTS AT CLOSING CHANGE IN FAIR VALUE OF ASSETS Fair value of assets at opening Acquired companies Yield on assets Employer contributions (1) Benefits paid Actuarial gains and losses Foreign exchange gains and other FAIR VALUE OF ASSETS AT CLOSING NET EXPENSE FOR THE YEAR Costs of services rendered Finance charges Interest expenses Yield on assets NET EXPENSE FOR THE YEAR PROVISION RECORDED IN THE BALANCE SHEET Commitments financed Fair value of assets Net commitments financed Commitments not financed PROVISION AT CLOSING CHANGE IN PROVISION Provision at opening Net expense for the year Actuarial gains and losses Employer contributions (1) (7,520) (967) (743) (191) 244 (758) (216) (10,152) 700 659 25 367 (144) 34 38 1,680 (743) (166) (191) 25 (909) (4,230) 1,680 (2,550) (5,923) (8,472) (6,820) (909) (724) 367 (6,944) (9) (690) (136) 118 69 73 (7,520) 95 - 6 633 (6) 4 (32) 700 (690) (130) (136) 6 (820) (2,439) 700 (1,739) (5,082) (6,820) (6,849) (820) 73 633 ESI GROUP • 2016 REGISTRATION DOCUMENT 995 FINANCIAL STATEMENTS Benefits paid Acquired companies Foreign exchange gain/loss PROVISION AT CLOSING (1) The change in hedging assets corresponds primarily to Korea. 5.3.3. Sensitivity of commitments to fluctuations in the discount rate 100 (308) (178) (8,472) (in € thousands) Commitment – 0.5% Commitment Commitment + 0.5% (in € thousands) Total actuarial gains/losses Experience adjustment Change in financial assumptions Yield on assets 112 (9) 40 (6,820) (10,552) (10,152) (9,308) (724) (173) (543) (8) Note 5.4 Share-based payments Stock options may be granted to selected Group employ- ees. They entitle employees to subscribe to new shares or purchase existing shares of ESI Group four or five years after stock options are awarded at a fixed exercise price set on the award date. Criteria for the granting of stock options may include performance requirements, additionally to continued employment requirement. In accordance with IFRS 2, options are measured at the fair value of the benefit granted to the employee, esti- mated at grant date. They are recorded as personnel costs in the income statement on a straight-line basis over the vesting period of the option, offset against eq- uity. The expense is recorded in the income statement per destination according to the allocation of each con- cerned person. The fair value of the option is determined using the “Black–Scholes” model, the main parameters of which include: the exercise price of the options, their expected life, share price at grant date, the inherent volatility of the share price and the risk-free interest rate. Free shares may also be awarded to Group employees. The fair value of the benefit granted is determined based on the share price on the day of the award multiplied by the number of shares awarded. This cost is recorded on a straight-line basis over the vesting period. ESI GROUP • 2016 REGISTRATION DOCUMENT 100FINANCIAL STATEMENTS 5 Terms and conditions of stock options and free shares plans Stock options and free share grants have been authorized by various General Meetings and could potentially dilute ESI Group's capital. The table below describes the status of the various plans under which options have been granted but not yet exercised. Plan number Year of implementation Number of stock options/shares allotted or to be allotted Number of stock options/shares granted O/w performance shares Weighted average exercise price Number of existing stock options/shares at January 31, 2017 Year that stock options can be exercised Plan 10 Plan 15 Plan 17 Plan 18 TOTAL STOCK OPTIONS Plans 6 and 7 TOTAL FREE SHARES 2012 2013 2014 2016 2016 180,000 294,538 180,000 297,753 180,000 20,000 17,350 0 62,300 20,000 0 25.95 21.66 24.97 111,175 20,000 17,350 2020-2025 2025 2023 957,291 217,350 82,300 60,000 60,000 27,262 27,262 0 0 0 0 0 148,525 27,208 2018-2020 27,208 175,733 TOTAL STOCK OPTIONS AND FREE SHARES 1,012,291 244,612 82,300 The total expense related to share-based payments for the fiscal year ended January 31, 2017 stands at €80 thousand. That related to free shares stands at €253 thousand. All stock options and free shares include a continued employment requirement. Movements in stock options and free shares plans are as follows: 2016 2015 Numbers of stock options and free shares Weighted average exercise price Numbers of options and free shares Weighted average exercise price STOCK OPTIONS AND SHARES EXISTING AT OPENING Stock options/free shares granted Stock options expired or canceled Stock options exercised and free shares delivered STOCK OPTIONS AND SHARES EXISTING AT CLOSING OPTIONS THAT MAY BE EXERCISED AT THE BALANCE SHEET DATE 207,080 37,262 (12,544) (56,065) 175,733 0 20.54 6.27 25.75 6.98 21.56 178,330 45,500 (10,100) (6,650) 207,080 31,920 19.71 24.26 25.81 8.86 20.54 8.86 The main data and assumptions underlying the valuation of stock options and free shares at fair value were as follows: Stock options Plan 10 Plan 15 Share price at grant date Exercise period of stock options/free shares in years Volatility Dividend rate Interest rate 25 to 28 3 to 5 22% to 25% 0% 0.3% to 1.3% 25 4 22% 0% 0.4% Plan 17 24 to 28 1 to 5 23% 0% 0.7% Free shares Plan 6 30 2 to 4 n.a. 0% 1.2% Plan 7 46 2 n.a. 0% 1.1% ESI GROUP • 2016 REGISTRATION DOCUMENT 1015 FINANCIAL STATEMENTS Note 6. Intangible and tangible assets Note 6.1. Intangible assets 6.1.1. Change in the gross value, amortization and net value of intangible assets (in € thousands) GROSS VALUES Development costs Intangible assets with an indefinite useful life Other intangible assets TOTAL AMORTIZATION Development costs Intangible assets with an indefinite useful life Other intangible assets TOTAL NET CARRYING AMOUNTS Development costs Intangible assets with an indefinite useful life Other intangible assets TOTAL January 31, 2016 Change in scope of consolidation Increase Decrease Foreign exchange gain/loss January 31, 2017 49,166 12,044 22,556 83,766 (15,626) (73) (13,444) (29,143) 33,539 11,971 9,112 54,623 1,885 28,289 (25,447) 1,885 478 28,767 (291) (25,738) (25,457) 25,447 (1,949) 269 (27,406) 25,715 1,885 2,832 1,885 (1,471) 1,361 (23) (23) 53,894 12,044 22,744 88,681 (15,637) (73) (15,142) (30,851) 38,257 11,971 7,602 57,830 1 1 (18) (18) (16) (16) Changes related to change in scope of consolidation refer to Mineset development costs. 6.1.2. Capitalized development costs evelopment costs borne to gain new scientific or technical knowledge are recorded as expenses when D incurred. Research and development costs are capitalized in situations where the six requirements set forth under IAS 38, “Intangible Assets,” are met: • Technical feasibility of completing the development project has been established; The Group intends to complete the project; The Group will be able to use or sell the product aris- ing from the development project; The product is likely to generate future economic benefits, and a market exists for this product; There are appropriate technical, financial and other resources available to complete the development project and to sell the resulting product; The Group has the ability to reliably measure the ex- penses attributable to the development project. • • • • • The expenses thus converted into assets include the cost of direct labor as well as subcontracting. Releases, which correspond to the commercial launch of new versions or upgrades to our software, are the result of commercial and strategic decisions. In some cases, management may decide to wait until several upgrades have been made before marketing a new version rather than to release several different versions with minor up- grades during the year; in other cases, a new version fea- turing a major innovation may be marketed even if other improvements are planned in the near future. While pro- ject releases are generally planned on a yearly basis, the actual release timeline may vary from one year to the next. These changes have an impact on amortization start dates and, consequently, on amortization amounts recorded. Capitalized expenses are amortized on a straight-line ba- sis over a period of 12 months for development work that leads to the yearly release of new annual versions of soft- ware packages sold by the Group, and on a straight-line ESI GROUP • 2016 REGISTRATION DOCUMENT 102 FINANCIAL STATEMENTS 5 basis over 24 or 36 months for development work that leads to major improvements to existing products, de- pending on the degree of innovation. evelopment costs that do not meet IAS 38 criteria are recorded as expenses when incurred. D In certain cases research and development costs entitle the Group to a tax credit, recorded during the fiscal year when expenses were incurred. These tax credits are deducted from research and development costs. NET IMPACT OF THE CAPITALIZATION OF DEVELOPMENT COSTS (in € thousands) Development costs capitalized during the period Development costs amortized during the period NET IMPACT OF THE CAPITALIZATION OF DEVELOPMENT COSTS January 31, 2017 January 31, 2016 28,289 (25,457) 2,832 23,556 (20,100) 3,456 Net value of capitalized developments costs represented 14.0 months of research and development costs (€38.3 million) incurred at January 31, 2017, compared to 13.8 months (€33.5 million) at January 31, 2016. RECONCILIATION OF R&D COSTS INCURRED AND ACCOUNTED FOR IN THE INCOME STATEMENT (in € thousands) R&D COSTS INCURRED DURING THE PERIOD (1) R&D costs capitalized during the period R&D costs amortized during the period French R&D tax credit TOTAL R&D COSTS RECOGNIZED AS EXPENSES DURING THE FISCAL YEAR (1) Including €4.405 million in expenses accounted for as direct costs in 2017, compared to €5.553 million in 2016. January 31, 2017 January 31, 2016 (32,694) 28,289 (25,457) 2,920 (26,942) (29,109) 23,556 (20,100) 2,881 (22,772) 6.1.3. Intangible assets with an indefinite useful life Intangible assets with an indefinite useful life include source codes that allow the Company to obtain intellec- tual property rights to the software code. Specifically, it involves the translation of the laws of physics into pro- gramming language in the form of algorithms that make it possible to simulate the reaction of materials under external constraints. The intangible assets stemming from the purchase of business units are deemed to have indefinite useful lives as long as no substitute technology currently exists and as long as the recurrent business model (yearly leases) ensure that the installed base continues to generate rev- enue over the long-term. The Group is of the opinion that the useful life of these intangible assets cannot be determined as long as the underlying scientific content in purchased products is not challenged by a technological breakthrough that would render it obsolete. Furthermore, significant re- search and development efforts (accounting for 30% of revenue from licensing) focusing on these up-and-com- ing products guarantee the long-term value of the asset. Assets with an indefinite useful life are not amortized. They are subject to impairment tests performed each year. The impairment testing process and results at Jan- uary 31, 2017 are described in note 3.1. The useful life of an intangible asset with an indefinite useful life is reviewed each year to determine whether events and circumstances continue to support an indef- inite useful life assessment for this asset. If they do not, the change in the useful life assessment from indefinite to finite must be accounted for prospectively. ESI GROUP • 2016 REGISTRATION DOCUMENT 1035 FINANCIAL STATEMENTS 6.1.4. Other intangible assets Intangible assets with a finite useful life consist mainly of software. In accordance with IAS 38, they are valued at cost. Amortization is recorded in the income statement based on the estimated useful life of the asset, according to the fol- lowing criteria: Office and similar software applications Other operational software Codes - third-party software integrated into products Method Straight-line method Straight-line method Straight-line method Useful life 1 to 3 years 3 to 5 years 5 to 8 years The period and method of amortization for an intangible asset with a finite useful life are re-measured at the end of each period or more frequently. Any change in the estimated useful life or the expected pattern of consumption of the future economic benefits embodied in the asset are recorded by modifying the period or method of amortization. The impact of such change is accounted for prospectively as a change in estimate. Amortization costs of intangible assets with finite useful lives are recorded in the income statement under the category of expense related to the function of the intangible asset. Note 6.2. Property, plant and equipment 6.2.1. Accounting principles In accordance with IAS 16 “Property, Plant and Equipment,” these assets are valued at cost. They are not subject to any type of revaluation. Amortization is recorded in the income statement based on the estimated useful life of the asset, according to the following criteria: Fixtures and fittings Computer hardware Office furnishings Method Straight-line method Straight-line method Straight-line method Useful life 5 to 10 years 3 to 5 years 5 to 10 years ESI GROUP • 2016 REGISTRATION DOCUMENT 104FINANCIAL STATEMENTS 5 6.2.2. Change in the gross value, amortization and net value of property, plant and equipment (in € thousands) GROSS VALUES Fixtures and fittings Computer hardware (1) Office furnishings and other tangible assets (1) TOTAL AMORTIZATION Fixtures and fittings Computer hardware (1) Office furnishings and other tangible assets (1) TOTAL NET CARRYING AMOUNTS Fixtures and fittings Computer hardware (1) Office furnishings and other tangible assets (1) January 31, 2016 Change in scope of consolidation Increase Decrease Foreign exchange gain/loss January 31, 2017 3,729 11,858 3,164 18,751 (2,502) (9,397) (2,587) (14,485) 1,227 2,461 577 53 53 (22) (22) 32 96 1,611 309 2,016 (222) (1,398) (176) (1,797) (126) 213 133 (385) (303) (126) (814) 279 290 126 696 (106) (12) (1) 38 49 26 113 (24) (26) (21) (71) 14 23 4 3,478 13,270 3,372 20,120 (2,469) (10,552) (2,659) (15,680) 1,010 2,717 713 TOTAL (1) €280 thousand in fixed assets were reclassified at opening with no impact on the gross value or total net value of the Group's property, plant and equipment. 4,266 220 32 (118) 41 4,440 Note 7. Financing and financial instruments Note 7.1. Financial assets and liabilities Financial assets and liabilities mainly comprise: • Long-term financial debts, short-term borrowings and overdrafts, together comprising gross debt – see details in note 7.1.2; Loans and other short-term financial assets, and cash and cash equivalents – see details in note 7.1.3 – which added to gross debt represent net financial debt ; Derivative financial instruments – see details in note 7.1.4. • • ESI GROUP • 2016 REGISTRATION DOCUMENT 1055 FINANCIAL STATEMENTS 7.1.1. Fair value of financial assets and liabilities (in € thousands) ASSETS Non-current financial assets: • • • • Non-consolidated investments Deposits and guarantees Factoring of French R&D tax credit for 2014 and 2015 (debt due from the French state) Derivative assets Trade receivables Cash and cash equivalents LIABILITIES Bank borrowings Factoring of French R&D tax credit for 2014 and 2015 (debt due from ESI to the factor) Other financial debts Derivative liabilities Other financial liabilities Payables In accordance with IFRS 13, the various valuation tech- niques for each financial instrument must be ranked. The different categories are as follows: • Level 1: direct reference to quoted (unadjusted) prices accessible on active markets for identical as- sets or liabilities; Level 2: valuation method based on directly or in- directly observable data associated with the asset or liability other than the quoted prices included in level 1 data; Level 3: valuation method based on unobservable data. • • The fair value of cash and cash equivalents is calculated using level 1. Derivative instruments (see notes 7.1.4 and 7.3) are val- ued using level 2. Debts on earnouts, put options (other financial liabilities) and investments in non-consolidated companies are val- ued using level 3. Carrying amount under IAS 39 January 31, 2017 Amortized cost Fair value through equity Fair value through profit and loss Carrying amount 3,437 4,439 74,064 46,188 4,439 796 10,895 53 1,247 124 22 14,470 414 124 3,437 4,439 22 74,064 14,470 46,188 4,439 1,210 53 1,247 10,895 7.1.2. Gross financial debt In November 2015, ESI Group signed a €49 million syndicated loan agreement with a pool of six banks. The lines of credit for refinancing the previous syndicated loan and external growth (€39 million) have a maturity date of November 2022, partly with annual straight- line amortization. WCR financing, which aims to optimize cash management at ESI Group, heavily impacted by the highly seasonal nature of its business model, was included in the syndicated loan in the form of a €10 million revolving line of credit. At January 31, 2017, €34.6 million of the long-term lines of credit had been used (following an initial repayment of €4.3 million) and ESI Group had established rate hedging instruments for 40% of the nominal amount of these lines (see note 7.1.4). €8 million of the revolving line of credit has been used. At the date , the entire revolv-ing line of credit had been of approval of financial statements by the Board paid off. of Directors All financial debts are denominated in euros. ESI GROUP • 2016 REGISTRATION DOCUMENT 106 FINANCIAL STATEMENTS 5 Detail and maturity of financial debt At January 31, 2017 (in € thousands) Syndicated loan Short-term revolving loan Other bank borrowings Factoring of French R&D tax credit for 2014 and 2015 Profit-sharing funds Other financial debts TOTAL At January 31, 2016 (in € thousands) Syndicated loan Short-term revolving loan Other bank borrowings Factoring of French R&D tax credit for 2014 2018 4,464 8,000 2,635 163 543 15,805 CURRENT: 15,805 2017 3,777 8,000 2,058 Profit-sharing funds 25 Repayable advances Other financial debts TOTAL 108 13,967 CURRENT: 13,967 Maturity at January 31 2020 4,464 1,991 65 6,520 Maturity at January 31 2019 3,777 258 328 4,363 2019 4,464 310 4,774 2018 3,777 155 272 129 4,333 400 2,448 65 7,377 1,991 65 5,833 2021 2022 and beyond 4,464 16,695 600 2020 2021 and beyond 3,777 17,940 Total 34,553 8,000 3,635 4,439 163 Total 33,048 8,000 2,316 1,991 179 272 65 17,360 1,047 51,837 NON-CURRENT: 36,031 129 18,069 759 46,566 NON-CURRENT: 32,597 Financial debt by type of interest rate and maturity At January 31, 2017 (in € thousands) Fixed-rate debt Variable-rate debt No-interest debt TOTAL 2018 163 15,513 129 15,805 CURRENT: 15,805 Maturity at January 31 2019 - 4,464 310 4,774 2020 - 6,455 65 6,520 2021 2022 and beyond Total - 7,312 65 7,377 - 17,295 65 17,360 163 51,041 633 51,837 NON-CURRENT: 36,031 7.1.3. Cash and cash equivalents “Cash and cash equivalents” corresponds to cash, bank interest-bearing accounts, mutual funds, deposits, money market funds and other liquid and easily con- vertible investments subject to an insignificant risk of changes in value qualified as cash equivalents, in ac- cordance with IAS 7. In accordance with IAS 39, marketable securities are recognized at market value at the closing date. Changes in market value are recognized in Financial Result. The Group classifies no-risk investments in interest- ESI GROUP • 2016 REGISTRATION DOCUMENT 1075 FINANCIAL STATEMENTS bearing accounts, commercial paper and certificates of deposit originally maturing in three months or less and not bearing any significant interest rate risk, as cash equivalents. (in € thousands) Cash Marketable securities TOTAL EQUIVALENTS CASH AND CASH January 31, 2017 January 31, 2016 14,470 - 10,327 - 14,470 10,327 7.1.4. Financial instruments The Group uses derivative instruments to manage its ex- posure to fluctuations in exchange rates and interest rates. In accordance with IAS 39, derivative instruments are recorded at fair value on the balance sheet. Changes in fair value of derivative financial instruments are accounted for as follows : • Cash flow hedges: changes in value are recognized in equity and reclassified in profit or loss until the effective completion of the forecast transaction. Instruments not qualifying for hedge accounting: certain derivatives that in substance represent hedges do not qualify for hedge accounting under IAS 39. Changes in fair value measurement of these derivative instruments are recognized in Financial Result. • Interest rate derivatives Interest rate swaps signed by ESI Group are hedging in- struments to the variable interest rate of the syndicated loan. Interest rate swaps signed at January 31, 2017 are as fol- lows: • Three swaps of €1.9 million, ESI Group receiving var- iable rate 1-month Euribor (with a 0% floor) and paying a fixed rate of 0.195% with two banks and 0.22% with a third bank; Three swaps of €2.7 million, ESI Group receiving var- iable rate 1-month Euribor (with a 0% floor) and paying fixed rates of 0.16%, 0.18% and 0.19%, re- spectively. • At January 31, 2017, the market value of these instru- ments was €-34 thousand. Foreign exchange instruments In order to manage foreign currency risk on cash flows be- tween the Group's parent company and its subsidiaries, ESI Group may purchase foreign currency options at any time and enter into any other type of foreign exchange contract. Foreign exchange instruments in place 2017 concerned Japanese yen (forwards, tunnels, targets), South Korean won (non-delivery forwards) and Indian rupee (non-delivery forwards). These considered hedging instruments are not instruments as defined by IAS 39. At January 31, 2017, the market value of these instruments was €3 thousand. during Note 7.2. Financial income and expenses (in € thousands) January 31, 2017 January 31, 2016 Interest and borrowings related expenses on Interest income Foreign exchange gain/(loss) Floor of syndicated credit Other financial expenses FINANCIAL RESULT (1,000) 12 (818) 258 (566) (2,115) (552) 30 314 (258) (484) 950 The increase in borrowing expenses is due to the draw- downs on long-term syndicated lines of credit carried out in January and February 2016 following the acquisitions of ITI GmbH and Mineset Inc. In accordance with IFRIC's position, issued in H1 2016 and stating that separate recognition is not necessary for an embedded interest rate floor in a syndicated debt con- tract, ESI Group reclassified to profit and loss the €258 thousand financial debt recognized at January 31, 2016. Other financial expenses include: • Interest charges calculated on employee benefit commitments; Factoring expenses for receivables under the French R&D tax credit; Overdraft interest charges; • Impairment of non-consolidated Cademce securities. • Details on foreign exchange gains and losses are as fol- lows: • (in € thousands) January 31, 2017 January 31, 2016 USD JPY KRW Other currencies TOTAL (216) (823) 114 107 (818) 415 120 (200) (21) 314 Note that the effect of the net foreign exchange loss on ESI GROUP • 2016 REGISTRATION DOCUMENT 108FINANCIAL STATEMENTS 5 cash and cash equivalents did not exceed €-550 thousand (hedging instruments and transactions in foreign curren- cies). Foreign exchange losses on JPY were due to the vol- atility of the currency starting from June 2016. Note 7.3. Risk management policy Country risk and foreign currency risk During the fiscal year ended January 31, 2017, 45.1% of the Group's revenue was generated in Europe, 39% in Asia (mainly Japan, South Korea, China and India) and 15.8% in the Americas (mainly the United States and Brazil). The Group is thus exposed to economic and political uncer- tainties in these areas. The Group is also highly exposed to risks stemming from changes in foreign exchange rates: for the fiscal year ended January 31, 2017, 42.2% of revenue was generated in EUR, 19.6% in USD (US dollar), 21.7% in JPY (Japanese yen), 4.4% in KRW (Korean won) and 4.6% in CZK (Czech koruna). Furthermore, 53.7% of costs are spent in EUR, 17.0% in USD (US dollar), 8.6% in JPY (Japanese yen), 6.5% in INR (Indian rupee), 3.2% in KRW (South Korean won), 3.0% in CZK (Czech koruna) and 2.6% in CHF (Swiss franc). The Group's policy aims, whenever possible, to hedge budgeted net operating cash flows on the basis of budg- eted exchange rates. The table below shows the results of sensitivity analysis of EBIT to exchange rate fluctuations. The assumption is a 10% decline in the average exchange rate applied to all transactions (purchases and sales), with respect to the principal cur- rencies to which the Group is exposed. Currency JPY KRW CZK USD INR CHF Average consolidation exchange rate 119.80 1,280.14 27.03 1.10 74.28 1.09 Exchange rate used for analysis Effect on Current Operating Result in € millions 131.78 1,408.15 29.74 1.22 81.71 1.20 - 1.8 - 0.2 - 0.2 - 0.1 0.4 0.3 the Group's Interest rate risk feature Most of st rates. To limit the negative impacts variable inter a non- the Group of rate fluctuation, speculative management policy, using derivatives described in Note 7.1.4. financial debts applies e rate interest analysis risk to Sensitivity The only debts included in the calculation of interest rate sensitivity are those with variable interest rates. These are mostly bank loans for which drawdown and repayment are left to the borrower's discretion. At January 31, cash Given ESI Group's optimization of flow management, the amount of debt incurred from bank loans over the course of the year has fluctuated, with generally lower levels, like-for-like, during the period than at the end of the fiscal year. The sensitivity presented below assume that financial debts remain stable at January 31, 2017 levels, meaning a fixed level of drawdown on bank loans as of that date. foreign-exchange calculations of 2017, €8 million of the revolving credit line has been used and this line was entirely paid off at the date of approval of financial statements by the Board of Directors (April 18, 2017). ESI GROUP • 2016 REGISTRATION DOCUMENT 1095 FINANCIAL STATEMENTS The table below simulates the effects in terms of outflows of interest rates rising and falling by 1%: (in € thousands) Variable rate financial liabilities Variable rate financial assets Off-balance sheet commitments NET POSITION Sensitivity to a 1-point decrease Sensitivity to a 1-point increase < 1 year (15,513) ≥ 1 year, < 5 years ≥ 5 years (18,231) (17,295) (15,513) (18,231) (17,295) Total (51,041) (51,041) 44 (251) Equity risk In accordance with IAS 32, treasury shares are accounted for as part of consolidated shareholder equity and varia- tions in value are not recorded. When treasury shares are acquired or sold, shareholder equity is adjusted to reflect the value of the shares acquired or sold. Note 9.1 contains a detailed description of changes in treasury stock, whether in the context of a liquidity agreement or in- tended to cover stock options and free share grants. As part of its cash flow management strategy, the Group does not directly hold any other listed stock and does not invest in equity-dominated or equity-benchmark UCITS. Thus, the Group's net financial income is not directly or significantly affected by variation in any given stock or market index. Liquidity risk The Company has specifically reviewed its liquidity risk and it considers itself to be in a position to satisfy future payment obligations. The ratios to be maintained (cove- nants) with regard to the syndicated loan contract entered into in November 2015 are detailed in Note 7.4. Note 7.4. Off-balance sheet commitments relating to Group financing ESI Group pledged 99.98% of the shares of ESI France and 95.50% of ESI Software Germany as collateral in a credit agreement dated November 5, 2015. As long as the Group remains bound by the collateral agreement or documents, it undertakes to adhere to the following ratios under penalty of early repayment: • Ratio R1: Consolidated net financial debt divided by consolidated EBITDA: less than or equal to 2.9 at Jan- uary 31, 2017 (tapering threshold for future years); Ratio R2: Consolidated net financial debt divided by consolidated equity: less than or equal to 0.60; Ratio R3: Consolidated free cash-flow divided by • • debt servicing: equal or greater than 1. If the ratio is lower than 1, the Ratio may still be considered as be- ing met if the net consolidated cash balance is posi- tive. As of January 31, 2017, on the basis of the consolidated financial statements certified by the auditors, the Group was compliant with the ratios described above. During the fiscal year ended January 31, 2017, ESI Group signed with Bpifrance a long-term financing envelope of up to €3 million over five years, €1 million of which had been used at the end of the fiscal year. Note 8. Income tax Note 8.1. Income tax expense Deferred tax assets and liabilities reflect future decreases or increases in income tax expense to be paid that result, for certain asset and liability items, from temporary valuation differences between their carrying amounts and their tax base, as well as from tax loss and tax credit carryforwards. Deferred tax assets and liabilities are assessed by tax entity or group based on the tax rates applicable to the years during which these temporary differences are likely to be re- versed or paid. Deferred tax assets and liabilities are adjusted for each entity to present either a net asset position or a net liability position. Deferred tax assets are only recorded in cases where it is likely that the future tax savings they represent will be real- ized. The Group reviews the probability of future recovery of deferred tax assets on a periodic basis for each tax entity. In some cases, this review can lead the Group to derecognize deferred tax assets that it had recognized in prior years. ESI GROUP • 2016 REGISTRATION DOCUMENT 110The Group has three tax groups: • • • In France, with the parent company, ESI Group, as head company; In Germany, with ESI Software Germany GmbH as head company; In the United States, with ESI North America, Inc. as head company. 8.1.1. Income tax expense (in € thousands) Current taxes Deferred taxes TOTAL 8.1.2. Tax proof (in € thousands) Net income before taxes Including share of profit of associates Theoretical tax rate Theoretical tax (expense)/benefit Permanent differences between accounting income and taxable income Impact of liability method Impact of standard tax rate differentials between parent company and subsidiaries Unrecognized deferred tax assets and unused tax losses Recognition of previously unrecognized deferred tax assets GROUP INCOME TAX EXPENSE Effective tax rate Note 8.2. Deferred taxes BREAKDOWN OF DEFERRED TAXES BY TAX BASE (in € thousands) DEFERRED TAX ASSETS Tax loss carryforwards Temporary differences related to tax treatment of maintenance Provisions for employee benefit commitments Temporary differences related to personnel Provisions and other adjustments TOTAL DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES Amortization of acquired intangible assets Other TOTAL DEFERRED TAX LIABILITIES NET DEFERRED TAX FINANCIAL STATEMENTS 5 January 31, 2017 January 31, 2016 (4,322) 330 (3,992) (3,254) 97 (3,595) January 31, 2017 January 31, 2016 11,695 89 33.33% (3,868) (263) (268) 207 (736) 936 (3,992) 34.4% 8,527 123 33.33% (2,801) 79 (85) (218) (381) 250 (3,157) 37.6% January 31, 2017 January 31, 2016 1,928 4,454 2,792 1,073 654 10,901 (2,005) (958) (2,963) 7,939 1,616 4,411 2,196 872 656 9,752 (1,697) (788) (2,485) 7,267 Unrecognized deferred tax assets on tax loss carryforwards came to €2.015 million. The timeframe used for estimating ESI GROUP • 2016 REGISTRATION DOCUMENT 1115 FINANCIAL STATEMENTS the recoverability of these deferred tax assets is generally five years, except in cases where the results of an entity are extremely predictable. RECONCILIATION OF DEFERRED INCOME TAX EXPENSE ON THE BALANCE SHEET AND INCOME STATEMENT (in € thousands) Net deferred tax assets at opening (February 1, 2016) Acquired companies Deferred tax expenses recorded in the income statement Deferred tax expenses recognized directly in equity (IAS 19 revised) Foreign exchange gain/loss on deferred tax expenses NET DEFERRED TAX ASSETS AT CLOSING (JANUARY 31, 2017) Note 9. Equity and earnings per share Note 9.1. Share capital, reserves and treasury stock ESI Group’s share capital is made up of ordinary shares. 7,267 (66) 330 247 160 7,939 The “Currency translation difference” line item is used to record losses or gains generated by converting the financial statements of foreign subsidiaries into euros as well as foreign exchange losses or gains on transactions characterized as long-term investments with foreign subsidiaries. When the Group buys back its own shares, these shares are recorded at their net purchase price as treasury stock and deducted from equity. The proceeds from the sale of treasury stock are accounted for directly in equity. Share capital At January 31, 2017, ESI Group's share capital was €17.976 million, comprising 5,991,992 common shares with a par value of €3 each. Dividend payout ESI Group did not pay out any dividend during the period. Treasury shares The number of treasury shared declined by 11,498 shares over the fiscal year. The percentage of capital held as treasury shares following these transactions stood at 7.0% at January 31, 2017, compared to 7.2% at January 31, 2016. The Group owns a total of 419,386 treasury shares, purchased at a historical cost of €4.437 million and with a market value of €19.439 million at the same date, for an unrealized gain of €15.001 million. €4.525 million corresponding to treasury shares and ad- justments for gains or losses on past disposals is deducted from equity. Transactions with non-controlling interests Transactions with non-controlling interests are recog- nized directly in equity. See details in notes 3.1 and 3.2. Note 9.2. Minority interests If, in the event of losses, the share corresponding to mi- nority interests is negative, the excess and any further losses attributable to the minority interests are deducted from the minority interests. Note 9.3. Earnings per share The table below details the net income (Group share) per share: (in € thousands) January 31, 2017 January 31, 2016 NET INCOME (GROUP SHARE) Net earnings per share (in euros) Average number of shares Diluted earnings per share (in euros) 7,523 5,330 1.36 0.96 5,547,500 5,534,542 1.35 0.96 Average number of diluted shares Only stock options and free shares may have a dilutive ef- fect 5,577,169 5,591,671 ESI GROUP • 2016 REGISTRATION DOCUMENT 112FINANCIAL STATEMENTS 5 Note 10. Other balance sheet items Note 10.1. Other assets 10.1.1. Other non-current assets (in € thousands) Security deposits mainly concern real estate rentals. Factored receivables under the French R&D tax credit concern FY2014 and FY2015 (see Note 7.1.2). Factoring from previous years was deconsolidated. January 31, 2017 January 31, 2016 10.1.2. Other current receivables Security deposits Factored French R&D tax credit Other long-term assets Investments companies in non-consolidated 3,082 4,439 355 1,957 1,991 - 24 124 TOTAL OTHER NON-CURRENT ASSETS 7,900 4,072 (in € thousands) French R&D tax credit Other tax credits VAT and other receivables January 31, 2017 January 31, 2016 3,230 1,488 7,554 2,836 2,647 7,208 TOTAL OTHER CURRENT ASSETS 12,273 12,692 French R&D tax credit receivables as of January 31, 2017 are related to costs incurred in FY2016. 10.1.3. Prepaid expenses Prepaid expenses consist primarily of rent for real estate and other property. Note 10.2. Other liabilities 10.2.1. Tax payables, employee-related liabilities and other short-term liabilities (in € thousands) January 31, 2017 January 31, 2016 Employee-related liabilities Tax payables Other current liabilities TAX PAYABLES, EMPLOYEE-RELATED LIABILITIES AND OTHER SHORT-TERM LIABILITIES 14,061 10,494 4,774 29,329 13,335 9,958 3,300 26,593 Tax payables consist primarily of VAT payables in the amount of €8.279 million. 10.2.2. Other provisions In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” a provision is recorded when the following 3 conditions are met: the Group has an obligation towards a third party resulting from past events, it is prob- able that future outflows of resources embodying economic benefits will be necessary to settle the obligation, the amount of the obligation can be estimated in a reliable way. Provisions are established mostly to mitigate labor-related risks and other risks and expenses related to the Company's business activities. (in € thousands) January 31, 2016 Provisions Reversals – provisions used Reversals – provisions not used Foreign exchange gain/loss January 31, 2017 Disputes CURRENT PROVISIONS FOR LIABILITIES 1,551 1,551 105 105 (623) (623) - - 8 8 1,042 1,042 Reversals during the fiscal year essentially concerned tax and employee-related risks France. The provision referring to tax audit for the years 2009-2011 has been totally reversed, as the audit is finished and the tax adjustment has been paid. ESI GROUP • 2016 REGISTRATION DOCUMENT 1135 FINANCIAL STATEMENTS Note 11. Related party transactions Executive corporate officers’ compensation Compensation and benefits paid to the Group's three executive corporate officers during the fiscal years ended January 31, 2017 and January 31, 2016 breaks down as follows: (in € thousands) Fixed compensation Variable compensation Travel bonus Benefits in kind Directors' fees TOTAL January 31, 2017 January 31, 2016 738 26 134 207 16 1,121 739 118 204 16 1,079 Related party transactions During the fiscal year, Ms. Cristel de Rouvray, Director, carried out specific assignments for ESI Group relating to human resources, consulting, and strategic management, in respect of which she received compensation in the amount of USD70 thousand. This agreement was renewed during FY2106 and reviewed by the Board of Directors at its April 8, 2016 meet- ing. ESI GROUP • 2016 REGISTRATION DOCUMENT 114FINANCIAL STATEMENTS 5 Note 12. Fees paid to statutory auditors PricewaterhouseCoopers Audit Ernst & Young Total Amount % Amount % Amount % (In € thousands, excluding tax) Y Y-1 Y Y-1 Y Y-1 Y Y-1 Y Y-1 Y Y-1 STATUTORY AUDIT, CERTIFICATION, REVIEW OF ANNUAL AND CONSOLIDATED FINANCIAL STATEMENTS 135 132 37% 52% 148 155 51% 60% 283 287 43% 56% • • Parent company Fully subsidiaries consolidated 101 236 77 28% 30% 209 65% 82% OTHER WORK AND SERVICES DIRECTLY RELATED TO STATUTORY AUDIT • • Parent company Fully subsidiaries consolidated TOTAL 47 78 125 361 38 13% 15% 9 47 22% 4% 35% 18% 133 281 9 9 97 46% 37% 252 97% 97% 7 7 3% 3% 0% 3% 0% 3% 234 517 56 78 134 651 174 36% 34% 461 79% 90% 45 9 54 9% 9% 12% 2% 21% 11% 514 100% 100% 256 100% 100% 290 259 100% 100% The Group opted to follow the recommendations of the French Association of Statutory Auditors (CNCC) to record, at the reporting date, expenses related to audit fees corresponding to services actually rendered during the period. The total budget for certification fees for the parent-company and consolidated financial statements for the fiscal year ended Jan- uary 31, 2017 came to €274 thousand. Note 13. Subsequent events In February 2017, ESI Group acquired 100% of the capital of French company Scilab Enterprises and purchased the mi- nority interests in its subsidiary ESI Italia, now 100% owned by the Group. ESI GROUP • 2016 REGISTRATION DOCUMENT 1155 FINANCIAL STATEMENTS 5.1.6. Statutory Auditors’ report on the consolidated financial statements This is a free translation into English of the statutory auditors’ report on the consolidated financial statements issued in French and it is provided solely for the convenience of English-speaking users. The statutory auditors’ report includes information specifically required by French law in such reports, whether modified or not. This information is pre- sented below the audit opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opini on on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures. This report also includes information relating to the specific verification of information given in the group’s management report. This report should be read in conjunction with and construed in accordance with French law and professional auditing standards applicable in France. Year ended January 31, 2017 To the Shareholders, In compliance with the assignment entrusted to us by your annual General Meeting, we hereby report to you, for the year ended January 31, 2017, on: • • • These consolidated financial statements have been approved by your Board of Directors. Our role is to express an opinion on these financial statements based on our audit. The audit of the consolidated financial statements of ESI Group as appended to this report; The justification of our assessments; The specific verification required by law. I. Opinion on the consolidated financial statements We conducted our audit in accordance with professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance that the consolidated financial statements are free of material misstatement. An audit involves sampling techniques or other methods of selection to verify information regarding the amounts and disclosures in the consolidated financial statements. An audit also involves evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion, the consolidated financial statements provide a true and fair view of the assets and liabilities, financial position and results of the group comprising the consolidated entities, in accordance with International Financial Report- ing Standards as adopted by the European Union. II. Justification of our assessments In accordance with the provisions of Article L. 823-9 of the French Commercial Code relating to the justification of our assessments, we draw your attention to the following matters: Development costs As part of our assessment of the accounting principles followed by your Group, we reviewed the criteria used for capital- izing and amortizing development expense and measuring the recoverable amount. We ensured that note 6.1.2 to the consolidated financial statements provides appropriate information. Impairment testing of intangible assets At each fiscal year end, your company systematically performs impairment tests on goodwill and intangible assets with indefinite useful lives, and assesses whether there exists evidence of impairment of these assets, as described in notes 3.1 (paragraph 7) and 6.1.3 to the consolidated financial statements. We reviewed the impairment testing method as well as the cash flow projections and assumptions used for the tests, and ensured that the information provided in notes 3.1 (paragraph 7) and 6.1.3 is appropriate. Deferred tax assets Note 8.1 to the consolidated financial statements presents the accounting rules and methods adopted with respect to accounting and valuation of deferred tax assets. Our work entailed assessing the data and assumptions underlying the estimation of the value of the deferred tax assets. These assessments were made as part of our audit of the consolidated financial statements taken as a whole, and there- fore contributed to our opinion as expressed in the first part of this report. III. Specific verification As required by law and in accordance with professional standards applicable in France, we also verified the information ESI GROUP • 2016 REGISTRATION DOCUMENT 116FINANCIAL STATEMENTS 5 presented in the Group’s Management Report. We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements. Neuilly-sur-Seine and Paris-La Défense, May 18, 2017 The statutory auditors PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau ESI GROUP • 2016 REGISTRATION DOCUMENT 1175 FINANCIAL STATEMENTS 5.2. ESI Group annual financial statements 5.2.1. Income statement (in € thousands) Sales of goods Sales of services NET REVENUE Production held as inventory Capitalized production Operating subsidies Reversals of depreciation, amortization, and provisions, expense transfers Other income INCOME FROM OPERATIONS Purchases of raw materials and other supplies (and customs duties) Changes in inventory (raw materials and supplies) Other purchases and external expenses Taxes and duties Wages and salaries Payroll taxes Depreciation and amortization of non-current assets Provisions Other expenses OPERATING EXPENSES OPERATING INCOME FINANCIAL INCOME CURRENT INCOME BEFORE TAX EXCEPTIONAL INCOME Employee profit-sharing Income tax PROFIT (LOSS) Note January 31, 2017 January 31, 2016 Published January 31, 2016 Restated (1) E.1 E.3 E.4 E.5 E.5 E.6 E.7 E.8 F.5 84,313 84,313 543 19 79,138 79,157 (78) 19 79,138 79,157 (78) 28,467 24,132 24,132 173 675 2 47 4,282 2 47 4,282 2 114,173 107,541 107,541 114 (96) 60,973 1,246 14,160 6,712 26,618 1,041 212 36 58,083 1,263 13,203 6,295 22,489 774 3,749 36 58,083 1,263 13,203 6,295 22,489 838 3,749 110,981 105,893 105,956 3,192 (2,492) 700 (721) 16 (1,669) 1,632 1,649 522 2,171 (341) (2,206) 4,036 1,585 482 2,067 (341) (2,206) 3,932 (1) The restated income statement at January 31, 2016 accounts for the change of accounting method for the fiscal year ended January 31, 2017, i.e. recognition of the provision for retirement obligations and post-employment benefits (see note A.2). ESI GROUP • 2016 REGISTRATION DOCUMENT 1185.2.2. Balance sheet Assets (in € thousands) Intangible assets Property, plant and equipment Financial assets NON-CURRENT ASSETS Inventories Down payments to suppliers Trade receivables Other receivables Marketable securities (treasury shares) Cash CURRENT ASSETS Prepaid expenses Expenses capitalized, to be amortized Foreign exchange gains and losses C.1 C.2 C.3 C.4 C.4 C.5 C.6 C.7 C.7 1,671 307 58,878 9,431 4,375 5,328 79,990 2,595 434 1,044 FINANCIAL STATEMENTS 5 Notes Gross value Amortization/Provisions Net value Restated net value (1) January 31, 2017 January 31, 2016 January 31, 2016 80,385 8,983 70,413 (25,455) (6,940) (5,521) 54,931 2,043 64,892 51,770 2,201 60,891 51,770 2,201 60,891 159,781 (37,916) 121,865 114,862 114,862 (2,093) (131) 1,671 1,668 307 56,785 9,299 4,375 5,328 22 48,898 9,041 4,106 2,856 (2,224) 77,766 66,592 2,595 434 1,044 203,704 2,137 509 560 1,668 22 48,898 9,041 4,106 2,856 66,592 2,137 509 560 TOTAL ASSETS 243,844 (40,140) 184,660 184,660 ESI GROUP • 2016 REGISTRATION DOCUMENT 1195 FINANCIAL STATEMENTS Liabilities (in € thousands) Share capital Additional paid-in capital Legal reserve Retained earnings Net profit (loss) Regulated provisions EQUITY OTHER EQUITY PROVISIONS FOR CONTINGENCIES AND CHARGES Bank borrowings Miscellaneous financial debt Down payments from clients FINANCIAL LIABILITIES Trade payables Notes January 31, 2017 January 31, 2016 January 31, 2016 restated (1) D.2 D.10 D.4 D.5 D.7 D.8 17,976 37,749 1,787 30,927 1,632 1,084 91,155 310 5,031 44,103 2,633 233 46,969 38,523 6,719 11,372 56,614 345 3,280 17,865 37,469 1,642 30,237 4,036 758 92,007 371 1,445 42,884 2,398 230 45,512 30,233 5,907 5,896 42,036 619 2,670 17,865 37,469 1,642 27,140 3,932 758 88,806 371 4,645 42,884 2,398 230 45,512 30,233 5,907 5,896 42,036 619 2,670 203,704 184,660 184,660 Tax payables and employee-related liabilities Other liabilities OPERATING LIABILITIES AND MISCELLANEOUS DEBTS D.9 D.6 & D.10 Deferred income Foreign exchange gains and losses TOTAL LIABILITIES (1) The restated balance sheet at January 31, 2016 accounts for the change of accounting method for the fiscal year ended January 31, 2017, i.e. recognition of the provision for retirement obligations and post-employment benefits (see note A.2). ESI GROUP • 2016 REGISTRATION DOCUMENT 120FINANCIAL STATEMENTS 5 5.2.3. Notes to ESI Group annual financial statements Table of contents of notes to the annual financial statements Significant events of the year and Note A. change in accounting Note B. Accounting principles and methods Note C. Asset details method 121 121 124 Note D. Liability details Note E. Details on income statement 130 Note F. Other information 134 136 The balance sheet total at January 31, 2017 came to €203,704 million and the income statement for the fiscal year showed net profit of €1.632 million. The fiscal year corresponds to a 12-month period, from February 1, 2016 to January 31, 2017. The financial statements were prepared in accordance with the French General Accounting Plan and generally ac- cepted accounting principles (French GAP Art. 831-1/1). All amounts listed in these notes are in thousands of euros unless otherwise indicated. The notes below are an integral part of the annual finan- cial statements. Note A. Significant events of the year and change in accounting method Note A.1. Significant events Changes in s • • take in subsidiaries Acquisition of a 100% interest in the US-based com- pany Mineset Inc. on February 5, 2016, financed through a drawdown on the syndicated loan. Buyout of minority interests in the subsidiaries ESI Software Germany (98.5% owned at January 31, 2017), ESI Services Tunisia (95%) and CyDesign Labs Inc. (99.9%). Note A.2. Change in accounting method As of the fiscal year ended January 31, 2017, ESI Group opted for recognition of the provision for retirement obli- gations and post-employment benefits in the balance sheet, and corresponding changes in the income state- ment. In previous years, these obligations were presented Note B. Accounting principles and methods The rules and methods remain unchanged from last year, with the exception of the change presented in note A.2. The general accounting conventions have been applied prudently, in accordance with the following assumptions: • Basic assumptions: – Going concern, – Consistency in accounting methods from one fiscal year to the next; – Independence of fiscal years; • General rules for preparing and presenting annual fi- nancial statements: the basic method used to meas- ure accounting items is the historical cost method. Note B.1. Use of estimates Preparation of the financial statements requires the use of in “Off-balance-sheet commitments” in the notes to the fi- nancial statements. This change in accounting method aims to offer a more relevant view of the Company's commitments by adopting the preferential method. The provision for retirement obligations and post-em- ployment benefits came to €3.604 million at January 31, 2017 and reflected the amount of the gross actuarial com- mitment (no hedging assets). At the start of the fiscal year, the €3.2 million provision was recorded as a correspond- ing decrease in retained earnings. For information purposes, the income statement and bal- ance sheet are presented with comparative figures at Jan- uary 31, 2016 – as published last year and restated (pro forma incorporating the change in method). estimates and assumptions that may have an impact on the carrying amount of certain items in the balance sheet or income statement, as well as the information provided in selected notes. ESI Group carries out comprehensive re- views of these estimates and assessments to take account of past experience and other factors judged relevant with regard to economic conditions. These estimates, assumptions and assessments are estab- lished on the basis of existing information or situations at the time the financial statements are drawn up, and which may not reflect future realities. These estimates mainly concern provisions for contingen- cies and charges and assumptions used for the valuation of equity investments and selected intangible assets. ESI GROUP • 2016 REGISTRATION DOCUMENT 121 5 FINANCIAL STATEMENTS Note B.2. Intangible assets Research and development costs - related and development Internal research and development costs are recorded category; expenses in the appropriate expense development and research corresponding to performed by service providers within the Group or third parties are recorded as subcontracting expenses. to development work Internal expenses incurred during the fiscal year (wages, payroll taxes and environment-related costs) are capitalized and recog- nized as capitalized production. Capitalization is performed on a per project basis. Only projects meeting the six criteria for capitalization defined in the regulations on assets are capitalized as or assets. Research not meeting all of the six criteria continue to be recognized as expenses. Amortization begins upon delivery of the project. Projects that are unfinished at the in progress. closing date are capitalized as work Projects involving development of new versions of ESI software delivered on a yearly basis are amortized over 12 months. Projects involving the development of new, significant features are amortized over 24 or 36 months depending on the degree of innovation. the version. Amortization begins at If there is a risk that a project will not be marketed, a provision for depreciation is recorded on developments that will not generate future economic gains. At the end of the amortization period, development costs are removed from the asset line. release of projects costs Other intangible assets Other amortized according according to their estimated useful life. intangible assets to software) are (patents, the straight-line method Office and similar software applications Other operational software 1 year on a straight-line basis 3 years on a straight-line basis Codes - third-party software integrated into products 5 years on a straight-line basis Assets with an indefinite useful life (including goodwill) are not amortized. They are recorded on the balance sheet at their gross carrying amount. They are subject to impair- ment tests if there are signs of impairment or at least once per year. A provision based on the difference between the calculated value and the carrying amount is recorded if applicable. Note B.3. Property, plant and equipment Property, plant and equipment is valued at cost (purchase price plus related expenses), and amortized according to expected useful life: General facilities Fixtures and building work fittings, miscellaneous Transportation equipment Office equipment New computer equipment Used computer equipment Furnishings 6 years on a straight-line basis 10 years on a straight-line basis 5 years on a straight-line basis 3 years on a straight-line basis 3 years on a tapering basis 1 year on a straight-line basis 5 to 10 years on a straight-line basis Note B.4. Financial assets Equity investments and related receivables, acquisition costs Equity investments are recorded on the balance sheet at the historical cost of acquisition of shares. At the closing date, if the restated value of the shares is less than their purchase price, a provision is established for the difference. The restated value is calculated using one of several methods according to the situation of the subsidiary in question: • Shares in active subsidiaries are valued on the basis of a multiple of revenue adjusted for net cash posi- tion of the subsidiary, or alternatively on the basis of discounted forecast cash flows for recently acquired entities; Shares in dormant subsidiaries or those with re- duced activity levels are valued on the basis of the share of the net equity attributable to ESI Group. Acquisition costs are recorded as part of the cost of the shares and deducted, for tax purposes, through acceler- ated capital allowances, over a period of five years. Receivables related to equity investments are there is a risk of non-recovery. if • impaired Other investments Other investments mainly comprise deposits and guaran- tees and factoring guarantee funds (factoring of receiva- bles from the French R&D tax credit). Note B.5. Inventories Supply inventories Other supply inventories are valued at cost according to the first in, first out method. Work in progress Work in progress corresponds to consulting studies in ESI GROUP • 2016 REGISTRATION DOCUMENT 122 progress and valued at production cost with a margin as- sessed according to the percentage of completion method. A provision for contingencies is recorded for foreign ex- change losses. FINANCIAL STATEMENTS 5 Note B.6. Receivables and debts Receivables and debts are measured at par value. A provision for impairment is recognized where the book value of a receivable (excluding advances to subsidiaries), based on the likelihood of recovery, is less than is determined on a case-by-case basis or following statistical analysis. Regarding advances granted to subsidiaries, the book value of these receivables follows the same as equity investments in terms of impairment. its accounting value. All impairment principles Note B.7. Marketable securities Marketable securities are recorded at their net purchase price. If, at the balance sheet date, the net asset value is less than the acquisition value, impairment is recorded for the difference. At the close of the fiscal year ended January 31, 2017, mar-ketable securities were made up exclusively of the Com-pany's treasury shares, valued according to the first in, first out method. Note B.8. Treasury shares In the context of the authorizations, limits and objectives set by the Shareholders' General Meeting, ESI Group may purchase, exchange or transfer its own shares. The recognition and impairment method for treasury shares depends on the objective underlying the acquisi-tion. Treasury shares backed by the liquidity contract signed by the Company are recognized as financial assets. Treasury shares acquired in the context of other objectives set by the General Meeting (primarily external growth and share grants to employees) are recognized as marketable secu-rities. Impairment is recorded when the share acquisition cost exceeds the current value as determined by the average share price over the final month of the fiscal year. Note B.9. Foreign currency transactions Income and expenses in foreign currency are recorded at their exchange value as at the date of the transaction. Lia-bilities, receivables and cash in foreign currency are rec-orded on the balance sheet at the exchange value prevail-ing at the balance sheet date. The difference resulting from the conversion of the debts and receivables in currencies at this final exchange rate is recorded on the balance sheet as a “currency translation adjustment.” Note B.10. Financial foreign exchange instruments ESI Group uses financial instruments to manage its exposure to exchange rate fluctuations. The Group's policy is to trade in the financial markets only to hedge its business-related obligations and not for speculative purposes. Gains or losses stemming from the financial instruments used as part of hedging operations are assessed and recorded in line with the income and expenses recorded on underlined transactions. They are ial income and expense at recognized under finan maturity, as Off-balance-sheet commitments in the notes to the financial statements in the period between subscription and maturity. presented c and Amortization of share acquisition costs. Differences between tax-related amortization Note B.11. Regulated provisions Regulated provisions consist of accelerated capital allowances of two types: • and amortization for depreciation; • These regulated provisions are statement under exceptional allowances and reversals. Note B.12. Provisions for contingencies and charges Provisions for contingency and charges are calculated on the basis of the assessment of related risks at the balance sheet date. in the income booked the projected unit Provision for retirement and post-employment benefits Retirement commitments are valued and recognized using credit method. This actuarial method stipulates that each period of service entitles the employee to one unit of benefit rights and evaluates each of these units separately to arrive at a final commitment. These calculations use assumptions in terms of mortality, staff turnover, discount rate, increases. inflation The expense for the period is recognized: • In operating profit or loss for the amount pertaining to cost of services and changes in actuarial gains and losses; In financial income and expense for the amount per- taining to interest on discounting to present value. future salary rate and • Differences observed between the valuation of obligations and forecasts of such obligations (on the basis of new pro- jections or assumptions) are known as actuarial gains and losses. The provision at the close of the fiscal year is the actuarial commitment. The Company has no hedging assets. ESI GROUP • 2016 REGISTRATION DOCUMENT 1235 FINANCIAL STATEMENTS Note B.13. Recognition of revenue Licensing revenue is generated from royalties paid under licensing agreements granted to end customers and re- lated maintenance services. This revenue is recognized when the following four crite- ria are met: • • • The Group can demonstrate the existence of an agreement with the client; The software has been delivered and accepted; The amount of the user license for the software is de- termined or determinable; Recovery is likely. • Revenues from services consist mainly of consulting and training fees. They are recognized according to the per- centage of completion method with regard to projects, such as the margin. Costs are recorded as soon as they are incurred. A provision for losses on completion is recorded if necessary. Intragroup revenue mainly comprises royalty income re- ceived from the Group's distribution subsidiaries and in- come from subcontracted consulting services, re-invoic- ing of personnel expenses and invoicing of management fees. Co-financed projects During production of a co-financed project, the income recognized in revenue is determined on the basis of the percentage of completion of the project, on a pro-rata ba- sis with regard to the proportion financed. Note B.14. Tax consolidation On February 1, 2008, ESI Group has formed a tax consoli- dation group with its French subsidiary, Engineering Sys- tem International. As part of the tax consolidation agreement, it was agreed that the tax burden of Engineering System International integrated for tax purposes would be equal to that which would have applied to it if the subsidiary was not a mem- ber of the tax Group. As regards the financial statements for the fiscal year, for Engineering System International there is no difference between the tax borne as part of the tax consolidation group and that which would have been borne in the ab- sence of tax consolidation. Neither of the two companies in the tax group has loss car- ryforwards. For information, the French competitiveness and employ- ment tax credit (crédit d’impôt pour la compétitivité et l’emploi or CICE) is recognized in the income statement as a deduction from tax expense. Note C. Asset details Note C.1. Intangible assets (in € thousands) Development costs Patents, licenses, brands Goodwill Intangible assets in progress, development costs Other intangible assets in progress TOTAL GROSS VALUE Development costs Patents, licenses, brands Goodwill TOTAL AMORTIZATION, PROVISIONS Development costs Patents, licenses, brands Goodwill Intangible assets in progress, development costs Other intangible assets in progress TOTAL NET VALUE January 31, 2016 38,372 27,247 1,028 9,939 76,586 (16,100) (8,643) (73) (24,816) 22,272 18,604 955 9,939 51,770 Increase 22,629 43 12,470 1,944 37,086 (25,017) (689) (25,705) 6,434 1,944 8,379 Decrease January 31, 2017 (25,663) (1,588) (6,035) (33,287) 25,067 25,067 (2,984) (2,234) (5,218) 35,338 25,701 1,028 16,373 1,944 80,385 (16,050) (9,332) (73) (25,455) 19,288 16,370 955 16,373 1,944 54,931 ESI GROUP • 2016 REGISTRATION DOCUMENT 124FINANCIAL STATEMENTS 5 The decrease in development costs reflects scrapping of fully amortized assets. The decrease in the patents, licenses, brands line item re- flects reclassification to other intangible assets in pro- gress. The goodwill mainly reflects the acquisition on July 26, 1991 from the company Engineering System Interna- tional, of the branch specialized in the edition of digital simulation software (Product in Applied Mechanics). It has not been impaired or amortized since this date. Note C.2. Property, plant and equipment (in € thousands) Fixtures and fittings Office furnishings and equipment Other tangible non-current assets TOTAL GROSS VALUE Fixtures and fittings Office furnishings and equipment Other tangible non-current assets TOTAL AMORTIZATION, PROVISIONS Fixtures and fittings Office furnishings and equipment Other tangible non-current assets TOTAL NET VALUE Note C.3. Financial assets (in € thousands) Equity investments Receivables related to equity investments Other financial assets (1) TOTAL GROSS VALUE Provisions for impairment of equity investments Provisions for receivables related to equity investments TOTAL AMORTIZATION, PROVISIONS Equity investments Receivables related to equity investments Other investments January 31, 2016 Increase Decrease January 31, 2017 2,281 5,998 26 8,305 (1,311) (4,771) (22) (6,104) 970 1,227 4 2,201 52 625 1 678 (151) (682) (4) (837) (99) (57) (3) (159) 2,333 6,623 27 8,983 (1,464) (5,453) (26) (6,940) 871 1,170 1 2,043 January 31, 2016 Increase Decrease January 31, 2017 4,634 184 4,818 (827) (827) 3,807 51,231 13,012 1,354 65,597 (2,958) (1,749) (4,707) 48,278 11,263 1,354 55,865 13,196 1,351 70,413 (3,785) (1,736) (5,521) 52,080 11,460 1,351 (3) (3) 13 13 13 (3) TOTAL NET VALUE (1) This line primarily includes deposits and guarantees on rental properties for an amount of €447 thousand, factoring guarantee funds for an amount of €695 60,891 3,991 10 64,892 thousand, and treasury shares (liquidity contract) for an amount of €62 thousand. ESI GROUP • 2016 REGISTRATION DOCUMENT 1255 FINANCIAL STATEMENTS Movements in shares/equity investments (gross value) (in € thousands) Engineering System International ESI Japan, Ltd ESI North America, Inc. ESI UK Limited Calcom ESI SA Hankook ESI Co., Ltd. ESI Group Hispania s.l. Mecas ESI s.r.o. STRACO ESI US Holding, Inc. Zhong Guo ESI Co., Ltd Acquisition costs Zhong Guo ESI Co., Ltd ESI Software (India) Private Limited ESI US R&D, Inc. Hong Kong ESI Co., Limited Acquisition costs Hong Kong ESI Co., Limited ESI-ATE Holdings Limited Acquisition costs ESI-ATE Holdings Limited ESI Italia s.r.l. ESI South America Comércio e Serviços de Informática Ltda ESI Services TUNISIA Acquisition costs ESI Services Tunisia ESI Group Beijing Co., Ltd ESI Software Germany GmbH Acquisition costs ESI Software Germany GmbH Efield AB Acquisition costs Efield AB OpenCFD Limited Acquisition costs OpenCFD Limited CyDesign Labs, Inc. Acquisition costs CyDesign Labs, Inc. ESI Services Vietnam Co., Ltd Acquisition costs ESI Services Vietnam Co. Ltd Avic-ESI (Beijing) Technology Co. Ltd Acquisition costs Avic-ESI (Beijing) Technology Co. Ltd Participation Mineset Inc. Acquisition costs Mineset Inc. CIVITEC Acquisition costs CIVITEC ITI GmbH Acquisition costs ITI GmbH Cademce SAS TOTAL January 31, 2016 Increase Decrease January 31, 2017 458 75 3,726 164 2,678 941 100 912 1,789 796 193 2 2 111 119 2 1,737 56 656 6 128 8 543 114 9,891 500 322 446 129 2,351 162 1,904 283 124 14 576 87 290 900 62 17,952 436 100 4,017 3 51,231 4,634 458 75 3,726 164 2,678 941 100 912 1,789 796 193 2 2 111 119 2 1,737 56 656 6 242 8 543 10,391 322 446 129 2,351 162 1,904 283 124 14 576 87 4,017 293 900 62 17,952 436 100 55,865 ESI GROUP • 2016 REGISTRATION DOCUMENT 126FINANCIAL STATEMENTS 5 Movements in the provision for shares/equity investments (in € thousands) ESI-ATE Holdings Limited Hong Kong ESI CO., Limited Zhong Guo Co., Ltd CyDesign Labs, Inc. OpenCFD Limited Cademce TOTAL January 31, 2016 Increase Reversal January 31, 2017 1,737 119 193 910 0 0 2,958 295 432 100 827 1,737 119 193 1,205 432 100 3,785 CyDesign Labs, Inc. shares have been impaired such that the net carrying amount equals the portion of the net equity of the subsidiary held by ESI, and those of the subsidiary OpenCFD have been depreciated according to the restated value of the shares. Cademce shared have been fully impaired. Receivables related to equity investments (in € thousands) Gross value Remuneration rate Loan ESI North America, Inc. (USD9.7 million) Loan Hong Kong ESI (USD1.124 million) (1) Loan ESI Group Hispania SL Loan ESI ATE Holdings (USD2.271 million) (2) January 31, 2017 January 31, 2016 9,019 1,045 1,020 2,112 8,883 1,029 6-month Libor $ + 1% margin 6-month Libor $ + 1% margin 1,020 Profit-sharing loan capped at 5% 2,080 6-month Libor $ + 1% margin TOTAL 13,196 13,012 (1) This loan has been impaired by €0.683 million. (2) This loan has been impaired by €1.052 million. ESI GROUP • 2016 REGISTRATION DOCUMENT 1275 FINANCIAL STATEMENTS Note C.4. Receivables – Provisions for receivables (in € thousands) At January 31, 2017 Gross value Due in 1 year or less Due in between 1 and 5 years At January 31, 2016 Gross value Loans granted to controlling interests Loans Treasury shares Deposits and guarantees Doubtful or disputed receivables Trade receivables Trade receivables with affiliate companies Income tax receivables – advance payment R&D tax credit receivable Competitiveness and employment tax credit receivable Other tax credits Value added tax (VAT) Co-financed projects Other receivables Prepaid expenses TOTAL Details of provisions for receivables (in € thousands) Provisions for doubtful receivables Provisions for other receivables TOTAL 13,196 147 62 1,142 2,091 10,784 46,003 759 3,083 136 155 1,037 4,054 206 2,595 85,450 147 62 4 2,091 10,784 46,003 759 3,083 136 155 1,037 4,054 206 2,595 71,117 13,196 13,012 452 41 861 1,531 10,162 38,753 1,031 2,836 108 255 1,133 3,594 216 2,137 76,121 1,138 14,333 January 31, 2016 Increase Reversal used January 31, 2017 1,548 126 1,674 623 5 629 (79) (79) 2,093 131 2,224 Note C.5. Treasury shares Treasury shares in the balance sheet are classified in Financial assets in an amount of €62 thousand (liquidity contract) and in Marketable securities in an amount of €4.375 million. Change in the number of treasury shares January 31, 2016 Increase Decrease January 31, 2017 Treasury shares 430,884 117,832 129,330 419,386 The total value on the balance sheet is thus €4.437 million, compared to a market fair value of €19.439 million at January 31, 2017, for an unrealized gain of €15.001 million. ESI GROUP • 2016 REGISTRATION DOCUMENT 128Note C.6. Prepaid expenses and expenses capitalized, to be amortized (in € thousands) Prepaid rent Maintenance prepaid expenses Other prepaid expenses Debt issuance expenses (1) TOTAL (1) Amortization over the duration of the loan. Note C.7. Foreign exchange gains and losses These gains and losses pertain to the following balance sheet items: (in € thousands) Trade receivables Trade payables Current accounts TOTAL Note C.8. Accrued income (in € thousands) Receivables to be invoiced Receivables to be invoiced from affiliate companies Vendor credit notes to be issued Miscellaneous income TOTAL FINANCIAL STATEMENTS 5 January 31, 2017 January 31, 2016 932 691 972 434 644 732 760 509 3,029 2,646 January 31, 2017 January 31, 2016 374 670 0 1,044 109 375 76 560 January 31, 2017 January 31, 2016 3,043 1,249 31 108 4,432 2,630 636 39 10 3,315 ESI GROUP • 2016 REGISTRATION DOCUMENT 1295 FINANCIAL STATEMENTS Note D. Liability details Note D.1. Equity The main movements during the fiscal year are summarized in the table below: (in € thousands) Capital Share premium ESI Software merger premium Systus merger premium Legal reserve Retained earnings Net profit for the year Regulated provisions TOTAL January 31, 2016 Allocation of 2015 profit 2016 profit Other January 31, 2017 17,865 24,938 9,677 2,854 1,642 30,237 4,036 758 92,007 145 3,891 (4,036) 1,632 - 1,632 111 280 (3,201) 326 (2,484) 17,976 25,218 9,677 2,854 1,787 30,927 1,632 1,084 91,155 Movements in the “Other” column reflect: • The capital increase with the associated share issuance premium following the exercise of 36,920 share subscription options during the fiscal year; A decrease in retained earnings following the change in accounting method concerning retirement obligations and post-employment benefits (see Note A.2); Accelerated capital allowances in an amount of €326 thousand. • • Note D.2. Legal capital Common shares (par value of €3) O/w preferred shares (double voting rights) Number of shares At the end of the fiscal year Created during the fiscal year Repaid during the fiscal year 5,991,992 2,227,080 36,920 - - The capital increase is attributable to the exercise of share subscription options for 36,920 shares. Note D.3. Stock subscription option plan Stock options have been authorized by various General Meetings and could potentially dilute ESI Group's legal capital. The table below describes the status of the various plans under which options have been granted but not yet exercised. ESI GROUP • 2016 REGISTRATION DOCUMENT 130Plan number Plan 10 Plan 15 Plan 17 Plan 18 TOTAL STOCK OPTIONS Plans 6 and 7 TOTAL FREE SHARES FINANCIAL STATEMENTS 5 Year that plan was established Number of stock options/shares allotted or to be allotted Number of stock options/shares granted Of which performance shares Weighted average exercise price Number of existing stock options/shares at January 31, 2017 Year that stock options can be exercised 2012 2013 2014 2016 2016 180,000 294,538 180,000 297,753 957,291 60,000 60,000 180,000 20,000 17,350 0 62,300 20,000 0 217,350 82,300 27,262 27,262 0 0 25.95 21.66 24.97 0 0 111,175 20,000 17,350 2020-2025 2025 2023 0 148,525 27,208 2018-2020 27,208 175,733 TOTAL STOCK OPTIONS AND FREE SHARES 1,012,291 244,612 82,300 All stock options and free shares include a continued employment requirement. Note D.4. Conditional advances (in € thousands) January 31, 2017 Up to 1 year 1 to 5 years More than 5 years January 31, 2016 Advance on Ademe financing agreement Bpifrance advance TOTAL 162 147 310 65 65 162 83 245 162 209 371 0 Note D.5. Provisions for contingencies and charges (in € thousands) January 31, 2016 Increase Reversal used January 31, 2017 Foreign exchange gains and losses (Note C.7) Provisions for contingencies and charges (operating result) Provision for retirement obligations (Note A.2) 560 885 3,200 (1) 1,044 75 404 (560) (577) TOTAL (1) Amount at opening restated on a proforma basis, the €3.2 million was recorded as a corresponding decrease in retained earnings. 1,523 4,645 (1,137) 1,044 383 3,604 5,031 Provisions for contingencies and charges as at January 31, 2017 mainly correspond to tax and labor-related risks. The provision referring to tax audit for the years 2009-2011 has been totally reversed, as the audit has been completed and the tax adjustment has been paid. The €404 thousand provision allowance for retirement obligations breaks down as follows: • thousand €343 thousand for an operating allowance, o/w €273 services rendered, €107 thousand in actuarial gains and losses and €-37 thousand in services paid during the fiscal year; €61 thousand for a financial allowance corre- sponding to interest expenses. costs for in • Actuarial assumptions for retirement obligations January 31, 2017 January 31, 2016 Discount rates Rate of salary increase 1.70% 2.50% 1.90% 2.50% The discount rate corresponds to AA-rate corporate bond rates in the Eurozone, adjusted according to the duration of the Group's commitments; Turnover rates are calculated per age group according to the past experience of the Company. ESI GROUP • 2016 REGISTRATION DOCUMENT 1315 FINANCIAL STATEMENTS Note D.6. Statement of liabilities (in € thousands) Banks borrowings (D.7) Miscellaneous financial debt (D.8) Trade payables January 31, 2017 Up to 1 year 1 to 5 years More than 5 years January 31, 2016 44,103 2,633 7,994 13,011 2,633 7,994 18,258 12,833 Group trade payables 30,529 30,529 Personnel and related receivables (D.9) Payroll taxes (D.9) Value-added tax (D.9) Other tax expense (D.9) Liabilities to fixed asset suppliers Other operating payables - Group and associates (D.10) Other operating payables – out of Group (D.10) Deferred income TOTAL 2,697 2,151 1,409 462 65 9,096 2,211 345 103,694 2,697 2,151 1,409 462 65 9,096 2,211 345 72,603 18,258 12,833 42,884 2,398 5,520 24,713 2,217 1,898 1,339 453 249 4,151 1,496 619 87,938 • • Note D.7. Bank borrowings At January 31, 2017, bank borrowings stand at €44.103 million and break down as follows: • €34.553 million related to the long-term syndicated lines of credit; €1 million in long-term borrowings from Bpifrance; €8 million in drawdowns from the revolving credit line; €135 thousand in accrued interest on borrowings; • €415 thousand in short-term bank overdrafts. • In November 2015, ESI Group signed a €49 million syndi- cated loan agreement with a pool of six banks. The lines of credit for refinancing the previous syndicated loan and ex- ternal growth (€39 million) have a maturity date of No- vember 2022, partly with annual straight-line amortiza- tion. WCR financing, which aims to optimize cash manage- ment at ESI Group, heavily impacted by the highly sea- sonal nature of its business model, was included in the syndicated loan in the form of a €10 million revolving line of credit. At January 31, 2017, long-term lines of credit account for €34.6 million and ESI Group has established hedging in- struments for 40% of the nominal amount of these lines. €8 million of the revolving line of credit has been used. As of the date of approval of financial statements by the Board of Directors (April 18, 2017), the entire revolving line of credit has been paid off. Off-balance-sheet commitments associated with this bor- rowing are presented in Note F.4. Note D.8. Miscellaneous financial debt (in € thousands) Coface financing Employee profit sharing/interest accrued Promissory note TOTAL January 31, 2017 Up to 1 year 1 to 5 years More than 5 years January 31, 2016 0 133 2,500 2,633 133 2,500 2,633 272 126 2,000 2,398 ESI GROUP • 2016 REGISTRATION DOCUMENT 132Note D.9. Tax payables and employee-related liabilities (in € thousands) Provision for paid leave, including payroll taxes Provision for bonuses to be paid to employees, including payroll taxes Other payroll taxes VAT collected Other taxes TOTAL FINANCIAL STATEMENTS 5 January 31, 2017 January 31, 2016 2,257 1,387 1,107 1,409 559 6,719 2,071 1,133 829 1,339 534 5,907 Note D.10. Other operating payables (in € thousands) Subsidiaries current account Advances on co-financed projects Other liabilities TOTAL January 31, 2016 4,151 1,397 99 5,647 Increase 5,936 699 15 6,651 Decrease January 31, 2017 (991) (991) 9,096 2,096 114 11,307 Note D.11. Foreign exchange gains and losses These gains and losses pertain to the following balance sheet items: (in € thousands) Trade receivables Trade payables Intercompany receivables Current accounts TOTAL Note D.12. Accrued expenses (in € thousands) Borrowings and financial debts Trade payables Provision for paid leave, including payroll taxes Provision for bonuses to be paid to employees, including payroll taxes Other tax expenses Other liabilities (advances on co-financed projects) Other liabilities TOTAL January 31, 2017 January 31, 2016 925 87 2,079 189 3,280 667 46 1,895 63 2,670 January 31, 2017 January 31, 2016 167 10,594 2,257 1,387 354 2,096 8 16,863 83 11,645 2,071 1,133 168 1,397 0 16,497 ESI GROUP • 2016 REGISTRATION DOCUMENT 1335 FINANCIAL STATEMENTS Note E. Details on income statement Note E.1. Revenue Breakdown by type (in € thousands) Software licenses Sub-contracting, consulting and other income Royalties received from Group distribution subsidiaries Sub-contracting, consulting and other income - Group Income from related activities - Group Management fees Group TOTAL Breakdown by geographic area: (in € thousands) France Europe (except France) Americas Asia TOTAL Note E.2. Other income from operations (in € thousands) Production held as inventory Capitalized production Reversal on depreciation and amortization Reversal on impairment of trade receivables from ESI North America, Inc. Other income TOTAL OTHER INCOME Note E.3. Other purchases and external expenses (in € thousands) Engineering studies and other services Engineering studies and other services - Group Research and development costs - Group Materials and supplies Leases and rental expenses Maintenance and repairs Insurance Payments to intermediaries and fees Royalties on third-party products and sales commissions Advertising, external relations Travel expenses January 31, 2017 January 31, 2016 13,983 1,865 57,834 4,458 1,638 4,535 84,313 12,018 2,908 54,917 4,154 1,477 3,683 79,157 January 31, 2017 January 31, 2016 9,905 21,668 13,884 38,856 84,313 9,692 25,938 14,962 28,565 79,157 January 31, 2017 January 31, 2016 543 28,467 675 0 175 29,861 (78) 24,132 677 3,538 116 28,384 January 31, 2017 January 31, 2016 9,055 18,159 19,567 305 3,642 1,543 302 1,884 2,942 897 1,557 8,217 18,962 17,724 304 3,508 1,302 278 1,754 2,065 754 2,034 ESI GROUP • 2016 REGISTRATION DOCUMENT 134Postage, telecommunications expenses Miscellaneous TOTAL Note E.4. Income tax expense (in € thousands) Corporate Value-Added Contribution (CVAE) Corporate Real Estate Contribution (CFE) Apprenticeship, continuing education and construction-related taxes Other taxes TOTAL Note E.5. Operating allowances (in € thousands) Amortization allowance for development costs Amortization allowance for other intangible assets Amortization allowance for tangible assets Amortization allowance for capitalized expenses to be amortized Provision for impairment of trade receivables Provision for retirement obligations Provision for contingencies and charges TOTAL Note E.6. Other operating expenses (in € thousands) Royalties Directors' fees Debt forgiveness agreement with ESI North America, Inc. Miscellaneous expenses TOTAL Note E.7. Financial income (in € thousands) Foreign exchange gain/(loss) realized Unrealized foreign exchange gain/(loss) Interest on borrowings Interest on subsidiaries current account Provision for retirement obligations Provision for impairment equity investments Reversal provision for investments AVIC ESI dividend Other financial income/(expenses) TOTAL FINANCIAL STATEMENTS 5 516 603 60,973 568 612 58,083 January 31, 2017 January 31, 2016 583 129 291 244 1,246 631 128 256 249 1,263 January 31, 2017 January 31, 2016 24,831 875 837 75 623 343 75 27,659 20,752 987 694 56 621 0 153 23,264 January 31, 2017 January 31, 2016 56 147 0 9 212 56 150 3,538 4 3,749 January 31, 2017 January 31, 2016 (230) (484) (868) 39 (61) (827) 13 31 (105) (2,492) 1,471 313 (431) 28 (910) 150 (98) 522 ESI GROUP • 2016 REGISTRATION DOCUMENT 1355 FINANCIAL STATEMENTS Note E.8. Exceptional income (in € thousands) Profit or loss on movements of treasury shares Accelerated capital allowances Exceptional expense on treasury shares sales Presto additional payment Miscellaneous TOTAL Note F. Other information Note F.1. Average headcount (in full-time equivalent) Executives Office personnel TOTAL Note F.2. Compensation paid to executive corporate officers Total compensation paid to ESI Group's three executive corporate are as follows: (in € thousands) Wages Benefits in kind Directors' fees Compensation paid by controlled companies Fringe benefits paid by controlled companies TOTAL January 31, 2017 January 31, 2016 (25) (326) 22 (148) (244) (721) (8) (217) (17) (99) (341) January 31, 2017 January 31, 2016 Headcount Headcount 214 20 234 197 20 217 January 31, 2017 January 31, 2016 473 49 16 426 158 436 47 16 423 158 1,121 1,079 Note F.3. Branches There are two branches integrated within ESI Group’s financial statements: Name Address ESI Group Netherlands – Branch Office ESI Group Shanghai Representative Office Postbus 1000-Box E57-2260BA Leidschendam Cross Region Plaza, Unit 20D, 899 Lingling Road 200235 Shanghai Country Netherlands China ESI GROUP • 2016 REGISTRATION DOCUMENT 136Note F.4. Off-balance sheet commitments Future lease obligations (in € thousands) Real estate rentals Movable property rentals TOTAL FINANCIAL STATEMENTS 5 Less than 1 year Between 1 and 5 years 1,409 1,385 2,794 3,158 530 3,688 Future lease commitments correspond to the outstanding amounts due on the Group's main lease and rental contracts until the contractual next maturity date. Off-balance sheet commitments relating to financing ESI Group pledged 99.98% of the shares of ESI France and 95.50% of ESI Software Germany as collateral in a credit agreement dated November 5, 2015. As long as the Group remains bound by the collateral agreement or documents, it undertakes to adhere to the following ratios under penalty of early repayment: • Ratio R1: Consolidated net financial debt divided by consolidated EBITDA: less than or equal to 2.9 at Jan- uary 31, 2017 (tapering threshold for future years); Ratio R2: Consolidated net financial debt divided by consolidated equity: less than or equal to 0.60; Ratio R3: Consolidated free cash-flow divided by debt servicing: equal or greater than 1. If the ratio is lower than 1, net consolidated cash balance should be positive. • • As of January 31, 2017, on the basis of the consolidated financial statements certified by the auditors, the Group was compliant with the ratios described above. During the fiscal year ended January 31, 2017, ESI Group signed with Bpifrance a long-term financing envelope of up to €3 million over five years, €1 million of which had been used at the end of the fiscal year. In terms of managing exposure to fluctuations in exchange rates and interest rates, ESI Group uses the following fi- nancial instruments, recognized under financial income and expense at maturity: • Interest rate derivatives – Three swaps in a nominal amount of €1.9 million, ESI Group receiving variable rate 1-month Euribor (with a 0% floor) and paying a fixed rate of 0.195% with two banks and 0.22% with a third bank; – Three swaps in a nominal amount of €2.7 million, ESI Group receiving variable rate 1-month Euribor (with a 0% floor) and paying fixed rates of 0.16%, 0.18% and 0.19%, respectively. – At January 31, 2017, the market value of these instru- ments was €-34 thousand. Foreign exchange instruments: • – In order to manage foreign currency risk on cash flows between the Group's parent company and its subsidiaries, ESI Group may purchase foreign cur- rency options at any time and enter into any other type of foreign exchange contract. Foreign exchange instruments in place at January 31, 2017 concerned Japanese yen (forwards, tunnels, targets), South Ko- rean won (non-delivery forwards) and Indian rupee (non-delivery forwards). – At January 31, 2017, the market value of these instru- ments was €3 thousand. ESI Group also has an obligation relating to the 2015 ac- quisition of Presto: a variable earnout payable in three in- stallments to the founders on the first three anniversaries of the acquisition, on condition of their employment at ESI on the payment dates. The first payment carried out dur- ing the fiscal year ended January 31, 2017 was recognized in exceptional items. Pledges At January 31, 2017, ESI Group had a rent security deposit with Crédit du Nord in an amount of €82 thousand, estab- lished in December 2012 and expiring in December 2022. ESI GROUP • 2016 REGISTRATION DOCUMENT 1375 FINANCIAL STATEMENTS Note F.5. Reconciliation of profit /(loss) and tax income/(charge) (in € thousands) Current income (loss) Exceptional income Employee profit sharing Competitiveness and employment tax credit French R&D tax credit TAX INCOME (LOSS) Profit (loss) before tax Reconciliation of income/loss Taxable income Tax (expense)/income Profit (loss) after tax 700 (721) 1,817 (1) (4) 2,517 (725) (21) 1,812 1,791 (1,318) 242 (16) 136 2,610 1,653 (619) (479) (16) 136 2,610 1,632 (1) This amount of €1.817 million refers primarily to the tax neutralization of the expense of branches included in the financial statements, in the amount of €877 thousand, as well as to provisions for equity investments in the amount of €826 thousand. Note F.6. Increases and decreases in future tax liabilities (in € thousands) Special social security contribution (contribution sociale de solidarité) Translation differences Interest TOTAL TEMPORARY DIFFERENCES NET DECREASE IN FUTURE INCOME TAX LIABILITIES (TAX RATE OF 33.33%) January 31, 2017 88 3,280 852 4,219 1,406 Increases and decreases in future income tax liabilities were measured based on the statutory tax rate for the French income tax. They result from time difference between tax and accounting treatment of income and expenses. Note F.7. ESI Group, consolidating company ESI Group is the consolidating holding company of the Group of the same name. ESI GROUP • 2016 REGISTRATION DOCUMENT 138FINANCIAL STATEMENTS 5 Note F.8. Table of controlled entities and affiliates (At January 31, 2017) (in € thousands) Head-quarters % of capital owned (As a %) Carrying amount of shares held Gross Net Capital (converted at the closing rate) Shareholders’ equity other than capital and net profit for the year (converted at the closing rate) Total guarantees granted by the Company Outstanding loans and advances granted by the Company or by the subsidiary Dividends received by the Company during the fiscal year Revenues, after tax, for the last fiscal year (converted at the average exchange rate) Profit or loss for the last fiscal year (covered at the average ex-change rate) A. DETAILED INFORMATION ON EACH SECURITY WITH GROSS VALUE EXCEEDING 10% OF THE COMPANY'S CAPITAL 1. Over 50%-owned subsidiaries Engineering International STRACO ESI Japan, Ltd. System France France Japan 1,020 2,559 100.0 458 458 (1,652) 15,608 (22) 2,981 97.7 1,789 1,789 (534) 11 12 499 82 3,729 97.0 75 75 Hankook ESI Co., Ltd. South Korea 1,185 (2,294) 98.8 941 941 ESI North America, Inc. USA 0 (2,543) 100.0 3,726 3,726 ESI Group Hispania s.l. Spain Mecas ESI s.r.o. Czech Republic ESI UK Limited United Kingdom ESI US R&D, Inc. (1) USA Calcom ESI SA Switzerland Zhong Guo Co., Ltd China Software ESI Private Ltd (India) India Hong Kong ESI Co., Limited China ESI-ATE Holdings Limited China 100 15 116 237 94 0 1 1 0 (987) 100.0 425 95.0 55 100.0 74.0 910 285 100 912 164 111 100 912 164 111 98.5 2,678 2,678 232 100.0 193 3,363 100.0 2 (870) 100.0 119 (1,361) 100.0 1,737 0 2 0 0 ESI Italia s.r.l. Italy 500 482 90.0 656 656 South ESI America Comércio e Serviços de Informática, Ltda Brazil ESI Services TUNISIA Tunisia ESI Group Beijing Co., Ltd China Software Germany ESI GmbH Efield AB Germany Sweden OpenCFD Limited United Kingdom 6 86 676 59 621 95.0 95.0 388 100.0 6 242 543 6 242 543 517 4,738 98.5 10,391 10,391 504 100.0 446 446 11 0 9,019 1,020 (1,249) 1,045 2,112 31,002 1,384 6,393 (201) 23,432 3,421 7,821 344 218 692 4,869 1,012 9,820 3,300 401 50 0 (10) 9,151 0 0 4,813 869 626 4,050 8,309 1,313 694 (1) (2) 125 (85) 179 792 753 198 31 666 100.0 2,351 1,920 (761) 1,008 (549) CyDesign Labs, Inc. USA 1,422 (416) 99.9 1,904 699 ESI Services Vietnam Co., Ltd CIVITEC ITI GmbH Vietnam France Germany Mineset Inc. USA 2. 10–50% owned subsidiaries ESI US Holding, Inc. AVIC-ESI USA China 88 13 100.0 1,125 (506) 80.0 124 900 124 900 (192) 26 0 479 96.0 17,952 17,952 33 100 4,017 4,017 720 1,346 (591) 436 49.0 45.0 796 576 796 576 (1) ESI US R&D, Inc.: direct interest = 49%; indirect via US Holdings = 25%. (299) 42 (104) 760 121 0 197 219 398 6,779 2,134 0 4,293 Note F.9. Subsequent events In February 2017, ESI Group acquired 100% of the capital of French company Scilab Enterprises and purchased the mi- nority interests in its subsidiary ESI Italia, now 100% owned by the Group. ESI GROUP • 2016 REGISTRATION DOCUMENT 1395 FINANCIAL STATEMENTS 5.2.4. Statutory Auditors’ report on the annual financial statements This is a free translation into English of the statutory auditors’ report on the financial statements issued in French and it is provided solely for the conven- ience of English-speaking users. The statutory auditors' report includes information specifically required by French law in such reports, whether modified or not. This information is pre- sented below the audit opinion on the financial statements and includes an explanatory paragraph discussing the auditors’ ass essments of certain signifi- cant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the fi nancial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures. This report also includes information relating to the specific verification of information given in the management report and in the documents addressed to the shareholders. This report should be read in conjunction with and construed in accordance with French law and professional auditing standards applicable in France. Year ended January 31, 2017 To the Shareholders, In compliance with the assignment entrusted to us by your annual General Meeting, we hereby report to you, for the year ended January 31, 2017, on: • • • These financial statements have been approved by your Board of Directors. Our role is to express an opinion on these financial statements based on our audit. The audit of the accompanying financial statements of ESI Group; The justification of our assessments; The specific verifications and information required by law. I. Opinion on the annual financial statements We conducted our audit in accordance with professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance that the annual financial statements are free of material mis- statement. An audit involves performing procedures, using sampling techniques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the financial statements. An audit also involves evaluating the ap- propriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropri- ate to provide a basis for our audit opinion. In our opinion, the financial statements give a true and fair view of the assets and liabilities and of the financial position of the company as at January 31, 2017 and of the results of its operations for the year then ended in accordance with French accounting principles. Without qualifying the opinion expressed above, we draw your attention to note A.2 to the annual financial statements, which present the change in accounting method regarding the provision for retirement obligations and post-employment benefits. II. Justification of our assessments In accordance with the provisions of Article L. 823-9 of the French Commercial Code relating to the justification of our assessments, we draw your attention to the following matters: Development costs Note B.2 to the annual financial statements presents the accounting rules and methods adopted with respect to recogni- tion of research and development costs. As part of our assessments of the accounting principles followed by your com- pany, we reviewed the criteria used for capitalizing and amortizing research and development expense and measuring the recoverable amount. We ensured that notes B.2 and C.1 to the financial statements provide appropriate information. Investments Investments are valued in accordance with the valuation methods described in note B.4 to the annual financial state- ments. Our work consisted in assessing the data and assumptions underlying these book value estimates. We made sure of the reasonableness of these estimates. These assessments were made as part of our audit of the financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report. ESI GROUP • 2016 REGISTRATION DOCUMENT 140FINANCIAL STATEMENTS 5 III. Specific verifications and information We have also performed, in accordance with professional standards applicable in France, the specific verifications re- quired by French law. We have no matters to report as to the fair presentation and the consistency with the financial statements of the infor- mation given in the management report of the Board of Directors and in the documents addressed to the shareholders with respect to the financial position and the financial statements. Concerning the information given in accordance with the requirements of article L. 225-102-1 of the French Commercial Code relating to compensation and benefits paid to corporate officers and any other commitments made in their favor, we have verified that such information is consistent with the financial statements, or with the underlying information used to prepare said financial statements and, where applicable, with the information obtained by your company from companies controlling your company or controlled by it. Based on this work, we attest the accuracy and fair presentation of this information. In accordance with French law, we have verified that the required information concerning the identity of the sharehold- ers or holders of the voting rights has been properly disclosed in the management report. Neuilly-sur-Seine and Paris-La Défense, Thursday, May 18, 2017 The statutory auditors French original signed by PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau ESI GROUP • 2016 REGISTRATION DOCUMENT 141RESOLUTIONS SUBMITTED FOR APPROVAL BY THE GENERAL MEETING 6 Decisions falling within the competence of the Ordinary General Meeting 1. Approval of the parent-company financial statements for the fiscal year ended January 31, 2017 2. Approval of the consolidated financial statements for the fiscal year ended January 31, 2017 3. Allocation of net profit for the year 4. Approval of the agreements referred to in Article L. 225-38 of the French Commercial Code 5. Reappointment of Mrs. Cristel de Rouvray 6. Reappointment of Mr. Charles-Helen des Isnards 7. Approval of the principles and criteria for determining, distributing and allocating the fixed, variable and ex- ceptional items that make up the total compensation and benefits of all types attributable to the Chairman and Chief Executive Officer and the Chief Operating Of- ficers 8. Determination of the compensation paid to the mem- bers of the Board of Directors (Directors’ fees) 9. Authorization to be granted to the Board of Directors for the Company to buy back its own shares Decisions falling within the competence of the Extraordinary General Meeting 10. Authorization to be granted to the Board of Directors to award stock subscription options Authorization to be granted to the Board of Directors to award stock purchase options Delegation of authority to the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, with preferential subscription rights Delegation of authority to the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, through public offerings maintenance of the shareholders' 11. 12. 13. 14. 15. 16. preferential subscription rights with cancellation Delegation of authority to the Board of Directors for of the shareholders' the purpose of increasing the issue amount in the event of over-demand Delegation of authority to the Board of Directors for the purpose of increasing the capital by the capitaliza- tion of premiums, reserves, profits or otherwise Delegation of authority to the Board of Directors for the purpose of issuing shares without preferential sub- scription rights as compensation for contributions of shares or share equivalents granted to the Company as part of a contribution in kind Delegation of authority to the Board of Directors for 17. the purpose of increasing the capital without preferen- tial subscription rights through private placement Authorization given to the Board of Directors to in- crease the capital by issuing shares reserved for em- ployees enrolled in the employee savings plan Extension of the age limit for the Chief Executive Of- ficer from 75 to 80 years of age and corresponding amendment to article 14-II, paragraph 4 of the articles of association 18. 19. tion 20. Amendment to applicable to the to comply article 16 of the articles of with the new legal requirements associa- scheme of regulated agreements article 18, paragraphs 7 to 9 of the with the new legal 21. Amendment to articles of association requirements ap-plicable to the date and procedures to comply for drawing up the General Meetings –Record Date list of persons authorized to attend article 4 of the articles of with the new provisions of Article L. French Commercial Code, as amended No. 2016-1691 of December 9, 2016 associa- tion 22. Amendment to 225-36 of the to comply by French Law (“Sapin II” Law) article 13 of the articles of with the new provisions of Article L. French Commercial Code, as amended No. 2016-1691 of December 9, 2016 associa- tion 23. Amendment to 225-36 of the to comply by French Law (“Sapin II” Law) ESI GROUP • 2016 REGISTRATION DOCUMENT 142 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 with the new provisions of 24. Amendment to article 17 of the articles of Article L. 823-1 of the French Commercial Code, as association to comply Joint decisions 25. Powers for formalities. 2016 (“Sapin II” Law) amended by French Law No. 2016-1691 of December 9, 6.1. Decisions falling within the competence of the Ordinary General Meeting First resolution Approval of the parent-company financial statements for the fiscal year ended January 31, 2017 Statement of reasons Based on the review of the Management report of the Board of Directors, the Report of the Chairman of the Board of Directors on corporate governance, internal control and risk management, the reports of the statutory auditors, the Gen- eral Meeting is requested to approve the parent-company financial statements for the fiscal year ended January 31, 2017, showing a profit of €1,632,373.85. The General Meeting, having reviewed the Management report of the Board of Directors, the Report of the Chair- man of the Board of Directors on corporate governance, internal control and risk management, and the reports of the statutory auditors and the parent-company financial statements for the fiscal year ended January 31, 2017, ap- proves the financial statements and balance sheet, as pre- sented, showing a profit of €1,632,373.85. It approves the transactions reflected in said financial statements or summarized in said reports. The General Meeting also approves the total expenses and charges not deductible from profits subject to income tax, equal to €204,186. Second resolution Approval of the consolidated financial statements for the fiscal year ended January 31, 2017 Statement of reasons Based on the review of the Management report of the Board of Directors, the Report of the Chairman of the Board of Directors on corporate governance, internal control and risk management, and the reports of the statutory auditors, the General Meeting is requested to approve the consolidated financial statements for the fiscal year ended January 31, 2017. The General Meeting, having reviewed the Management report of the Board of Directors, the Report of the Chair- man of the Board of Directors on corporate governance, internal control and risk management and the reports of the statutory auditors and the consolidated financial statements as at January 31, 2017, approves these finan- cial statements as presented. Third resolution Allocation of net profit for the year Statement of reasons The General Meeting is requested to allocate the profit of €1,632,373.85 as follows: • • Following this allocation, the balance of the legal reserve will stand at €1,797,597.60. Following this allocation, retained earnings will stand at €32,548,508.07. €11,075.99 to the legal reserve; €1,621,297.86 to retained earnings. ESI GROUP • 2016 REGISTRATION DOCUMENT 1436 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING The Board of Directors reminds the General Meeting that no dividends have been paid out for the past three fiscal years. the year ended The General Meeting, acknowledging that the net profit for January 31, 2017 stands at €1,632,373.85, decides, at the Board of Directors’ recom- mendation, to allocate this profit as follows: Current position: • • • Net profit for the year: Retained earnings: €30,927,210.21 Total to be allocated: €1,632,373.85 €1,632,373.85 €11,075.99 to the legal reserve; €1,621,297.86 to retained earnings. Allocated as follows: • • Following this allocation, the balance of the legal reserve will stand at €1,797,597.60. Following this allocation, retained earnings will stand at €32,548,508.07. The General Meeting notes that no dividends have been paid out for the past three fiscal years.4082422123 Fourth resolution Approval of the agreements referred to in Article L. 225-38 of the French Commercial Code Statement of reasons Based on the special report by the statutory auditors on regulated agreements, the General Meeting is requested to acknowledge that during FY2016 the two following agreements gave rise to the procedure provided for in Articles L. 225- 38 et seq. of the French Commercial Code: • the buyback of 8,000 ESI shares from a shareholder who held over 10% of the voting rights under terms set out in the report of the statutory auditors; the consultancy contract initially signed in 2015 with Ms. Cristel de Rouvray, Director, and extended under the same terms in 2016 following a review by the Board of Directors on April 8, 2016. • The General Meeting, having reviewed the special report by the statutory auditors on the agreements referred to in Article L. 225-38 of the French Commercial Code, Fifth resolution Reappointment of Mrs. Cristel de Rouvray acknowledges the conclusions of said report and approves the agreements mentioned therein. Statement of reasons As the directorship of Mrs. Cristel de Rouvray expires at the end of this General Meeting, the Shareholders are requested to renew her directorship for a term of four years, until the General Meeting to be convened to approve the financial state- ments for the year ending January 31, 2021. The Board of Directors reminds the General Meeting that Ms. Cristel de Rouvray has been a director since 1999. She is currently Chair of the Compensation, Nomination and Governance Committee and a member of the Strategic Committee. Her biography is presented in the Chairman’s report. The General Meeting, having reviewed the Report of the Board of Directors, and noting that the term of office of Ms. Cristel de Rouvray expires at the end of the General Meeting, decides to renew her directorship for a term of four years, expiring at the end of the General Meeting to be convened to approve the financial statements for the year ending January 31, 2021. Sixth resolution Reappointment of Mr. Charles-Helen des Isnards Statement of reasons As the directorship of Mr. Charles-Helen des Isnards expires at the end of this General Meeting, the Shareholders are re- quested to renew his directorship for a term of four years, until the General Meeting to be convened to approve the financial ESI GROUP • 2016 REGISTRATION DOCUMENT 144RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 statements for the year ending January 31, 2021. The Board of Directors reminds the General Meeting that Mr. Charles-Helen des Isnards has been an independent board member since 2008. He is currently Chair of the Audit Committee and a member of the Strategic Committee and Compen- sation, Nomination and Governance Committee. Mr. Charles-Helen des Isnards has also been given special assignments in recent years. His biography is presented in the Chairman’s report. The General Meeting, having reviewed the Report of the Board of Directors, and noting that the term of office of Mr. Charles-Helen des Isnards expires at the end of the General Meeting, resolves to renew his directorship for a Seventh resolution term of four years, expiring at the end of the General Meet- ing to be convened to approve the financial statements for the year ending January 31, 2021. Approval of the principles and criteria for determining, distributing and allocating the fixed, variable and exceptional items that make up the total compensation and benefits of all types attributable to the Chairman and Chief Executive Officer and the Chief Operating Officers Statement of reasons In application of Article L. 225-37-2 of the French Commercial Code, as introduced by the French “Sapin II” Law on Trans- parency, Anti-Corruption and Modernization of Economic Life, the General Meeting is requested every year as of 2017 to approve the principles and criteria for determining, distributing and allocating the fixed, variable and exceptional items that make up the total compensation and benefits of all types attributable to the corporate executive officers, based on their mandate. These principles and criteria are presented in the report appended to the Report of the Board of Directors and are included in section 2.5.2 of the Registration Document. The General Meeting, deliberating in accordance with the quorum and majority requirements for Ordinary General Meetings, in application of Article L. 225-37-2 of the French Commercial Code, approves the principles and cri- teria for determining, distributing and allocating the fixed, variable and exceptional items that make up the total com- pensation and benefits of all types attributable to the Eighth resolution Chairman and Chief Executive Officer and the Chief Oper- ating Officers as set out in the report appended to the re- port mentioned in Articles L. 225-100 and L. 225-102 of the French Commercial Code, and presented in the Regis- tration Document. Determination of the compensation paid to the members of the Board of Directors (Directors’ fees) Statement of reasons The General Meeting is requested to set the total annual amount of Directors’ fees allocated to members of the Board of Directors for FY2017 at €180,000 to account for changes in the Board of Directors. It should be noted that in its previous decision, the General Meeting of July 21, 2016 set the total amount at €160,000. The General Meeting decides to set the compensation paid to the members of the Board of Directors in the form of Directors’ fees at €180,000 for FY2017. The Board will freely distribute this amount among its members. ESI GROUP • 2016 REGISTRATION DOCUMENT 1456 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING Ninth resolution Authorization to be granted to the Board of Directors for the Company to buy back its own shares Statement of reasons As the existing authorization expires in January 2018, it is proposed to the General Meeting to terminate this authorization and grant the Board of Directors a new authorization for the Company to buy back its own shares for a new period of 18 months as from the General Meeting of June 29, 2017. Given the rise in the ESI share price, it is proposed to set the maximum purchase price at €80 per share. Pursuant to current legislation, the maximum number of shares that may be vested is limited to 10% of the capital, after deduction of treasury stock held by the Company, 7% at the end of the 2016 fiscal year. The Company will not be allowed to pay out more than €15,000,000 under the share buyback program. The Company can buy back its own shares to: • stimulate the secondary market or the liquidity of ESI Group shares through a liquidity contract signed with an in- vestment service provider; allocate them to free share awards or stock purchase options; hold them and use them at a later date as payment for acquisitions; cancel them by a reduction in share capital. • • • The General Meeting, deliberating in accordance with the quorum and majority requirements for Ordinary General Meetings, and having reviewed the Report of the Board of Directors in accordance with Article L. 225-209 of the French Commercial Code: • Terminates the authorization granted by the seventh resolution of the Ordinary and Extraordinary Gen- eral Meeting of July 21, 2016, which authorized the Board to trade in its own shares; Authorizes the Board of Directors to purchase the Company’s shares, not to exceed 10% of its capital, for a period of 18 months beginning on June 29, 2017, in order to: • (i) Stimulate the secondary market or the liquidity of ESI Group shares through a liquidity contract signed with an investment service provider and compliant with the AMAFI’s Code of Ethics dated September 23, 2008 and approved by the French Financial Markets Authority (AMF); (ii) Fulfill its share issue obligations, in accordance with the terms and conditions set forth by law, undertaken as part of the following: - Plans granting stock options for the purchase of ex- isting shares by the Group’s employees or corpo- rate officers; - Employee profit-sharing plans under which these shares would be granted to employees and/or cor- porate officers; - Free share grants to the Group’s employees and corporate officers; - Shares provided upon exercise of the rights at- tached to securities giving access to shares by any • means, whether immediately or in the future, un- der the conditions set forth by the AMF and at any time deemed appropriate by the Board of Direc- tors; (iii) Retain shares to subsequently use them in exchange or as payment for future business acquisitions; (iv) Cancel shares by a reduction in share capital. • Decides that the purchase price per share may not exceed €80. Shares may be purchased or retained at the discretion of the Board of Directors by any means by trading on or off the market, or on an over-the-counter market, on one or more occasions. All shares purchased under the author- ized share buyback program may be acquired in the form of blocks of shares. Such transactions may be carried out at any time, including during public offering periods, in ac- cordance with the regulations in force. The Company may not, at any time, hold, either directly or via an intermediary, more than 10% of the total shares making up its own share capital. The Company will not be allowed to pay out more than €15,000,000 under the share buyback program. The Board of Directors shall inform Shareholders of any purchases or sales carried out pursuant to this authoriza- tion in its management report. The General Meeting grants full authority to the Board of Directors to: • Publish, on the website of the AMF, a detailed notice explaining this share buyback program authorized by the General Meeting prior to using this authoriza- tion; Place any and all stock market orders and enter into ESI GROUP • 2016 REGISTRATION DOCUMENT 146RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 any and all agreements to record share purchases and sales; • Make any and all disclosures to the stock market reg- ulators, carry out any other formalities and, in gen- eral, take any necessary steps. 6.2. Decisions falling within the competence of the Extraordinary Gen- eral Meeting Tenth resolution Authorization to be granted to the Board of Directors to award stock subscription options Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to award stock subscription options to corporate officers and employees of the Company and its affiliates, or certain categories of them, for a new period of 38 months starting with the General Meeting of June 29, 2017. The number of shares that may be awarded under this authorization must not exceed 3% of the share capital at the date of the General Meeting, i.e. 180,000 options. The subscription price of shares will be determined at the date on which the options are granted by the Board of Directors. Pursuant to current legislation, this price shall be no less than 80% of the average share price from the last 20 trading days preceding the date on which the options are granted. The Board of Directors will determine the identity of the beneficiaries of the share grants and the procedures and condi- tions under which they are awarded within the limits of this authorization and within legal and regulatory limits. Options must be exercised no later than eight years after the date on which they are granted; however, the Board of Direc- tors may nonetheless shorten this period for all or part of the beneficiaries. The Board of Directors may prohibit the immediate resale of the shares subscribed; however, the period of time during which beneficiaries are required to retain shares may not exceed three years from the date on which the option is exercised. This authorization will entail the Shareholders’ express waiver, for the benefit of beneficiaries of the options, of the Share- holders' preferential subscription rights to shares that will be issued as options are exercised. In accordance with legal requirements, the increase in capital resulting from the exercise of stock subscription options will be final and definite as of the declaration of the exercise of the option(s) accompanied by the corresponding payment made in cash or by offsetting receivables with the Company. The Extraordinary General Meeting, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, authorizes the Board of Directors to grant to the corporate executives defined by law and the employees of the Company and its affiliates, as defined under Article L. 225-180 of the French Commercial Code, options for the subscription of new Company shares to be issued through the Company's capital increase operations, not to exceed the number of shares representing 3% of the capital as of the date of this Meeting, i.e. 180,000 options. This authorization, which may be exercised on one or more occasions, is granted for a term of thirty-eight months from the date of this General Meeting. The subscription price of shares will be determined at the date on which the options are granted by the Board of Di- rectors. This price shall be no less than 80% of the average share price from the last 20 trading days preceding the date on which the options are granted. This price may not be subsequently modified, except where necessary to protect the interests of beneficiaries of options pursuant to Article L. 225-181 of the French Commercial Code. No option may be granted less than 20 days following an ex-coupon date (whereby the option entitled the holder to a dividend or to participate in a share issue), nor within a period of ten trading days preceding and following the date on which the consolidated financial statements, or, in the absence thereof, the parent-company financial state- ments, are published, nor within the period between the date on which the Company’s corporate bodies became aware of information that, if it were disclosed to the pub- lic, would have a material impact on the Company’s share price and the date ten trading days after the date on which said information is made public. ESI GROUP • 2016 REGISTRATION DOCUMENT 1476 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING Options must be exercised no later than eight years after the date on which they are granted; however, the Board of Directors may nonetheless shorten this period for all or part of the beneficiaries. The Board of Directors may prohibit the immediate resale of the shares subscribed; however, the period of time dur- ing which beneficiaries are required to retain shares may not exceed three years from the date on which the option is exercised. The General Assembly acknowledges that this authoriza- tion entails the Shareholders' express waiver, for the ben- efit of beneficiaries of the options, of the Shareholders' preferential subscription rights to shares that will be is- sued as options are exercised. The General Meeting grants full authority to the Board of Directors to decide all other terms and conditions regard- ing the granting and exercising of options, within legal and regulatory limits, and specifically authorizes the Board of Directors to: • • Grant options to designated individuals; Determine the expiration date of the options, within the limits set forth above; Set forth requirements governing the granting and exercising of options; the Board of Directors may: (a) restrict, limit or prohibit (i) the exercise of options or (ii) the sale or conversion to bearer shares of the shares obtained through the exercise of options, dur- ing certain periods or within a certain period follow- ing certain events (b) bring forward exercise dates or • periods for the options, extend the exercisable na- ture of the options or modify dates or periods within which the shares obtained by exercise of the options may not be transferred or converted to bearer shares; Establish, where applicable, a period during which shares arising from the exercise of options may not be sold or converted to bearer shares; such lock-up period may not exceed three years from the date on which the option was exercised; Adjust the number and the price of the shares that may be obtained by exercising options, where appli- cable, in keeping with the legal and regulatory re- quirements in force. • • The increase in capital resulting from the exercise of stock subscription options will be final and definite as of the declaration of the exercise of the option(s) accompanied by the corresponding payment made in cash or by offset- ting receivables with the Company. At its first meeting following the end of each fiscal year, the Board of Directors will record the total shares issued during the course of the year, where applicable, amend the articles of association as necessary and perform any pub- lic disclosure formalities. This authorization cancels, in the amount of the unused portion, the ninth resolution of the Ordinary and Extraor- dinary General Meeting of July 24, 2014. ESI GROUP • 2016 REGISTRATION DOCUMENT 148RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 Eleventh resolution Authorization to be granted to the Board of Directors to award stock purchase options Statement of reasons The General Meeting is requested to terminate the existing authorization of July 21, 2016 and grant the Board of Directors a new authorization to award stock purchase options to corporate officers and employees of the Company and its affiliates, or certain categories of them, for a new period of 38 months starting with the General Meeting of June 29, 2017. The number of shares that may be awarded under this authorization must not exceed 5% of the share capital at the date of the General Meeting, i.e. 299,600 shares. The purchase price of shares will be determined at the date on which the options are granted by the Board of Directors. Pursuant to current legislation, this price shall be no less than 80% of the average share price over the last 20 trading days preceding the date on which the options are granted. The Board of Directors will determine the identity of the beneficiaries of the share grants and the procedures and condi- tions under which they are awarded within the limits of this authorization and within legal and regulatory limits. Options must be exercised no later than eight years after the date on which they are granted; however, the Board of Direc- tors may nonetheless shorten this period for all or part of the beneficiaries. The Board of Directors may prohibit the immediate resale of the shares subscribed; however, the period of time during which beneficiaries are required to retain shares may not exceed three years from the date on which the option is exercised. The Extraordinary General Meeting, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, authorizes the Board of Directors to grant to the corporate executives defined by law and the employees of the Company and its affiliates, as defined under Article L. 225-180 of the French Commercial Code, options to purchase existing shares bought back by the Company under the conditions provided for by law, not to exceed the number of shares representing 5% of the capi- tal as of the date of this Meeting, i.e. 299,600 shares. This authorization, which may be exercised on one or more occasions, is granted for a term of thirty-eight months from the date of this General Meeting. The purchase price of shares will be determined at the date on which the options are granted by the Board of Di- rectors. This price shall be no less than 80% of the average share price over the last 20 trading days preceding the date on which the options are granted. This price may not be subsequently modified, except where necessary to protect the interests of beneficiaries of options pursuant to Article L. 225-181 of the French Commercial Code. No option may be granted less than 20 days following an ex-coupon date (whereby the option entitled the holder to a dividend or to participate in a share issue), nor within a period of ten trading days preceding and following the date on which the consolidated financial statements, or, in the absence thereof, the parent-company financial state- ments, are published, nor within the period between the was disclosed to date on which the Company's corporate bodies became aware of information that, if it the pub-lic, would have a material impact on the Company's share price and the date ten trading days after the date on which said information is made public. Options must be exercised no later than eight years after the date on which they are granted; however, the Board of Directors may nonetheless shorten this period for all or part of the beneficiaries. The Board of Directors may prohibit the immediate resale of the shares purchased; however, the period of time dur- ing which beneficiaries are required to retain shares may not exceed three years from the date on which the option is exercised. The General Meeting grants full authority to the Board of Directors to decide all other terms and conditions regard- ing the granting and exercising of options, within legal and regulatory limits, and specifically authorizes the Board of Directors to: • • Grant options to designated individuals; Determine the expiration date of the options, within the limits set forth above; Set forth requirements governing the granting and exercising of options; the Board of Directors may (a) restrict, limit or prohibit (i) the exercise of options or (ii) the sale or conversion to bearer shares of the shares obtained through the exercise of options, dur- ing certain periods or within a certain period follow- ing certain events and (b) bring forward exercise • ESI GROUP • 2016 REGISTRATION DOCUMENT 1496 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING dates or periods for the options, extend the exercisa- ble nature of the options or modify dates or periods within which the shares obtained by exercise of the options may not be transferred or converted to bearer shares; Establish, where applicable, a period during which shares arising from the exercise of options may not be sold or converted to bearer shares; such lock-up period may not exceed three years from the date on • Twelfth resolution • which the option was exercised; Adjust the number and the price of the shares that may be obtained by exercising options, where appli- cable, in keeping with the legal and regulatory re- quirements in force. This authorization cancels, in the amount of the unused portion, the eleventh resolution of the Ordinary and Ex- traordinary General Meeting of July 21, 2016. Delegation of authority to the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, with maintenance of the shareholders' preferential subscription rights Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to increase capital via the issue of shares of common stock or of any securities convertible into equity, with maintenance of the shareholders' preferential subscription rights. This authorization will be granted for a new period of 26 months starting with the General Meeting of June 29, 2017. Shareholders will have preferential subscription rights, in proportion to the number of their shares, to the securities issued in accordance with this resolution. The Board of Directors will have the option of granting the Shareholders the right to apply for a number of securities in excess of the number of shares for which they can apply as of right, in proportion to their subscription rights and according to their request. The nominal amount of any immediate or future capital increases may not exceed €20,000,000 or its equivalent in any other currency. All capital increases that may be carried out pursuant to the authorizations granted to the Board of Direc- tors by resolutions 12 to 17 submitted at the General Meeting will be deducted from this limit. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, and in accordance with Articles L. 225- 129,L. 225-129-1, L. 225-129-2 et seq. and L. 228-92 et seq. of the French Commercial Code: • Authorizes the Board of Directors to issue, on one or more occasions, common stock of the Company or any other securities, including stand-alone share subscription warrants with or without considera- tion, carrying immediate or deferred rights to com- mon stock of the Company. The Board of Directors will have full discretionary powers to determine the amount, terms and timing of this issue, which may be carried out in France or abroad and within the frame- work of this resolution, and may be denominated in euros, foreign currency or any monetary unit deter- mined by reference to a basket of currencies. Securities may be subscribed for in cash or by offset- ting debt. The issue price of each share may not be less than the par value. • • This authorization granted to the Board of Directors is valid for a period of 26 months as from the date of this Meeting. Decides that the total nominal amount of immediate or future capital increases that may be carried out may not exceed €20,000,000 or its equivalent in any other currency, plus the amount of any additional shares issued to maintain the rights of holders of se- curities giving access to shares, in line with legal pro- visions. All capital increases that may be carried out pursuant to the authorizations granted to the Board of Directors by resolutions 12 to 17 submitted at the General Meeting will be deducted from this limit. Furthermore, the total nominal amount of debt in- struments with immediate or deferred access to the capital that may be issued in application of this au- thorization may not exceed €300,000,000 or its equivalent in any other currency. Decides that existing Shareholders will have a pref- erential right to subscribe for the securities issued pursuant to this authorization, in proportion to their existing holdings; ESI GROUP • 2016 REGISTRATION DOCUMENT 150RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 • The Board of Directors will have the option of grant- ing the Shareholders the right to apply for a number of securities in excess of the number of shares for which they can apply as of right, in proportion to their subscription rights and according to their re- quest. Decides that if the applications for shares as of right and, if applicable, applications for excess shares, do not cover the entire issue, the Board of Directors may use one or more of the options below in the order it deems fit: – Limit the amount of the issue to the subscriptions received, provided that at least 75% of the issue is taken up; – Freely distribute all or part of the unsubscribed Thirteenth resolution • • • securities; – Float all or part of the unsubscribed securities. Notes that, as required, this authorization automati- cally waives Shareholders’ preferential subscription rights to the shares to which these securities entitle them in favor of holders of securities issued in appli- cation of this resolution and giving deferred access to Company shares that may be issued. Decides that this authorization also covers the au- thorization granted to the Board of Directors to amend the articles of association as necessary. Acknowledges that this authorization cancels and re- places any previous authorizations with the same purpose. Delegation of authority to the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, through public offerings with cancellation of the shareholders' preferential subscription rights Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to increase capital via the issue of shares of common stock or of any securities convertible into equity, through public offerings with cancellation of the shareholders' preferential subscription rights. This authorization will be granted for a new period of 26 months starting with the General Meeting of June 29, 2017. Shareholders’ preferential subscription rights to securities to be issued under this authorization will be cancelled. The Board of Directors will have the option of granting Shareholders a priority subscription right to shares as of right and, if applicable, applications for excess shares, for all or part of the issue, for the period and on the terms it will set pursuant to the applicable legislative and regulatory provisions when it decides to exercise this authorization. The nominal amount of any immediate or future capital increases may not exceed €20,000,000 or its equivalent in any other currency. All capital increases that may be carried out pursuant to the authorizations granted to the Board of Direc- tors by resolutions 12 to 17 submitted at the General Meeting will be deducted from this limit. Furthermore, the total nom- inal amount of debt instruments with immediate or deferred access to the capital that may be issued in application of this authorization may not exceed €300,000,000 or its equivalent in any other currency. The issue price may not be less than the weighted average price of shares quoted over the three days prior to the decision, less 5%. For issues of stand-alone share subscription warrants carrying immediate or deferred rights to Company shares, this minimum price applies to the sum of the price of the warrant and the share. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, and in accordance with Articles L. 225-129, L. 225-129-1, L. 225-129-2 et seq., L. 225-135, L. 255-136, and L. 228-92 et seq. of the French Commercial Code: • Authorizes the Board of Directors to issue, through public offerings, on one or more occasions, common stock of the Company and/or share equivalents carrying rights to other equity securities or to debt securities and/or share equivalents carrying rights to equity securities to be issued governed by Articles L. 228-91 et seq. of the French Commercial Code. The Board of Directors will have full discretionary pow- ers to determine the method and terms of this issue, which may be carried out in France or abroad. Securities may be subscribed for in cash or by offset- ting debt, or may result from securities tendered to a ESI GROUP • 2016 REGISTRATION DOCUMENT 1516 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING future capital public exchange offer initiated by the Company un- der Article L. 225-148 of the French Commercial Code. This authorization granted to the Board of Directors is valid for a period of 26 months from the date of this Meeting. Decides that the nominal amount of any immediate or increases may not exceed €20,000,000 or its equivalent in any other currency. All capital increases that may be carried out pursuant to the authorizations granted to the Board of Direc- tors by resolutions 12 to 17 submitted at this General Meeting will be deducted from this limit. Further- more, the total nominal amount of debt instruments with immediate or deferred access to the capital that may be issued in application of this authorization may not exceed €300,000,000 or its equivalent in any other currency. Decides to cancel Shareholders’ preferential sub- scription rights to securities to be issued under this authorization, and give the Board of Directors the op- tion of granting Shareholders a priority subscription right to shares as of right and, if applicable, applica- tions for excess shares, for all or part of the issue, for • • • • the period and on the terms it will set pursuant to the applicable legislative and regulatory provisions when it decides to exercise this authorization. This priority subscription right will not be transferable or tradable. Decides that the issue price may not be less than the weighted average price of shares quoted over the three days prior to the decision, less 5%. For issues of stand-alone share subscription warrants carrying immediate or deferred rights to Company shares, this minimum price applies to the sum of the price of the warrant and the share. Notes that, as required, this authorization automati- cally waives Shareholders’ preferential subscription rights to the shares to which these securities entitle them in favor of holders of securities issued in appli- cation of this resolution and giving deferred access to Company shares that may be issued. Decides that this authorization also covers the au- thorization granted to the Board of Directors to amend the articles of association as necessary. Acknowledges that this authorization cancels and re- places any previous authorizations with the same purpose. • • Fourteenth resolution Delegation of authority to the Board of Directors for the purpose of increasing the issue amount in the event of over-demand Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to increase the issue amount in the event of over-demand for a new period of 26 months. For each issue carried out in application of the twelfth and thirteenth resolutions above, the Board of Directors will be authorized to increase the number of shares to be issued in accordance with Article L. 225-135-1 of the French Commercial Code in the event of over-demand, and under the following terms: (i) within 30 days of the close of the original issue, (ii) for up to 15% of its amount, (iii) for a maximum of €20,000,000, and (iv) at the same price applied in the original issue. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, decides that for each issue carried out in appli- cation of the twelfth and thirteenth resolutions above, the Board of Directors is authorized to increase the number of shares to be issued in accordance with Article L. 225-135- 1 of the French Commercial Code in the event of over-de- mand, and within 30 days of the close of the original issue, Fifteenth resolution and for up to 15% of its amount. The subscription price will be the same as that applied in the original issue. However, this increase may not exceed the overall maxi- mum of €20,000,000 authorized for all capital increases carried out by the Board of Directors pursuant to resolu- tions 12 to 17 submitted at this General Meeting. The General Meeting acknowledges that the present au- thorization cancels and replaces any previous authoriza- tions with the same purpose. ESI GROUP • 2016 REGISTRATION DOCUMENT 152RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 Delegation of authority to the Board of Directors for the purpose of increasing the capital by the capitalization of premiums, reserves, profits or otherwise Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to increase capital by the capitalization of premiums, reserves, profits or otherwise, for a new period of 26 months. The total amount of capital increases that may be carried out, plus the amount required to maintain the rights of holders of securities giving access to shares, in line with legal provisions, may not exceed the total amount of reserves, premiums and profits existing at the time of the capital increase, or €100,000,000. This limit may be reduced to the amount of capital increases carried out pursuant to resolutions 12 to 17 submitted at this General Meeting. In application of Article L. 225-130 of the French Commer- cial Code, the General Meeting, having reviewed the Re- port of the Board of Directors: • Authorizes the Board of Directors, for a period of 26 months as from the date of this Meeting, to increase the capital, on one or more occasions, through incor- poration of additional paid-in capital, retained earn- ings, earnings, or other amounts that may be capital- ized in accordance with the applicable laws and the Company’s articles of association, in the form of free share awards, the increase of the nominal amount of existing shares or a combination of these two meth- ods. The total amount of capital increases that may be carried out, plus the amount required to maintain the rights of holders of securities giving access to shares, in line with legal provisions, may not exceed the total amount of reserves, premiums and profits Sixteenth resolution • existing at the time of the capital increase, or €100,000,000. This limit may be reduced to the amount of capital increases carried out pursuant to resolutions 12 to 17 submitted at this General Meet- ing. Decides that, in the event that the Board of Directors exercises this authorization, rights to fractional shares may not be traded or transferred, and that the corresponding securities will be sold. Proceeds from sale will be allocated to rights holders within the time limit set forth in regulations in force. Decides that this authorization also covers the au- thorization granted to the Board of Directors to amend the articles of association as necessary. The General Meeting acknowledges that the present au- thorization cancels and replaces any previous authoriza- tions with the same purpose. • Delegation of authority to the Board of Directors for the purpose of issuing shares without preferential subscription rights as compensation for contributions of shares or share equivalents granted to the Company as part of a contribution in kind Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new authorization to issue shares without preferential subscription rights as compensation for contributions of shares or share equivalents granted to the Company as part of a contribution in kind. This authorization will be granted for a new period of 26 months. Within the overall maximum of €20,000,000, the Board of Directors will have the option of issuing shares of common stock in line with the report of the contributions auditor(s), not to exceed 10% of the Company’s share capital. Within the overall maximum of €20,000,000 appli- cable to capital increases authorized by the resolu- tions 12 to 17 submitted at this General Meeting and in accordance with Article L. 225-147 of the French Commercial Code, the General Meeting, deliberating in accordance with the quorum and majority re- quirements for Extraordinary General Meetings, having reviewed the Report of the Board of Direc- tors, authorizes the Board of Directors, for a period of 26 months as from the date of this Meeting, to is- sue shares of common stock in line with the report of the contribution appraiser(s), not to exceed 10% of the Company’s share capital, as compensation for contributions in kind granted to the Company in the ESI GROUP • 2016 REGISTRATION DOCUMENT 1536 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING form of shares or share equivalents. The General Meeting acknowledges that this author- ization cancels and replaces any previous authoriza- tions with the same purpose. This authorization also covers the authorization granted to the Board of Di- rectors to amend the articles of association as neces- sary. Seventeenth resolution Delegation of authority to the Board of Directors for the purpose of increasing the capital without preferential subscription rights through private placement Statement of reasons As the existing authorization expires in September 2017, it is proposed to the General Meeting to terminate this authori- zation and grant the Board of Directors a new delegation of authority to increase the share capital without preferential subscription rights by private placement, for an additional 26 months. The total amount of share capital increases that may be carried out pursuant to this delegation is limited to 20% of the share capital per year, up to an overall ceiling of €20,000,000. The issue price of the shares issued directly will be equal to or greater than the minimum required by the regulatory pro- visions in force on the day of issue for an issue without preferential subscription rights (to date, the weighted average of the share price over the three trading days preceding the setting of the subscription price of the capital increase less 5%), after correcting of this average in the event of a difference between the dividend dates. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, in application of Article L. 225-136 of the French Commercial Code and Article L. 411-2 of the French Mon- etary and Financial Code: • Delegates to the Board of Directors, for a period of 26 months from the date of this General Meeting, the au- thority to carry out, on one or more occasions, a cap- ital increase reserved for qualified investors or a lim- ited circle of investors in accordance with the provi- sions of Article L. 225-136 of the French Commercial Code and Article L. 411-2 of the French Monetary and Financial Code. Decides that the issue price of the shares issued di- rectly will be equal to or greater than the minimum • required by the regulatory provisions in force on the day of issue for an issue without preferential sub- scription rights (to date, the weighted average of the share price over the three trading days preceding the setting of the subscription price of the capital in- crease less 5%), after correcting of this average in the event of a difference between the dividend dates. Decides that the total amount of share capital in- creases that may be carried out pursuant to this del- egation is limited to 20% of the share capital per year, up to an overall ceiling of twenty million euros (€20,000,000). • In all cases, the amount of the capital increases carried out pursuant to this resolution shall be charged against the ceilings provided for in resolutions 12 to 17. The General Meeting acknowledges that this delegation cancels and replaces any previous authorization having the same purpose. Eighteenth resolution Authorization granted to the Board of Directors to increase the capital by issuing shares reserved for employees enrolled in the employee savings plan ESI GROUP • 2016 REGISTRATION DOCUMENT 154RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 Statement of reasons In accordance with the provisions of Articles L. 3332-1 et seq. of the French Labor Code and Articles L. 225-129-6 and L. 225-138-1 of the French Commercial Code, providing in particular for a permanent obligation to consult the Sharehold- ers regarding capital increases reserved for employees enrolled in the company savings plan, the General Meeting is called upon to terminate the existing authorization and to authorize the Board of Directors to carry out capital increases reserved for employees enrolled in the company savings plan. This authorization will be granted for a new period of 26 months as of the General Meeting of June 29, 2017. The ceiling of the nominal amount of the Company's capital increase, resulting from all share issues carried out pursuant to this resolution, is set at 2% of the share capital, this ceiling being autonomous and distinct from the ceilings referred to in other resolutions and established without taking into account the nominal value of the ordinary shares to be issued, if any, in respect of adjustments carried out to preserve the rights of holders of securities conferring entitlement to shares in the Company, in accordance with the law. The preferential subscription right to which the issue of shares or other securities giving access to the capital provided for in this resolution confers immediate or subsequent entitlement will be canceled for the benefit of employees enrolled in the company savings plan. The Board of Directors shall be free to determine the terms and conditions of such increases, within the limits of this au- thorization and within legal and regulatory limits. • The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors and the special report of the statutory auditors, in application of Articles L. 3332-1 et seq. of the French Labor Code and Articles L. 225-129-6 and L. 225- 138-1 of the French Commercial Code, and acting in ac- cordance with the provisions of said Code: • Decides that the Board of Directors shall have a max- imum period of 26 months to implement a new com- pany savings plan in accordance with the provisions of Articles L. 3332-1 et seq. of the French Labor Code. Delegates to the Board of Directors, for a period of 26 months from the date of this General Meeting, all powers to increase the share capital, on one or more occasions, at its sole discretion, by issue of shares or other securities giving access to the Company's capi- tal reserved for members of a company savings plan implemented by the Company and French or foreign companies affiliated thereto, pursuant to Article L. 225-180 of the French Commercial Code and L. 3344- 1 and L. 3344-2 of the French Labor Code. The ceiling of the nominal amount of the Company's capital increase, resulting from all share issues car- ried out pursuant to this resolution, is set at 2% of the share capital, this ceiling being autonomous and distinct from the ceilings referred to in other resolu- tions and established without taking into account the nominal value of the ordinary shares to be issued, if any, in respect of adjustments carried out to preserve the rights of holders of securities conferring entitle- ment to shares in the Company, in accordance with • • • • • • the law. Decides that the issue price of shares issued pursu- ant to this authorization will be determined by the Board of Directors in accordance with the legal and regulatory provisions applicable to companies whose shares are admitted to trading on a regulated market. Decides that the characteristics of the other securi- ties giving access to the capital of the Company will be determined by the Board of Directors under the conditions set out by regulations. Decides to cancel the preferential subscription right to shares to which the issue of shares or other secu- rities giving access to the capital as provided for in this resolution confers immediate or subsequent en- titlement, for the benefit of the employees enrolled in a company savings plan, and to waive any right to any shares or other securities to be awarded pursu- ant to this resolution. Decides that the Board of Directors shall have full powers to implement this delegation, within the lim- its and under the conditions specified above, partic- ularly for the following purposes: determine the characteristics of the securities to be issued, the amounts proposed for subscription and, in particular, set the issue prices, dates, deadlines, terms and conditions for subscription, release, deliv- ery and enjoyment of securities, in accordance with applicable laws and regulations; record the completion of capital increases up to the amount of the shares that will actually be subscribed ESI GROUP • 2016 REGISTRATION DOCUMENT 1556 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING • • • • or other securities issued pursuant to this authoriza- tion; if applicable, charge the costs of the capital increases against the amount of the related premiums and de- ducting from this amount the sums necessary to bring the legal reserve to one-tenth of the new capital after each capital increase; conclude all agreements, perform directly or by proxy all transactions and procedures including pro- ceeding with all formalities following capital in- creases and corresponding amendments to the arti- cles of association and, more generally, do whatever is necessary; in general, enter into any agreement, in particular to successfully complete the proposed issues, take all measures and carry out all formalities relevant to the issue, listing and financial servicing of securities is- sued pursuant to this delegation and the exercise of the rights attached thereto. Decides that this authorization shall terminate, as of this date, up to the amount of the unused portion, au- thorizations previously granted to the Board of Di- rectors to increase the share capital of the Company by issue of shares reserved for members of company savings plans with cancellation of preferential sub- scription rights in favor of the latter. Nineteenth resolution Extension of the age limit for the Chief Executive Officer from 75 to 80 years of age and corresponding amendment to article 14-II, paragraph 4 of the articles of association Statement of reasons The General Meeting is called upon to approve the extension of the age limit of the Chief Executive Officer from 75 to 80 years of age and the corresponding amendment to article 14-II, paragraph 4, of the Company's articles of association. For information, it is specified that, according to article 10 of the articles of association, the age limit for the exercise of the functions of member of the Board of Directors and Chairman of the Board is 80 years of age. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to increase the age limit of the Chief Executive Officer from 75 to 80 years of age. The General Meeting therefore decides to amend article 14-II, paragraph 4 of the articles of association as follows: “For the performance of his duties, the Chief Executive Of- ficer must be under 80 years of age. When this age limit has been reached during the term of office, the Chief Exec- utive Officer shall be deemed to have resigned and a new Chief Executive Officer shall be appointed.” The remainder of this article remains unchanged. Twentieth resolution Amendment to article 16 of the articles of association to comply with the new legal requirements applicable to the scheme of regulated agreements Statement of reasons With respect to the agreements submitted for approval, Article L. 225-38 of the French Commercial Code, as amended by Order No. 2014-863 of July 31, 2014, now provides for an obligation to state the reasons for the decision to authorize said agreements. In addition, the new Article L. 225-40-1 of the French Commercial Code, as introduced by the aforementioned ordinance, provides for an annual review by the Board of Directors of agreements concluded and authorized in previous fiscal years. As regards current agreements, Article L. 225-39 of the French Commercial Code, as amended by the same ordinance, ex- cluded certain intra-Group agreements from the regulated agreements procedure. The General Meeting is called upon to approve the amendment of article 16 of the Company's articles of association to bring it into line with these new legal provisions relating to regulated and current agreements. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to amend article 16 of the ar- ticles of association, bringing it in line with the provisions of (i) of Article L. 225-38 of the French Commercial Code, ESI GROUP • 2016 REGISTRATION DOCUMENT 156RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 as amended by Ordinance No. 2014-863 of July 31, 2014, which now provides for an obligation to state the reasons for the decision to authorize the agreement; (ii) the new Article L. 225-40-1 of the French Commercial Code as in- troduced by Ordinance 2014-863 of July 31, 2014, which now provides for an annual review by the Board of Direc- tors of the agreements concluded and authorized in previ- ous years; and (iii) those of Article L. 225-39 of the French Commercial Code, as amended by Ordinance No. 2014- 863 of July 31, 2014, which excluded certain intra-Group agreements from the regulated agreements procedure. The General Meeting therefore decides to: • Amend article 16, paragraph 5 of the articles of asso- ciation as follows: “These agreements must be authorized and ap- proved in accordance with Article L. 225-40 of the French Commercial Code. Previous authorization by the Board of Directors is motivated by justifying the benefits of the agreement for the Company, particu- larly by specifying the financial conditions related thereto.” Add the following text after article 16, paragraph 5 of • • the articles of association: “In addition, agreements concluded and authorized in previous fiscal years, the execution of which has continued during the past fiscal year, are examined each year by the Board of Directors and transmitted to the auditors for the purposes of drawing up the statutory auditors' special report on regulated agree- ments.” Amend article 16, paragraph 6 of the articles of asso- ciation as follows: “Agreements relating to current and ordinary trans- actions, as well as agreements concluded between two companies, one of which holds, directly or indi- rectly, 100% of the capital of the other, following de- duction of the minimum number of shares required to meet the requirements set out in Article 1832 of the French Civil Code or Articles L. 225-1 and L. 226- 1 of the French Commercial Code, if applicable, are not subject to the authorization and approval proce- dure provided for in Articles L. 225-38 et seq. of the French Commercial Code.” The remainder of this article remains unchanged. Twenty-first resolution Amendment to article 18, paragraphs 7 to 9 of the articles of association to comply with the new legal requirements applicable to the date and procedures for drawing up the list of persons authorized to attend General Meetings – Record Date Statement of reasons Decree No. 2014-1466 of December 8, 2014 amended the date and procedures for drawing up the list of persons authorized to attend a General Meeting as a Shareholder or bondholder of a French listed company. For meetings held from 2015 onwards, the right to attend or be represented at the Meeting is subject to the registration of the securities in the name of the Shareholder or the intermediary registered on behalf of the latter, at least two business days prior to the General Meeting, at 12:00 AM Paris time. The General Meeting is called upon to approve the amendment of article 18, paragraphs 7-9 of the Company's articles of association to bring them in line with these new legal provisions relating to the “Record Date.” The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to amend article 18, para- graphs 7-9 of the articles of association to bring them in line with the provisions of Decree No. 2014-1466 of De- cember 8, 2014 modifying the date and procedures for drawing up the list of persons authorized to attend Gen- eral Meetings (Record Date). The General Meeting therefore decides to amend article 18, paragraphs 7-9 of the articles of association as follows: “All Shareholders have the right, upon presentation of proof of their identify, to take part in meetings by attend- ing them in person, by video conference or by other means of electronic telecommunication or transmission, or by re- turning the mail-in ballot or designating a proxy. The right to attend or be represented at the Meeting is subject to the registration of the securities in the name of the Shareholder or the intermediary registered on behalf of the latter, at least two business days prior to the General Meeting, at 12:00 AM Paris time: • Either in the registered share account kept by the Company; Or in bearer share accounts kept by the authorized intermediary. • ESI GROUP • 2016 REGISTRATION DOCUMENT 1576 RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING A participation certificate must be established by the au- thorized intermediary on the basis of this registration and attached to the mail-in ballot/proxy form or the access card application submitted in the name of the Share- holder.” The remainder of this article remains unchanged. Twenty-second resolution Amendment to article 4 of the articles of association to comply with the new provisions of Article L. 225-36 of the French Commercial Code, as amended by French Law No. 2016-1691 of December 9, 2016 (“Sapin II” Law) Statement of reasons Until now, the Board of Directors could decide to transfer the Company's head office within the département or to a neighboring département, subject to ratification of this decision by the next Ordinary General Meeting. Article 142 of the “Sapin II” law extended this possibility, authorizing the transfer of the head office throughout France, subject nonetheless to ratification of the decision by the General Meeting after the fact. The General Meeting is called upon to approve the amendment of article 4 of the articles of association of the Company to bring it into line with these new legal provisions relating to the authority of the Board of Directors to transfer the head office. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to bring article 4 of the articles of association in line with the new provisions of Article L 225-36 of the French Commercial Code as amended by law No. 2016-1691 of December 9, 2016, known as the "Sapin II" law. The General Meeting therefore decides to amend article 4 of the articles of association as follows: “The head office of the Company is located at Twenty-third resolution 100-102 Avenue de Suffren – 75015 Paris. It may be transferred to any other location in France by simple decision of the Board of Directors, subject to ratifi- cation of this decision by the next Ordinary General Meet- ing, and to any other location by decision of the Extraordi- nary General Meeting of Shareholders. The Board of Directors may create, transfer and eliminate, all institutions, agencies, branches, offices and counters in France and abroad.” Amendment to article 13 of the articles of association to comply with the new provisions of Article L. 225-36 of the French Commercial Code, as amended by French Law No. 2016-1691 of December 9, 2016 (“Sapin II” Law) Statement of reasons Article 142 of the “Sapin II” law amended Articles L. 225-36 and L. 225-65 of the French Commercial Code with a view to extending the powers of the Board of Directors: henceforth, pursuant to a delegation of powers by the Extraordinary General Meeting, the Board may amend the articles of association as necessary to bring them in line with legal and reg- ulatory provisions, subject to ratification of such amendments by the next Extraordinary General Meeting. The General Meeting is called upon to approve the amendment of article 13 of the Company’s articles of association to bring it into line with these new legal provisions relating to the authority of the Board of Directors to amend the articles of association. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to bring article 13 of the arti- cles of association in line with the new provisions of Arti- cle L 225-36 of the French Commercial Code as amended by law No. 2016-1691 of December 9, 2016, known as the “Sapin II” law. The General Meeting therefore decides to amend article 13 of the articles of association, appending to said article a paragraph to read as follows: “Pursuant to a delegation of powers by the Extraordinary General Meeting, the Board amends the articles of associ- ESI GROUP • 2016 REGISTRATION DOCUMENT 158RESOLUTIONS SUBMITTED FOR APPROVAL BY T HE GENERAL MEETING 6 ation as necessary to bring them in line with legal and reg- ulatory provisions, subject to ratification of such amend- ments by the next Extraordinary General Meeting.” Twenty-fourth resolution The remainder of this article remains unchanged. Amendment to article 17 of the articles of association to complywith the new provisions of Article L. 823-1 of the French Commercial Code, as amended by French Law No. 2016-1691 of December 9, 2016 (“Sapin II” Law) Statement of reasons Article 140 of the “Sapin II” law, amending Article L. 823-1, paragraph 2 of the French Commercial Code, eliminated the obligation to appoint (an) alternate statutory auditor(s), except in the event that the principle statutory auditor is a nat-ural person or a one-person company. The General Meeting is called upon to approve the amendment of article 17 of the Company's articles of association to bring it in line with these new legal provisions. The General Meeting, deliberating in accordance with the quorum and majority requirements for Extraordinary General Meetings, having reviewed the Report of the Board of Directors, decides to bring article 17 of the arti- cles of association in line with the new provisions of Arti- cle L 823-1 of the French Commercial Code as amended by law No. 2016-1691 of December 9, 2016, known as the “Sapin II” law. The General Meeting therefore decides to: • Amend article 17, paragraph 1 of the articles of asso- ciation as follows: “The Ordinary General Meeting appoints one or more • statutory auditors responsible for carrying out the assignments set out by law and complementary reg- ulations.” Amend the last paragraph of article 17 of the articles of association as follows: “In the event that the statutory auditor thus ap- pointed is a natural person or a one-person company, one or more alternate statutory auditors, called upon to replace the principle statutory auditors in the event of refusal, impediment, resignation or death, are appointed under the same conditions.” The remainder of this article remains unchanged. 6.3. Joint decisions: Twenty-fifth resolution Powers to carry out formalities Statement of reasons This resolution is intended to grant the powers necessary to carry out formalities subsequent to the General Meeting. The General Meeting grants full powers to the bearer of an original, excerpt or copy of the minutes of this Meeting to carry out all legal and administrative formalities, as well as all filing and publication requirements set forth by applicable law. ESI GROUP • 2016 REGISTRATION DOCUMENT 1597 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7.1. Information on the Company 7.1.1. General information Corporate name and head office ESI Group 100-102, avenue de Suffren 75015 Paris, France Legal form ESI Group is a French limited company (société anonyme) with a Board of Directors. Legislation governing the issuer French Date of incorporation and term of the issuer ESI Group was incorporated on January 28, 1991. The term of the Company is 99 years from registration, unless extended or dissolved before such time. Company registration Paris Trade and Companies Registry No. 381 080 225 Corporate purpose (article 2 of the articles of association) The Company pursues the following corporate purpose in France and in all other countries: • To research, develop, design, manufacture and dis- tribute computer software. To provide all forms of assistance, training and, in general, all activities that may be directly or indirectly related to the corporate purpose; To acquire, receive, hold, manage and trade in a port- folio of securities, especially in fields related to the publishing of scientific software, including digital simulation software for prototyping and manufac- turing processes and related decision-making sup- port tools. • The Company may perform any of the abovementioned operations on its own behalf or on behalf of third parties by creating new companies, forming partnerships, sub- scribing to shares in existing companies, purchasing secu- rities or rights to equity instruments, merging companies, forming business alliances, undertaking joint invest- ments, obtaining the use of any property under a lease or lease management agreement, forming joint ventures or otherwise. To this end, the Company carries out any and all economic or financial studies necessary and provides recommenda- tions in relation to investments, acquisitions and divesti- tures. It also provides assistance as a management con- sultant to companies in which it holds a stake and to other companies. It prepares all types of reports and expert opinions; it assists with business restructuring measures and mergers. In general, it carries out any and all financial, commercial or industrial operations and real estate and property transactions that may be directly or indirectly related to the corporate purpose of the Company or likely to pro- mote the Company's expansion or growth. Fiscal year (article 22 of the articles of association) The fiscal year begins on February 1st and ends on January 31 of each year. It covers 12 months. Exceptional events and disputes To the best of the Company's knowledge, there is no ex- ceptional event or dispute that may have or has had a ma- terial impact on the financial position or profit of the Com- pany or the Group of which it is a part. With the exception of disputes arising in the ordinary course of business, the Company was not involved in any in governmental, FY2016. judicial or arbitration procedure ESI GROUP • 2016 REGISTRATION DOCUMENT 160 INFORMATION ON THE COMPANY AND SHARE CAPITALs 7 7.1.2. Information regarding rights, privileges and restrictions attached to shares Allocation of income and distribution of profits (Article 22 of the articles of association) Pursuant to Article 22 of the articles of association, 5% of the net profit for the fiscal year, less any losses carried for- ward, will be set aside to form the legal reserve fund; this deduction is no longer required once the legal reserve has reached one-tenth of the share capital; the requirement applies again when, for any reason, the reserve falls below said one-tenth fraction. The balance of said profit, plus any retained earnings, forms the profit available for distribution. Shareholders have sole control over this profit and decide how it will be appropriated at the Annual General Meeting. To this end, the Annual General Meeting may decide to al- locate this profit, in full or in part, to any general or special reserve funds, carry it forward or distribute it to the Shareholders. However, except in the case of a capital reduction, no profit may be distributed to the Shareholders if net assets are or will subsequently become less than the total capital plus reserves that may not be distributed in accordance with the law or the articles of association. Any losses are recorded in the balance sheet under a spe- cial account once the financial statements have been ap- proved by the Annual General Meeting. General Meetings (Article 18 of the articles of association) In accordance with Article 18 of the articles of association and legislation in force, decisions are made collectively by Shareholders in General Meetings classified as either Or- dinary or Extraordinary General Meetings. The procedures for convening and holding General Meet- ings are governed by French law. Meetings are held at the head office or at any other location indicated in the meet- ing notice. Ordinary General Meetings are convened to make all deci- sions that do not require amendments to the articles of as- sociation. They occur at least once a year, within six months from the end of the previous fiscal year. Only Extraordinary General Meetings have the power to amend any provision set forth in the articles of associa- tion. However, such meetings may not increase the obliga- tions of Shareholders, except in the event of transactions stemming from any valid consolidation of shares. If there are multiple categories of shares, the rights at- tached to the shares of a certain category may not be changed without the approval of an Extraordinary Gen- eral Meeting open to all Shareholders and, in addition, without further approval from a special meeting open only to those Shareholders holding shares belonging to the category in question. All Shareholders are entitled, upon presentation of proof of their identify, to take part in meetings by attending them in person, by video conference or by other means of electronic telecommunication or transmission, or by re- turning the mail-in ballot or designating a proxy. The right to attend or be represented at the General Meet- ing is subject to shares being recorded for accounting pur- poses in the name of the Shareholder or the intermediary registered on behalf of the latter, by 12:00 AM Paris time, two working days prior to the General Meeting: • Either in the registered share account kept by the Company; • Or in bearer share accounts kept by the author- ized intermediary. A participation certificate must be established by the au- thorized intermediary on the basis of this registration and attached to the mail-in ballot/proxy form or the access card application submitted in the name of the Share- holder. In accordance with the conditions set forth above, the le- gal representatives of Shareholders deemed legally in- competent and individuals representing legal persons that hold shares in the Company may take part in General Meetings, regardless of whether or not they are Share- holders themselves. Proxy forms and mail-in ballots must be prepared and sent out in accordance with legislation in force. An attendance sheet is filled out for each meeting. This at- tendance sheet must be duly signed by the Shareholders present and by the proxies, and must be certified as accu- rate by the officers of the Meeting. General Meetings are chaired by the Chairman of the Board of Directors and, in the absence thereof, by the Board member appointed to replace him or her. The two Shareholders present at the Meeting who repre- sent the largest number of shares, either on their own be- half or as proxies, are appointed to serve as scrutineers, provided that they accept the responsibility. ESI GROUP • 2016 REGISTRATION DOCUMENT 161 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL The officers of the meeting, thus designated, are responsi- ble for appointing a secretary who need not be a Share- holder. Quorum and majority (Article 19 of the articles of association) The Ordinary General Meeting cannot validly conduct business when first convened unless the Shareholders present or represented account for at least one-fifth of shares with voting rights. When convened a second time, no quorum is required. The Meeting issues decisions by a majority vote of the shareholders present or represented. The Extraordinary General Meeting cannot validly con- duct business unless the Shareholders present or repre- sented account for at least one-fourth of shares with vot- ing rights when first convened, and one-fifth when con- vened a second time. If this quorum is not attained, the second General Meeting may be postponed for a maxi- mum of two months from the date at which it was initially convened. The Extraordinary General Meeting issues decisions by a two-thirds majority vote of the shareholders present or represented. Special General Meetings cannot validly conduct business unless the Shareholders present or represented account for at least half of shares with voting rights when first con- vened, and one-fourth when convened a second time. If this quorum is not attained, the second General Meeting may be postponed for a maximum of two months from the date at which it was initially convened, the one-fourth quorum remaining necessary. Special General Meetings issue decisions by a two-thirds majority vote of the shareholders present or represented. Shareholders' right to information (Article 21 of the articles of association) All shareholders are entitled to receive information, and the Board of Directors is required to send or make availa- ble any documents necessary for Shareholders to make in- formed decisions relating to the management and situa- tion of the Company. Shareholders' right to information, the nature of docu- ments provided and the arrangements for such docu- ments to be made available or transmitted shall adhere to the terms set out by applicable law. of the share capital the share represents. Anyone who has held fully paid-up registered shares for at least four years as of the date of the Extraordinary Gen- eral Meeting of June 14, 2000 or thereafter is entitled to double voting rights under the law. Furthermore, if the capital is increased through the capitalization of reserves, profits or share premiums, this double voting right will apply, from the time of issue, to registered shares awarded free of charge to Shareholders on the basis of shares al- ready held that bear this entitlement. Any shares converted to bearer shares or transferred to a different owner are stripped of double voting rights, alt- hough other rights and obligations attached to the share are transferred to any owner thereof. However, double voting rights are not lost and the above- mentioned four-year period is not interrupted in the event that shares are transferred by way of an inheritance, fol- lowing the liquidation of a marital estate, or in the form of an inter vivos gift to a spouse or a relative in the direct line of succession. Shareholding thresholds In accordance with the provisions of Article L. 233-7 of the French Commercial Code, any natural or legal person, act- ing alone or in concert, that comes to own, directly or in- directly, a number of shares accounting for more than 5%, 10%, 15%, 20%, 25%, 30%, 33.3%, 50%, 66.66%, 90% or 95% of the share capital or voting rights is required to so inform the Company as provided for by law. In the event of failure to make such a declaration, any per- son holding shares exceeding the percentage that should have been declared will be stripped of their voting rights in accordance with Article 233-14 of the French Commer- cial Code for a term of two years from the date on which the declaration is duly made. There are no other requirements under the articles of as- sociation regarding shareholding thresholds except for those set forth under current law. Form and transfer of shares (Article 9 of the articles of association) Form Shareholders may opt to hold fully paid-up shares as ei- ther registered shares or bearer shares. Shares will be rec- orded in the Company's accounts in accordance with the terms and procedures set forth by law. Double voting rights (Article 9 of the articles of association) In accordance with Article 9 of the articles of association, each share gives its holder ownership interest in the Com- pany's assets and profits, proportionate to the percentage Transfer of shares Shares may be freely traded unless otherwise stipulated by law or regulation. Shares may be sold or traded by the Company and by third parties via transfer between ac- counts in accordance with the regulations in force. ESI GROUP • 2016 REGISTRATION DOCUMENT 162 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7 7.1.3. Information concerning administrative and management bodies Information on members of administrative and management bodies, as well as their respective authority, is presented in chapter 2, “Corporate Governance.” 7.2. Information on the Company's capital 7.2.1. Statutory requirements governing modifications to the capital and rights attached to shares Extraordinary General Meetings have sole authority to de- cide to carry out or to authorize capital increases, upon recommendation by the Board of Directors. If the share capital is increased through the capitalization of reserves, profit or share premiums, the General Meeting may make such decision in accordance with the require- ments for quorum and majority set forth for Ordinary General Meetings. The share capital must be fully paid up prior to any issue of new shares to be paid up in cash; otherwise the trans- action may be declared null and void. Shareholders are entitled, in proportion to their total shares, to preferential subscription rights to shares issued for cash as part of a capital increase. The value of any contributions in kind must be appraised by one or more contribution appraisers appointed upon request by the presiding judge of the relevant commercial court. Shares representing contributions in kind or stemming from the capitalization of profits or reserves must be fully paid up upon issuance. At least one-fourth of the value of cash shares and the en- tire share premium, where applicable, must be paid up at the time of subscription. The remainder must be paid up in one or more installments within a period of five years from the date on which the capital increase was finalized. Subject to the restrictions and reserves set forth by law, Extraordinary General Meetings may also decide to carry out or authorize a reduction in the share capital for any reason or in any manner whatsoever, including due to losses or via repayment or partial buyback of shares, re- duction in the number of shares, or reduction in the par value of shares; under no circumstances may the reduc- tion in capital undermine the principle of equality be- tween Shareholders. 7.2.2. Issued share capital and authorized unissued share capital At January 31, 2017, the Company's share capital stood at €17,975,976. It was divided into 5,991,992 shares with a par value of €3 each, all in the same category and fully paid up. Aside from the stock option plans and free share grants described in section 7.3, there is no other financial instru- ment that entitles its holder to ownership interest in the Company's share capital. ESI GROUP • 2016 REGISTRATION DOCUMENT 1637 INFORMATION ON THE COMPANY AND SHARE CAPITAL Table summarizing currently valid delegations granted to the Board of Directors and use of such delegations during the fiscal year Resolution number Purpose of Term authorization the Expiration date Maximum Authorized uses COMBINED GENERAL MEETING OF JULY 24, 2014 Resolution 9 Authorization to grant stock options 38 months September 2017 Not to exceed 180,000 shares representing 3.068% of the share capital as of the date of the Combined General Meeting COMBINED GENERAL MEETING OF WEDNESDAY, JULY 22, 2015 Resolution 9 Resolution 10 to Delegation of authority the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, with preferential subscription rights accorded to shareholders to Delegation of authority the Board of Directors for the purpose of increasing the capital via the issue of shares of common stock or of any securities convertible into equity, through public offerings and eliminating preferential subscription rights 26 months September 2017 26 months September 2017 Securities: €90,000,000 Debt securities: €45,000,000 Securities: €90,000,000 Debt securities: €45,000,000 granted 31, at 2017: remaining: Options January 17,350 Options 162,650 None None Resolution 11 Delegation of authority the Board of Directors for the purpose of increasing the issue amount in the event of over-demand to Within 30 days of the closing of the original issue September 2017 Not to exceed 15% of the value of the original issue (referred to in resolutions 9 and 10) or the total ceiling of €90,000,000. None Resolution 12 to Delegation of authority the Board of Directors for the purpose of increasing the capital by the capitalization of premiums, reserves, profits or otherwise 26 months September 2017 Not to exceed the total amount of reserves, premiums and profits existing at the time of the capital increase or €150,000,000 (a ceiling that might be reduced to the amount of capital increases undertaken pursuant to resolutions 9 to 14) None Resolution 13 to Delegation of authority the Board of Directors for the purpose of issuing shares without preemptive subscription rights as compensation for contributions of shares or share equivalents granted to the Company as part of contributions in kind Resolution 14 to Delegation of authority the Board of Directors for the purpose of increasing the capital without preemptive subscription rights through private placement Resolution 15 Authorization given to the Board of Directors to increase issuing shares reserved for employees who are members of the employee savings plan the capital by 26 months September 2017 Total ceiling of €90,000,000 applied to capital increases authorized by resolutions 9 to 12 None 26 months September 2017 20% of the share capital per year, not to exceed the overall maximum of €90,000,000 None 26 months September 2017 Not to exceed 2 % of the Company's share capital None COMBINED GENERAL MEETING OF THURSDAY, JULY 21, 2016 Resolution 7 Authorization to be granted to the Board of Directors for the Company to buy back its own shares 18 months January 2018 Not to exceed 10 % of the Company's share capital of 8,000 Acquisition shares in December 2016 from a Shareholder with more than 10% of voting rights Resolution 9 Authorization to the Board of Directors to reduce the share capital by canceling shares purchased by the Company under Article L. 225-209 of the French Commercial Code 26 months September 2018 Not to exceed 10% of the Company's share capital per 24-month period None Resolution 10 Authorization to the Board of Directors to grant free shares to eligible employees and executive corporate officers of the Company and affiliated companies 38 months September 2019 Not to exceed 60,000 shares representing 1% of the share capital as of the date of the Combined General Meeting Free shares awarded at January 31, 2017: 27,262 Free shares remaining: 32,738 Resolution 11 Authorization to the Board of Directors to grant stock purchase options 38 months September 2019 Not to exceed 5% of the Company's share capital at the date of the Combined General Meeting, i.e. 297,753 shares None Non-equity securities As of the date the Registration Document was drawn up, the Company had not issued any non-equity securities. ESI GROUP • 2016 REGISTRATION DOCUMENT 164 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7 7.2.3. History of changes in share capital Meeting date Operation type Change in share capital Issue of cash shares Resulting total share capital Total number of shares Par value (In euros) Premium (In euros) Number of shares created Par value (In euros) 15.24 EGM of 1/28/1991 Incorporation of the Company EGM of 7/26/1991 Capital increase in cash EGM of 7/26/1991 Capitalization of share premium 15.24 (2,274,021) 15.24 (2,261,779) 2,500 834 38,112 50,827 2,500 15.24 3,334 15.24 2,312,606 3,334 694 EGM of 7/31/1991 Stock split and free share award 694 300,060 2,312,606 303,394 7.62 EGM of 11/5/1996 Capital increase in cash 7.62 3,565,206 32,276 2,558,628 335,670 7.62 EGM of 3/26/1997 Capitalization of share premium 7.62 (3,577,448) 6,140,707 335,670 18.29 And withdrawal from the legal reserve (4,631) EGM of 4/24/1997 Capital increase in cash 18.29 130,801.26 975 6,158,544 336,645 18.29 EGM of 12/9/1998 Stock split 18.29 3,703,095 6,158,544 4,039,740 1.52 EGM of 3/15/1999 Capital increase in cash 1.52 4,364,334 524,902 6,958,752 4,564,642 1.52 EGM of 7/8/1999 Capitalization of share premium 1.52 4,175,251 11,134,003 4,564,642 2.44 EGM of 6/14/2000 Capital increase in cash 2.44 2,783,502 1,141,161 13,917,505 5,705,803 2.44 BoD meeting of 5/9/2001 Share capital adjustment Exercise of share subscription options 2.44 103,236 42,324 14,020,741 5,748,127 2.44 BoD meeting of 5/9/2001 Conversion of the share capital from French francs to euros 2.44 14,020,741 5,748,127 (EGM of 6/14/2000)) Capitalization of the share premium by increasing the par value of the shares 3 3,223,640 17,244,381 5,748,127 BoD meeting of 3/8/2002 Share capital adjustment Exercise of share subscription options BoD meeting of 3/8/2005 Share capital adjustment Exercise of share subscription options BoD meeting of 6/7/2007 Share capital adjustment Exercise of share subscription options BoD meeting of 4/14/2008 Share capital adjustment Exercise of share subscription options BoD meeting of 2/1/2012 Share capital adjustment Exercise of share subscription options BoD meeting of 2/28/2013 Share capital adjustment Exercise of share subscription options BoD meeting of 2/7/2014 Share capital adjustment for Capital employees who are members of the employee savings plan through cash contribution increase BoD meeting of 2/7/2014 Share capital adjustment Exercise of share subscription options BoD meeting of 3/10/2015 Share capital adjustment Exercise of share subscription options BoD meeting of 2/18/2016 Share capital adjustment Exercise of share subscription options BoD meeting of 2/23/2017 Share capital adjustment Exercise of share subscription options 3 7,500 2,500 17,251,881 5,750,627 3 301,500 100,500 17,553,381 5,851,127 3 3 3 3 36,156 12,052 17,589,537 5,863,179 21,775 3,350 17,599,587 5,866,529 2,051 350 17,600,637 5,866,879 24,905 4,250 17,613,387 5,871,129 3 276,014.18 21,463 17,677,776 5,892,592 3 252,214.4 43,040 17,806,896 5,935,632 3 74,949.4 12,790 17,845,266 5,948,422 38,969 6,650 17,865,216 5,955,072 3 3 280,351 36,920 17,975,976 5,991,992 3 3 3 3 3 3 3 3 3 3 3 3 3 ESI GROUP • 2016 REGISTRATION DOCUMENT 165 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7.2.4. Corporate shareholding structure Shareholding structure At January 31, 2017, Mr. Alain de Rouvray, conjointly with the de Rouvray family, held 1,824,385 shares, represent- ing 30.45% of the share capital and 46.35% of voting rights. To the Company's knowledge, there are no other Share- holders who hold, directly or indirectly, individually or jointly, 5% or more of the Company's share capital or vot- ing rights, with the exception of those named in the table below. The number of shares held by each member of the Board of Directors, as well as employee shareholding, is pre- sented in the table below. CHANGE IN THE BREAKDOWN OF THE COMPANY'S SHARE CAPITAL OVER THE PAST THREE FISCAL YEARS At January 31, 2017 First and last name Number and shares % of capital Number of voting rights that may be exercised % of voting rights that may be exercised The de Rouvray family (Ms. Amy de Rouvray, Ms. Cristel Anne de Rouvray, Mr. John Alexandre de Rouvray and Ms. Amy Louise de Rouvray) Estate of Jacques Dubois 1,824,385 30.4% 400,619 6.7 % SUB-TOTAL OF SHAREHOLDERS' AGREEMENT (REGISTERED SHARES) 2,225,004 37.1% Vincent Chaillou Charles-Helen des Isnards Éric d’Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann 16,197 0.3% 3,751 0.1% 1,589 0.0% 1 1 1 0.0% 0.0% 0.0% MEMBERS OF THE BOARD OF DIRECTORS (REGISTERED SHARES) (EXCLUDING FOUNDERS) 21,540 0.4% TOTAL EMPLOYEE SHAREHOLDING (REGISTERED SHARES) 64,288 1.1% Public shareholding, registered shares Public shareholding, bearer shares SUB-TOTAL PUBLIC SHAREHOLDING TREASURY SHARES TOTAL Total number of theoretical voting rights: 8,219,072 32,565 0.5% 3,230,594 53.9% 3,263,159 54.5% 418,001 7.0% 5,991,992 100.0% 7,801,071 3,619,425 797,038 4,416,463 28,893 6,552 2,928 1 1 1 38,376 76,091 39,547 3,230,594 3,270,141 0 46.4% 10.2% 56.6% 0.4% 0.1% 0.0% 0.0% 0.0% 0.0% 0.5% 1.0% 0.5% 41.4% 41.9% 0.0% 100.0% ESI GROUP • 2016 REGISTRATION DOCUMENT 166INFORMATION ON THE COMPANY AND SHARE CAPITAL 7 Number and shares % of capital Number of voting rights that may be exercised % of voting rights that may be exercised At January 31, 2016 First and last name The de Rouvray family Estate of Jacques Dubois SUB-TOTAL OF SHAREHOLDERS' AGREEMENT (REGISTERED SHARES) 2,234,804 37.5% 4,361,263 1,824,385 30.6 % 410,419 6.9% 3,554,425 806,838 Vincent Chaillou Charles-Helen des Isnards Éric d’Hotelans 13,597 0.2% 3,751 0.1% 1,589 0.0% MEMBERS OF THE BOARD OF DIRECTORS (REGISTERED SHARES) (EXCLUDING FOUNDERS) 18,937 0.3% TOTAL EMPLOYEE SHAREHOLDING (REGISTERED SHARES) 52,814 0.9% Public shareholding, registered shares Public shareholding, bearer shares SUB-TOTAL PUBLIC SHAREHOLDING TREASURY SHARES TOTAL Total number of theoretical voting rights: 8,115,520 At January 31, 2015 First and last name The de Rouvray family Jacques Dubois SUB-TOTAL OF SHAREHOLDERS' AGREEMENT (REGISTERED SHARES) Vincent Chaillou Charles-Helen des Isnards Éric d’Hotelans Francis Bernard Michel de la Serre 88,149 1.5% 3,131,215 52.6% 3,219,364 54.1% 429,153 7.2% 5,955,072 100.0% 1,814,522 30.5% 396,419 6.7% 2,210,941 37.2% 13,597 0.2% 3,401 0.1% 1,589 0.0% 2,321 0.0% 1,615 0.0% MEMBERS OF THE BOARD OF DIRECTORS (REGISTERED SHARES) (EXCLUDING FOUNDERS) 22,523 0.4% TOTAL EMPLOYEE SHAREHOLDING (REGISTERED SHARES) 46,642 0.8% Public shareholding, registered shares Public shareholding, bearer shares SUB-TOTAL PUBLIC SHAREHOLDING TREASURY SHARES TOTAL Total number of theoretical voting rights: 8,104,577 86,589 1.5% 3,160,874 53.1% 3,247,463 54.6% 420,853 7.1% 5,948,422 100.0% 46.2 % 10.5% 56.7% 0.3% 0.1% 0.0% 0.5% 0.8% 1.2% 40.7% 42.0% 0.0% 100.0% 26,293 6,252 2,215 34,760 64,643 94,486 3,131,215 3,225,701 0 7,686,367 3,539,099 792,838 4,331,937 26,293 5,402 2,215 3,592 1,845 39,347 58,571 92,995 3,160,874 3,253,869 0 7,683,724 46.1% 10.3% 56.4% 0.3% 0.1% 0.0% 0.0% 0.0% 0.5% 0.8% 1.2% 41.1% 42.3% 0.0% 100.0% Number and shares % of capital Number of voting rights that may be exercised % of voting rights that may be exercised Shareholders' agreement and other agreements An agreement was signed on October 25, 2000 between Mr. Alain de Rouvray (Chairman and founder of the Com- pany), the members of his family group (Ms. Amy de Rou- vray, Ms. Cristel Anne de Rouvray, Mr. John Alexandre de Rouvray and Ms. Amy Louise de Rouvray), Mr. Jacques Du- bois (member of the Board of Directors and co-founder of the Company) and Mr. Philippe Billaud in their capacity as ESI Group shareholders. The parties indicated that the purpose of the agreement was to formalize a concert party agreement that took ef- fect between them on the date that the Company’s shares were first listed on the “Nouveau Marché” stock market. This Shareholders' agreement was published in La Trib- une on Friday, October 27, 2000 following CMF decision No. 200C1608 dated October 27, 2000. This agreement includes a right of first refusal. This right of first refusal does not apply to transfers of shares to the heirs of any shareholder who is a private in- dividual and a party to the agreement in the event of death, or to transfers between members of the de Rouvray family who are party to the agreement. This agreement also contains: • An obligation on the part of the parties to the agree- ment, to either purchase or sell their shareholding: in the event that Mr. Alain de Rouvray decides to sell all ESI GROUP • 2016 REGISTRATION DOCUMENT 167 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL ESI Group shares that he currently holds or may hold at some point in the future, each party is irrevocably bound to either: – Exercise its right of first refusal and purchase the shares under the conditions set forth under the agreement, or – Waive its right of first refusal and consequently sell its entire shareholding at the sale price; • A commitment to act in concert prior to the purchase of any additional shares that would force the parties to the agreement to jointly file a draft takeover bid. In keeping with this agreement, the parties declare that they act in concert. In accordance with the “Dutreil” law in France, an agreement was also signed on December 22, 2003, and renewed on December 31, 2011 for a term of five years and six months, renewable indefinitely, between Mr. Alain de Rouvray (Chairman and founder of the Company), Ms. Amy de Rouvray, Ms. Cristel Anne de Rouvray, Mr. John Alexandre de Rouvray and Ms. Amy Louise de Rouvray in their capacity as shareholders of the Company. At January 31, 2017, this agreement represented 30.4% of the Company's capital and 46.4% of voting rights, and collectively binds its signatories to retain half of their shares. 7.2.5. Company share buybacks The description of the share buyback program implemented by the Company can be consulted on the website. A liquidity contract was concluded with CIC in 2009 and remains in force. The monthly report on the liquidity contract is also available on the website. During FY2016, the Company repurchased 8,000 of its own shares. Date of authorization by the General Meeting Date of expiration of the authorization Ceiling on authorized buybacks Minimum purchase price per share Authorized purposes Board of Directors' meeting at which buybacks were decided Buyback period Number of shares repurchased Purchase price per share Use of repurchased shares Number of treasury shares at January 31, 2017 Percentage of capital held by the Company at January 31, 2017 Resolution 7 of July 21, 2016 January 21, 2018 10% of share capital at the transaction date €60 Cancellation Share purchase options Free share grants Liquidity and market-making External growth November 30, 2016 December 20, 2016 8,000 €39.29 Share purchase options Free share grants 418,001 7% 7.3. Presentation of stock option and free share grant plans 7.3.1. Stock option plans Grant of stock subscription options At its March 11, 2016 meeting, the Board of Directors, act- ing on the proposal of the Compensation, Nomination and Governance Committee, allocated 10,000 shares to a man- ager. This allocation was governed by plan No. 17bis. Vest- ing will take place in five equal annual tranches as of March 1, 2017, followed by March 1, 2018-2021, and will be subject to continued employment of the beneficiary. The maximum potential capital increase will be in a total par amount of €30,000, corresponding to 10,000 new shares with a par value of €3 each. Exercise of stock subscription options The Board of Directors noted that the number of new shares issued following exercise of stock options during FY2016 came to 36,920 shares with a par value of €3, rep- resenting a capital increase in an amount of €110,760, thereby bringing the capital from €17,865,216 to €17,975,976. ESI GROUP • 2016 REGISTRATION DOCUMENT 168 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7 Allocation of stock purchase options No stock purchase options were allocated during FY2016. ESI GROUP • 2016 REGISTRATION DOCUMENT 169 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL Table summarizing the stock option plans available to employees and corporate officers Stock option plan for the subscription and purchase of new shares Stock options available to be awarded(1) at January 31, 2017 As a % of share capital Existing stock options(2) at January 31, 2017 Exercise price (In €) As a % of share capital Stock options exercised at January 31, 2017 As a % of share capital No. 9 (GM of June 29, 2006) No. 10 (GM of June 26, 2012) No. 15 (GM of July 23, 2013) No. 17 (GM of Thursday, July 24, 2014) 0 0 0 0% 0% 0% 0 8.86 111,175 25.95 20,000 21.66 0% 1.86% 0.33% 162,650 2.71% 17,350 24.97 0.29% 85,900 5,000 1.43% 0.08% 0 0 0 No. 18 (GM of July 21, 2016) 297,753 5% 0 TOTAL 460,403 7.71% 148,525 - - - 2.48% 90,900 1.51% (1) “Stock options available to be allocated” represent the difference between the total number of stock options authorized by the General Meeting and the number of stock options already granted by the Board of Directors at January 31, 2017. (2) The options forfeited or canceled following an employee’s departure were removed from “Existing options” at January 31, 2017. History of allocations of stock subscription or purchase options (Table 8 of AMF recommendations) Meeting date Plan 7: 6/30/2005 Plan 9: 6/29/2006 Plan 10: 6/26/2012 Plan 15: 7/23/2013 Date(s) of the meeting(s) of the Board of Directors 7/10/2008 7/10/2008 2012 to 2015 3/26/2015 Plan 17: 7/24/2014 7/22/2015 3/11/2016 Number of options granted O/w: • Vincent Chaillou • Christopher St. John 100,000 200,000 180,000 20,000 17,350 32,000 0 6,000 14,000 3,500 2,975 0 0 0 0 Starting date of exercise period 7/10/2013 7/10/2013 2017 to 2019 2/1/2019 2017 to 2019 Expiration date Subscription or purchase price (in euros) 7/8/2016 7/8/2016 2020 to 2025 2/1/2025 2023 to 2026 8.86 8.86 25.94 21.66 24.97 Total number of options exercised 13,100 85,900 5,000 Total number of shares eligible to be subscribed or purchased, expired or canceled 86,900 114,100 63,825 0 0 0 0 Existing stock options at the balance sheet date 0 0 111,175 20,000 17,350 Stock options granted to the top ten employee grantees, not including corporate officers (Table 9 of AMF recommendations) Stock options granted to/exercised by the top ten employee grantees (not including corporate officers) Total number of options granted/shares subscribed or purchased Weighted average price Plan number Options granted during the fiscal year, by the issuer and any other companies within the issuer's group entitled to grant options, to the top ten employees of the issuer and any aforementioned company having granted the highest number of options Options issued by the issuer and any aforementioned company exercised during the fiscal year by the top ten employees who thus purchased or subscribed to the largest number of options 10,000 23.35 17 24,450 11.48 9 & 10 7.3.2. Free share grant plans At its July 21, 2016 meeting, the Board of Directors, acting on the proposal of the Compensation, Nomination and Gov- ernance Committee, granted a maximum total number of 25,000 ordinary shares in the Company, with a par value of €3 each, to eight beneficiaries. At its December 23, 2016 meeting, the Board of Directors, acting on the proposal of the Compensation, Nomination and Governance Committee, granted a maximum total number of 2,262 ordinary shares in the Company, with a par value of €3 each, to all employees and corporate officers of the Group's French companies present at that date, i.e. ESI Group, ESI France and CIVITEC. ESI GROUP • 2016 REGISTRATION DOCUMENT 170 INFORMATION ON THE COMPANY AND SHARE CAPITAL 7 The table below lists the free share grant plans for employees with and without the status of corporate officer Free share award plans Free shares available to be awarded(1) at January 31, 2017 As a % of share capital Existing free shares(2) at January 31, 2017 As a ²% of share capital Authorization of the GM of July 21, 2016 TOTAL 32,738 32,738 0.55% 0.55% 27,208 27,208 0.45% 0.45% (1) “Free shares available to be allocated” represent the difference between the total number of free shares authorized by the General Meeting and the number of shares already granted by the Board of Directors at January 31, 2017. (2) The forfeited free shares were removed from “Existing free shares” at Tuesday, January 31, 2017. History of allocations of free shares (Table 10 of AMF recommendations) Meeting date Plan 14: 6/26/2012 Plan 6: 7/21/2016 Plan 7: 7/21/2016 Date(s) of the meeting(s) of the Board of Directors Number of granted shares O/w: • Vincent Chaillou • Christopher St John Date of delivery Date of availability Total number of shares delivered Total number of expired or canceled shares Existing shares at the balance sheet date 7.4. ESI shares – market 12/19/2012 21,755 3,600 3,100 12/20/2016 12/20/2016 19,145 2,610 0 7/21/2016 12/23/2016 25,000 2,262 5,000 5,000 0 0 As of 7/21/2018 12/23/2018 7/21/2020 12/23/2020 0 0 25,000 0 54 2,208 7.4.1. Share price trends The chart below shows how ESI Group's stock price has performed relative to the CAC Mid & Small and CAC 40 base 100 index since February 1st, 2012 until the end of April 2017: ESI GROUP • 2016 REGISTRATION DOCUMENT 171 7 INFORMATION ON THE COMPANY AND SHARE CAPITAL The chart below shows how ESI Group's stock price has performed since its initial public offering on July 6, 2000 until the end of April 2017 and the daily volume of transactions: 7.4.2. Survey of identifiable bearer shares On April 24, 2017, the Group carried out a survey of identifiable bearer shares (TPI: Titres au Porteur Identifiable) on 99 % of its free float (excluding treasury shares) which could be compared to the one realized on April 15, 2016. French institutional investors Foreign investors Individual Shareholders Companies At April 24, 2017 At April 15, 2016 As % of free float As a % of share capital As % of free float As a % of share capital 48% 42% 8% 0% 26% 23% 4% 0% 70% 18% 10% 0% 37% 10% 5% 0% This analysis points to a strong increase in foreign shareholders, which currently account for 23% of share capital, com- pared to 10% last year. ESI GROUP • 2016 REGISTRATION DOCUMENT 172 8 ADDITIONAL INFORMATION 8.1. Persons responsible for the Registration Document 8.1.1. Person responsible for the content of the Registration Document Paris, May 19, 2017. Mr. Alain de Rouvray, Chairman and Chief Executive Of- ficer of ESI Group: “Having taken all reasonable care to ensure that such is the case and to the best of my knowledge, I hereby declare that the information contained in this Registration Docu- ment gives a true and fair view of the facts and that no ma- terial aspects have been omitted. I hereby declare that, to the best of my knowledge, the fi- nancial statements have been prepared in accordance with applicable accounting standards and that they give a fair view of the assets, financial position and results of the Company and all consolidated companies making up the Group. I further declare that, to the best of my knowledge, the management report provided in Section 4 presents a fair picture of the business trends, results and financial position of the Company and all consolidated companies making up the Group, as well as a description of the pri- mary risks and uncertainties these entities face. I have obtained a letter from the statutory auditors stating that they have completed their assignment, which in- cluded checking the information relating to the financial position and the financial statements provided in this doc- ument as well as reading the entire annual report.” 8.1.2. Person responsible for the financial information Mr. Laurent Bastian, Chief Financial Officer of ESI Group. 8.2. Statutory auditors Statutory auditors PricewaterhouseCoopers Audit 63, rue de Villiers 92200 Neuilly-sur-Seine France Represented by Mr. Thierry Charron. Date of appointment: Combined General Meeting of July 22, 2015 for a term of six years. Term of office: Annual General Meeting called to approve the financial statements for the year ended January 31, 2021. PricewaterhouseCoopers Audit is a member of the Versailles Regional Association of Statutory Auditors. Ernst & Young Audit Faubourg de l’Arche 1/2, place des Saisons 92400 Courbevoie Paris-La Défense 1 Represented by Mr. Frédéric Martineau. Date of appointment: Combined General Meeting of July 22, 2015 for a term of six years. Term of office: Annual General Meeting called to approve the financial statements for the year ended January 31, 2021. Ernst & Young Audit is a member of the Versailles Regional Association of Statutory Auditors. Alternate auditors Auditex Faubourg de l’Arche 11 Allée de l’Arche 92037 Paris-La Défense Cedex Represented by Mr. Emmanuel Roger. ESI GROUP • 2016 REGISTRATION DOCUMENT 173 ADDITIONAL INFORMATION 8 Date of appointment: Combined General Meeting of July 22, 2015 for a term of six years. Term of office: Annual General Meeting called to approve the financial statements for the year ended January 31, 2021. Mr. Yves Nicolas 63, rue de Villiers 92200 Neuilly-sur-Seine France Date of appointment: Combined General Meeting of July 22, 2015 for a term of six years. Term of office: Annual General Meeting called to approve the financial statements for the year ended January 31, 2021. 8.3. Documents available to the public All corporate documents related to the Company can be consulted at the Company's headquarters, located at 100- 102 Avenue de Suffren in Paris (75015), France, and on its website: www.esi-group.com. The website provides both in French and English a detailed description of the Group and its business activities, as well as financial information for shareholders and investors, including all mandatory information required under the European Transparency Directive. It provides access to registration documents, fi- nancial reports, annual and interim consolidated financial statements, press releases, regulated information, the ar- ticles of association, Shareholder letters and guides and stock prices. In keeping with the Transparency Directive adopted in 2007, ESI Group has decided to use a reporting service li- censed by the French Financial Markets Authority (AMF). This allows the Group to provide proof of compliance with legal reporting requirements. Lastly, this registration document is available in a paper version upon simple request sent to: ESI Group Corentine Lemarchand 100-102, avenue de Suffren 75015 Paris investors@esi-group.com NewCap Louis-Victor Delouvrier 21, place de la Madeleine 75008 Paris esi@newcap.fr ESI GROUP • 2016 REGISTRATION DOCUMENT 174 Registration Document cross-reference table CROSS-REFERENCE TABLE Pursuant to Article 28 of European Commission Regulation (EC) No 809/2004 of April 29, 2004, the following information is incorporated by reference in this registration document: • • The parent-company financial statements, consolidated financial statements, and the report of the statutory audi- tors for the fiscal year ended January 31, 2016, which appear on pages 69–112 of the Registration Document filed with the French Financial Markets Authority (AMF) on May 20, 2016 under number D.16-0512; The parent-company financial statements, consolidated financial statements, and the report from the statutory au- ditors for the fiscal year ended January 31, 2015, which appear on pages 65–108 of the registration document filed with the French Financial Markets Authority (AMF) on May 20, 2015 under number D.15-0528; Information 1. Responsible persons 1.1. Persons responsible for the information contained in the document 1.2. Statement by the persons responsible for the document 2. Statutory auditors 2.1. Name and address of the issuer's statutory auditors 2.2. Statutory auditors who resigned, were removed or were not reappointed during the period in question 3. Selected financial information 3.1. Selected historical financial information 3.2. Selected historical financial information for interim periods 4. 5. Risk factors Information concerning the issuer 5.1. History and development of the Company 5.1.1. Corporate name and commercial name of the issuer 5.1.2. Place of registration and registration number of the issuer 5.1.3. Date of incorporation and term of the issuer 5.1.4. Headquarters and legal form of the issuer, law governing its operations, country of origin, address and telephone number of its registered headquarters 5.1.5. Significant events in the issuer's business development 5.2. Investments 5.2.1. Principal investments made by the issuer during each fiscal year 5.2.2. Principal investments by the issuer in progress 5.2.3. Principal investments that the issuer intends to make in the future and for which its management bodies have alread y undertaken firm commitments 6. Business overview 6.1. Main activities 6.1.1. Description of operations carried out by the issuer and its principal business activities 6.1.2. Significant new products or services launched on the market 6.2. Main markets 6.3. Exceptional factors having influenced information provided under items 6.1 and 6.2 6.4. Extent to which the issuer is dependent on patents or licenses, industrial, commercial or financial contracts or new manufacturing processes 6.5. Basis for any statements made by the issuer regarding its competitive position 7. Flowchart 7.1. Brief description of the Group and the issuer's position within the Group 7.2. List of major subsidiaries 8. Property, plant and equipment 8.1. Significant property, plant and equipment, existing or planned 8.2. Environmental considerations that may affect the use of these assets 9. Review of financial position and performance Chapters 8.1. 8.1. 8.1. 8.2. 8.2. N/A 1.4. 1.4. N/A 1.6. 7. 1.2. 7.1.1. 7.1.1. 7.1.1. 7.1.1. 1.2. 1.5. 1.5.1. 1.5. 1.5.3. 1.1. 1.1.1. 1.1.1. N/A. 1.1.3. N/A N/A 1.1.3. 1.3. 1. 1.3.2, 5.1.5. note 3.4. and 5.2.3. note F.9. 5.1.5. note 6.2. and 4.6. 1.6.2. and 3.4.3. ESI GROUP • 2016 REGISTRATION DOCUMENT 175 CROSS-REFRENCE TABLE Information 9.1. Financial position of the issuer 9.2. Operating income 9.2.1. Major factors 9.2.2. Reasons for major changes in net revenues or income 9.2.3. Governmental, economic, fiscal, monetary or political strategies or factors that have materially affected, or could materially affect, the issuer's operations either directly or indirectly 10. Cash flows and capital 10.1. Information on the issuer's capital 10.2. Source and amount of the issuer's cash flows and descriptions of these cash flows 10.3. Information on the borrowing requirements and financing structure of the issuer 10.4. Information regarding any restrictions on the use of capital resources that have materially affected, or could materially affect, the issuer’s operations 10.5. Information concerning anticipated sources of funds 11. Research and development, patents and licenses 12. Information on business trends 13. Profit forecasts or estimates 14. Administrative, management and supervisory bodies and executive management 14.1. Administrative bodies 14.2. Conflicts of interest within administrative, management and supervisory bodies 15. Compensation and benefits 15.1. Compensation paid to corporate officers 15.2. Total amounts set aside or accrued to provide pension, retirement or similar benefits 16. Practices and procedures of the administrative and management bodies 16.1. End date of current terms of office 16.2. Information on service agreements 16.3. Information on the issuer's Committees 16.4. Declaration of compliance with the corporate governance standards 17. Headcount 17.1. Number of employees 17.2. Profit-sharing and stock options 17.3. Description of any employee profit-sharing agreements involving the issuer's capital 18. Key Shareholders 18.1. Key Shareholders 18.2. Different voting rights 18.3. Control of the Company 18.4. Description of any agreements, known to the Company, the performance of which may result in a change in control of the Company at a later date 19. Related party transactions 20. Financial information concerning the issuer’s assets and liabilities, financial position and performance 20.1. Historical financial information 20.2. Pro-forma financial information 20.3. Financial statements 20.4. Auditing of historical annual financial information 20.5. Date of latest financial information 20.6. Interim and other financial information 20.7. Dividend payout policy 20.8. Legal and arbitration proceedings 20.9. Material changes in the financial or trading position 21. Additional information 21.1. Legal capital 21.2. Instrument of incorporation and articles of association 22. Key contracts 23. Information provided by third parties, statements made by experts and declarations of interests Chapters 4.1. 4.1. 4.1. 4.1. 1.6. 5.1.5. 5.1.4. & 4.1.2. 4.1.2.4. and 5.1.5. note 7.1. 4.1.2.4. and 5.1.5. notes 7.1. and 7.4. 4.1.2.4. and 5.1.5. note 7.1. 4.1.3. 4.2.2 N/A 2. 2.4. 2.2. 2.5. 2.5. and 5.1.5. note 5. 2.5 2.2. 2.3 1.6.2. 2.4. 2.1. 3.2. 3.2.1. 7.3. 3.2.4. 7.2.4. 7.2.4. 7.1.2. 7.2.4. 7.2.4. N/A 5. 5.1. & 5.2. N/A 5.1. & 5.2. 5.1.6. & 5.2.4. N/A N/A N/A 1.6.4. & 7.1.1. 4.1.1. & 5.1.5. note 2. 8. 7.2. 7.1. & 7.2. 4.1.1. N/A ESI GROUP • 2016 REGISTRATION DOCUMENT 176 Information 24. Documents available to the public 25. Information on equity interests CROSS-REFERENCE TABLE Chapters 8.3. 5.2.3. notes C and F9. Annual financial report cross-reference table For ease of reference, the following cross-reference table facilitates identification of information making up the Annual financial report, the publication of which is required under Article L. 451-1-2 of the French Financial and Monetary Code and Article 222-3 of French Financial Markets Authority (AMF) General Regulations. Information Statement by the person responsible for the registration document • Annual financial statements • Consolidated financial statements • Statutory Auditors’ report on the annual financial statements • Statutory Auditors’ report on the consolidated financial statements • Management report Article L. 225-100 of the French Commercial Code – Analysis of business development – Analysis of performance – Analysis of the financial position – Key contingencies and uncertainties – Table summarizing currently valid delegations granted to the Management Board by the General Meeting of Shareholders regarding capital increases Article L. 225-100-3 of the French Commercial Code – Factors that may have an impact in the event of a public offering Article L. 225-211 of the French Commercial Code – Company share buybacks • Statutory Auditors’ special report on regulated agreements • Fees paid to statutory auditors • Report of the Chairman of the Board of Directors on corporate governance, internal control and risk management • Statutory Auditors’ report on the report of the Board of Directors Chapter 8.1. 5.2. 5.1. 5.2.4. 5.1.6. w o e b l l e b a t e c n e r e f e r - s s o r c e e S 4.3.3. 5.1.5 note 12. 2. 2.7. ESI GROUP • 2016 REGISTRATION DOCUMENT 177 CROSS-REFRENCE TABLE Management report cross-reference table For ease of reference, the following cross-reference table facilitates identification of information required in the Manage- ment report pursuant to Articles L. 225-100 et seq., L. 232-1 et seq. and R. 225-102 et seq. of the French Commercial Code. Information Group position and business • Objective and exhaustive analysis of development of the Group's business, performance and financial position • Key events between the closing date and the date of the Management report • Description of main risks and uncertainties and indication regarding the use of financial instruments by the Group • Foreseeable development of the Group's situation and future outlook • Research and Development activity Corporate governance/corporate officers • List of all offices and positions held in any company by each corporate officer during the fiscal year • Compensation and benefits of any kind paid by the Group to each corporate officer during the fiscal year • Report on the principles and criteria for determining, distributing and attributing fixed, variable and exceptional components comprising total compensation and benefits of any kind payable to executive corporate officers • Agreements entered into between a manager of key shareholder and a subsidiary • Allocation and retention of stock options by corporate officers • Allocation and retention of free shares by executive corporate officers Shareholding and share capital • Structure and development of the Group's share capital • Status of employee share ownership • Acquisition and disposal of own shares by the Group • Information that may have an impact in the event of a public offering Environmental, social and societal information • Environmental information • Social information • Societal information Other information • Information regarding supplier payment terms • Table summarizing currently valid delegations granted by the General Meeting • Table showing the Group's results over each of the past five fiscal years • Report of the Chairman of the Board of Directors on corporate governance, internal control and risk management Chapter 4.1.1. & 4.1.2. 4.2.1. 1.6. 4.2. 4.1.3. 2.3. 2.5. 2.5. N.A. 2.5.2. & 7.3. 2.5.2. & 7.3. 7.2. 7.2.4. 7.2.5. 4.4. 3.4. 3.2. 3.3. & 3.5. 4.1.4. 7.2.2. 4.5. 2. ESI GROUP • 2016 REGISTRATION DOCUMENT 178 Sustainable Development and Corporate Social Responsibility cross-reference table CROSS-REFERENCE TABLE For ease of reference, the following cross-reference table facilitates identification of environmental, social and societal information making up the Report on Sustainable Development and Corporate Social Responsibility, provided in accord- ance with Articles L. 225-102-1, R. 225-105 and R. 225-105-1 of the French Commercial Code. SOCIAL INFORMATION Employment • Total workforce and breakdown by gender, age and geographic area • Recruitments and dismissals • Compensation and changes in compensation over time Work organization • Work schedules • Absenteeism Labor relations • Organization of employer-employee dialogue • Summary of collective agreements Health and safety • Workplace health & safety conditions • Summary of agreements signed with trade unions or employee representatives regarding workplace health and safety • Workplace accidents, in particular frequency and severity, as well as occupational illnesses Training • Training policies implemented • Total number of training hours Equal treatment • Steps taken in support of gender equality • Steps taken in support of employment and inclusion of people with disabilities • Anti-discrimination policy Promotion and observance of the fundamental conventions of the International Labor Organization • Observance of freedom of assembly and the right to collective bargaining • Elimination of discrimination in employment and occupation • Elimination of forced or mandatory labor • Effective elimination of child labor SOCIETAL INFORMATION Territorial, economic and social impact of the Company’s activity • In terms of employment and regional development • On neighboring or local communities Relations with persons or organizations with an interest in the activity of the Company, including NGOs, educational institutions and local communities • Terms of dialog with such persons or organizations Subcontracting and suppliers • Consideration of social issues in the purchasing policy • Consideration of environmental issues in the purchasing policy • Amount of subcontracting and consideration of the social and environmental responsibility of suppliers and subcontractors in relationships with them Fair trade practices • Actions taken to prevent corruption • Measures promoting the health and safety of consumers ENVIRONMENTAL INFORMATION Overall environmental policy • Organization of the Company for the consideration of environmental issues and environmental evaluation or certification proce sses, where applicable • Employee training and information on environmental protection 3.2.1. 3.2.4. 3.2.4. 3.2.4. 3.2.4. 3.2.3. 3.2.3. 3.2.4. 3.2.4. 3.2.4. 3.2.2. 3.2.2. 3.2.3. 3.2.3. 3.2.3. 3.2.3. 3.2.3. 3.5.2. 3.5.2. 3.5.1. 3.5.1. 3.5.1. 3.3.2. 3.3.2. 3.3.2. 3.3.2. 3.3.2. 3.4.1. 3.4.1. ESI GROUP • 2016 REGISTRATION DOCUMENT 179 CROSS-REFRENCE TABLE • Resources devoted to preventing environmental risks and pollution • Amount of provisions and guarantees for environmental risks Pollution • Prevention, reduction or remediation of discharges with serious environmental impact on the air, water or soil • Consideration of noise and any other form of pollution specific to an activity Circular economy • Waste prevention and management: prevention, recycling, reuse and other waste recovery and elimination measures measures to fight food waste; • Sustainable use of resources: water consumption and supply in relation to local constraints; consumption of raw materials and measures to enhance efficiency; energy consumption, measures to improve energy efficiency and use of renewable energies; land use Climate change • Significant factors of greenhouse gas emissions caused by the Company's activity, particularly through use of the goods and services produced by the Company; • Adapting to the impact of climate change Protecting biodiversity • Measures to preserve or enhance biodiversity 3.4.1. & 3.4.2. 3.4.1. 3.4.3. 3.4.3.2. 3.4.3.2. 3.4.3.1. 3.4.3.1. 3.4.3.1. 3.4.3.1. 3.4.3.1. 3.4.3.3. Not relevant Not relevant ESI GROUP • 2016 REGISTRATION DOCUMENT 180Shareholders relations Corinne Romefort-Régnier & Corentine Lemarchand 100-102, avenue de Suffren – 75015 Paris – France Tel: + 33 (0)1 53 65 14 51 Fax: + 33 (0)1 53 65 14 12 investors@esi-group.com G.LE/17.0052-A

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